[Federal Register Volume 81, Number 20 (Monday, February 1, 2016)]
[Rules and Regulations]
[Pages 5170-5357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01274]



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Vol. 81

Monday,

No. 20

February 1, 2016

Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Part 447





Medicaid Program; Covered Outpatient Drugs; Final Rule

  Federal Register / Vol. 81 , No. 20 / Monday, February 1, 2016 / 
Rules and Regulations  

[[Page 5170]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2345-FC]
RIN 0938-AQ41


Medicaid Program; Covered Outpatient Drugs

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

ACTION: Final rule with comment period.

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SUMMARY: This final rule implements provisions of the Patient 
Protection and Affordable Care Act of 2010, as amended by the Health 
Care and Education Reconciliation Act of 2010 (collectively referred to 
as the Affordable Care Act) pertaining to Medicaid reimbursement for 
covered outpatient drugs (CODs). This final rule also revises other 
requirements related to CODs, including key aspects of their Medicaid 
coverage and payment and the Medicaid drug rebate program.

DATES: Effective Date: The final rule is effective on April 1, 2016.
    Compliance Date: State Medicaid Agencies must comply with the 
requirements of Sec.  447.512(b), Sec.  447.518(a), and Sec.  
447.518(d) by submitting a State Plan Amendment (SPA) by June 30, 2017 
to be effective no later than April 1, 2017.
    Comment Date: To be assured consideration, comments must be 
received at one of the addresses provided below, no later than 5 p.m. 
on April 1, 2016. (See the SUPPLEMENTARY INFORMATION section of this 
final rule with comment period for a list of provisions open for 
comment.)

ADDRESSES: In commenting, please refer to file code CMS-2345-FC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to www.regulations.gov. Follow the instructions for 
``submitting a comment.''
    2. By regular mail. You may mail written comments to the following 
address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-2345-FC, P.O. Box 8013, Baltimore, MD 
21244-8013.

    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-2345-FC, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.

    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments before the close of the comment period 
to either of the following addresses:

a. For delivery in Washington, DC-- Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 
20201.

    (Because access to the interior of the Hubert H. Humphrey 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 persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.

FOR FURTHER INFORMATION CONTACT: Ruth Blatt, (410) 786-1767, for issues 
related to the definition of covered outpatient drug, including drug 
category, and rebates for line extensions.
    Brian Du, (410) 786-6814, for issues related to the offset of 
rebates and collection of information.
    Emeka Egwim (410-786-1092), for issues related to 340B and the 
Federal Upper Limits.
    Lisa Ferrandi, (410) 786-5445, for issues related to 340B, rebates 
for drugs dispensed by Medicaid managed care organizations, 
requirements for states, the Collection of Information Requirements, 
and the Regulatory Impact Analysis.
    Renee Hilliard, (410) 786-2991, for issues related to the 
definitions of states and United States.
    Christine Hinds, (410) 786-4578, for issues related to authorized 
generics, nominal price, blood clotting factor, and exclusively 
pediatric drugs.
    Gail Sexton, (410) 786-4583, for issues related to Federal upper 
limits and the definitions of actual acquisition cost and professional 
dispensing fee.
    Terry Simananda, (410) 786-8144, or Wendy Tuttle, (410) 786-8690, 
for issues related to the determination of Average Manufacturer Price 
(AMP), identification of 5i drugs, the determination of Best Price, and 
manufacturer reporting requirements.
    Andrea Wellington, (410) 786-3490 for issues related to the 
Regulatory Impact Analysis.
    Wendy Tuttle, (410) 786-8690, for all other inquiries.

SUPPLEMENTARY INFORMATION: 
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will also 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, 
phone 1-800-743-3951.
    Provisions open for comment: We will consider comments that are 
submitted as indicated above in the Dates and Addresses sections on the 
following subject areas discussed in this final rule with comment 
period: The definition and identification of line extension drugs.
    To assist readers in referencing sections contained in this 
document, we are providing the following Table of Contents.

Table of Contents

I. Background
    A. Introduction
    B. Changes Made by the Affordable Care Act
    C. Other Changes Concerning the Medicaid Drug Rebate Program

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II. Summary of Proposed Provisions, Analysis of and Response to 
Public Comments, and Provisions of the Final Rule
    A. Basis and Purpose (Sec.  447.500)
    B. Definitions (Sec.  447.502)
    C. Determination of Average Manufacturer Price (Sec.  447.504)
    D. Determination of Best Price (Sec.  447.505)
    E. Authorized Generic Drugs (Sec.  447.506)
    F. Exclusion From Best Price of Certain Sales at a Nominal Price 
(Sec.  447.508)
    G. Medicaid Drug Rebates (Sec.  447.509)
    H. Requirements for Manufacturers (Sec.  447.510)
    I. Requirements for States (Sec.  447.511)
    J. Drugs: Aggregate Upper Limits of Payment (Sec.  447.512)
    K. Upper Limits for Multiple Source Drugs (Sec.  447.514)
    L. Upper Limits for Drugs Furnished as Part of Services (Sec.  
447.516)
    M. State Plan Requirements, Findings, and Assurances (Sec.  
447.518)
    N. FFP: Conditions Relating to Physician-Administered Drugs 
(Sec.  447.520)
    O. Optional Coverage of Investigational Drugs and Other Drugs 
Not Subject to Rebate (Sec.  447.522)
III. Collection of Information Requirements
    A. Wage Estimates
    B. ICRs Carried Over from the February 2, 2012, Proposed Rule
    1. Information Collection Requirement (ICR) Regarding Covered 
Outpatient Drug Definition (Sec.  447.502)
    2. ICR's Regarding Identification of 5i Drugs (Sec.  447.507)
    3. ICR's Regarding Medicaid Drug Rebates (Sec.  447.509)
    4. ICR's Regarding Requirements for Manufacturers (Sec.  
447.510)
    5. ICR's Regarding Requirements for States (Sec.  447.511)
    C. Summary of Annual Burden Estimates
    D. Submission of PRA-Related Comments
IV. Regulatory Impact Analysis
    A. Introduction
    B. Statement of Need
    C. Overall Impacts
    D. Detailed Economic Analysis
    1. Anticipated Effects on Drug Manufacturers
    2. Anticipated Effects on Retail Community Pharmacies
    3. Anticipated Effects on State Medicaid Programs
    4. Anticipated Effects on U.S. Territories
    E. Alternatives Considered
    F. Accounting Statement and Table
    G. Conclusion
V. Regulatory Flexibility Act Analysis
VI. Unfunded Mandates Reform Act Analysis
VII. Federalism Analysis
VIII. Congressional Review Act

Acronyms

    Because of the many organizations and terms to which we refer by 
acronym in this final rule, we are listing these acronyms and their 
corresponding terms in alphabetical order below:

5i drug Inhalation, infusion, instilled, implanted or injectable 
drugs
AAC Actual acquisition cost
ADA Antibiotic drug application
AI/AN American Indians and Alaska Natives
AMP Average manufacturer price
ANDA Abbreviated New Drug Application
APA Administrative Procedures Act
APD Advanced planning document
ASP Average sales price
AWP Average wholesale price
BLA Biologics license application
BMN Brand medically necessary
COD Covered outpatient drug
CPI-U Consumer Price Index--Urban
DDR Drug data reporting [for Medicaid system]
DRA Deficit Reduction Act
EAC Estimated acquisition cost
ELA Establishment license application
FDA Food and Drug Administration
FFP Federal financial participation
FFDCA Federal Food, Drug and Cosmetic Act
FQHC Federally qualified health center
FR Federal Register
FSS Federal supply schedule
FUL(s) Federal upper [reimbursement] limit(s)
GPO Group purchasing organization
HCERA Health Care and Education Reconciliation Act
ICR Information Collection Requirement
I/T/U IHS, Tribal, and Urban Indian Organizations
IHS Indian Health Services
MCO Managed care organization
MDR Medicaid drug rebate
MMIS Medicaid Management and Information Systems
NADAC National average drug acquisition cost
NCPDP National Council for Prescription Drug Plans
NDA New Drug Application
NDC National drug code
NSDE NDC Structured Product Labeling (SPL) Data Elements
OBRA `90 Omnibus Budget Reconciliation Act of 1990
OBRA `93 Omnibus Budget Reconciliation Act of 1993
OIG Office of Inspector General
OPA Office of Pharmacy Affairs
OTC Over-the-counter
PBM Pharmacy Benefit Manager
PHS Public Health Service
PHSA Public Health Service Act
PLA Product license application
REMS Risk Evaluation and Mitigation Strategy
SPA State plan amendment
SPAP State pharmacy assistance program
SPL Structured Product Labeling
U&C Usual and customary
URA Unit rebate amount
WAC Wholesale acquisition cost

I. Background

A. Introduction

    Under the Medicaid program, states may provide coverage of 
prescribed drugs as an optional service under section 1905(a)(12) of 
the Social Security Act (the Act). Section 1903(a) of the Act provides 
for federal financial participation (FFP) in state expenditures for 
these drugs. Section 1927 of the Act governs the Medicaid Drug Rebate 
(MDR) Program and payment for covered outpatient drugs (CODs), which 
are defined in section 1927(k)(2) of the Act. In general, for payment 
to be made available under section 1903(a) of the Act for CODs, 
manufacturers must enter into a National rebate agreement (agreement) 
as set forth in section 1927(a) of the Act. Section 1927 of the Act 
provides specific requirements for rebate agreements, drug pricing 
submission and confidentiality requirements, the formulas for 
calculating rebate payments, and requirements for states for CODs.
    This final rule implements changes to section 1927 of the Act made 
by sections 2501, 2503, and 3301(d)(2) of the Patient Protection and 
Affordable Care Act of 2010 (Pub. L. 111-148, enacted on March 23, 
2010), and sections 1101(c) and 1206 of the Health Care and Education 
Reconciliation Act of 2010 (HCERA) (Pub. L. 111-152, enacted on March 
30, 2010) (collectively referred to as the Affordable Care Act). It 
also implements changes to section 1927 of the Act as set forth in 
section 202 of the Education Jobs and Medicaid Assistance Act (Pub. L. 
111-226, enacted on August 10, 2010). As discussed in the proposed rule 
published in the February 2, 2012 Federal Register (77 FR 5318) and 
summarized in this section, these revisions are consistent with the 
Secretary's authority set forth in section 1102 of the Act to publish 
regulations that are necessary to the efficient administration of the 
Medicaid program.

B. Changes Made by the Affordable Care Act

    Section 2501(a) of the Affordable Care Act amended section 1927(c) 
of the Act by increasing the minimum rebate percentage for most single 
source and innovator multiple source drugs from 15.1 percent of the 
average manufacturer price (AMP) to 23.1 percent of AMP. Section 
2501(a) of the Affordable Care Act also amended section 1927(c) of the 
Act by establishing a minimum rebate percentage of 17.1 percent of AMP 
for certain single source and innovator multiple source clotting 
factors and single source and innovator multiple source drugs approved 
by the Food and Drug Administration (FDA) exclusively for pediatric 
indications. Section 2501(a) of the Affordable Care Act also added 
section 1927(b)(1)(C) to the Act to make changes to the non-Federal 
share of rebates by specifying that the amounts attributable to the 
increased rebate percentages be remitted to the

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federal government. The amendments made by section 2501(a) of the 
Affordable Care Act were effective January 1, 2010.
    Section 2501(b) of the Affordable Care Act amended section 1927(c) 
of the Act by increasing the rebate percentage for noninnovator 
multiple source drugs from 11 percent of AMP to 13 percent of AMP, 
effective January 1, 2010.
    Section 2501(c) of the Affordable Care Act amended section 
1903(m)(2)(A) of the Act by specifying new conditions for managed care 
organization (MCO) contracts, including that CODs dispensed to 
individuals eligible for medical assistance under Title XIX of the Act 
who are enrolled with a Medicaid MCO shall be subject to the same 
rebate required by the rebate agreement authorized under section 1927 
of the Act. The Affordable Care Act also amended section 1903(m)(2)(A) 
of the Act to establish that MCO capitation rates shall be based on 
actual cost experience related to rebates and subject to federal 
regulations at 42 CFR 438.6 regarding actuarial soundness of capitation 
payments. The legislation also provided that MCOs are responsible for 
reporting to the state certain utilization data and such other data as 
the Secretary determines necessary for the state to access the rebates 
authorized by this provision.
    Section 2501(c) of the Affordable Care Act also made conforming 
amendments to section 1927(b)(1)(A) of the Act by requiring 
manufacturers that participate in the MDR program to provide rebates 
for drugs dispensed to individuals enrolled with a MCO, if the MCO is 
responsible for coverage of such drugs. It also amended section 
1927(b)(2)(A) of the Act by requiring states to include information on 
drugs paid for by Medicaid MCOs under the state plan during the rebate 
period when requesting rebates from manufacturers. Finally, section 
2501(c) modified section 1927(j)(1) of the Act to specify that CODs are 
not subject to the rebate requirements if such drugs are both subject 
to discounts under the 340B of the Public Health Service Act (PHSA) and 
dispensed by health maintenance organizations (HMOs), including 
Medicaid MCOs. The amendments made by section 2501(c) were effective 
March 23, 2010.
    Section 2501(d) of the Affordable Care Act added a new section 
1927(c)(2)(C) of the Act effective for drugs paid for by a state on or 
after January 1, 2010. This provision modifies the unit rebate amount 
(URA) calculation for a drug that is a line extension (new formulation) 
of a single source or innovator multiple source drug that is an oral 
solid dosage form.
    Section 2501(e) of the Affordable Care Act amended section 
1927(c)(2) of the Act by adding a new subparagraph (D) and establishing 
a maximum on the total rebate amount for each single source or 
innovator multiple source drug at 100 percent of AMP, effective January 
1, 2010.
    Section 2501(f) of the Affordable Care Act made conforming 
amendments to section 340B of the PHSA, but those amendments are not 
addressed in this final rule.
    Section 2503(a)(1) of the Affordable Care Act amended section 
1927(e) of the Act by revising the Federal upper reimbursement limit 
(FUL) to be no less than 175 percent of the weighted average 
(determined on the basis of utilization) of the most recently reported 
monthly AMPs for pharmaceutically and therapeutically equivalent 
multiple source drug products that are available for purchase by retail 
community pharmacies on a nationwide basis. Additionally, it specifies 
that the Secretary shall implement a smoothing process for AMP which 
shall be similar to the smoothing process used in determining the 
average sales price (ASP) of a drug or biological product under 
Medicare Part B. Section 2503(a)(2) of the Affordable Care Act amended 
section 1927(k) of the Act by revising the definition of AMP to now 
mean the average price paid to the manufacturer for the drug in the 
United States by wholesalers for drug distribution to retail community 
pharmacies and retail community pharmacies that purchase drugs directly 
from the manufacturer.
    Section 2503(a)(3) of the Affordable Care Act also amended the 
definition of multiple source drug to specify in the definition that 
the sales of such drugs shall be specifically within the United States. 
Section 2503(a)(4) of the Affordable Care Act added to section 1927(k) 
of the Act definitions of retail community pharmacy and wholesaler for 
purposes of section 1927 of the Act.
    Section 2503(b) of the Affordable Care Act amended section 1927(b) 
of the Act by establishing a requirement that manufacturers report, not 
later than 30 days after the last day of each month of a rebate period 
under the agreement, on the manufacturer's total number of units that 
are used to calculate the monthly AMP for each COD. It also amended the 
preexisting requirement that the Secretary disclose AMPs to instead 
require the Secretary to post, on a Web site accessible to the public, 
the weighted average of the most recently reported monthly AMPs and the 
average retail survey price determined for each multiple source drug in 
accordance with section 1927(f) of the Act. The amendments made by 
section 2503(b) of the Affordable Care Act were effective October 1, 
2010.
    Section 2503(c) of the Affordable Care Act amended section 1927(f) 
of the Act by clarifying that the survey of retail prices described in 
such subsection applies to retail community pharmacies. Section 2503(d) 
of the Affordable Care Act specified that the amendments made by 
section 2503 of the Affordable Care Act were effective October 1, 2010. 
Section 2503(d) of the Affordable Care Act further specified that the 
amendments made by section 2503 shall take effect without regard to 
whether final regulations to carry out such amendments have been issued 
by October 1, 2010.
    Section 3301(d)(2) of the Affordable Care Act included a conforming 
amendment to the definition of best price (BP) under Medicaid at 
section 1927(c)(1)(C)(i)(VI) of the Act. This amendment provides that 
any discounts provided by manufacturers under the Medicare coverage gap 
discount program under section 1860D-14A of the Act are exempt from a 
manufacturer's best price calculation, effective for drugs dispensed on 
or after July 1, 2010.
    Section 7101(a) of the Affordable Care Act expanded the drug 
pricing program under section 340B of the PHSA to include certain 
children's hospitals, freestanding cancer hospitals, critical access 
hospitals, rural referral centers, and sole community hospitals.
    Section 204 of the Medicaid Extenders Act of 2010 (Pub. L. 111-309) 
revised section 340B of the PHSA by removing children's hospitals from 
the orphan drug exclusion described in section 2302 of HCERA.
    Section 1101(c) of HCERA also includes a conforming amendment to 
the definition of AMP under Medicaid at section 1927(k)(1)(B)(i) of the 
Act by providing that discounts provided by manufacturers under the 
Medicare coverage gap discount program under section 1860D-14A are 
excluded from a manufacturer's determination of AMP, effective March 
30, 2010.

C. Other Changes Concerning the Medicaid Drug Rebate Program

    This final rule also implements other miscellaneous provisions 
pertaining to CODs. It implements changes to section 1927 of the Act as 
set forth in section 221 of Division F, Title II, of the Omnibus 
Appropriations Act, 2009, (Pub. L. 111-8, enacted on March 11, 2009) 
(the Appropriations Act). It

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codifies other requirements in section 1927 of the Act pertaining to 
the MDR program, revises certain regulatory provisions presently 
codified at 42 CFR part 447, subpart I, and makes other changes 
concerning rebate requirements.

II. Summary of Proposed Provisions, Analysis of and Responses to Public 
Comments, and Provisions of the Final Rule

    The proposed rule for implementing the requirements of section 1927 
of the Act, as revised by the Affordable Care Act, and the requirements 
related to coverage and payment for CODs, was published on February 2, 
2012 (77 FR 5318). As discussed in the proposed rule, we specifically 
proposed provisions that would revise the MDR program (77 FR 5320), 
including the calculation of AMP (77 FR 5326), drug rebate payments (77 
FR 5338), and upper limits for multiple source drugs (77 FR 5345).
    We received approximately 425 comments from drug manufacturers, 
membership organizations, law firms, pharmacy benefit managers, state 
Medicaid agencies, advocacy groups, not-for-profit organizations, 
consulting firms, health care providers, employers, health insurers, 
health care associations, as well as individual citizens. The comments 
ranged from general support or opposition to the proposed provisions to 
very specific questions or comments regarding the proposed changes.
    The following summarizes comments about the proposed rule, in 
general, or about issues not addressed in the proposed regulations:
    Comment: Several commenters expressed support for the proposed 
rule, noting that it was a significant undertaking and important for 
CMS to require adequate state and federal reimbursement for CODs under 
the Medicaid program.
    Response: We appreciate the support the commenters expressed about 
the proposed rule and we believe that the final policies we are 
adopting in this final rule will continue to allow the federal and 
state governments the flexibility to provide adequate reimbursement for 
the cost of CODs under the Medicaid program.
    Comment: One commenter emphasized the importance of pharmacists in 
the health care team and the need to provide reasonable reimbursement 
for both prescription and cognitive services to ensure beneficiary 
access.
    Response: We appreciate the comment and agree that pharmacists play 
a vital role in the health care delivery system. We have provided for 
payment consistent with the statute and regulations which contemplate 
reimbursement for appropriate professional dispensing fees, which we 
have defined to include certain prescription and beneficiary counseling 
services.
    Comment: While many commenters were supportive of the proposed 
rule, some voiced concerns regarding its impact on the economy or 
pharmacy payments. Some commenters also voiced concerns with the 
implementation of Medicare Prescription Drug Coverage, the birth 
control mandate, and coverage of mental health benefits.
    Response: While we appreciate these comments, issues regarding the 
implementation of Medicare Prescription Drug Coverage, the birth 
control mandate, and coverage of mental health benefits are beyond the 
scope of this rulemaking. As we discuss later in the final rule, we do 
not believe this rule will have an adverse impact on the economy or 
pharmacy payments; this final rule is designed to ensure that pharmacy 
reimbursement is aligned with the acquisition cost of drugs and that 
the states pay an appropriate professional dispensing fee. Discussions 
regarding the impact on the economy and pharmacy payments are discussed 
in the Regulatory Impact Analysis section of this final rule.
    Comment: One commenter requested that CMS evaluate every aspect of 
the proposed rule and revise it in favor of simplicity versus 
complexity and clarity versus complication.
    Response: To the extent practical, we have made every effort to 
ensure that the provisions of this final rule are simple and clear.
    Comment: One commenter expressed general concerns that, if CMS 
finalized the proposed rule as drafted, it would violate the 
Administrative Procedure Act (APA) because CMS's interpretations are 
either contrary to statute or are arbitrary and capricious under 5 
U.S.C. 706(2)(A). The commenter stated that many of CMS's proposals 
(such as AMP, line extensions, inclusion of territories, and 340B 
issues in best price) in the proposed rule are entirely conclusory, 
failed to consider important aspects of the problem, or are internally 
inconsistent, and constitute unreasonable interpretations. The 
commenter urged CMS to revise its proposals related to calculating AMP 
using a buildup versus presumed inclusion methodology; AMP for 5i drugs 
not generally dispensed through retail community pharmacies, line 
extensions, territories, 340B issues in best price, and bundled sales 
arrangements.
    Response: We disagree with the commenter. We believe that we have 
sufficiently met the requirements of the APA. In particular, in the 
proposed rule, we identified the legal authority for our proposals, 
sufficiently described the substance of the proposed rule and the 
subjects involved, as well as proposed regulation text. The proposed 
rule also identified the data, information, and assumptions supporting 
our proposals. After consideration of public comments, we are issuing 
this final rule and, as discussed in greater detail in the sections 
that follow, we demonstrate that we have examined the relevant 
information, considered the significant issues relevant to the proposed 
rule, and sufficiently explained our final policies. The detailed 
comments and responses pertaining to issues concerning AMP, best price, 
line extensions, and bundled sales arrangements can be found in 
subsequent sections of this final rule. In those sections, we explain 
why our proposals are consistent with the relevant provisions of the 
statute, and our authority to implement those provisions, as well as 
consistent with our understanding of congressional intent and recent 
Affordable Care Act amendments. We also explain in response to comments 
why we either finalized a proposed provision or revised a proposed 
provision based on comments. Accordingly, we believe that we have taken 
the necessary steps to comply with the requirements of the APA and that 
the requirements of this final rule are neither arbitrary nor 
capricious.
    Comment: Several commenters requested that CMS specifically 
identify any provisions that are retroactive and specify the effective 
date and legal basis for the retroactive application. Many commenters 
requested that the final rule be implemented on a prospective basis 
only and believe that it is reasonable that manufacturers, states and 
territories will require a lead time of 6 to 12 months from the 
publication date of the final rule to implement the significant changes 
in the proposed rule. One commenter noted that allowing all parties 
equal time for implementation would recognize that all parties 
(manufacturers, states and territories) have equal responsibility to 
comply with the program requirements. Another commenter believed that 
stakeholders and manufacturers are not bound by the proposed rule 
because it is non-binding.
    Response: The final rule is effective on April 1, 2016. We believe 
our final

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policies will allow adequate time for implementation and where 
appropriate, have extended time for compliance. We further note that 
the Affordable Care Act established earlier effective dates for certain 
statutory provisions without regard to this rulemaking, as discussed in 
the proposed rule (77 FR 5319). To the extent any provisions are not 
new and merely emphasize or clarify longstanding agency policy, we have 
endeavored to note that as such.
    Comment: One commenter requested that CMS confirm that 
manufacturer's use of reasonable interpretations of the statute is 
permissible prior to the effective date of the final rule.
    Response: Manufacturers are always encouraged to interpret the 
statute in a manner consistent with the requirements and intent of 
section 1927 of the Act and federal regulations, as discussed in prior 
rules regarding the MDR program (see, for example, 72 FR 39167 (July 
17, 2007)) and consistent with the national rebate agreement. However, 
in accordance with the requirements of the national rebate agreement, 
manufacturers must maintain adequate documentation supporting any 
assumptions.
    Comment: One commenter requested that CMS provide the states 
flexibility to come into compliance with final regulations or guidance 
due to variations in timing of state legislative sessions and state 
procurement procedures. The commenter was particularly concerned with 
the provisions relating to reimbursement at AAC and the professional 
dispensing fee.
    Response: We appreciate the concerns expressed by the commenter. As 
discussed in this section, we have included a compliance date that 
specifies that states will have 1 year after the effective date of this 
final rule to submit a state plan amendment (SPA) which would 
incorporate the requirements of the final rule. We expect to issue 
subregulatory guidance to the states regarding this process.

A. Basis and Purpose (Sec.  447.500)

    Section 2501(c) of the Affordable Care Act established new 
requirements for manufacturers that participate in the MDR program to 
pay rebates for drugs dispensed to individuals enrolled with a Medicaid 
MCO, if the MCO is responsible for coverage of such drugs. To 
effectuate those changes, we proposed to add Sec.  447.500(a)(4), to 
specify sections 1903(m)(2)(A)(xiii) and 1927(b) of the Act as the 
basis for requiring that manufacturers provide rebates for CODs 
dispensed to individuals eligible for medical assistance who are 
enrolled in Medicaid MCOs (77 FR 5320). We proposed to add Sec.  
447.500(a)(5) which would add section 1902(a)(30)(A) as an additional 
statutory basis for calculating payments for CODs. We received no 
comments concerning the proposals to add Sec.  447.500(a)(4) and (5), 
and therefore, for the reasons we noted, we are finalizing these 
provisions as proposed. We note that the comments and responses 
pertaining to the proposed requirements regarding the calculation of 
rebates for drugs dispensed through Medicaid MCOs are discussed later 
in the Medicaid Drug Rebates (Sec.  447.509) section (section II.G.3.) 
of this final rule.

B. Definitions (Sec.  447.502)

1. 5i drug
    Section 202 of the Education, Jobs and Medicaid Assistance Act 
(Pub. L. 111-226), enacted on August 10, 2010 and effective on October 
1, 2010, amended the definition of AMP under section 
1927(k)(1)(B)(i)(IV) of the Act to include sales for inhalation, 
infusion, instilled, implanted, or injectable drugs that are not 
generally dispensed through retail community pharmacies.
    Given this amendment, we included a proposed definition, which 
defined a ``5i drug'' to mean an inhalation, infusion, instilled, 
implanted, or injectable drug that is not generally dispensed through a 
retail community pharmacy (77 FR 5359). We did not receive any comments 
specific to this proposed definition of 5i drug, but we received a 
number of comments concerning the identification of such drugs for 
purposes of the calculation of AMP. We address comments pertaining to 
the identification of and other 5i drug issues in section II.C. of this 
final rule.
    At this time, we do not believe a definition of 5i drug is 
necessary and therefore we are not finalizing any definition for 5i 
drug that was proposed in Sec.  447.502 (77 FR 5359). However, we note 
that the acronym ``5i drug'' has already been widely adopted in the 
nomenclature of many stakeholders, including drug manufacturers, retail 
community pharmacies, consulting firms and even CMS as simply a 
convenient way to condense the list of the five specific drug types 
(inhalation, infusion, instilled, implanted, or injectable drugs). 
Therefore, we will use the ``5i drug'' acronym to refer to all 
inhalation, infusion, instilled, implanted, or injectable drugs when 
discussing the identification of such drugs. Therefore, for the reasons 
discussed in this section, we have decided not to finalize in Sec.  
447.502 the definition of 5i drug that was proposed (77 FR 5359).
2. Actual Acquisition Cost
    In proposed Sec.  447.502, we proposed to replace the term, 
``estimated acquisition cost'' (EAC) with ``actual acquisition cost'' 
(AAC) and to define AAC as the agency's determination of the pharmacy 
providers' actual prices paid to acquire drug products marketed or sold 
by specific manufacturers (77 FR 5320 and 5359). As discussed in the 
proposed rule, we believe that this definition provides a more accurate 
estimate of the prices available in the marketplace, while assuring 
sufficient beneficiary access, consistent with section 1902(a)(30)(A) 
of the Act (77 FR 5320 through 5321). We received the following 
comments concerning the proposed revised definition of AAC:
a. Support for Proposal To Define/Implement AAC
    Comment: One commenter supports CMS's efforts to provide states 
with accurate reference prices upon which to base reimbursement for 
CODs and to replace EAC with AAC. Several commenters appreciated CMS's 
desire to move away from an estimated reimbursement based on average 
wholesale price (AWP) or wholesale acquisition cost (WAC) and to 
substitute instead a requirement that states adopt AAC payment 
formulas. Another commenter stated that drug reimbursement based on AAC 
as opposed to AWP seems to present a fair cost-based approach to 
pharmacy reimbursement and allows pharmacies to negotiate for their 
true value in the healthcare system in the professional dispensing fee.
    Response: We agree with these comments and believe that 
reimbursement based on AWP or WAC may fail to represent accurate 
purchase prices, because (unlike prices based on AAC) prices based on 
AWP or WAC do not necessarily include the discounts and price 
concessions available in the marketplace.
    Comment: One commenter stated that CMS should require states to 
implement AAC as the exclusive means to reimburse drugs. The commenter 
expressed concern that allowing states to include AAC in their existing 
lower of reimbursement formulas would result in inconsistent and 
inadequate reimbursement. The commenter also noted that CMS should 
require states to adopt an adequate professional dispensing fee with 
their AAC reimbursement methodology.
    Response: In accordance with the provisions of section 
1902(a)(30)(A) of

[[Page 5175]]

Act, which requires, in part, that states have methods and procedures 
to assure that payment for Medicaid care and services are consistent 
with efficiency, economy, and quality of care, we proposed to replace 
the term EAC with AAC, which revises the reimbursement standard for 
prescription drugs. We believe that this change is necessary to require 
that states calculate reimbursement prices based on the prices actually 
available to pharmacies in the marketplace. However, we recognize that 
there may be instances when a survey price, such as the National 
average drug acquisition cost (NADAC), is not available for a specific 
drug product, and therefore, we believe that states should have some 
flexibility for establishing reimbursement rates.
    Furthermore, as discussed in the State Plan Requirements, Findings 
and Assurances section (section II.M.) of this final rule, we have 
revised Sec.  447.518(d) of this final rule such that when states are 
proposing changes to either the ingredient cost reimbursement or the 
professional dispensing fee reimbursement, they will be required to 
evaluate their proposed changes in accordance with the requirements of 
this final rule to ensure that total reimbursement to the pharmacy 
provider complies with the requirements of section 1902(a)(30)(A) of 
the Act. States are responsible for providing adequate information to 
support any proposed changes to either or both of the components of the 
reimbursement methodology.
b. Opposition to Proposal To Define/Implement AAC
    Comment: Several commenters believe that states should be able to 
use an EAC or an AAC for pharmacy reimbursement. One of the commenters 
stated that to implement an AAC methodology, a state would have to 
conduct their own regular, costly survey or depend on the NADAC. The 
commenter added that some states may think that the NADAC does not 
truly represent the costs to pharmacies in that state, especially where 
a state has a disproportionate share of independent pharmacies.
    Response: EAC was defined, in part, as the states' estimate of the 
prices generally and currently paid for a drug, and states 
traditionally used published compendia prices such as the AWP to 
establish this estimate. The HHS Office of Inspector General (OIG) has 
published several reports (OIG Audit reports--A-06-00-00023, A-06-01-
00053, A-06-02-00041),\1\ which demonstrate that, because of the flawed 
nature of an AWP-based reimbursement, states have often reimbursed too 
much for CODs; thus, the OIG has recommended that we work with states 
and the Congress to base reimbursement on an amount that more 
accurately reflects pharmacy acquisition cost. We believe that a change 
to AAC is more consistent with the statutory provisions at section 
1902(a)(30)(A) of the Act as AAC requires states to calculate 
reimbursement prices based on the prices actually paid by pharmacy 
providers. We have cited examples in the proposed rule (77 FR 5350) 
that the states can use to develop or support an AAC. As discussed 
further below, states retain the flexibility to establish an AAC 
reimbursement based on several different pricing benchmarks, but they 
have the responsibility to ensure that Medicaid pharmacy providers are 
adequately reimbursed in accordance with the requirements of section 
1902(a)(30)(A) of the Act.
---------------------------------------------------------------------------

    \1\ ``Medicaid Pharmacy--Actual Acquisition Cost of Brand Name 
Prescription Drug Products,'' (A-06-00-00023), August 10, 2001; 
``Medicaid Pharmacy--Actual Acquisition Cost of Generic Prescription 
Drug Products'' (A-06-01-00053), March 14, 2002; ``Medicaid 
Pharmacy--Additional Analyses of the Actual Acquisition Cost of 
Prescription Drug Products,'' (A-06-02-00041), September 16, 2002.
---------------------------------------------------------------------------

    Comment: One commenter stated that the phrase ``actual acquisition 
cost'' is misleading, as pharmacy providers' reimbursement will not be 
based on their actual price. The commenter stated that, for example, a 
yearly national survey cannot simultaneously or accurately reflect 
actual ingredient costs in different states and believes that AAC is no 
better a price indicator than the EAC. A few commenters stated that EAC 
should be used for pharmacy reimbursement because it may be unrealistic 
for a state to determine any pharmacy's AAC for a drug product, net of 
rebates, incentives, or other purchasing arrangements because invoice 
reviews will not provide the actual cost, will only apply to a 
particular timeframe, drug prices change rapidly, and the dispense date 
may be different than the actual date it was purchased. A few 
commenters stated that the methodology for calculating the AAC should 
be referenced in the definition. One commenter also stated that because 
prices paid may be different due to pharmacy provider's wholesaler 
agreements, EAC or average invoice cost or ``average actual acquisition 
cost'' would be a more accurate terminology.
    Response: We believe that AAC is a better price indicator than EAC. 
As discussed in this section, there has been longstanding concern by 
the OIG that states continue to overpay for Medicaid CODs, as states 
traditionally used published compendia prices such as the AWP to 
establish the EAC. As we stated in the proposed rule, (77 FR 5350), 
states retain the flexibility to establish an AAC reimbursement based 
on several different pricing benchmarks, including, but not limited to, 
a national survey of AACs, a state survey of retail pharmacy providers, 
or AMP data. The AMP is based on actual sales data and reported and 
certified by drug manufacturers, and could be considered as a 
reimbursement metric, provided that the use of such a metric is 
consistent with section 1927(b)(3)(D) of the Act. The state can 
determine the relationship of the AMP to factors such as the wholesaler 
markup, which covers the cost of distribution and other service charges 
by the wholesaler, to determine a reasonable reimbursement that would 
appropriately compensate pharmacies.
    As we stated in the proposed rule (77 FR 5321 and 5350), we realize 
that states may have difficulty determining the actual price of each 
drug at the time it was purchased. However, as states have flexibility 
to establish a methodology to determine AAC, we decline to include a 
specific methodology for calculating AAC in the definition.
    Comment: One commenter stated that the proposal to move to AAC for 
branded drugs was not authorized by the Congress, and therefore, should 
not be undertaken. The commenter further stated that the Congress 
legislated specific limits on Medicaid pricing for drugs subject to 
FULs, but changes to brand drugs were absent. One commenter stated that 
when CMS issued the AMP final rule on the Deficit Reduction Act (DRA) 
in July 2007, they declined to modify the definition of EAC because CMS 
stated that the DRA did not modify the definition. Another commenter 
stated that by proposing a shift from EAC to AAC, CMS has introduced an 
issue that is not germane to the implementation of the AMP changes in 
the Affordable Care Act for rebate and FUL purposes.
    Response: While we agree with the commenter that these changes are 
not expressly required by the Affordable Care Act, as discussed 
previously in this section, we are authorized to make these changes 
under section 1902(a)(30)(A) of the Act. Furthermore, we believe that 
AAC will be more reflective of actual prices paid, as opposed to 
unreliable published compendia pricing, while

[[Page 5176]]

continuing to provide sufficient payment to assure beneficiary access. 
At the time that we issued the proposed rule, certain states had 
already begun to incorporate survey data based on pharmacy invoice 
prices into their pharmacy reimbursement methodologies to calculate 
more accurate payment rates.\2\ Since the publication of the proposed 
rule, additional states have incorporated the use of acquisition costs, 
based on survey data, as a reimbursement metric for CODs, including 
Colorado, Idaho, Iowa, and Louisiana. In addition, using a commercially 
published reference price as the basis for Medicaid pharmacy 
reimbursement has been problematic for both the states and the federal 
government because reimbursement based on published compendia prices, 
as discussed in several reports issued by the OIG, is often 
significantly inflated, and not necessarily reflective of a pharmacy's 
actual purchase price for a drug.\3\ Therefore, we have decided to 
finalize the requirements concerning AAC in this final rule.
---------------------------------------------------------------------------

    \2\ Alabama-10-008, effective date September 22, 2010 (Alabama 
AAC Survey information available at http://www.mslc.com/Alabama/) 
and Oregon-10-13, effective date January 1, 2011 (Oregon AAC Survey 
information available at http://www.mslc.com/Oregon/)
    \3\ http://oig.hhs.gov/oas/reports/region6/60000023.htm; http://oig.hhs.gov/oas/reports/region6/60100053.htm;http://oig.hhs.gov/oas/reports/region6/60200041.htm;
---------------------------------------------------------------------------

    Comment: One commenter stated that some states have requested that 
CMS establish a national benchmark based on AAC; however, the commenter 
believed that Congressional intent was not for CMS to mandate that an 
AAC benchmark be implemented by states.
    Response: The definition of AAC in this final rule does not mandate 
that states use a specific formula or methodology to establish their 
AAC reimbursement. As we stated in the proposed rule, (77 FR 5350), 
states continue to retain the flexibility to establish an AAC 
reimbursement based on several different pricing benchmarks, including, 
but not limited to, NADAC files, AMP, or surveys--such as a state 
survey of retail pharmacy providers-- because all of these measures are 
based on actual market prices of drugs. The state may use WAC to 
develop and support an AAC model of reimbursement, if the state can 
provide data to support a model of reimbursement using the WAC prices 
consistent with Sec.  447.512(b) of this final rule.
c. Language Changes to the Proposed Definition of AAC
    Comment: A few commenters stated that the AAC definition should be 
amended to require that the word ``currently'' be included in the 
definition between ``prices'' and ``paid'' (that is, ``actual prices 
currently paid'') to ensure payment is not based on outdated pricing 
and also stated that this is especially important for brand drugs which 
are responsible for 80 percent of all Medicaid drug spending.
    Response: We do not believe that it is necessary to incorporate the 
term ``currently'' into the definition of AAC. We have defined AAC to 
require that states establish payment rates based on actual prices paid 
to acquire drug products, and we expect that those prices would reflect 
current prices. The pricing benchmarks we provide to states, for 
example, the weekly NADAC files, and the monthly and quarterly AMP, are 
updated to reflect current prices. Further, if a state chooses to 
conduct a state survey to create a database of acquisition cost data, 
then the timing of the collection of that data would be at the state's 
discretion subject to federal approval.
    Comment: A few commenters indicated that the AAC definition in the 
proposed rule should be more explicit and should address implementation 
issues such as a requirement that the AAC be recalculated whenever the 
state makes a change in the professional dispensing fee.
    Another commenter stated that the language in the proposed rule is 
confusing regarding the cost of the product, and that the proposal to 
replace EAC with AAC seems to create a mandate for states to move to a 
reimbursement mechanism that uses a close estimate of the pharmacy's 
AAC, but is not clear in that respect.
    Response: We appreciate the comments. We have revised Sec.  
447.518(d) to require states to consider both the ingredient cost 
reimbursement and the professional dispensing fee reimbursement when 
proposing changes to either of these components of the reimbursement 
for Medicaid covered drugs. Additionally, we have addressed such 
implementation concerns by noting that states that need to revise their 
payment methodologies in accordance with this final rule must submit a 
SPA no later than 4 quarters from the effective date of this final rule 
to revise their payment methodology for CODs in accordance with the 
requirements of Sec. Sec.  447.512(b) and 447.518(d).
    For the reasons we articulated, we are finalizing the definition of 
AAC at Sec.  447.502 as proposed (77 FR 5359).
3. Authorized Generic Drug
    We proposed moving the definition of ``Authorized generic drug'' 
from Sec.  447.506(a) to Sec.  447.502 (discussed in more detail at 77 
FR 5321). However, we did not propose any revisions to the definition 
presently set forth at Sec.  447.506(a). To clarify, for purposes of 
the MDR program, we define an authorized generic drug as any drug sold, 
licensed, or marketed under a New Drug Application (NDA) approved by 
the FDA under section 505(c) of the Federal Food, Drug and Cosmetic Act 
(FFDCA) that is marketed, sold, or distributed under a different 
labeler code, product code, trade name, trademark, or packaging (other 
than repackaging the listed drug for use in institutions) than the 
brand name drug. We did not receive any comments concerning the 
proposal to move the definition of authorized generic drug. Therefore, 
we are finalizing the definition of authorized generic drug in Sec.  
447.502 as it was proposed.
4. Bona Fide Service Fee
    In proposed Sec.  447.502, we proposed to revise the definition of 
bona fide service fee to mean fees paid by a manufacturer to 
wholesalers or retail community pharmacies that represent fair market 
value for a bona fide, itemized service actually performed on behalf of 
the manufacturer that the manufacturer would otherwise perform (or 
contract for) in the absence of the service arrangement; and that is 
not passed on in whole or in part to a client or customer of an entity, 
whether or not the entity takes title to the drug. The fee includes, 
but is not limited to, distribution service fees, inventory management 
fees, product stocking allowances, and fees associated with 
administrative service agreements and patient care programs (such as 
medication compliance programs and patient education programs) (77 FR 
5321 and 5359).
    We received the following comments concerning the proposed revision 
to the definition of bona fide service fee:
a. Application of Bona Fide Service Fees Exclusion to Limited Entities
    Comment: Many commenters supported the proposed definition of bona 
fide service fee at proposed Sec.  447.502. One commenter indicated 
there are a wide variety of legitimate service arrangements with 
wholesalers and other direct purchase customers, and those arrangements 
frequently

[[Page 5177]]

change to address new patient needs and new challenges in the drug 
distribution chain. These commenters further stated that retention of 
the existing standard set forth in Sec.  447.502 for bona fide service 
fee facilitates manufacturer compliance and allows manufacturers to 
develop new business models and contractual relationships to adapt to 
the changing prescription drug market.
    However, many commenters expressed their concerns regarding the 
proposed definition of bona fide service fee because it contains a 
recipient limitation. The proposed definition limited the application 
of the bona fide service fee exclusion to fees paid by manufacturers to 
only wholesalers and retail community pharmacies and does not account 
for other direct purchase customers further recognized in the 
calculation of AMP under the proposed regulation and statute. One 
commenter indicated that CMS proposed to include in the AMP transaction 
many other entities, such as those CMS view as ``conducting business 
as'' wholesalers or retail community pharmacies, secondary 
manufacturers for authorized generics, and a wide spectrum of entities 
that dispense 5i drugs not generally dispensed through retail community 
pharmacies; and while the commenter does not believe all these 
transactions should be included in the calculation of AMP, to the 
extent transactions with other entities are included in AMP, any bona 
fide service fees paid to those entities should also be excluded.
    Several commenters stated that the Congress did not amend the 
statute to define ``bona fide service fee,'' but amended the AMP 
provision of the statute to provide examples of bona fide service fees. 
Many of the commenters stated that in light of those amendments, the 
revised reference from ``an entity'' to ``wholesalers and retail 
community pharmacies'' was a drafting error by CMS, and does not make 
sense for AMP calculations for 5i drugs not generally dispensed through 
retail community pharmacies and best price determinations because such 
calculations include transactions to other direct customers other than 
retail community pharmacies and wholesalers. Other commenters believed 
there was a drafting error in the proposed definition at Sec.  447.502 
because in proposed Sec.  447.505, the proposed rule expressly included 
fees paid to group purchasing organizations (GPOs), which are not 
wholesalers or retail community pharmacies. Another commenter provided, 
as an example, that if a manufacturer was to purchase ``pharmaco-
economic data'' from a health plan at fair market value and the 
arrangement otherwise satisfied the four-part test for bona fide 
service fees, it would not make sense to treat this payment as a 
discount merely because it was not paid to a wholesaler or a retail 
community pharmacy.
    One commenter noted that including bona fide service fees paid by 
manufacturers to any entity in AMP for 5i drugs not generally dispensed 
through retail community pharmacies and including bona fide service 
fees in best price as discounts or price concessions would result in an 
artificially low AMP for such 5i drugs calculation and a lower best 
price determination for all single source or innovator multiple source 
drugs. Another commenter indicated that limiting the definition would 
be operationally difficult to do since manufacturers would need to 
recognize the same fee as a discount/price concession in some 
government pricing programs, but as a legitimate fee for service in 
others.
    Several commenters also noted that under the existing regulation 
(definition of bona fide service fee at Sec.  447.502 based on the 2007 
AMP final rule (72 FR 39240)) bona fide service fee is defined in 
relevant part to mean, ``fees paid by a manufacturer to an entity'' and 
that the reference to ``an entity'' from this current rule has been 
replaced with ``wholesalers and retail community pharmacies.'' The 
commenters stated that ``an entity'' language is more appropriate for 
purposes of defining bona fide service fee because the definition 
applies not only to the calculation of AMP, but also to the calculation 
of AMP for 5i drugs not generally dispensed through retail community 
pharmacies and best price determinations as well. One commenter stated 
that CMS's proposed definition was unreasonable in that fees would need 
to be treated as discounts because the customer, while included in the 
AMP and best price calculation, did not qualify as a wholesaler or 
retail community pharmacy.
    Response: We appreciate the support for the proposed definition of 
bona fide service fee and comments that raised concerns regarding our 
changes we proposed given the specific changes to the AMP calculation 
as added by section 2503(a)(2) of the Affordable Care Act. After 
considering the issues raised by the commenters, we have decided to 
amend the definition at Sec.  447.502 in this final rule to remove the 
references to wholesalers and retail community pharmacies. We agree 
with commenters that there is no indication that the Congress intended 
to limit the definition of bona fide service fees for best price. 
Section 1927(k)(1)(B)(i)(II) of the Act, as added by section 2503(a)(2) 
of the Affordable Care Act, excludes from the definition of AMP bona 
fide service fees paid by manufacturers to wholesalers and retail 
community pharmacies and it includes examples of those fees included in 
that exclusion. However, section 1927(k)(1)(B)(i)(II) of the Act does 
not provide an express definition of what constitutes a bona fide 
service fee generally, nor does it directly apply to Best Price. 
Therefore, we believe the proposed definition may have been too 
limiting with regard to the entities that were identified. Accordingly, 
in this final rule we are revising the definition of bona fide service 
fee at Sec.  447.502 to remove the reference to ``wholesalers and 
retail community pharmacies'' and replace it with ``an entity'' so that 
manufacturers can apply the definition with regard to their calculation 
of both AMP and best price. Further discussion regarding what is 
included and excluded from the determination of AMP and best price is 
included in sections II.C (Sec.  447.504(c) and (f)) and II.D (Sec.  
447.505(c)) of this final rule.
b. Four-Part Test
    Comment: Commenters stated that the proposed definition of bona 
fide service fee has no basis in the statute and stated that the 
Congress chose not to adopt the 2007 AMP final rule (72 FR 39142) 
definition because it is too limiting. Commenters also questioned 
whether the Congress intended that distribution fees, inventory 
management fees, and product stocking allowances be subject to fair 
market value, as the statutory language makes no reference to such a 
test, but stated they are to be excluded. A commenter noted that the 
proposed rule does not offer any criteria for whether a particular 
amount does or does not satisfy the test, thereby leaving manufacturers 
potentially at risk of inappropriately excluding a fee from their 
calculation of AMP.
    A commenter also provided that it is not clear why the decision of 
the service provider to pass on all, or a portion of, the service fee 
to a client should have any bearing on the determination as to whether 
a service was provided in return for the fee. One commenter agreed with 
CMS that the 2007 ``four-part test'' remains a definitive test to 
qualify a payment as a bona fide service fee and the four-part test 
should be applied to all agreements, regardless of the agreements 
referenced in the Affordable Care Act. The commenter requested that CMS 
establish the same

[[Page 5178]]

policy for treatment of bona fide service fees (that is, allow 
manufacturers to presume, in the absence of such evidence, that a bona 
fide service fee is not passed on in whole or in part to the client) in 
AMP, best price, and ASP.
    Response: Section 1927, along with our general rulemaking authority 
in section 1102 of the Act, provides the requisite authority for CMS to 
define and interpret certain terms such as bona fide service fees in 
regards to calculation of AMP and best price. Although the Affordable 
Care Act amendments to the AMP definition address such fees in regards 
to the exclusions from AMP, section 1927(k)(1)(B)(i)(II) of the Act 
does not provide an actual definition of bona fide service fee or apply 
directly to best price. Therefore, even though these statutory 
amendments to section 1927(k)(1)(B)(i)(II) of the Act are instructive 
and provide examples of the types of fees that would qualify as bona 
fide, we believe that the statutory amendments do not prohibit us from 
proposing a general definition of bona fide service fee that 
incorporates the four-part test we proposed and have been using in 
light of the definition in the present regulations (at Sec.  447.502). 
We agree with the commenter that the four-part test remains a 
definitive test to qualify a payment as a bona fide service fee and 
that manufacturers are responsible for meeting all four parts of the 
definition before a fee can qualify as a bona fide service fee. We 
believe the element regarding fees paid by a manufacturer that are not 
passed on in whole or in part to a client or customer of an entity is a 
major factor in distinguishing bona fide service fees from price 
concessions, such that if a fee is passed on in whole or in part to a 
client or customer of an entity, the fee would be considered a price 
concession and therefore would be included in the calculation of AMP. 
Price concessions reduce the price realized by the manufacturer for 
drugs distributed to retail community pharmacies as they do not reflect 
any service or offset of a bona fide service performed on behalf of the 
manufacturer. In light of comments regarding the need for the same 
application of the four-part test in the AMP, best price and ASP 
calculations, we have decided to revise our position taken in regards 
to the 2007 AMP final rule for the ``not passed on'' prong of the bona 
fide service fee test to more fully align with the ASP policy. 
Specifically, in the 2007 AMP final rule (72 FR 39183), our approach to 
this part of the four-part test differed slightly from the ASP policy. 
At that time, we believed that there must be no evidence or arrangement 
indicating that the fee is passed on to the member pharmacy, client or 
customer of any entity included in the calculation of AMP for the 
manufacturer to exclude these fees from the determination of AMP. 
However, based on comments received, we are revising our position and 
adopting the policy set forth in the CY 2007 Physician Fee Schedule 
(PFS) final rule, published December 1, 2006 (71 FR 69669), in which 
CMS allows manufacturers, for certifying to the accuracy of their ASP 
calculations, to presume, in the absence of any evidence or notice to 
the contrary, that the fee paid is not passed on to a client, or 
customer of any entity (if a fee paid meets the other elements of the 
definition of bona fide service fee).
    Therefore, if a manufacturer has determined that a fee paid meets 
the other elements of the definition of bona fide service fee, then the 
manufacturer may presume, in the absence of any evidence or notice to 
the contrary, that the fee paid is not passed on to a client or 
customer of any entity.
    Comment: One commenter pointed out that there are three slightly 
different definitions of bona fide service fee in the proposed rule: 
(1) The proposed definitions section at Sec.  447.502 which is limited 
to retail community pharmacies and wholesalers; (2) the proposed 
determination of AMP section at Sec.  447.504(c)(14) which is limited 
to retail community pharmacies, wholesalers and GPOs; and (3) the 
proposed determination of best price section at Sec.  447.505(c)(16) 
which includes any other entity that conducts business as a wholesaler 
or a retail community pharmacy.
    Several commenters urged CMS to replace these three definitions 
with one uniform bona fide service fee definition. The commenters 
specifically recommended using the proposed definition from the 
definitions section which includes the traditional four-part criteria, 
as well as the statutory examples of bona fide service fee. Some 
commenters recommended that CMS simplify the definition of bona fide 
service fee to mean the fair market value for services performed, and 
should eliminate the other requirements of the bona fide service fee 
definition. Another commenter stated that regardless of who receives a 
bona fide service fee, the payment is fair market value compensation 
for work done and not a price concession.
    Response: We agree with the commenter that the proposed definition 
of bona fide service fee is inconsistent in Sec. Sec.  447.502, 447.504 
and 447.505; furthermore, it was not our intent to have three 
definitions of bona fide service fee. As discussed in this section, we 
have replaced the limiting phrase ``to wholesalers or retail community 
pharmacies'' with ``an entity'' in the definition of bona fide service 
fee at Sec.  447.502 and have streamlined Sec. Sec.  447.504 and 
447.505 to refer to the definition of bona fide service fee at Sec.  
447.502, rather than restate the definition, to avoid inconsistencies. 
Additionally, we disagree with the commenters that suggested we 
simplify the definition of bona fide service fee by eliminating the 
requirements (specifically the four-part test). As discussed in this 
section, the statutory amendments do not prohibit CMS from proposing a 
general definition of bona fide service fee that incorporates the four-
part test CMS proposed, and has been using since the 2007 AMP Final 
Rule. We continue to believe that the four-part test provides a 
standard for manufacturers to use when determining whether or not a fee 
is bona fide. Furthermore, as discussed in this section, we are 
revising our position on ``the passed on in whole or in part'' prong of 
the four-part test to be consistent with ASP and are adopting the 
policy provided by CMS in CY 2007 PFS final rule (71 FR 69669). The 
application of the exclusion of bona fide service fee is more fully 
addressed in the determination of AMP and best price sections of the 
regulations text (Sec. Sec.  447.504 and 447.505). Additional 
discussion regarding these changes are addressed in sections II.C 
(Sec.  447.504(c) and (f)) and II.D (Sec.  447.505(c)) of this final 
rule.
    Comment: Several commenters noted that the proposed definition of 
bona fide service fee does not capture all the fees that a manufacturer 
may pay to AMP/best price-eligible customers and indicated that they 
wanted specific examples, or a list of bona fide service fees in the 
regulations text. The commenters indicated that certain categories of 
wholesaler services--such as financial services (for example, managing 
manufacturers' contracted discounts, processing chargebacks, and 
handling credits and re-bills to correct for mistakes in the assessment 
of 340B or Federal Supply Schedule (FSS) eligibility), marketing and 
sales services, and data management services--should be included as 
bona fide service fees. Another commenter stated that manufacturers 
must enlist wholesalers and distributors to perform the services 
associated with the returns and they pay them for these services on a 
fair market value basis as a bona fide service fee.

[[Page 5179]]

Therefore, the commenter urged CMS to exclude from AMP payments for 
returned goods handling and processing, reverse logistics, and drug 
destruction, if such payments meet the definition of a bona fide 
service fee.
    One commenter recommended that an initial stocking allowance not be 
considered a bona fide service fee, as it is normally a one-time event, 
is intended to promote the sales of products, and does not meet the 
definition of either bona fide service fee or a customary prompt pay 
discount. Commenters also suggested that the cost of providing data 
management services should be identified in the regulations text as 
being bona fide service fee eligible. The commenter also stated that 
because AMP will play a role in reimbursement for multiple source 
drugs, it is necessary for the final rule to acknowledge that the sales 
and marketing services wholesalers provide to generic manufacturers are 
also candidates for bona fide service fee treatment.
    One commenter believed that the lists of bona fide service fees in 
the Affordable Care Act are examples, rather than an exhaustive list, 
and was pleased that the proposed rule concurs with that assessment. 
This commenter stated that attempting to specify all bona fide service 
fees in regulations text would limit future flexibility and hamper 
innovation in a highly competitive marketplace.
    Response: We appreciate the comments but do not agree that we 
should provide further examples, an all-inclusive list, or additional 
types of bona fide service fees. Although we do not believe the bona 
fide service fee examples provided in the Affordable Care Act amendment 
to the AMP definition is an exhaustive list, we believe that the 
examples provided in the Affordable Care Act amendments (including 
stocking allowances) to the AMP definition are bona fide service fees 
and sufficient to provide manufacturers with a general sense of the 
types of such fees.
    Comment: One commenter requested guidance from CMS regarding the 
kinds of agreements encompassed within the term ``administrative 
service agreements'' as provided in the proposed rule.
    Response: While we are not defining the term administrative service 
agreements in this final rule, we would consider administrative service 
agreements to include, but not be limited to, activities of a clerical, 
managerial, or processing nature that the manufacturer would otherwise 
perform (or contract for) in the absence of the administrative service 
agreement.
    Comment: Several commenters suggested that in the final rule CMS 
should clarify in the definition of bona fide service fee that not all 
service fees paid by manufacturers need to be subject to the bona fide 
service fee test, and may be automatically ignored. As examples of such 
fees, the commenter stated fees paid by the manufacturer to its tax 
preparer, or to its landscaping company, are clearly not fees that 
would be considered price concessions. Therefore, the commenter 
suggested that CMS consider adding, ``Only fees paid to an entity in 
the chain of distribution or payment of CODs must be evaluated under 
the bona fide service fee test'' to the definition of bona fide service 
fee to makes clear that not all fees to any entity need to be subject 
to the test.
    Response: We agree with the commenters that for purposes of the MDR 
program certain fees unrelated to the sale of a drug or drugs but 
rather to the overall business of the manufacturer, such as tax 
preparation services, would not need to be treated as a bona fide 
service fee because the transactions to such entities (tax preparers) 
would not be included in the determination of AMP or best price. 
However, we do not believe it is necessary to further amend the 
regulation to note the fees or transactions that are not subject to or 
excluded from the definition of bona fide service fee.
c. Fair Market Value
    Comment: Several commenters supported CMS's decision not to define 
fair market value and leave this determination to the manufacturer. The 
commenters believed this flexibility is critical due to the wide array 
of service providers and fee arrangements present in the marketplace. 
One commenter stated that this approach provides manufacturers with the 
needed flexibility to use the most appropriate methodology for the 
arrangement being evaluated, while still ensuring that the fair market 
value determination is documented and available for review as 
appropriate. Another commenter stated that this approach appropriately 
balances the need for a clear standard with the need for flexibility to 
adapt to a changing market.
    Response: We agree with the commenters. Given the continually 
changing pharmaceutical marketplace, we will continue to allow 
manufacturers the flexibility to determine the fair market value of a 
service when evaluating whether the service fee is bona fide or not.
    Comment: Several commenters had concerns with CMS not defining fair 
market value as part of this rule. The commenters urged CMS to set 
forth clear criteria to utilize in determining whether or not given 
fees satisfy the fair market value requirement.
    One commenter stated that language in the preamble regarding 
potential fraud concerns may have the effect of increasing 
manufacturers' concerns over possible litigation regarding alleged 
inflation of the prices reported for Medicaid rebates. Another 
commenter stated that without clear guidance on fair market value, some 
manufacturers will continue using unrealistic, overly restrictive fair 
market value assumptions that could undermine the industry's fee-based 
distribution business model and inappropriately complicate negotiations 
over service fees that permit wholesalers to provide appropriate 
services to manufacturers and bring efficiencies to the supply channel.
    Several commenters encouraged CMS to provide guidance on the 
concept of fair market value, stating that without more specificity 
about what CMS considers reasonable it may encourage some manufacturers 
to adopt unrealistic restrictive fair market value assumptions. 
Further, CMS should supplement the definition in the final rule by 
clarifying how manufacturers are expected to determine fair market 
value to increase uniformity in price reporting between manufacturers. 
Another commenter stated that CMS should establish more specific 
grounds for establishing fair market value when service fees for a 
variety of services are combined and stated as a percentage of sales 
payment. Finally, another commenter encouraged CMS to acknowledge that 
many or most of the fee arrangements that are common in the industry 
tend to be percentage based agreements and that manufacturers can 
establish a fair market value rationale for a percentage based fee 
through industry benchmarking by comparing types of specific services 
outlined in an agreement with ranges of payments observed throughout 
the industry.
    Response: We do not agree that we should further define fair market 
value for purposes of the bona fide service fee definition in Sec.  
447.502. We continue to believe that manufacturers should retain 
flexibility in determining whether service fees are paid at fair market 
value in light of constant changes in the pharmaceutical marketplace. 
We agree with the discussion in the CY 2007 PFS final rule (71 FR 
69669) that the appropriate method for determining whether a fee 
represents fair market

[[Page 5180]]

value may depend upon specific contracting terms and the services 
involved. Therefore, we are not mandating a specific method or 
providing further guidance on fair market value at this time.
    Comment: Several commenters requested that if CMS does not define 
fair market value, it should identify the nature and scope of what it 
would consider to be adequate fair market value documentation and 
establish some ground rules for establishing fair market value. For 
example, the rule could state that it would be sufficient to document 
hard-fought negotiations between wholesalers and manufacturers over the 
scope of services to be provided and the fees paid, including the 
manufacturer's assessment of alternatives such as using internal 
resources or other service providers, or going without. Documentation 
of negotiations between manufacturers and wholesalers over fee 
arrangements should be sufficient to establish that any agreed upon 
fees are consistent with a meeting of the minds by the parties, which 
is the essence of the definition of fair market value. One commenter 
indicated that CMS should clarify that adequate documentation does not 
require third party appraisals and rather requires that the contract 
between the parties show the agreed upon price.
    Response: We appreciate the comments but have decided not to 
specify the type or scope of documentation that is necessary to support 
a manufacturer's determination of fair market value as part of this 
final rule because, we believe the determination of fair market value 
is by nature subjective and many factors can contribute to its 
determination, and as a result, it can be a range of values. Therefore, 
we believe that any documentation can be used, provided that it makes 
clear the methodologies or factors the manufacturer used in making its 
fair market value determination. We expect such determination of fair 
market value and documentation be made contemporaneously with the 
manufacturer's agreement to pay the fee. As with other reasonable 
assumptions, in accordance with the requirements of the national rebate 
agreement, each manufacturer must maintain adequate documentation 
supporting its assumptions.
    Comment: One commenter stated that CMS should require manufacturers 
to disclose to the service provider the portion of the service it will 
treat as bona fide, and if not 100 percent, its basis for excluding a 
portion. The commenter also said that CMS should issue some guidelines, 
based on the data it has collected (that is, for purposes of 
determining direct or indirect remuneration under Medicare Part D), as 
to what it will accept as a reasonable fair market value determination 
or method. The commenter also indicated that guidance should not be 
exclusive, but in the form of safe harbors so that the parties can work 
to meet the safe harbor and know that, if they do, the arrangement will 
be respected. While the commenter understands CMS's concern that 
discounts may be disguised as services fees, the commenter does not 
believe that providing guidance on fair market value will make this 
practice more likely (discounts disguised as service fees). Instead the 
commenter believes such guidance will give the parties the means by 
which to demonstrate in a manner acceptable to CMS when service fees 
are in fact legitimate.
    Response: As we noted previously, we have decided not to provide 
additional guidance regarding fair market value given that a fair 
market value determination may depend on the details of the specific 
arrangements regarding the services being performed. We believe that 
any documentation can be used, provided that it clarifies the 
methodologies or factors the manufacturer used in making its fair 
market value determination, and, the manufacturer maintains adequate 
documentation supporting its determination.
    Furthermore, we are not responsible for establishing such safe 
harbors, as the OIG of the U.S. Department of Health and Human Services 
is responsible for issuing such advisory opinions related to health 
care fraud and abuse under section 1128D(b) of the Act.
    Comment: A few commenters urged CMS to rely on the GPO safe harbor 
associated with the federal anti-kickback statute as it defines which 
fees would qualify as bona fide. The commenter stated that the final 
rule should state that a fee satisfying the anti-kickback statute safe 
harbor requirement meets the fair market value prerequisite and is a 
bona fide service fee. Another commenter believed fees paid to GPOs may 
qualify as a bona fide service fee based upon the fact that GPOs are 
non-purchasing entities whose main business is acting as a brokering 
agent to negotiate pricing for the operational costs of managing the 
agreements and memberships.
    Response: We believe that to adopt a categorical exclusion of 
administrative fees if they fall within the GPO safe harbor provisions 
would be inconsistent with our guidance regarding an actual 
determination as to whether or not the fee is bona fide because it 
would mean that the manufacturer has not evaluated the details of the 
specific arrangements regarding the services being performed. 
Additionally, we do not agree that we should adopt the safe harbor 
provisions associated with the federal anti-kickback statute as part of 
this rule as it does not address bona fide service fee determinations 
for purposes of determining included and excluded transactions related 
to a manufacturer's determination of AMP and best price.
d. ``Not Passed on In Whole or In Part''
    Comment: One commenter stated that the CY 2007 PFS Final Rule (71 
FR 69624) would somewhat resolve the proposed rule's silence on CMS's 
interpretation of ``not passed on'' requirement that remains in the 
proposed bona fide service fee definition. The commenter requested that 
CMS clarify that unless a manufacturer has specific knowledge that a 
service fee is being passed through to a member, the manufacturer does 
not need to account for it in AMP and best price reporting. Further, 
the commenter requested that at the very least manufacturers have no 
affirmative duty to ascertain from GPO members information about any 
GPO service fee, and to the extent that such information must be 
reported by the manufacturer, the GPO should furnish the information. 
Moreover, any reporting obligation should be triggered only when such 
services are uniformly based on member purchases of the manufacturers' 
products and not based on any GPO allocations methods, GPO incentive 
programs, GPO ownership interests, or other factors.
    Another commenter encouraged CMS to consider ways to facilitate 
such reporting if CMS elects not to affirmatively continue the not-
passed through presumption. One commenter stated that administrative 
fees paid to pharmacy benefit manufacturers (PBMs) under the national 
rebate agreement should be presumed to be retained by the PBM and not 
intended to adjust the purchase price, unless there is evidence that 
the PBM intends to pass them through. Additionally, the commenter 
believed that a rule that treats these types of fees paid to non-
purchasers as distinct from discounts provided to the beneficiaries of 
their services is consistent with the Medicaid statute and safe 
harbors, and is far easier to administer through manufacturers' drug 
price reporting systems.
    Response: As discussed earlier in this section, we have revised our 
position taken in regards to the 2007 AMP final rule for the not passed 
on prong of the

[[Page 5181]]

bona fide service fee test to more fully align with the ASP policy 
which allows manufacturers, for certifying to the accuracy of their ASP 
calculations, to presume, in the absence of any evidence or notice to 
the contrary, that the fee paid is not passed on to a client, or 
customer of any entity (if a fee paid meets the other elements of the 
definition of bona fide service fee).
    Therefore, for the calculation of AMP and best price, we are now 
allowing that if a manufacturer has determined that a fee paid meets 
the other elements of the definition of bona fide service fee, then the 
manufacturer may presume, in the absence of any evidence or notice to 
the contrary, that the fee paid is not passed on to a client or 
customer of any entity. However, when a manufacturer does have specific 
knowledge that a fee is being passed on in whole or in part, it must be 
accurately accounted for in the determination of AMP and best price.
    Furthermore, fees, including but not limited to, distribution 
service fees, inventory management fees, product stocking allowances, 
fees associated with administrative service agreements and patient care 
programs (such as medication compliance programs and patient education 
programs) and other fees paid to GPOs that meet the definition of bona 
fide service fees as defined in this final rule, are excluded from the 
calculation of AMP and best price. If a manufacturer has an agreement 
with the GPO that any of these fees are passed on to the GPO's members 
or customers, they would be considered price concessions and not 
excluded as bona fide service fees. When there is evidence or knowledge 
that the fee or other price concession is passed on to the GPO's member 
or customers (for example, the contract between the manufacturer and 
GPO or other service provider may contain a provision that indicates 
the fee be used by the provider to further discount the price paid by 
the wholesaler or retail community pharmacy), the manufacturer must 
account for such fee or price concession in its calculation of AMP as 
described elsewhere in this final rule. This is consistent with the 
statutory requirement at section 1927(k)(1)(B)(ii) of the Act which 
specifies, in part, that any other discounts, rebates, payment or other 
financial transactions that are received by, paid by, or passed through 
to, retail community pharmacies shall be included in the AMP for a COD.
    Comment: A few commenters requested that CMS provide guidance as to 
whether the ``passed on'' portion of a service fee would cause the 
entire fee to fail the bona fide service fee test thus making the 
entire fee a discount, or whether only that portion of a fee which is 
passed on would be treated as a discount.
    Response: As discussed earlier in this section of this final rule, 
as well as the CY 2007 PFS final rule (71 FR 69668), a fee is not a 
bona fide service fee if even a portion of the fee is passed on. 
However, the manufacturer would need to conduct further analysis as to 
whether there is an adjustment of price for an entity included in the 
AMP or best price calculation to determine if the fee is passed on, in 
whole or in part. As discussed in prior responses, we believe that by 
making the application of the exclusion of bona fide service fees 
consistent with the ASP rule, manufacturers will be less likely to have 
compliance concerns.
e. Buildup Approach Implications
    Comment: One commenter noted that if the buildup approach is 
adopted into rule, manufacturers are concerned about valuation of the 
increased data services at fair market value in bona fide service fees 
to wholesalers. The commenter specified that manufacturers raised 
concerns with their ability to evaluate fair market value of the 
necessary expanded data services.
    Response: We appreciate the comments and, as discussed in greater 
detail section II.C. of this final rule, in regards to the buildup 
model, we have decided to retain the option that manufacturers may make 
reasonable assumptions and presume, in the absence of guidance and 
adequate documentation to the contrary, that prices paid to 
manufacturers by wholesalers are for drugs distributed to retail 
community pharmacies. We believe that the concerns raised by commenters 
regarding data services in the context of bona fide service fee 
determinations under a buildup model have been addressed by this change 
as the buildup model is not being finalized.
    Therefore, in light of the comments and for the reasons we 
articulated in this section, in this final rule we are finalizing the 
definition of bona fide service fee and replacing the specific 
reference to ``wholesalers or retail community pharmacies'' with ``an 
entity'' under Sec.  447.502.
5. Bundled Sales
    In proposed Sec.  447.502, we proposed to revise the bundled sale 
definition by reformatting its structure to separate the additional 
clarifying characteristics of bundled sales from the main definition. 
This was accomplished by creating two paragraphs at the end of the 
definition that provided further clarification regarding 
characteristics of a bundled sale. We also proposed, in response to 
prior manufacturer questions, to add the phrase ``including but not 
limited to those discounts resulting from a contingent arrangement'' to 
paragraph (1) to clarify which discounts should be allocated under the 
bundled arrangement (as discussed in more detail at 77 FR 5321). We 
received the following comments concerning the proposed bundled sales 
revised definition:
    Comment: We received several comments regarding the statement added 
to the existing definition of bundled sale at Sec.  447.502, concerning 
discounts in a bundled sale which include, but are not limited to, 
those discounts resulting from contingent arrangements. Several 
commenters expressed concern that the phrase ``including but not 
limited to'' will require manufacturers to allocate non-contingent 
discounts provided on drugs included in bundled sales (as well as any 
contingent discounts on those drugs) across all products in the bundled 
sale. The commenters indicated that non-contingent discounts are not 
part of bundled arrangements and should not be subject to allocation. 
Commenters noted that CMS could add an explicit element to the 
definition of bundled sale to indicate that a bundled sale does not 
exist where a discount or price concession is established independently 
and not conditioned upon any other purchase or performance requirement, 
or where the discount is not greater than if purchased outside of the 
multi-product arrangement.
    One commenter stated that the preamble language intended to clarify 
that, where discounts for different products in a single contract are 
each determined independently and with no contingencies across 
products, a bundled sale does not exist and no discount allocations 
across products are required. However, this is inconsistent with CMS's 
proposed regulations text and CMS needs to make its final regulations 
text consistent with this approach.
    One commenter indicated that if CMS's intent to have the new 
paragraph on non-contingent sales specifically require the allocation 
of non-contingent discounts on drugs that are part of a bundled sale 
along with any contingent discounts on these drugs, it is important for 
CMS to recognize that this may require a change to the discount 
allocation method some manufacturers have implemented based on the 
current definition. Furthermore, if this

[[Page 5182]]

paragraph is adopted in this final rule, CMS should clarify 
requirements are effective the date of the final rule on a prospective 
basis.
    Several commenters provided reasons why we should not require that 
a non-contingent discount be considered as part of a bundled 
arrangement and allocated across the entire bundled sale, such as AMP 
and/or best price reporting uncertainties, 340B ceiling price 
calculation uncertainties, and reduction in Medicaid rebate 
liabilities. Several commenters provided detailed mathematical 
equations and examples (with very similar scenarios) to demonstrate 
that the including but not limited to language should be removed.
    In one of these examples, the commenter provided that it does not 
make sense to treat a discount as bundled when it is not contingent and 
included the following examples: If 3 drugs are part of the same 
contract, and a contingent discount is offered on drug A and B if they 
are placed on a preferred formulary tier and a non-contingent discount 
is offered on drug C, drug C should not be considered as part of the 
drug A and B bundled arrangement simply because drug C is covered by 
the same contract as Drug A and B. Another example provided if 2 drugs 
are part of the same contract and 5 percent discount is offered on Drug 
A if X volume is purchased and/or 5 percent discount is offered on Drug 
A if Drug A and B are both placed on a preferred formulary tier, the 
volume discount should not be considered as part of any bundled 
arrangement with Drug B simply because the non-contingent volume 
discount is included in the same contract as the contingent formulary 
discount. The commenter requested that CMS remove the including but not 
limited language to clarify that in the first scenario only drugs A and 
B should be considered a bundle arrangement and not Drugs A, B and C, 
and that in the second scenario only the formulary tier discount should 
be considered a part of a bundled arrangement and not the volume 
discount.
    Response: We did not intend to revise the policy expressed in the 
2007 AMP final rule but rather to reiterate that when a bundled sale 
exists, manufacturers are required to allocate all discounts across all 
the products in the bundled arrangement. As discussed in the 2007 AMP 
final rule, we consider all drugs to be within the bundled sales if: 
(1) Any drug must be purchased to get a discount on any drug in the 
bundle regardless of whether any drug is purchased at full price; (2) 
there is a performance requirement (such as inclusion or tier placement 
on a formulary or achieving a certain level or percentage of sales for 
one drug to receive a discount on another drug); or (3) price 
concessions are greater than those which would have been available had 
the bundled drugs been purchased separately or outside the bundled 
arrangement. When a manufacturer offers discounts on multiple products 
under a single contract (for example, to minimize the administrative 
burden of developing several single contracts which offer separate 
discounts on the multiple products) no bundled sales arrangement exists 
as long as all of the following conditions are met: (1) A discount or 
price concession is established independently for each product within 
the contract; (2) the purchase price under the contract is not 
contingent upon any other product in the contract or upon some other 
performance requirement (such as the achievement of market share or 
inclusion or tier placement on a formulary); and (3) the discount 
provided for any product under the contract is no greater than if the 
product was purchased outside of the contract. We understand the 
commenters' concerns regarding the proposed language ``but not limited 
to'' in the definition as proposed at Sec.  447.502, and therefore, in 
this final rule, we are not finalizing that proposed language in 
paragraph (1), and reiterate that all discounts in a bundled sale would 
need to be allocated proportionally to the total dollar value of units 
of all drugs or products sold under the bundled arrangement.
    Comment: Several commenters requested or encouraged CMS to use 
specific illustrative examples to further explain these bundled sales 
issues in the final rule, just as it did in the AMP final rule, 
including examples of multi-product contracts with no contingencies, 
multi-product contracts with both contingent and non-contingent 
discounts, multi-product contracts in which one or more discounts is 
contingent on the purchase or the achievement of other performance 
requirements, and multi-product contracts in which one of the discounts 
or other price concessions are greater than those which would have been 
available had the product been purchased separately.
    Response: As we noted previously, we are finalizing Sec.  447.502 
without the proposed language ``but not limited to'' in the definition 
of bundled sales. As noted above, we have identified the conditions 
that must be met for a multi-product sales arrangements to fall outside 
the bundled sales definition, so illustrative examples of bundled 
arrangements with non-contingent discounts are not needed.
    Comment: A commenter recommended that CMS revise the language in 
paragraph (1) to read as follows: ``(1) All discounts on all products 
included in a bundled sales arrangement, including those discounts on 
such products that do not result from a contingent arrangement, are to 
be allocated proportionally to the dollar value of the units of all 
products sold under the bundled arrangement,'' because this language 
specifically addresses the treatment of non-contingent and contingent 
discounts. Another commenter requested the following language be added 
to the regulatory definition of bundled sale: ``No bundled sale exists 
where multiple products are included in a single arrangement and the 
discount on each product is determined independently of the discount, 
pricing, and performance as to any other product in the arrangement, 
and the discounts offered are not greater than would be the case if the 
products were purchased outside of the multi-product arrangement.'' The 
commenter believed the addition of this language would make it explicit 
that a multi-product contract that includes no cross-product 
contingencies does not constitute a bundled sale.
    Response: We appreciate the comments and suggested changes. In this 
final rule, we are not retaining the ``but not limited to'' language we 
proposed in the definition of bundled sale at Sec.  447.502. We believe 
that the removal of this proposed language in the final regulation, and 
our responses above regarding the treatment of multi-product sales 
reflect our long-standing policy regarding bundled sales.
    Comment: A commenter indicated that the proposed change in the 
definition of a bundled sale could have an adverse impact on wholesaler 
contractual relationships with certain manufacturers, unduly 
complicating the aggregation and allocation of discounts associated 
with wholesaler purchases of multiple products for inclusion in the 
portfolio of products offered to pharmacies under generic sourcing 
programs.
    Response: We believe that not finalizing the proposed phrase ``but 
not limited to'' in the definition of bundled sale in this final rule 
will address the commenter's concerns with any potential adverse impact 
on the contractual relationships between wholesalers and manufacturers 
since the final bundled sale definition reiterates that all discounts 
in the bundled arrangement must be allocated

[[Page 5183]]

proportionally to the total dollar value of the units of all drugs or 
products sold under the bundled arrangement. While the issue of bundled 
sale in the context of AMP and best price was not addressed as a 
subject within the Affordable Care Act, as we stated in the proposed 
rule, we believe clarification on this subject was necessary as 
manufacturers had previously raised questions after the publication of 
the 2007 AMP final rule (77 FR 5321). Our intent in reiterating views 
previously expressed to questions raised in the 2007 AMP final rule (77 
FR 5321) was to provide clarification and ensure that all manufacturers 
adopt a consistent approach when accounting for bundled arrangements in 
the determination of AMP and best price.
    Comment: A few commenters indicated that the broader term, 
products, should be used rather than drugs because the DRA final rule 
specifically recognized that bundled sale arrangements can involve 
CODs, as well as some other purchase requirement. These commenters 
noted that the suggested modifications include the term, product, 
rather than drugs because as CMS recognized in the 2007 AMP final rule, 
bundled sales arrangements can include CODs, as well as some other 
purchase requirement.
    Response: We agree and have revised the final bundled sale 
definition at Sec.  447.502 to add the term product, because bundled 
arrangements can include CODs, as well as other product purchases as 
part of the bundled sale requirement. A discount based upon the 
purchase of another non-drug product within a contingent arrangement 
(for example, discounts on drug purchases contingent upon sales of non-
drug products) is considered a bundled arrangement.
    Comment: One commenter stated that the terms, bundled sale and 
bundled arrangement, are synonymous because they appear to be used 
interchangeably and without distinction in the definition of bundled 
sale in the proposed rule. The commenter asked that CMS provide 
additional guidance and make clarifying edits to the proposed 
definition of bundled sale to further the goal of ensuring AMP and best 
price reflect true and accurate prices.
    Response: We agree with the commenter that bundled sale and bundled 
arrangement are used interchangeably. Therefore, we do not believe that 
further changes to the definition are needed since these terms are used 
interchangeably.
    Comment: A few commenters were concerned that the proposed 
procedures would require vendors to keep two sets of books--one for 
financial reporting purposes in which product-specific sales are 
recorded at the contracted discounted price assigned to each product 
reduced by the allocated amount of any overarching performance driven 
volume discount, and a second shadow set of books for government price 
reporting purposes that reflect the reallocated product-specific prices 
that flow from sales made under different contracts that nominally use 
identical product pricing.
    A few commenters believed that, absent changes in common contract 
terms, the new definition would require the incorporation of complex 
manual steps into the calculation of monthly AMPs and complicate the 
difficult process of completing these calculations in compliance with 
applicable timelines. The commenters were worried about the economic 
waste associated with having to renegotiate a large number of contracts 
if they cannot manage the manual process that the bundled sale 
aggregation and allocation would require. The penalties for late AMP 
filing adds to these concerns and the commenters encouraged CMS to 
forego implementing the changed definition of bundled sales.
    A few commenters stated that the revised definition of bundled 
sales in the proposed rule could complicate the aggregation and 
allocation of discounts associated with sales of multiple source 
products to large customers including wholesalers and retail community 
pharmacies.
    Response: We are not requiring manufacturers to change their 
generally accepted accounting practices. Moreover, it was not our 
intention to create a significant change to the definition of bundled 
sales; rather, we only intended to provide additional clarification as 
noted in the proposed rule (77 FR 5321). We believe the revision we are 
making to the definition of bundled sale in this final rule by removing 
the ``but not limited to'' language will address the concerns raised by 
these commenters regarding manufacturers development of contracts 
specific to bundled sales.
    For the reasons we articulated in this section, we are finalizing 
our proposed definition of bundled sales at Sec.  447.502, except that, 
in response to the comments, we are omitting ``but not limited'' in 
paragraph (1); and have revised paragraph (2) to add ``or products'' 
before ``in the bundle'' at the end of the paragraph.
6. Clotting Factor
    Section 2501(a) of the Affordable Care Act established a minimum 
rebate percentage of 17.1 percent of AMP for a single source drug or an 
innovator multiple source drug that is a clotting factor for which a 
separate furnishing payment is authorized under section 1842(o)(5) of 
the Act and which is included on a list of such factors specified and 
updated regularly by the Secretary. We proposed a definition of 
clotting factor consistent with these provisions in proposed Sec.  
447.502 (77 FR 5321 and 5359).
    We did not receive any comments about the proposed definition of 
clotting factor under Sec.  447.502, so we are finalizing it as 
proposed, except to remove the word ``the'' prior to the first 
reference to CMS. This technical revision is not intended to change the 
meaning of this definition.
7. Covered Outpatient Drug (COD)
    In accordance with section 1927 of the Act, manufacturers that have 
entered into a rebate agreement with the Secretary are responsible for 
paying rebates to states for their CODs for which payment has been made 
under the state plan. Manufacturers are responsible for submitting 
certain drug product data for each of their CODs. As discussed in the 
proposed rule (77 FR 5321 through 5323, 5359 through 5360), we proposed 
to add a definition of COD to Sec.  447.502. We proposed that a drug is 
considered a COD when the drug may be dispensed only upon prescription 
(except as discussed later in this section for certain non-prescription 
drugs), and it meets at least one of the criteria as described in 
section 1927(k)(2) of the Act.
    Consistent with section 1927(k)(3) of the Act, we proposed (77 FR 
5322 and 5360) that except as discussed later in this preamble section, 
a drug, biological product, or insulin would not be considered a COD 
when that drug or product is billed as a bundled service with, and 
provided as part of or incident to and in the same setting as, any of 
the following services (and payment is made as part of that service 
instead of as a 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 
CODs;
     Physician services;
     Outpatient hospital services;
     Nursing facility and services provided by an intermediate 
care facility for individuals with intellectual disabilities; \4\
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    \4\ Please note that since publication of the proposed rule 
there has been a change in terminology and the phrase ``mentally 
retarded'' has been replaced with ``individuals with intellectual 
disabilities.''

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

[[Page 5184]]

     Other laboratory and x-ray services; or
     Renal dialysis.
    Additionally, in accordance with section 1927(k)(2) of the Act and 
the requirements of section 510 of the FFDCA, we proposed that a drug 
would only be treated as a COD if the drug is required to have a 
National Drug Code (NDC) and is listed electronically with FDA (77 FR 
5322). We further proposed that manufacturers submit any relevant FDA 
approved application numbers for drugs reported to the MDR program (77 
FR 5322). For drugs that are CODs that do not have an approved 
application number, we proposed that the manufacturer must provide 
evidence demonstrating that its drug meets the statutory definition of 
a COD (77 FR 5323). These additional standards were designed to ensure 
compliance with the definition of COD in section 1927(k) of the Act.
    We received the following comments concerning the proposal to add a 
definition of COD to Sec.  447.502:
a. Consistency With Medicare
    Comment: One commenter suggested that CMS reconsider its 
interpretation of ``covered Part D drug'' under Medicare Part D to make 
the definitions consistent between Medicaid and Medicare, which is 
especially important for dual-eligible individuals.
    Response: We appreciate the comment; however, this rule is designed 
to implement the Medicaid provisions regarding CODs as set forth in 
section 1927(k) of the Act. We are not addressing the definition of a 
Medicare covered Part D drug in this final rule.
b. FDA (Electronic Listing, Drug Approval Status, Application Number, 
etc.)
    Comment: A few commenters noted that for a product to meet the 
definition of a COD, it is not categorically required to have an FDA 
approval, and that there are other ways for a product to meet the 
definition. A few commenters stated that CMS's goals are to provide 
safe, functional and low-cost benefits to beneficiaries, and that these 
goals are not dependent on an FDA approval.
    Response: We agree that there are some drugs on the market that do 
not have an FDA approved application but, nonetheless, meet the 
definition of a COD. However, for drugs without FDA approval to satisfy 
the definition of COD, those drugs must still meet the definition of 
COD in section 1927(k)(2) of the Act. We believe this will ensure that 
only drugs that meet the statutory definition of COD are dispensed to 
Medicaid beneficiaries and that Medicaid dollars are spent consistent 
with the statute.
    Comment: One commenter asked how states will be informed as to the 
status of drugs without approved FDA numbers and what will be used to 
make the determination and the reasoning or algorithm used to make that 
determination.
    Response: In accordance with the requirements of the MDR program, 
manufacturers are required to report to CMS drugs that meet the 
definition of a COD. Beginning July 19, 2014, manufacturers have been 
reporting the FDA application number, if applicable, and the COD status 
code as part of their product data information via the Drug Data 
Reporting for Medicaid (DDR) system to demonstrate how their drugs that 
are reported to the MDR program meet the statutory definition of a COD. 
This is a set of codes that identify either the type of FDA approval or 
other authority under which the drug is marketed. The COD status code 
provides information which the states can utilize to determine how a 
drug without an FDA approval meets the definition of a COD. States have 
information via DDR or by accessing the CMS's quarterly rebate drug 
product data file on www.Medicaid.gov.
    Comment: A few commenters stated that because the information found 
on FDA's databases is not up to date, fully accurate, nor fully 
electronic and because CMS has no oversight over FDA, that FDA's data 
should not be used to administer CMS's programs. Commenters recommended 
that CMS states how it will ensure that information relied on by states 
for administration of pharmacy benefits will be maintained in a current 
fashion. Several commenters also expressed concern regarding their lack 
of control over the time it takes FDA to transfer files from paper to 
the electronic database, if FDA agrees to do so.
    Response: Given the comments received, we have decided not to 
finalize the electronic FDA listing requirement that was included in 
the proposed COD definition. Specifically, we have decided not to 
finalize proposed paragraph (3)(ii) which excludes from the definition 
of COD, a drug that is not listed electronically with the FDA.
    However, we are clarifying that manufacturers are responsible for 
submitting accurate data to CMS. We also note that for CMS to be able 
to verify that NDCs reported to the MDR program meet the definition of 
a COD, we will be using drug information listed with FDA such as 
Marketing Category and Drug Type, for example, to verify that an NDC 
meets the statutory definition in section 1927(k) of the Act. 
Additionally, when a drug is electronically listed with FDA, we have 
the ability to consult with FDA staff regarding the regulatory status 
of the drug. Therefore, manufacturers should ensure that their NDCs are 
listed with FDA (See 21 CFR 207.20, 207.21(b), 207.30) and should 
contact FDA if discrepancies or omissions are identified. Drug 
information can be searched by NDC or by downloading a comprehensive 
NDC Structured Product Labeling (SPL) Data Elements file (NSDE) file at 
FDA's Online Label Repository at http://labels.fda.gov. FDA updates the 
Online Label Repository on a regular basis with the most recent drug 
listing information that companies have submitted to FDA. Manufacturers 
may email FDA at [email protected] for assistance with regulatory 
questions or [email protected] for technical questions.
    Further, we appreciate the comments concerning our use of the FDA 
listing to verify if a product meets the definition of COD for purposes 
of our program. Given the statutory definition of COD under section 
1927(k)(2) of the Act, we have used that listing as a basis to seek 
additional information from manufacturers regarding product 
submissions. For example, we have previously published a file 
containing products that were not listed with FDA (the non-listed 
product file) on Medicaid.gov at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Medicaid-Drug-Rebate-Program-Data.html. This non-listed product file was created 
by matching the NDCs in the MDR program against FDA's Online Label 
Repository's comprehensive NSDE file to determine which NDCs in the MDR 
program were not listed with FDA.
    We have updated the non-listed product file on Medicaid.gov and we 
have also notified manufacturers that report products to CMS that are 
not listed with FDA. If we are not able to verify if a product meets 
the definition of a COD, we will delete these products from the MDR 
file after providing notice to manufacturers of these products and to 
states. A deleted drug may be reinstated into the MDR program once we 
are able to verify that the drug meets the statutory definition of a 
COD. In such situations, we will use information submitted by the 
manufacturer (for example, letter of approval from FDA or

[[Page 5185]]

application number) to verify that the drug meets the statutory 
definition of a COD.
    Additionally, we appreciate the commenters' concerns about relying 
on FDA's electronic database. We recognize that the electronic database 
is not published for the purposes of the MDR program. As discussed in 
this section, we use FDA's electronic database to consider manufacturer 
submissions and seek additional information, if necessary, to confirm 
that products meet the COD definition in section 1927(k) of the Act.
    Comment: One commenter expressed concern regarding FDA's method of 
publishing the NDCs of drugs that are packaged with one NDC-11 on inner 
package and a different NDC-11 on the outer package. The commenter was 
concerned because FDA does not list each NDC-11 as a separate drug 
listing on the new NDC Directory, and therefore, CMS would be unable to 
confirm that each NDC-11 met the FDA listing requirement found in the 
proposed rule. The commenter asked for assurance that FDA's handling of 
the inner/outer NDCs would not jeopardize their drugs' inclusion in the 
MDR program.
    Response: As discussed previously in this section, we are not 
relying on the NDC Directory information for verification that a drug 
reported to CMS meets the definition of a COD. We recognize that the 
NDC Directory does not identify the different NDC-11s that could affect 
the reporting of the inner and outer packages. Therefore, as discussed 
previously in this section, we use FDA's NSDE file, which can be found 
by accessing FDA's Online Label Repository Web page at http://labels.fda.gov, to seek additional information about the status of 
products submitted by manufacturers. If manufacturers have any problems 
with the reporting of products for the purpose of CMS verifying whether 
a product meets the definition of CODs, the manufacturers can contact 
CMS for further information on how they can demonstrate compliance with 
section 1927(k)(2) of the Act.
    Comment: A few commenters requested clarification on the proposed 
requirement to list all drugs electronically with FDA for a drug to 
meet the definition of a COD if the current manufacturer is not the 
original submitter of the registration to FDA, or if the drug was not 
originally listed by electronic means. A commenter stated that in the 
case of the current manufacturer having purchased the drug from another 
manufacturer, the only way for the current manufacturer to submit 
updates to the listing information is by paper submission, as part of 
FDA's Waiver process. Another commenter noted that although some of 
their products were submitted using the old paper process, the products 
nonetheless appear on FDA's new NDC Directory. This commenter asked if 
old paper filings would need to be resubmitted electronically, or if 
CMS will use the new NDC Directory to verify that the electronic 
listing requirement has been met.
    Response: We recognize the concerns that commenters have regarding 
difficulties that may be encountered when a manufacturer attempts to 
submit their NDC information to FDA electronically. We encourage 
manufacturers to check the FDA's NSDE file or Online Label Repository 
to confirm that their NDCs are properly listed there, especially those 
NDCs which may have been submitted to FDA on paper. Additionally, we 
encourage manufacturers to ensure that their drugs are listed on FDA's 
NSDE file or Online Label Repository, whether or not there have been 
updates to their drugs. We are aware that since the publication of the 
proposed rule, FDA has been updating the NSDE file/Online Label 
Repository on a daily basis and has been assisting manufacturers with 
questions/issues regarding listing their drugs electronically, whether 
the current manufacturer was the original submitter or not, or if the 
original information was submitted on paper. Additionally, as 
previously stated, we have decided not to finalize the electronic FDA 
listing requirement that was included in the proposed COD definition. 
Specifically, we have decided not to finalize proposed paragraph 
(3)(ii) which excludes from the definition of COD, a drug that is not 
listed electronically with the FDA.
    Comment: One commenter suggested that the electronic listing 
requirement in the proposed definition of COD be changed to include any 
NDC that is listed with FDA and for which updates are filed (whether by 
paper or electronically) may qualify as a COD if all other requirements 
are met.
    Response: We appreciate the comment, but as noted previously in 
this section, we have decided not to finalize this requirement and so 
this change is not necessary. However, as discussed previously in this 
section, we will still use the FDA NSDE file as a source to verify that 
drugs reported to the MDR program meet the definition of a COD as 
defined in section 1927(k)(2) of the Act.
    Comment: One commenter asked if a manufacturer should 
electronically list their entire over-the-counter (OTC) line of 
products, or only those that have been approved under an NDA or an 
ANDA. Another commenter noted that sometimes prescriptions are written 
for OTC products and these products are not listed with FDA. One 
commenter stated that they have some OTC products that are not listed 
electronically with FDA because the products are not approved by FDA, 
nor will the manufacturer be seeking approval, and they asked for a 
solution for this situation.
    Response: FDA requires all prescription and OTC drugs, regardless 
of the marketing authority or FDA approval status, to be listed 
electronically with FDA (21 CFR part 207). We will use the FDA listing 
as a source to verify whether drugs qualify as CODs but as noted 
previously, manufacturers have other options to demonstrate that their 
products meet the definition of COD in section 1927(k)(2) of the Act.
    Comment: One commenter stated that some approved products, such as 
biologics, are not listed on Drugs@FDA and the commenter asked if this 
is the sole source for obtaining and providing application numbers.
    Response: To our knowledge, Drugs@FDA was the only source at the 
time of publication of the proposed rule to list biological products 
approved for sale in the United States. Since that time, FDA has 
created the Purple Book: Lists of Licensed Biological Products which 
also contains information on application numbers for biologics and can 
be found at http://www.fda.gov/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/ApprovalApplications/TherapeuticBiologicApplications/Biosimilars/ucm411418.htm. As noted 
previously, although we are not finalizing our proposal to require 
electronic FDA listing as was included in the proposed COD definition, 
we will use the FDA listing to help verify that the product meets the 
definition of a COD. However, manufacturers have other options to 
demonstrate that their products meet the definition of COD in section 
1927(k)(2) of the Act.
    Comment: One commenter stated that they market some products 
``approved as other'' but the products are listed in FDA's new NDC 
Directory and questioned if that is sufficient.
    Response: Although, as previously noted, we are not finalizing the 
electronic FDA listing requirement that was included in the proposed 
COD definition, if manufacturers list their drugs with FDA, and those 
drugs are included on FDA's NSDE file, then CMS

[[Page 5186]]

will be able to use the listing information to verify whether a drug 
meets the statutory definition of a COD for purposes of the MDR 
program.
    Comment: We received many comments regarding the proposal that, in 
the case where a product does not have an FDA application number, 
manufacturers provide evidence demonstrating that the product meets the 
statutory definition of a COD under section 1927(k)(2) through (4) of 
the Act (77 FR 5323). One commenter requested that we withdraw the 
proposal requiring manufacturers to submit evidence that a drug is not 
a new drug. The commenter stated that requiring such evidence is beyond 
the authority of CMS, that the requirement usurps FDA's role in the 
determination of legally marketed products, and that CMS lacks 
technical expertise to evaluate the evidence.
    Another commenter asked who, such as CMS or pharmaceutical 
professionals, will decide if the evidence provided is sufficient to 
prove a product's status as a COD. Several commenters also asked for 
detailed guidance, or a protocol, on what information to submit as 
evidence. One of these commenters asked if, in the case of OTC 
products, quoting an OTC monograph would be sufficient evidence. 
Another commenter suggested that when a manufacturer reports a product 
to CMS as a COD and the manufacturer certifies that product data, the 
certification could serve as the evidence that the product meets the 
definition of a COD.
    Response: We appreciate the comments received concerning the need 
to clarify our proposal regarding the submission of evidence concerning 
the COD status (77 FR 5323). We have the responsibility of 
administering the MDR program and ensuring that the information we 
provide to states is accurate. Manufacturers who have signed the 
national rebate agreement have the responsibility of reporting to the 
program drugs that meet the definition of a COD. Manufacturers have, at 
times, submitted erroneous product information to CMS, where the 
products do not qualify as CODs. Therefore, for CMS to be able to 
ensure compliance under section 1927 of the Act, we need to have 
adequate information to verify whether drugs entering the MDR program 
meet the statutory definition of a COD. We believe our list of COD 
Status codes is broad enough for manufacturers to have various options 
to choose from to support how their drugs meet the definition of a COD.
    We also appreciate the comments concerning our authority to require 
information that demonstrates that a product is not a new drug. As 
noted previously, although we are not finalizing the requirement that a 
drug be listed electronically with the FDA to meet the definition of 
COD, we will use the FDA listing to verify that the product meets that 
definition; however, manufacturers have other options to demonstrate 
that their products meet the definition of COD in section 1927 of the 
Act. In addition to the broad list of COD Status codes that 
manufacturers can select from to support how their drugs meet the 
definition, manufacturers could submit the FDA application number or 
other information (for example, approval letter) to demonstrate that 
their products meet the COD definition if the list of COD Status codes 
does not provide enough information. Manufacturers can also email CMS 
at [email protected] if they have questions about how to report 
their drugs or how to determine if their drugs meet the definition of a 
COD.
    Finally, we disagree with the commenter that specifically asked us 
to withdraw the proposal to submit evidence that a drug is not a new 
drug or a COD. As discussed previously in this section, manufacturers 
are responsible for submitting product data regarding CODs as defined 
in section 1927(k) of the Act. The submission of evidence requested in 
the proposed rule was designed to address this responsibility and to 
establish that a drug satisfies the criteria in section 1927(k)(2) of 
the Act. We are also clarifying that CMS does not make determinations 
regarding whether or not a drug is legally marketed, but only 
determines whether the products reported to the MDR program meet the 
statutory definition of a COD.
    We note that we do not intend to usurp FDA's role regarding whether 
or not a drug is legally marketed. Rather, we are only requesting that 
manufacturers submit information needed for CMS to make a determination 
regarding coverage under the MDR program. We believe that the 
clarifications provided in this final rule will address the commenters' 
concerns.
    Comment: We received several comments regarding the proposed 
requirement to submit supporting evidence, including evidence about 
specific products and how such products meet the COD statutory 
definition. For example, commenters provided regulatory background, 
history of products, and comparisons of one type of product to another 
to demonstrate why certain products or types of products meet the 
definition.
    Response: We appreciate the various explanations and other 
information that was submitted regarding the regulatory background and 
history of specific products and types of products that could be used 
to evaluate the COD status under the statutory definition. As 
previously noted in this section, manufacturers are able to submit 
information, such as the COD status code, FDA application number, or 
approval letter, to provide evidence that a drug qualifies as a COD 
which will allow us to verify whether a product meets the statutory 
definition of a COD.
    Comment: One commenter requested clarification about language in 
the proposed definition of COD regarding two groups of drugs that are 
defined based on their relationship to the Drug Amendments of 1962. The 
commenter asked if there is a list of these drugs published on FDA's 
Web site, and if CMS will publish a list of these drugs or if CMS will 
use a marker on the quarterly tape of the DDR for Medicaid system to 
track these drugs.
    Response: The FDA does not publish a list of those drugs which 
qualify as CODs under section 1927(k)(2) of the Act based on their 
relationship to the Drug Amendments of 1962. At this time we are not 
planning on publishing a list or using a marker to identify those drugs 
that meet the definition of a COD based on their relationship to the 
Drug Amendments of 1962. However, we publish a list of all products 
reported to the MDR program quarterly on Medicaid.gov, which includes a 
COD status for each product, which may provide the information the 
commenter seeks.
    Comment: One commenter questioned how the application number for a 
product will be submitted to CMS and if the type of application needs 
to be submitted. A few commenters asked for information regarding what 
application number should be listed if a drug holds multiple approved 
application numbers, how application numbers will be submitted, and 
what other information needs to be submitted. Additionally, one 
commenter asked how long manufacturers will have to submit application 
numbers.
    Response: Starting July 19, 2014, through product data fields in 
DDR, manufacturers have been able to report the FDA application number, 
if applicable, and the COD status code to CMS. Manufacturers may 
continue to email CMS at [email protected] if they have 
specific questions, such as the above, about entering their product 
information.

[[Page 5187]]

c. Over-the-Counter (OTC) Products
    Comment: Several commenters questioned OTC products and their 
status as CODs. One commenter believed that there should be additional 
clarity and guidance for manufacturers as to when OTC products are 
defined as CODs. The commenter noted that sometimes prescriptions are 
written for OTC products and questioned whether these products are 
rebate-eligible, and if so, how rebates are calculated. Another 
commenter stated that the proposed definition of COD excludes some 
products, such as OTCs that are not drugs. Another commenter asked CMS 
to instruct states on how to cover OTCs that are not drugs and wanted 
to ensure that states permit seamless pharmacy reimbursement through 
processes in place for CODs.
    Response: Section 1927(k)(4) of the Act provides that if a state 
plan for medical assistance includes coverage of prescribed drugs, as 
described in section 1905(a)(12) of the Act, and permits coverage of 
OTC drugs, then such drugs are regarded as CODs and, states have the 
option of covering OTC drugs. As required by section 1927(k)(4) of the 
Act, they must be prescribed by a physician or other authorized 
practitioner and must be specifically addressed in the state plan.
    Manufacturers are responsible for reporting pricing information on 
OTC drugs and calculating a URA based on the statutory and regulatory 
requirements. This information is included in the MDR drug product data 
file posted on Medicaid.gov. Drugs listed on the drug product data 
file, which may be accessed by states through the DDR system or on 
Medicaid.gov, have been reported and certified by manufacturers for 
inclusion in the MDR program.
    Comment: One commenter requested that CMS create or adopt a list of 
critical OTC products that are CODs.
    Response: States are responsible for determining coverage of OTCs 
and describing that coverage in their state plan. Given that coverage 
will vary, depending on each state plan, we will not create or adopt a 
list of critical OTCs; however, we will continue to maintain the drug 
product data file posted on Medicaid.gov which includes all drugs that 
are reported to the MDR program.
d. Radiopharmaceuticals
    Comment: One commenter suggested that due to distinct features of 
radiopharmaceuticals, such products do not meet the statutory 
definition of CODs. The commenter stated that radiopharmaceuticals 
traditionally have not been viewed as CODs because they are specially 
compounded to prepare patient-ready unit doses. The commenter noted 
that most radiopharmaceuticals are used in diagnostic imaging and not 
therapeutic regimens, but acknowledged that some are used 
therapeutically. According to the commenter, the components of 
radiopharmaceutical doses are analogous to excipients and active 
pharmaceutical ingredients (APIs), which have been confirmed not to 
meet the definition of a COD.
    Another commenter stated that CMS needs to provide more specific 
guidance on how radiopharmaceuticals would be reported for purposes of 
the administration of the MDR program. Generally, the commenters noted 
challenges that would occur in the reporting of radiopharmaceuticals to 
the MDR program.
    Response: We disagree with the commenter that radiopharmaceuticals 
do not meet the statutory definition of CODs. Section 1927(k)(2)(A) of 
the Act defines a COD, in part, as a drug which is approved for safety 
and effectiveness as a prescription drug under section 505 or 507 of 
the FFDCA or which is approved under section 505(j) of such Act. 
Radiopharmaceuticals meet the definition of a COD if they are approved 
under section 505 of the FFDCA unless the limiting definition in 
section 1927(k)(3) of the Act applies. The statute does not 
differentiate between diagnostic and therapeutic drugs; both drugs may 
be considered CODs if they meet the statutory COD definition. While 
section 1927(k)(3) of the Act limits the definition of a COD, such that 
the term does not include any such drug ``provided as part of, or as 
incident to and in the same setting as'' certain specified services 
(and for which payment may be made as part of payment for those 
services and not as direct reimbursement for the drug, in situations 
where the product is separately reimbursed), radiopharmaceuticals 
qualify as a COD because of the approval process undergone with FDA 
under section 505 of the FFDCA. Therefore, radiopharmaceuticals are to 
be reported to the MDR program in the same manner as other CODs for the 
purposes of the administration of the MDR program.
    Further, radiopharmaceuticals approved under section 505 of the 
FFDCA used in compounding patient-ready doses are also considered CODs 
because they are required to be assigned NDCs, as well as meet the 
other requirements in section 1927(k) of the Act to be considered CODs. 
Unlike radiopharmaceuticals, APIs are not approved as drugs under 
section 505 of the FFDCA, or as biological products, or insulin. In 
addition, they are not otherwise covered as described in section 
1927(k)(4) of the Act. Therefore, APIs, the individual bulk ingredients 
used to prepare other compounded prescriptions, are not similar to 
radiopharmaceuticals, which are subject to FDA's approval process.
    Finally, we are aware that several manufacturers have identified 
potential challenges in reporting product and pricing information for 
radiopharmaceuticals to the rebate program. We have been working with 
the radiopharmaceutical manufacturers to address questions and concerns 
regarding the reporting of these drugs. If a manufacturer has a 
specific question regarding certain aspects of the reporting 
requirements specific to radiopharmaceuticals, they should contact CMS 
for further discussion. We will continue to be available to assist 
manufacturers with questions on these drugs.
e. Drugs Billed as Part of Bundled Service
    Comment: One commenter noted that there was a difference between 
section 1927(k)(3) of the Act, as compared with the proposed rule, 
regarding exclusion of drugs from the definition of COD provided 
incident to and in the same setting as specified services. The 
commenter stated the statute applies an exclusion for drugs for which 
payment may be made as part of specified services, while the proposed 
rule applies that exclusion if payment is made as part of those 
services. The commenter stated that the definition in the proposed rule 
may imply that a drug's status as a COD may vary from state to state 
and unit to unit, and would be unworkable.
    Response: We agree with the commenter and have decided to revise 
the definition in light of the statutory language in section 1927(k)(3) 
of the Act. We are revising proposed Sec.  447.502, paragraph (2) of 
the COD definition to change ``and for which payment is made as part of 
that service . . .'' to ``and for which payment may be made as part of 
that service . . .''. As discussed in the proposed rule (77 FR 5322), a 
drug which is billed as part of a bundled service with, and provided as 
part of or incident to and in the same setting as the services 
described in section 1927(k)(3) of the Act meets the definition of a 
COD if the state authorizes and provides a direct payment for the drug, 
consistent with

[[Page 5188]]

the applicable state plan, separately from the service. While we agree 
with the commenter that the drug's status as a COD may vary from state 
to state depending on the state plan and how the drug is paid, we do 
not agree that states cannot appropriately handle rebate invoicing and 
utilization reporting. States are currently reporting these CODs, for 
which the state has provided direct reimbursement, for rebate purposes.
    Comment: We received a few comments regarding the status of a drug 
as a COD, if the drug is paid in part by Medicare as being billed to 
Medicare as part of a bundled service, and then the billing is 
subsequently unbundled and a portion of that drug is paid for by 
Medicaid. One commenter presented the scenario of a dual eligible 
patient who received treatment for End Stage Renal Disease (ESRD) and 
Medicare, the primary payer, is billed under the bundled services 
payment methodology that became effective January 1, 2011. The provider 
then unbundled the charges and billed the secondary payer, Medicaid, 
using the NDC for the individual drugs. The commenter asked, since 
Medicaid is being billed and paying for the claim at an NDC level, if 
the drug would be rebate-eligible.
    Another commenter requested confirmation that if the drug is 
bundled together with the service for billing purposes, then the drug 
is not subject to rebates. The commenter believed that if the drugs are 
paid for under the Medicare ESRD bundled payment rate, and a state 
Medicaid program paid for any portion of that bundled rate, then the 
drugs included in the bundled payment rate do not qualify as CODs, and 
are, therefore, not rebate-eligible.
    Response: Generally, if a state Medicaid program provides any 
payment for a COD that has been billed separately from a service, then 
in accordance with section 1927(b)(1) of the Act, the drug is subject 
to a manufacturer rebate under the MDR program. Alternatively, if the 
drug is provided as part of a bundled service and not separately 
reimbursed, then the drug does not qualify as a COD, in accordance with 
section 1927(k)(3) of the Act, and is not subject to rebates.
    We note, however, that section 1881(b)(14)(A)(i) of the Act 
provides that for services furnished on or after January 1, 2011, 
payments by Medicare for ESRD renal dialysis services, including 
certain drugs, generally are made under a bundled payment system. We 
have interpreted these provisions to provide that manufacturers are not 
required to pay rebates for drugs that are included in the bundled 
payment, regardless of the state payment. For more information please 
refer to Manufacturer Release #85 (October 26, 2012).
    Comment: One commenter supported CMS's effort to define a COD, 
especially for the exclusion from the definition of a drug that is 
reimbursed as part of a bundled service. The commenter asked CMS to 
clarify that the statement ``and for which payment is made as part of 
that service instead of as a direct reimbursement for the drug'' does 
not require a manufacturer to have data for every unit's ultimate 
reimbursement (that is, government program, private insurer, or patient 
payment).
    Response: We agree that the definition of a COD does not impose a 
requirement on the manufacturer to have data regarding the ultimate 
payer for each unit for the purposes of the MDR program. States are 
responsible, in accordance with section 1927(b)(2) of the Act, for 
collecting and reporting to manufacturers information for all CODs for 
which payment was made under the state plan.
    Comment: One commenter asked if CMS will maintain a list of 
products that must be reported as CODs if they are billed separately 
from a service. If not, the commenter asked if CMS will be providing 
access to a central repository of information.
    Response: In accordance with section 1927 of the Act, manufacturers 
are responsible for reporting product data for all of their drugs that 
meet the definition of a COD. States have access, through the DDR 
system, to a list of all of the drugs that manufacturers report to CMS, 
which is also posted on Medicaid.gov. At this time, we do not have 
plans to delineate that data further by identifying those drugs that 
are considered CODs if they are billed separately from a service.
    Comment: One commenter asked if a drug is provided as part of a 
bundled service, will the manufacturer be required to submit 
information stating that the drug is billed separately from the service 
to be used as evidence that the drug is a COD. If yes, then the 
commenter asked us to elaborate on what type of information.
    Response: If a drug meets the statutory definition of a COD, the 
drug must be reported to the MDR program by participating 
manufacturers. The manufacturer does not need to submit information 
stating that the drug may be billed separately from the service.
f. Prescription Prenatal Vitamins, Fluoride, and Medical Foods
    Comment: A few commenters supported the statement in the proposed 
rule that prescription prenatal vitamins without approved applications 
meet the definition of a COD. One of the commenters encouraged CMS to 
allow reimbursement for these products during the time that CMS is 
resolving their regulatory status. The commenter also noted that CMS 
should explain why it may make determinations regarding the COD status 
of a product when other agencies may make differing statements. The 
commenter noted that CMS has different goals than FDA, and should not 
be bound by FDA's recommendations.
    Another commenter expressed concern that the narrow interpretation 
of the term COD may deny coverage of prescription prenatal vitamins and 
fluoride. The commenter asked CMS to clarify that prescription prenatal 
vitamins and fluoride meet the definition of a COD.
    Response: Section 1927(d)(1) of the Act provides that states may 
exclude or otherwise restrict certain CODs. Section 1927(d)(2)(E) of 
the Act specifically provides that the list of drugs subject to 
restriction may include prescription vitamins and mineral preparations, 
except prescription prenatal vitamins and fluoride preparations. We 
read these provisions in context to provide that prescription prenatal 
vitamins and fluoride preparations would qualify as CODs, which in 
accordance with section 1927(d)(2)(E) of the Act states may not 
restrict or exclude from coverage. Additionally, we note that the COD 
term is a term used for the purposes of the MDR program, and other 
agencies' statements regarding the term may not be relevant to the MDR 
program.
    Comment: A commenter expressed concern regarding the requirement 
that to meet the definition, a product must be used for an accepted 
medical indication as substantiated by citations in medical compendia. 
The commenter stated that ample literature shows that prescription 
prenatal vitamins meet the definition of a COD based on medically 
accepted use and that compendia requirement may not apply.
    Response: Section 1927(k)(3) of the Act specifically excludes from 
the definition of CODs, those drugs or biological products used for a 
medical indication which is not a medically accepted indication. 
Section 1927(k)(6) of the Act, in turn, defines medically accepted 
indication to mean any use approved by the FDA or use supported by one 
or more citations in certain compendia identified in section 
1927(g)(1)(B)(i) of the Act. Accordingly, states may not exclude or 
restrict coverage of prescription prenatal vitamins when prescribed for 
medically

[[Page 5189]]

accepted indications unless such exclusion or restriction is otherwise 
permitted by section 1927(d)(1)(B) of the Act.
    Comment: One commenter stated that medical foods should meet the 
definition of a COD under the same rationale as prescription prenatal 
vitamins and older drugs. The commenter listed several statutory 
criteria and stated that demonstrating any one of these would provide 
for a product to meet the definition. The commenter cited: (1) A 
compelling justification for medical need; (2) the product must be used 
for a medically accepted indication; or (3) the drug was commercially 
used or sold in the United States before October 10, 1962 or is 
identical, related, or similar to such a drug. The commenter contended 
that medical foods meet the definition because medical foods can be 
shown to fulfill each of these criteria.
    Response: We appreciate the detailed information provided by the 
commenter. However, we disagree with the commenter that medical foods 
meet the statutory definition of a COD. These products are not 
addressed in section 1927(d)(2) of the Act and these products are not 
treated as prescribed drugs for purposes of section 1905(a)(12) of the 
Act. Therefore, in light of these provisions and the definition of COD 
provided in section 1927(k) of the Act, medical foods do not meet the 
definition of a COD.
g. Medically Accepted Indications
    Comment: We received a few comments regarding the requirement in 
the definition of COD to ensure that the use of a drug is limited to 
``medically accepted indications.'' Some of the commenters requested 
clarification on the intent of the language, guidance on how to ensure 
compliance, and CMS's expectations for states. Other commenters stated 
that the determination of the indication for which each prescription is 
written is difficult, unworkable, and would cause undue burden to 
states and providers.
    Response: Section 1927(k)(3) of the Act excludes from the 
definition of COD a drug or biological product used for a medical 
indication which is not a medically accepted indication. Consistent 
with this provision, the proposed regulatory definition of a COD, which 
we are finalizing, excludes drugs used for a medical indication which 
is not a medically accepted indication. This language regarding the 
exclusion of a drug or biological product for an indication that is not 
medically accepted was not revised under the Affordable Care Act, and 
we are not changing the requirement. States are responsible for the 
coverage of CODs consistent with this definition and their state plans. 
As noted, states have the flexibility to require prior authorization to 
ensure that CODs prescribed and dispensed by providers are used for 
medically accepted indications.
    Comment: One commenter requested that the requirement for 
determining that a drug is used for medically accepted indications be 
met by the presence of an NDC and electronic listing with FDA, or 
another definition listed in the chapter.
    Response: We disagree with the commenter that simply having an NDC, 
along with electronic listing with FDA, would substantiate that a drug 
was being utilized for a medically accepted indication. These two 
elements would not provide sufficient information regarding the medical 
indication for which the drug is being utilized for a particular 
beneficiary.
h. Miscellaneous Comments
    Comment: One commenter pointed out that in the preamble to the 
proposed rule, in the section discussing the definition of COD, and in 
the statutory definition of COD, reference is made to a drug which was 
commercially used or sold in the United States, but in the proposed 
regulations text, the language omitted the phrase ``used or.''
    Response: We appreciate the comment. We inadvertently failed to 
include the reference in the proposed text. Accordingly, in the 
definition we are finalizing in this final rule, we have revised the 
definition of CODs in Sec.  447.502 to reference a drug that was 
``commercially used or sold in the United States.''
    Comment: One commenter asked if CMS will include definitions, or 
references to definitions of ``ANDA,'' ``NDA,'' and ``FFDCA.''
    Response: ANDA and NDA are terms defined by FDA and CMS does not 
see a need to include those definitions in the regulation. FFDCA is the 
acronym for the Federal Food, Drug, and Cosmetic Act. We inadvertently 
did not write out the expansion of ANDA where it first appears in the 
regulation, and therefore, have revised the definition of COD to 
include the written out expansion of ANDA where it first appears in the 
regulatory text under Sec.  447.502.
    Comment: One commenter asked several questions regarding state drug 
files and their relationship to other data sources, such as pricing 
compendia. The commenter asked if state covered-drug files should match 
DDR for Medicaid in terms of the new COD definition. They stated that 
FDA updates their electronic file twice monthly and the state receives 
weekly updates regarding new products from an external pricing 
compendium. The commenter also asked how these new products will be 
priced during the lag time between an addition to the state files and 
being listed with FDA. The commenter also noted that variable formats 
between FDA's file and the state drug files make comparison of the two 
files difficult.
    Response: As states are primarily responsible for developing their 
own drug file based on drug coverage under their approved state plan, a 
state's drug file may not be identical to DDR (for example, it may 
contain additional NDC's for products such as experimental drugs or 
APIs). However, a state's drug file should include the NDCs of the CODs 
of those labelers that have signed the national rebate agreement. Those 
NDCs are available on Medicaid.gov at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Medicaid-Drug-Rebate-Program-Data.html and may also be found in the DDR 
system. Data provided by the MDR program, such as via DDR, should be 
the primary source of information used by states in developing their 
MDR file. States have flexibility to use external pricing compendia to 
supplement the information provided by CMS; however, states are 
responsible for operating their programs in accordance with the 
requirements of the MDR program. All states should have access to DDR, 
which is updated daily to reflect new drugs entering the MDR program, 
as well as updates or changes to existing drugs.
    Comment: One commenter stated that CMS should ensure it establishes 
a process to evaluate COD status and create a process for a quick 
appeal of a negative decision.
    Response: We agree that there should be a process to evaluate a 
drug's COD status and manufacturers may submit a request to CMS for 
reconsideration of their drug's status. We will make every attempt to 
provide a timely response to such requests.
    Comment: One commenter stated that by requiring approval 
information to be submitted to the MDR program, it imposes a burden on 
the manufacturers of updating and maintaining more fields in their 
product master.
    Response: We understand that the new requirements will result in 
manufacturers having to report and maintain additional information. 
However, as some manufacturers continue to report products that do not 
meet the statutory definition, we believe

[[Page 5190]]

that this additional information is necessary for CMS to improve the 
administration of the MDR program and to ensure that federal and state 
funds are being utilized appropriately, as recommended in an OIG report 
from October 2011. Specifically, the OIG report (A-07-10-06003 Multi-
State Review of Centers for Medicare & Medicaid Services Medicaid Drug 
Expenditure Controls) stated that cost savings to Medicaid could be 
realized if CMS worked with drug manufacturers to ensure that the 
information that manufacturers report is complete and accurate. In 
light of such concerns, CMS will be able to use manufacturer reported 
information, such as the COD status code, in combination with 
information available on FDA's NSDE file, to verify that the NDCs 
reported to the MDR program as CODs qualify as such.
    Based on the comments received, and for the reasons discussed, we 
are finalizing the definition of COD in Sec.  447.502 as specified in 
the proposed rule with the following changes. In addition, in light of 
the discussion in the innovator multiple source drug definition 
(section II.B.9. of this final rule), we are deleting the reference to 
NDA and ANDA from the final definition of COD, and instead are tracking 
the language of the statutory definition.
     The addition of ``of this definition'' at the end of the 
parenthetical clause ``(except as provided in paragraphs (2) and (3))'' 
to ensure this exception is appropriately identified.
     The replacement of ``and also'' with ``or'' in paragraph 
(1)(i). This change is technical in nature and not intended to alter 
the meaning or intent of the definition.
     The deletion of the phrases ``where the manufacturer has 
obtained a NDA'' and ``where the manufacturer has obtained an ANDA'' 
from paragraph (1)(i) to more closely mirror the statutory definition 
of covered outpatient drug at section 1927(k)(2) of the Act. This final 
change is not intended to alter the meaning or intent of the 
definition.
     The addition of ``used or'' in paragraph (1)(ii) to more 
closely mirror the statutory definition of COD at section 1927(k)(2) of 
the Act.
     The change in paragraph (2) of the regulatory text from 
``and for which payment is made as part of that service . . .'' to 
``and for which payment may be made as part of that service . . .''
     The change in terminology in paragraph(2)(vi) from 
``mentally retarded'' to ``individuals with intellectual disabilities'' 
as there has been a change in terminology since the publication of the 
proposed rule, and the phrase ``mentally retarded'' has been replaced 
with ``individuals with intellectual disabilities.''
     The deletion of proposed paragraph (3)(ii) from the 
regulatory text, which excluded any drug product that is not listed 
electronically with the FDA from the definition, and renumbering 
paragraphs (3)(iii), 3(iv), and (3)(v) to 3(ii), (3)(iii), and (3)(iv), 
respectively.
     The replacement of the term ``biologic product'' with 
``biological product'' as we want to be consistent with the statutory 
definition of covered outpatient drug, which at section 1927(k)(2) of 
the Act uses the term ``biological product''. This change is technical 
in nature and not intended to alter the meaning or intent of the 
definition.
8. Customary Prompt Pay Discounts
    We proposed to add a definition of customary prompt pay discount to 
ensure consistent application of such discounts among manufacturers 
when calculating AMP (77 FR 5323 and 5360). In proposed Sec.  447.502, 
we proposed to define customary prompt pay discounts as any discount 
off of the purchase price of a drug routinely offered by the 
manufacturer to a wholesaler for prompt payment of purchased drugs 
within a specified timeframe and consistent with its customary business 
practices for payment (77 FR 5360). We received no comments concerning 
the proposed definition of customary prompt pay discount, and 
therefore, we are finalizing the definition under Sec.  447.502 as 
proposed. Comments pertaining to the application of customary prompt 
pay discounts to the determination of AMP can be found in section 
II.C.6. of this rule.
9. Innovator Multiple Source Drug
    As currently defined in Sec.  447.502, an innovator multiple source 
drug means a multiple source drug that was originally marketed under an 
original NDA approved by FDA, including an authorized generic drug. It 
also includes a drug product marketed by any cross-licensed producers, 
manufacturers, or distributors operating under the NDA and a COD 
approved under a product license approval (PLA), establishment license 
approval (ELA), or antibiotic drug approval (ADA). In the proposed rule 
(77 FR 5323 and 5360), we proposed to add multiple source drugs 
originally marketed under a Biologics License Application (BLA), as the 
BLA approval process is a successor to the PLA and ELA, and drugs sold 
under a BLA are explicitly referenced in the proposed regulatory 
definition of single source drug (77 FR 5326 and 5361).
    In addition, we proposed to clarify that, for purposes of the MDR 
program, an original NDA is equivalent to an NDA filed by the 
manufacturer for approval under section 505 of the FFDCA for purposes 
of approval by FDA for safety and effectiveness (77 FR 5323 and 5360). 
In light of this definition, we also proposed to use the term ``NDA'' 
when addressing such application types for brand name drugs and not use 
the term ``original NDA'' when referring to such drugs throughout the 
proposed rule (77 FR 5323).
    We received many comments that provided concerns regarding the term 
``original NDA'' as well as a few comments regarding products approved 
under a BLA. The issues in these comments are relevant to both the 
proposed definitions of single source drug and innovator multiple 
source drug. Given the overlap of these issues (they are not unique to 
either definition), we have decided to address the comments relating to 
the term ``original NDA'' and products approved under a BLA in the 
innovator multiple source definition section of this final rule (and we 
will provide a cross-reference to this section in the single source 
drug definition regarding these comments). We also addressed in this 
section additional comments we received that were specific to the 
definition of innovator multiple source drug, including older drug 
approvals, the timing of the changes, as well as the effect of the 
revised definition of innovator multiple source drug on manufacturers. 
We received the following comments:
a. ``Original NDA''
    Comment: We received many comments regarding our proposal to 
provide that for purposes of the MDR program, an original NDA is 
equivalent to an NDA filed by the manufacturer for approval under 
section 505 of the FFDCA for purposes of approval by the FDA for safety 
and effectiveness. Some commenters maintained that CMS has no authority 
to read out any word from the statute because no word is insignificant 
and by doing so, we are violating the cardinal principle of statutory 
construction that no language shall be superfluous, void, or 
insignificant. A few commenters noted that by reading out the word 
``original,'' we are defining a brand name drug as any drug approved 
under an NDA, regardless of the circumstances surrounding the approval, 
ignoring the changing history of FDA's approval

[[Page 5191]]

process, and that we have done so without consideration of policy or 
legal implications.
    Another commenter stated that there is no justification why 
manufacturers of certain ``generics'' must pay higher rebates only 
because they are approved under an NDA. The commenter stated that many 
NDAs are as ``abbreviated'' as ANDAs are, and it is those NDAs that are 
not original. One commenter stated that the Congress included the word 
``original'' because it intended for only the first NDA for that drug 
to be considered a ``brand.'' Another commenter stated that the term 
``original new drug application'' is unique to section 1927(k)(7)(A) of 
the Act and nowhere else where an NDA is discussed is the term 
``original NDA'' used as a synonym for NDA. The commenter stated, 
therefore, that the word ``original'' must have meaning, especially 
because the word is used in a provision of the statute that is intended 
to clarify the meaning of statutory terms. The commenter also stated 
that the term ``original NDA'' clarifies the concept of an innovator 
drug by clarifying the distinction Congress made between innovator and 
generic drugs and not the less meaningful and sometimes non-existent 
difference between drugs approved in NDAs and ANDAs. Additionally, the 
commenter stated that if Congress merely wanted to differentiate 
between NDA and ANDA, they would have used only those terms, like they 
did elsewhere and they would not have introduced the term ``original 
NDA.''
    Another commenter stated that the intent of the MDR statute is to 
impose a higher rebate liability on new chemical entities, marketed for 
the first time under the NDA process, and which received some form of 
market protection. Another commenter stated that actions that will be 
required by manufacturers, based on the proposed definition of original 
NDA, including the reevaluation of their drug categories and having to 
utilize the higher rebate percentage to calculate URAs, will result in 
a substantial financial burden without adequate justification or 
consideration within the economic analysis of the proposed rule.
    Response: We appreciate the comments and agree with the commenters 
who have stated that we cannot read out the word ``original'' from the 
statute. However, we do not believe that either the proposed rule or 
this final rule ignore the word ``original'' as it is used in the 
context of the statute.
    Section 1927(k)(7)(A) of the Act provides a definition for each of 
the drug categories that are used in the MDR program to identify the 
rebate percentage used to calculate the URA for each drug. 
Specifically, section 1927(k)(7) of the Act defines drugs to include 
single source drugs, innovator multiple source drugs, and noninnovator 
multiple source drugs. Section 1927(k)(7)(A)(iv) of the Act defines a 
single source drug, in part, to mean a covered outpatient drug produced 
or distributed under an original NDA, including a drug product marketed 
by any cross-licensed producers or distributors operating under the 
NDA. Our understanding is that a single source drug is typically the 
first drug on the market; it has been produced or distributed under an 
NDA, other than an ANDA, approved by the FDA for the drug and has no 
therapeutic equivalents. Similarly, our understanding is that an 
innovator multiple source drug is a drug that was initially marketed 
under an NDA, other than an ANDA, approved by FDA but is rated 
therapeutically equivalent to at least one other product in the FDA's 
`Approved Drug Products with Therapeutic Equivalence Evaluations' 
(Orange Book) that is sold or marketed in the United States during the 
rebate period. Section 1927(k)(7)(A)(iii) of the Act defines 
noninnovator multiple source drugs as multiple source drugs that are 
not innovator multiple source drugs, which are typically marketed under 
an ANDA, as opposed to an NDA, approved by FDA. In accordance with 
these provisions, we disagree with the commenter that Congress needed 
to use the specific terms NDA and ANDA to differentiate between those 
drugs which are to be considered single source drugs or innovator 
multiple source drugs and those which are to be considered noninnovator 
multiple source drugs. Therefore, in light of the comments received and 
in accordance with the statutory definitions of innovator multiple 
source and single source drugs, when read in context with the statutory 
scheme, we believe that the term ``original NDA'' is designed typically 
to mean an NDA (including an NDA filed under section 505(b)(1) or (2) 
of the FFDCA), other than an ANDA, which is approved by the FDA for 
marketing.
    There may be very limited circumstances where, for the purposes of 
the Medicaid Drug Rebate (MDR) program, certain drugs might be more 
appropriately treated as if they were approved under an ANDA and 
classified as a noninnovator multiple source drug. For example, certain 
parenteral drugs in plastic immediate containers, for which FDA 
required that an NDA be filed, might be more appropriately treated, for 
purposes of the MDR program, as if they are marketed under an ANDA and 
classified as a noninnovator multiple source drug. Likewise, certain 
drugs approved under a paper NDA prior to the enactment of the Hatch-
Waxman Amendments of 1984 or under certain types of literature-based 
505(b)(2) NDA approvals after the Hatch-Waxman Amendments of 1984 might 
be more appropriately treated as if they were approved under an ANDA 
and classified as a noninnovator multiple source drug, depending on the 
unique facts and circumstances of the particular situation. We plan on 
issuing additional guidance on the scope of these very limited 
circumstances in the future. In the meantime, we remind manufacturers 
that these limited circumstances constitute very narrow exceptions to 
the rule that drugs marketed under NDAs (including section 505(b)(2) 
NDAs), other than ANDAs, should be classified as either single source 
or innovator multiple source drugs. For example, the narrow exception 
will not be considered applicable to drugs marketed under NDAs that 
were not approved under either the paper NDA process prior to 1984 or 
under certain types of literature-based 505(b)(2) approvals, or for 
drugs that received patent protection or statutory exclusivity.
    Drugs reported to the MDR program for the first time on or after 
the effective date of the final rule, including drugs newly marketed 
under an NDA, other than an ANDA; and drugs previously marketed under 
an NDA, other than an ANDA, and are reported to the MDR program 
because, (1) the drug was not reported previously, or (2) the 
manufacturer receives a new rebate agreement on or after the effective 
date of the final rule, should be classified as single source or 
innovator multiple source drugs. If a manufacturer believes that a drug 
marketed under an NDA, other than an ANDA, and reported to the MDR 
program on or after the effective date of the final rule should qualify 
for the narrow exception referenced above because it was approved under 
the paper NDA process prior to 1984 or an NDA approved under certain 
types of literature-based 505(b)(2) approvals after 1984 and the unique 
facts and circumstances warrant reclassification, the manufacturer 
should submit materials to CMS demonstrating the basis of how the drug 
might be subject to the narrow exception to classify the drug as a 
noninnovator multiple source drug. CMS will review these materials and: 
(1) Confirm in writing that this narrow

[[Page 5192]]

exception does apply to the drug at issue and permit reclassification 
as a noninnovator multiple source drug; or (2) state that the exception 
does not apply, and the manufacturer must continue to report the drug 
as either a single source or innovator multiple source drug.
    For drugs marketed under an NDA and reported currently to MDR 
program as noninnovator multiple source drugs, manufacturers are 
reminded of their statutory and regulatory reporting obligations to 
report such drugs as innovator multiple source drugs or single source 
drugs, as applicable. However, manufacturers of such drugs will have up 
to four quarters after the effective date of the final rule to apply 
for an exception and, if applicable, make the required data changes to 
bring their reporting efforts into statutory and regulatory compliance 
before CMS takes any administrative action, if appropriate, against 
such manufacturers. To the extent any such manufacturer believes that a 
drug should qualify for the narrow exception, allowing such drugs to be 
reported as noninnovator multiple source, that manufacturer may also 
submit materials to CMS demonstrating the basis of how the drug may be 
subject to the narrow exception to classify the drug as a non-innovator 
multiple source drug. CMS will review these materials and: (1) Confirm 
in writing that this narrow exception does apply to the drug at issue; 
or (2) state that the exception does not apply, and the manufacturer 
must report the drug as either a single source or innovator multiple 
source drug. To the extent a manufacturer has previously reported a 
drug marketed under an NDA, other than an ANDA, as a noninnovator 
multiple source drug, or believes it has approval from CMS to do so, 
that manufacturer must submit materials and receive a written 
determination from CMS as described above pursuant to this final rule.
    Therefore, while drugs marketed under an ANDA are noninnovator 
multiple source drugs, drugs marketed under an NDA, other than an ANDA, 
approved by the FDA are innovator multiple source or single source 
drugs, unless the narrow exception has been determined by CMS to apply. 
CMS's decision to allow manufacturers up to four quarters to come into 
compliance before taking administrative action in no way relieves 
manufacturers of other potential liability.
    Our interpretation regarding original NDA results in consistent 
treatment of multiple source drugs, such that those multiple source 
drugs, which were initially approved for marketing by the FDA under an 
original NDA, as opposed to an ANDA, would be considered innovator 
multiple source drugs. For these reasons, and after considering the 
comments, we have revised the proposed definitions of single source 
drug and innovator multiple source drug that are found in the proposed 
rule at 77 FR 5360 and 5361. We are finalizing a change to the 
definitions of single source drug and innovator multiple source drug by 
including a reference to an original NDA. With regard to the meaning of 
the term ``original NDA'' within the definitions of single source drug 
and innovator multiple source drug under the MDR program, in this final 
rule we have revised the proposed definition of ``original NDA'' to 
reference an NDA, other than an ANDA, approved by the FDA for 
marketing, unless the narrow exception discussed above applies (which 
requires the manufacturer's written submission to CMS, and CMS's 
response confirming that the exception applies).
    Comment: One commenter noted that the proposed rule fails to 
recognize that duplicate and paper NDAs, although filed under section 
505(b) of the FFDCA, were not filed for ``purposes of approval by FDA 
for safety and effectiveness'' because safety and effectiveness were 
established by the Drug Efficacy Study Implementation (DESI) notice 
(used for drugs marketed prior to 1962) or the approval of the NDA 
referenced by the paper NDA, in that clinical trial data are not 
included in either type of filing.
    Response: The reference to applications approved on the basis of 
DESI notices refers to the fact that ANDAs that relied on those notices 
were approved under section 505(b) of the FFDCA, since section 505(j) 
was not part of the statute until 1984. While those applications were 
approved under section 505(b), if they were classified by FDA as ANDAs 
we consider the drugs to have been approved under ANDAs. The reference 
to paper NDAs refers to applications that were also approved under 
section 505(b), but as noted in response to other comments, the FDA's 
paper NDA policy incorporated two types of approvals--one for 
duplicates of approved NDAs (now approved under section 505(j)), and 
one for other than those for duplicate products (now approved under 
section 505(b)(2)). As section 505(b)(2) applications are NDA 
applications, not ANDA applications, these drugs should be classified 
as single source or innovator multiple source drugs, unless the narrow 
exception applies, as discussed above pursuant to this final rule. In 
the proposed rule, the proposed regulatory definitions for innovator 
multiple source drug and single source drug (77 FR 5360 through 5361) 
included that ``for the purposes of the MDR program, an original NDA is 
equivalent to an NDA filed by the manufacturer for approval under 
section 505 of the FFDCA for purposes of approval by the FDA for safety 
and effectiveness.''
    We agree with the commenter that NDAs that were approved prior to 
1962 were approved for safety only, and not efficacy. We do not believe 
that section 1927(k)(7) of the Act provides that the definition of 
single source drug and innovator multiple source drug should be limited 
to only those drugs approved in 1962 or later. Therefore, in addition 
to the previously discussed modification, we are further modifying the 
regulatory definitions of innovator multiple source drug and single 
source drug. Specifically, in this final rule, we are finalizing the 
definitions for single source drug and innovator multiple source drug 
under Sec.  447.502 by eliminating the proposed language ``approval 
under section 505 of the FFDCA for the purposes of approval by the FDA 
for safety and effectiveness'' to clarify that single source and 
innovator multiple source drugs are not limited to only those drugs 
approved in 1962 or later.
    As discussed above, drug products marketed under NDAs, other than 
ANDAs, should be classified by manufacturers as either single source or 
innovator multiple source drugs for the purposes of the MDR program 
unless the narrow exception applies, as discussed above pursuant to 
this final rule. If the manufacturer believes that a drug approved 
under an NDA prior to 1962, including a drug approved under one of the 
NDA processes to which the commenter refers, should be classified as a 
noninnovator multiple source drug, the manufacturer should submit 
materials to CMS demonstrating why a drug should be classified as a 
noninnovator multiple source drug. CMS will review these materials and: 
(1) Confirm in writing that this narrow exception does apply to the 
drug at issue and the manufacturer must report the drug as a 
noninnovator multiple source drug; or (2) state that the exception does 
not apply, and the manufacturer must report the drug as either a single 
source or innovator multiple source drug.
b. Older Drug Approvals
    Comment: A few commenters discussed older drugs, which were 
marketed initially with no approval but later received an NDA approval 
under a section 505(b)(2) application. The

[[Page 5193]]

commenters stated that when these drugs were initially marketed, they 
were not marketed under an NDA and were not new drugs that would 
require a section 505(b)(1) approval; therefore, they would not meet 
the innovator multiple source drug definition, which states that the 
drug was ``originally marketed under an original new drug 
application.''
    Another commenter stated that the proposed rule provides that pre-
1962 drugs that were originally marketed without an NDA as noninnovator 
multiple source drugs and, prior to the effective date of this rule, 
were reviewed by FDA and received an NDA under FDA's section 505(b)(2) 
provision, would continue to be treated as noninnovator multiple source 
drugs, per the guidance found in the preamble to CMS's proposed rule 
(60 FR 48453), published in 1995. The commenter additionally stated 
that they believe CMS intends for pre-1962 drugs that receive an NDA 
subsequent to the effective date of this rule would have their status 
changed to innovator multiple source drugs. The commenter concluded 
that if the section 505(b)(2) application was submitted as a supplement 
or change to an innovator multiple source drug, then the drug should be 
treated as an innovator multiple source drug; however, if the section 
505(b)(2) application did not reference an innovator multiple source 
drug, it should be treated as a noninnovator multiple source drug. The 
commenter indicated that if their interpretation of CMS's intent was 
correct, that CMS would be eliminating the statutory requirement that 
an innovator multiple source drug be originally marketed under an 
original NDA.
    Response: We disagree with the commenter that the 2012 proposed 
rule would contradict the statutory requirement that an innovator 
multiple source drug be originally marketed under an original NDA. We 
interpret the phrase ``originally marketed'' in the context of the 
definition of an innovator multiple source drug to reference a drug 
that was initially marketed as a single source drug. Specifically, 
section 1927(k)(7) of the Act defines a single source drug as a drug 
that is produced or distributed under an ``original NDA'' approved by 
the FDA, with no therapeutic equivalents. Once that single source drug 
has therapeutic equivalents, it falls within the definition of an 
innovator multiple source drug.
    We disagree with the commenter that there will be different 
treatment regarding drug category determinations of previously 
unapproved drugs that subsequently received FDA approval, depending on 
whether the FDA approval occurred before or after the effective date of 
this final rule. Section 1927(k)(7) of the Act provides definitions for 
single source drugs, innovator multiple source drugs, and noninnovator 
multiple source drugs. It is possible that based on the approval of a 
previously unapproved drug, that drug may require a change in reported 
drug category. Additionally, the portion of the proposed 1995 rule 
referred to by the commenter was not finalized and is not 
determinative. In the final rule published on July 17, 2007, we 
provided, in part, that due to changes in the prescription drug 
industry, we do not plan to finalize the provision from the proposed 
1995 rule to which the commenter refers (72 FR 39143). If a 
manufacturer believes that a drug marketed under a section 505(b)(2) 
NDA is subject to this narrow exception discussed above, the 
manufacturer should submit materials to CMS outlining the basis for 
classifying the drug as a noninnovator multiple source drug. CMS will 
review these materials and: (1) Confirm in writing that this narrow 
exception does apply to the drug at issue and the manufacturer must 
report the drug as a noninnovator multiple source; or (2) state that 
the exception does not apply, and the manufacturer must report the drug 
as either a single source or innovator multiple source drug.
    All drugs marketed under an NDA, other than an ANDA, regardless of 
when they were approved, should be categorized as single source or 
innovator multiple source drugs, unless CMS determines that a narrow 
exception applies as discussed above pursuant to this final rule. The 
final rule does not release manufacturers from any reporting 
liabilities. If a manufacturer determines a drug category change is 
needed, the manufacturer is responsible for contacting CMS to request 
that change.
    Accordingly, we have modified the definition of innovator multiple 
source drug in the proposed regulatory text (77 FR 5360) to include the 
term ``originally marketed.'' Specifically, in this final rule, in 
response to comments and as discussed in this section, we are 
finalizing the definition of innovator multiple source drug under Sec.  
447.502 to provide that an innovator multiple source drug means a 
multiple source drug that was originally marketed under an original NDA 
approved by FDA, including an authorized generic drug, unless the 
narrow exception discussed above applies (which requires the 
manufacturer's written submission to CMS, and CMS's response confirming 
that the exception applies).
c. Timing of Changes
    Comment: Many commenters requested that the changes in the 
definitions of the drug categories be made prospectively, not apply to 
prior reporting periods, and that sufficient lead time be allowed to 
accommodate the changes. One commenter suggested that we not adopt the 
new definition of innovator multiple source drug at all because the 
changes would be financially harmful and operationally difficult to 
implement retrospectively. Further, a commenter stated that if the 
changes are implemented prospectively, they will be inconsistent with 
past treatment of some drugs.
    Response: This final rule is designed to clarify existing policy 
regarding the definitions of original NDA and single source drugs, 
innovator multiple source drugs, and noninnovator multiple source 
drugs. To address the commenters who requested sufficient lead time to 
change their practices, we will allow manufacturers up to 4 quarters 
after the effective date of the final rule to make the necessary data 
changes in accordance with the definitions we are finalizing for single 
source drug and innovator multiple source drug in this final rule, 
before CMS takes any administrative action, if appropriate.
    Manufacturers are responsible for reporting drugs that were 
marketed under an original NDA as single source or innovator multiple 
source drugs, unless the narrow exception applies as noted previously. 
We understand that some manufacturers may need to make operational 
changes to their pricing systems, such as calculating a base date AMP 
and best price for a drug that should be categorized as innovator 
drugs. Therefore, we are allowing manufacturers up to 4 quarters after 
the effective date of the final rule to make the necessary data changes 
before CMS takes any administrative action, if appropriate.
d. Effect on Manufacturers
    Comment: We received many comments claiming that many drugs 
historically viewed as generics, including some that never benefited 
from patent protection or other forms of exclusivity, would now be 
classified as brand, subjecting them to higher rebate liability, even 
though they would likely continue to be priced and reimbursed like a 
generic. In addition, they would be subject to additional rebate 
penalties, line extension penalties, lower VA and 340B prices, TRICARE 
rebates, Medicare

[[Page 5194]]

coverage gap discounts, and the branded prescription drug fee program. 
Commenters noted that these higher liabilities will discourage 
manufacturers from continuing production of these lower cost drugs, 
such as drugs approved prior to the enactment of the Hatch-Waxman Act 
in 1984, including drugs approved under FDA's paper NDA process; drugs 
approved under section 505(b)(2) of the FFDCA; drugs that were required 
by FDA to submit for NDA approval solely based on the need for safety 
testing of their plastic immediate containers; and grandfathered 
products that subsequently received NDA approval.
    Several commenters stated that simply because the ANDA process of 
approval was not utilized, and instead an alternative approval process 
was utilized, this should not be the basis of determining a drug to be 
an innovator multiple source drug. One commenter stated that FDA 
sometimes requests that a manufacturer submit a 505(b)(2) application 
or other short-form application for approval of an older generic drug 
which, the commenter concluded, cannot reasonably be viewed as an 
innovator multiple source drug. The commenter stated that CMS should 
provide some flexibility regarding the classification of these drugs. 
Several commenters cited an FDA-proposed rule that referred to pre-
Hatch-Waxman NDAs as ``duplicate'' drugs and commented that if a drug 
is a duplicate of another, then it should be considered to be a 
noninnovator product.
    Response: In this final rule, we are providing a regulatory 
definition for single source drug and innovator multiple source drug so 
that manufacturers report drug categories in accordance with section 
1927 of the Act on a consistent basis. Manufacturers are responsible 
for reporting drugs that are marketed under an original NDA as 
innovator multiple source drugs. However, we believe it is important 
for manufacturers to continue production of such drugs and we did not 
intend that this rule would have any impact on their production; 
rather, we are providing our interpretation of section 1927(k) of the 
Act for how manufacturers should report drug categories under the 
rebate program. As described in FDA's draft guidance for industry found 
at http://www.fda.gov/downloads/Drugs/Guidances/ucm079345.pdf, entitled 
``Applications Covered by Section 505(b)(2)'' in 1999, a section 
505(b)(2) application type is submitted under section 505(b)(1) and 
approved under section 505(c). However, for a drug to be a noninnovator 
multiple source, the final rule published on July 17, 2007 (72 FR 
39143), provided that the drug should be marketed under an ANDA, which 
is approved specifically under section 505(j) of the FFDCA. 
Additionally, the review process for a drug approved under section 
505(b)(2) is distinct from the review under section 505(j). Therefore, 
based on our interpretation of the statute and the applicable FDA 
approval process, we do not believe that most drugs approved under a 
section 505(b)(2) application meet the definition of a noninnovator 
multiple source drug unless the narrow exception discussed above 
applies (which requires the manufacturer's written submission to CMS, 
and CMS's response confirming whether or not the exception applies). 
Additionally, FDA proposed rules, as cited by a commenter, are not 
applicable to drug rebate provisions.
    Regarding a grandfathered drug, or a drug that was previously 
marketed without approval and subsequently received approval of an NDA, 
as opposed to an ANDA, that drug should be reported as a single source 
drug or innovator multiple source drug, whichever is applicable, unless 
the narrow exception discussed above applies. The final rule does not 
release manufacturers from any reporting liabilities. If a manufacturer 
determines a drug category change is needed, the manufacturer is 
responsible for contacting CMS to request that change.
    Comment: We received several comments noting that enacting the 
proposed definition would require manufacturers to report a base date 
AMP and best price for older drugs that require a drug category change 
due to the clarification in the definitions of single source and 
innovator multiple source drug. Several commenters asked how 
manufacturers should report the base date AMP or best price for these 
drugs in the absence of data, which may occur especially if the drug 
was purchased from another company, and data going back to the original 
market date may not be available. The commenters were also concerned 
about data not being available to establish a market date and asked for 
guidance in addressing the gap in data.
    Response: If a drug is purchased from another company, then the 
purchasing manufacturer needs to report a purchased product date (PPD) 
for this drug (please see Manufacturer Release #90 (April 18, 2014) for 
more information). Once a PPD is reported and the PPD is later than 
both the Market Date quarter and the Omnibus Budget Reconciliation Act 
of 1993 (OBRA '93) Base date AMP quarter, the system will not require 
the purchasing manufacturer to report a best price for the base AMP 
quarter. However, manufacturers are still required to report the base 
date AMP based on the original market date of the drug and if 
manufacturers have reported their quarterly pricing in compliance with 
the rebate program, the CMS system will use the quarterly AMP from the 
base date AMP quarter (which is based on the original market date of 
the drug, when the drug was first marketed), to populate the base date 
AMP for the drug. However, if there is any missing pricing information 
for the base date AMP quarter, then the manufacturer is responsible for 
providing CMS with that base date AMP information via DDR.
e. Prior Regulation and Proposed Rule
    Comment: Many commenters referenced information from the 1995 
proposed rule (60 FR 48453) where we discussed that it was our 
understanding that the term ``original NDA'' was included in the 
statute by Congress with the intent of extracting larger rebates from 
those drugs that received some form of patent or marketing protection 
for a specific period of time. Some commenters stated that this was the 
only guidance issued by CMS on this topic and that manufacturers have 
been relying on that guidance for their drug category determinations.
    Response: In the final rule published on July 17, 2007 (72 FR 
39143), we stated that we were not finalizing most provisions from the 
1995 proposed rule (60 FR 48453). Therefore, the discussion in the 1995 
proposed rule regarding patent protection and exclusivity was not 
determinative for drug category determinations. Based on the given 
statutory definition, which categorizes a drug based on the marketing 
under an original NDA and not on patent protection or exclusivity, we 
are finalizing this final rule without sole consideration of patent 
protection or exclusivity as a factor in determining a drug category 
for the purposes of the MDR program. Rather, in accordance with this 
final rule, drugs marketed under an original NDA are categorized as 
single source drugs or innovator multiple source drugs according to 
those definitions in section 1927(k)(7) of the Act. In contrast, drugs 
marketed under an ANDA are categorized as noninnovator multiple source 
drugs. Because many of the drugs that receive patent protection and 
exclusivity have original NDAs, we believe this final rule serves the 
Congressional interests identified in the 1995 proposed rule and 
codified in the Act.
    Comment: One commenter suggested that while pre-Hatch-Waxman 
``generic

[[Page 5195]]

drug NDAs'' are technically NDA approvals, and thus, would fall within 
the proposed single source drug or innovator multiple source drug 
definition, this is inconsistent with CMS's definition of noninnovator 
multiple source drug. The commenter stated that the inconsistency stems 
from CMS's response to a comment that was received in response to the 
proposed rule that was finalized on July 17, 2007 (72 FR 39142) and 
addressed in Sec.  447.502. In the 2007 rule, the commenter asked for 
the appropriate classification of a drug that (1) is ``the only COD 
remaining on the market'' and (2) was approved in an ANDA. The 
commenter noted that CMS responded to this comment by deeming the drug 
to be a noninnovator multiple source drug.
    Response: We do not agree that our definitions of single source 
drug or innovator multiple source drug are inconsistent with the 
definition of noninnovator multiple source drug. Our response to the 
comment in the July 17, 2007 final rule (72 FR 39162) stated that we do 
not believe that it would be consistent with the statute to modify the 
definition of an innovator multiple source drug to include drugs 
marketed under an ANDA and we continue to believe that to be true.
f. Miscellaneous Comments
    Comment: Some commenters maintained that an original NDA is not 
equivalent to an NDA because drugs approved under an original NDA may 
not have been the original drug on the market or may not be the 
reference drug in the Orange Book.
    Response: We disagree with the comments regarding whether a drug's 
appearance in the Orange Book as a reference drug is determinative for 
the reporting of a drug category for purposes of the MDR program. In 
particular, we are not relying on whether a drug may have been the 
reference drug in the Orange Book to determine whether a drug is a 
single source drug, innovator multiple source drug, or noninnovator 
multiple source drug, but instead we are interpreting provisions of 
section 1927 of the Act for purposes of the MDR program. The status of 
a drug as the listed reference drug in the Orange Book does not mean 
that the drug is an innovator multiple source or single source drug as 
defined by section 1927 of the Act for the purposes of the MDR program.
    Comment: Some commenters discussed that, under the enactment of 
Hatch-Waxman in 1984, certain drugs were transferred to FDA's Division 
of Generic Drugs. The commenters stated that because the regulation of 
these drugs was transferred to the Division of Generic Drugs, that the 
drugs are considered to be generic drugs by FDA and should, therefore, 
be treated by CMS as noninnovator multiple source drugs.
    Response: We disagree. The FDA's transfer of a drug to its Division 
of Generic Drugs does not necessarily indicate that the drug should be 
categorized as a noninnovator multiple source drug for purposes of the 
MDR program. While FDA may assign their regulatory processes or 
oversight to any division they believe is appropriate, the internal 
administrative process of FDA does not have an impact on the 
categorization of innovator or noninnovator multiple source drugs for 
the purposes of the MDR program. Section 1927 of the Act does not 
specify that CMS consider which FDA division has oversight for a drug 
in determining drug category. As discussed previously in this section, 
drugs reported to the MDR program should be categorized based on the 
provisions in section 1927 of the Act, not based on the division of FDA 
that is assigned oversight of the drug.
    Comment: Several commenters stated that it would be inappropriate 
to include a drug approved in a BLA in the definition of innovator 
multiple source drug because there are no therapeutic equivalents for 
drugs approved under a BLA. One of the commenters also acknowledged 
that although CMS correctly states that the BLA technically replaced 
the PLA as the approval vehicle for drugs under the PHSA, the approval 
standards under the PHSA are different than those under FDA. The 
commenter explained that although there may be a time when FDA approves 
a BLA as an interchangeable biosimilar under the PHSA, such a product 
is not likely to ever receive a therapeutic equivalent or 
pharmaceutical equivalent rating from FDA. The commenter concluded that 
at this time, it is inappropriate for CMS to include BLAs in the 
definition of innovator multiple source drug. Another one of the 
commenters requested that CMS clarify that biologics should be 
recognized as single source drugs consistently across Medicaid and 
Medicare. The commenter stated that the proposed definition of 
innovator multiple source drug, including biologicals, does not align 
with Medicare's definition. The commenter stated that under Medicare, 
biologicals are single source drugs with the exception that, if there 
was more than one drug within a billing and payment code as of October 
1, 2003, then they may be considered multiple source drugs.
    Response: We agree with the commenter that, given our proposed 
definitions, no currently marketed BLA drugs would be considered 
multiple source drugs. Accordingly, given the definitions we are 
finalizing in this final rule, a drug marketed under a BLA would be 
considered a single source drug. On March 30, 2015, CMS issued Medicaid 
Drug Rebate Program Notices for Participating Drug Manufacturers (No. 
92) and for State Technical Contacts (No. 169) clarifying that 
biological products licensed under a BLA, including biosimilar 
biological products, fall within the definition of single source drug. 
We further note that the identification of a drug under the definitions 
for multiple source drugs under the MDR program are unaffected by 
billing and payment codes the commenter referenced; therefore, such 
coding does not apply to Medicaid.
    Comment: We received one comment that expressed concern regarding 
the use of the terms ``brand'' and ``generic,'' rather than 
``innovator'' and ``noninnovator,'' because the commenter stated that 
some ``generic'' drugs may have been given branded names and that alone 
does not categorize a drug as an innovator drug.
    Response: We understand the commenter's concern regarding the words 
``brand'' and ``generic,'' and note that these terms generally have 
been used interchangeably with ``innovator'' and ``noninnovator'' 
within the industry. For the purposes this rule, we will not use the 
terms interchangeably but instead focus on the terms single source and 
innovator multiple source, except when used within the summary of 
comments received in response to the proposed rule. For the purpose of 
drug categorization in the MDR program, a drug category is determined 
based on the drug's approval status with FDA, such as under an ANDA or 
NDA, and single source, innovator multiple source, and noninnovator 
multiple source will be used regardless of whether the drug has been 
given a branded name or not.
    Comment: We received several comments regarding CMS's use of the 
word ``clarification'' in our discussion of the proposed definition of 
innovator multiple source drug. The commenters stated that rather than 
clarification, the proposed definition is instead a reversal of 
previous policy, or a major change to standard industry practice, which 
could potentially have the effect of imposing retrospective liability 
for manufacturers.
    Response: We disagree with the commenters that our interpretation 
of the definition of single source and innovator multiple source drug 
could be

[[Page 5196]]

perceived as a change or reversal of policy. Our proposed language was 
not designed to change CMS policy, but rather to provide further 
clarification that an ``original NDA'' means an NDA, other than an 
ANDA, approved by the FDA for marketing, unless the narrow exception 
discussed above applies.
    The final rule does not release manufacturers from any reporting 
liabilities. If a manufacturer determines a drug category change is 
needed, the manufacturer is responsible for contacting CMS to request 
that change. The statute requires a different rebate formula for single 
source and innovator multiple source drugs, which results in higher 
rebates owed for those drugs than for noninnovator multiple source 
drugs. We encourage manufacturers to properly classify their drugs for 
rebate calculation purposes.
    Comment: One commenter was concerned about the plain meaning of the 
words ``original'' and ``duplicate.'' The commenter stated that the 
meaning of the word ``original'' has an opposite meaning to the word 
``duplicate'' and, therefore, CMS cannot make the claim that an 
``original NDA'' has the same meaning as a ``duplicate NDA.''
    Response: FDA published draft guidance for industry entitled 
``Applications Covered by Section 505(b)(2)'' in 1999. In that draft 
guidance, FDA describes that it historically utilized a ``paper NDA 
policy'' which had ``permitted an applicant to rely on studies 
published in the scientific literature to demonstrate the safety and 
effectiveness of duplicates of certain post 1962 pioneer drug products 
(46 FR 27396, May 19, 1981).''
    The draft guidance states, in part, that section 505(b)(2) and (j) 
of the FFDCA replaced FDA's paper NDA policy. The draft guidance also 
states that ``enactment of the generic drug approval provision of the 
Hatch-Waxman amendments ended the need for approvals of duplicate drugs 
through the paper NDA process.'' Specifically, section 505(j) of the 
FFDCA allows for approval of duplicates of approved NDAs on the basis 
of chemistry and bioequivalence data. Section 505(b)(2) of the FFDCA 
allows for approval of applications other than those for duplicate 
products. The draft guidance also states that a section 505(b)(2) 
application is an NDA submitted under section 505(b)(1) and approved 
under section 505(c) of the FFDCA.
    As FDA indicated in the draft guidance, two types of approvals 
replaced FDA's paper NDA policy--one for duplicates of approved NDAs 
(now approved under section 505(j)) and one for applications other than 
those for duplicate products (now approved under section 505(b)(2)). 
Accordingly, it follows that not all products that were approved under 
FDA's paper NDA policy can be considered noninnovator products.
    Therefore, even though a duplicate of a drug approved under an NDA 
may have historically been approved under FDA's paper NDA policy, if it 
would now be approved under section 505(j) and result in an ANDA 
approval, it would be classified as a noninnovator multiple source 
drug. However, drugs which are not such duplicates, although they may 
have historically been approved under the paper NDA policy, but which 
are now approved under section 505(b)(2) and receive an NDA approval 
should be classified as either a single source drug or innovator 
multiple source drug, unless the narrow exception discussed above 
applies (which requires the manufacturer's written submission to CMS, 
and CMS's response confirming that the narrow exception applies).
    Comment: One commenter suggested that CMS recognizes that Chemical 
Types, assigned by FDA when approving NDAs, reflect the newness of a 
drug or a measure of innovation. For example, the commenter identified 
CMS's discussion of Chemical Types 3 (new formulation) and 5 in the 
line extension section of the proposed rule (77 FR 5339) as evidence of 
CMS's position that such drugs are not innovative. The commenter 
further suggested that our proposed use of Chemical Types elsewhere in 
the proposed rule implies our acceptance that certain NDAs, if assigned 
particular Chemical Types, are recognized as noninnovator.
    Response: Our discussion of the use of Chemical Types in the 
proposed rule (77 FR 5339 through 5340) was only for the purposes of 
identifying line extension drugs. Although in the line extension 
discussion in the proposed rule we did take into consideration the use 
of Chemical Types, the provisions regarding line extensions in the 
proposed rule were designed to address rebate calculations for single 
source and innovator multiple source drugs that are new formulations. 
However, we did not discuss the use of Chemical Types for the purpose 
of reporting drug categories to the MDR program or how these Chemical 
Types could apply to single source drugs, innovator multiple source 
drugs, and noninnovator multiple source drugs.
    Comment: One commenter stated that our proposed definition of 
innovator multiple source drug would include parenteral products 
packaged in plastic and that these products have been identified by the 
VA as non-covered drugs.
    Response: We appreciate the comment; however, we note that the VA 
program is operated separately from the MDR program. We make 
determinations for the MDR program based on our specific statutory 
provisions. If a parenteral drug packaged in plastic has been approved 
by FDA under an ``original NDA,'' then under the statutory provisions 
of the MDR program, the drug is a single source drug or an innovator 
multiple source drug according to those definitions in section 
1927(k)(7) of the Act, unless the narrow exception discussed above 
applies.
    Comment: One commenter requested the development of an appeals 
process if a manufacturer disagrees with CMS's determination of drug 
category.
    Response: We currently do not have an appeals process established. 
However, if manufacturers disagree with CMS on any determination, 
manufacturers may contact CMS for further discussion.
    For the reasons we noted in this section, and based on the comments 
received and detailed in this section, we are finalizing the definition 
of innovator multiple source drug under Sec.  447.502 by:
     Revising the introductory sentence to add ``that was 
originally'' prior to the word ``marketed'' and to delete ``a'' and 
replace it with ``an original'' prior to the phrase ``new drug 
application.''
     Adding the word ``also'' between the words ``It'' and 
``includes'' in the second sentence. This change is technical in nature 
and not intended to alter the meaning or intent of the definition.
     Revising the final sentence to specify that for purposes 
of this definition and the MDR program, an original NDA means an NDA, 
other than an Abbreviated New Drug Application (ANDA), approved by the 
FDA for marketing, unless CMS determines that a narrow exception 
applies.
     Replacing the word ``approval'' with ``application'' in 
the three instances in which it is used in this definition as the 
correct terminology is ``Product License Application (PLA)'', 
``Establishment License Application (ELA)'', and ``Antibiotic Drug 
Application (ADA)''. These changes are technical in nature and not 
intended to alter the meaning or intent of the definition.
     Changing the word ``biologic'' to ``biologics'' as the 
correct terminology is ``Biologics License Application (BLA)''.

[[Page 5197]]

This change is technical in nature and not intended to alter the 
meaning or intent of the definition.
10. Line Extension Drug (New Formulation)
    The Affordable Care Act established a separate calculation for the 
URA for a drug that is a line extension of a single source drug or an 
innovator multiple source drug that is an oral solid dosage form. 
Section 1927(c)(2)(C) of the Act, added by section 2501(d) of the 
Affordable Care Act, defines line extension to mean a new formulation 
of a drug, such as an extended release formulation. We proposed to 
define line extension as a single source or innovator multiple source 
drug that is an oral solid dosage form that has been approved by FDA as 
a change to the initial brand name listed drug in that it represents a 
new version of the previously approved listed drug, such as new ester, 
new salt or other noncovalent derivative; a new formulation of a 
previously approved drug; a new combination of two or more drugs; or a 
new indication of an already marketed drug. We additionally proposed 
that regardless of whether the drug is approved under an NDA or a 
supplemental NDA, if the change to the drug is assigned to one of the 
above changes, it will be considered a line extension drug (77 FR 
5323).
    We received numerous comments regarding our proposed definition of 
line extension drug. The comments addressed reasons that various 
changes to drugs should not be included in the definition of a line 
extension drug. For example, comments addressed why new combinations, 
new indications and new ester, new salt or other noncovalent 
derivatives should not be included in the definition of a line 
extension. Other comments included concerns that our definition was too 
broad and not supported by legislative history and suggestions for 
alternative definitions of line extension drugs.
    We appreciate the comments that were provided, however, at this 
time we have decided not to finalize the proposed regulatory definition 
of line extension drug at Sec.  447.502. Instead, we are requesting 
additional comments on the definition of line extension drug as we may 
consider addressing this in future rulemaking.
11. Manufacturer
    For purposes of the MDR program, we proposed to clarify our current 
definition of manufacturer by revising it to state that a manufacturer 
means any entity that holds the NDC for a COD or biological product (77 
FR 5324, 5360). We received no comments concerning the proposed 
revision to the manufacturer definition under Sec.  447.502, and 
therefore, are finalizing it as proposed, except to add the phrase 
``meets the following criteria:'' after the word ``and'' in the 
introduction in order to provide further clarity as to the criteria to 
be met. This edit is not intended to change the meaning of the 
definition.
12. Multiple Source Drug
    In accordance with section 1927(k) of the Act, as amended by the 
Affordable Care Act, we proposed to define multiple source drug in 
proposed Sec.  447.502 as a COD for which there is at least one other 
drug product which--
     Is rated as therapeutically equivalent as reported in 
FDA's most recent publication of ``Approved Drug Products with 
Therapeutic Equivalence Evaluations'' which is available at http://www.fda.gov or can be viewed at FDA's Freedom of Information Public 
Reading Room at 5600 Fishers Lane, Room 12A-30, Rockville, MD 20857 or 
successor publications and Web sites;
     Is pharmaceutically equivalent and bioequivalent, as 
determined by FDA; and
     Is sold or marketed in the United States during the rebate 
period.
    This proposal is discussed in more detail at 77 FR 5324. We 
received the following comments concerning the proposed definition of 
multiple source drug:
    Comment: One commenter stated that robust availability of multiple 
source products should be a second criterion to the bioavailability 
criteria in the discussion. The commenter stated that it should not be 
confused with functional availability or acceptability for use of the 
product. State substitution laws should also be considered by the 
states when using this proposed definition and latitude to do so should 
be given by CMS.
    Response: We appreciate the comment but, in light of the statutory 
definition of multiple source drug at section 1927(k)(A) of the Act, we 
do not agree that state substitution laws or robust availability should 
be referenced in the final regulatory definition.
    Comment: A few commenters stated that a drug can be considered a 
multiple source drug if it is sold or marketed in any state in the 
United States during the rebate period; however, for the purpose of 
determining FULs, the commenters stated that the drug should be sold or 
marketed during the most immediate monthly rebate period.
    Response: We have not revised the definition of multiple source 
drug in this final rule, given our reading of the statutory definition 
of multiple source drug at section 1927(k) of the Act; however, as 
discussed in the proposed rule (77 FR 5346 and 5366), section 
1927(e)(5) of the Act requires the Secretary to calculate the FUL as no 
less than 175 percent of the weighted average (determined on the basis 
of utilization) of the most recently reported monthly AMPs for 
pharmaceutically and therapeutically equivalent multiple source drug 
products that are available for purchase by retail community pharmacies 
on a nationwide basis. If a pharmaceutically and therapeutically 
equivalent multiple source drug product does not have any utilization 
for that most recently reported monthly period, that is, there are zero 
AMP units reported for that drug for that monthly period, we consider 
that the drug was not sold or marketed during that monthly period, and 
we will not use that drug in the calculation of the FUL. We received no 
other significant comments concerning the proposed definition of 
multiple source drug. Thus we are finalizing the definition at Sec.  
447.502 as proposed, except to make the following technical edit which 
is not intended to change the meaning of the definition:
     We are adding the phrase ``meets the following criteria:'' 
after the word ``and'' in the introduction in order to provide further 
clarity as to the criteria to be met.
    Other comments received about multiple source drugs, as they relate 
to the calculation of the FUL are discussed in detail in the Upper 
limits for multiple source drugs section (section II.K.) of this final 
rule.
13. National Drug Code
    We proposed to revise the definition of NDC to mean the numerical 
code maintained by FDA that includes the labeler code, product code, 
and package code. For purposes of this subpart, the NDC is considered 
to be an 11-digit code, unless otherwise specified in this subpart as 
being without regard to package size (that is, the 9-digit numerical 
code) (discussed in more detail at 77 FR 5324). We did not receive any 
comments concerning the proposed definition of NDC at Sec.  447.502; 
therefore, for the reasons we noted, we are finalizing the definition 
as proposed.
14. Noninnovator Multiple Source Drug
    We proposed to amend the definition of a noninnovator multiple 
source drug to also include other drugs that have not gone through an 
FDA approval process but otherwise meet the definition of

[[Page 5198]]

COD (77 FR 5324). We also proposed to amend the definition of 
noninnovator multiple source drug to clarify that for purposes of 
Medicaid payment and rebate calculations, the term shall include 
noninnovator drugs that are not therapeutically equivalent (77 FR 5324 
and 5360). These revisions are discussed in more detail in the proposed 
rule at 77 FR 5324. In this section we address the comments we received 
concerning the proposed noninnovator multiple source drug definition.
    Comment: One commenter noted that part of our proposed definition 
for noninnovator multiple source drugs was in conflict with the 
proposed definition of multiple source drug. The commenter stated that 
what we proposed in the definition of noninnovator multiple source drug 
included noninnovator drugs that are not therapeutically equivalent. 
The proposed definition of multiple source drug, however, includes 
therapeutic equivalence requirements.
    Response: In the preamble of the proposed rule, we specified that 
the amended definition of noninnovator multiple source drug, which 
includes other drugs that are not therapeutically equivalent, was for 
purposes of clarifying the Medicaid rebate calculations (77 FR 5324). 
Section 1927(c)(3) of the Act provides that for those drugs that are 
not single source drugs or innovator multiple source drugs the rebate 
should be calculated based on an applicable percentage, which after 
December 31, 2009, is 13 percent. In light of this provision, we 
proposed to include drugs which do not qualify as single source or 
innovator multiple source drugs within the noninnovator multiple source 
definition to clarify the applicable rebate calculation. However, we 
recognize the conflict that the commenter identified and have removed 
the language that references drugs that are not therapeutically 
equivalent from the regulatory text definition by deleting proposed 
paragraph (5) from the noninnovator multiple source drug definition. 
This deletion is not designed to have any rebate implications as the 
rebate calculation for noninnovator multiple source drugs remains 
subject to the formula in section 1927(c)(3) of the Act. We 
additionally note that paragraphs (3) and (4) in the definition of 
noninnovator multiple source drug also reference drugs that meet the 
definition of a COD and may not qualify as single source or innovator 
multiple source drugs. Furthermore, given the deletion of proposed 
paragraph (5), as previously noted, we have renumbered paragraph (6) to 
paragraph (5) in the definition of noninnovator multiple source drug.
    Comment: One commenter expressed concern that a product originally 
approved under an ANDA, that was later required by FDA to file an NDA, 
would require a drug category change to an innovator multiple source 
drug, although it has been affirmed by CMS to be a noninnovator 
multiple source drug in the past, and it has been treated as a 
noninnovator multiple source drug since its inception. The commenter 
stated that making this change from noninnovator multiple source drug 
to innovator multiple source drug has significant consequences and 
could require reviews and restatements back to inception of MDR 
program. The commenter requested that such a change be made on a 
prospective basis only, and not subject to prior reporting periods.
    Response: The definitions of single source drug, innovator multiple 
source drug, and noninnovator multiple source drug that we are 
finalizing in this final rule are clarifications of existing statutory 
language, and we encourage manufacturers who may have incorrectly 
classified their drugs in the past to take appropriate action now. The 
final rule does not release manufacturers from any reporting 
responsibilities. If a manufacturer determines a drug category change 
is needed, the manufacturer is responsible for contacting CMS to 
request that change.
    Comment: One commenter suggested a new NDC be required if a non-
approved product subsequently receives FDA approval to avoid confusion 
between the approved and unapproved versions.
    Response: Because the proper issuance of NDCs is within the purview 
of FDA and the responsibility of the manufacturer, this issue is 
outside the scope of the proposed rule.
    Comment: One commenter suggested that if a product was reported as 
a noninnovator multiple source drug and subsequently receives FDA 
approval, which requires a recategorization to single source or 
innovator multiple source, that the base date AMP should be based on 
the first quarter after FDA approval was issued and that the ``market 
date'' should be the date of the launch of the newly approved NDC-9.
    Response: In the specific example provided by the commenter, where 
the newly approved drug is launched under a different 9 digit NDC, the 
manufacturer could report a base date AMP for the drug based on the 
first full quarter after the newly approved drug's market date. As 
previously stated in this section, the provisions of this final rule 
are effective on a prospective basis only.
    After considering the public comments, and for the reasons we 
articulated, we are finalizing the definition of noninnovator multiple 
source drug under Sec.  447.502, except--
     As noted earlier, we are deleting paragraph (5) (Any 
noninnovator drug that is not therapeutically equivalent) from the 
regulatory text and renumbering paragraph (6) to paragraph (5); and
     In the new paragraph (5), we are making a technical 
correction to state that if any of the drug products listed in this 
definition of a noninnovator multiple source drug subsequently receives 
an NDA or ANDA approval from FDA, the product's drug category changes 
to correlate with the new product application type. This change is 
technical in nature and not intended to alter the meaning or intent of 
the definition.
15. Oral Solid Dosage Form
    We proposed to interpret oral solid dosage form in accordance with 
FDA regulation at 21 CFR 206.3, which defines solid oral dosage form to 
mean capsules, tablets, or similar drug products intended for oral use. 
In addition, we also proposed to further interpret an oral route of 
administration as any drug that is intended to be taken by mouth. The 
proposed definition is discussed in more detail at 77 FR 5324 through 
5325. We received the following comments regarding this definition:
    Comment: We received several comments supporting this proposed 
definition of oral solid dosage form, stating that this interpretation 
is consistent with the statute and will not impede innovation.
    Response: We appreciate that support. Based on the comments and for 
the reasons we discussed previously, we are finalizing the definition 
of oral solid dosage form at Sec.  447.502 as proposed.
16. Over-the-Counter (OTC) Drug
    We proposed to add a definition of OTC drugs to clarify which 
products would be treated as OTC drugs in the Medicaid program (77 FR 
5325). We proposed to define OTC drugs as drugs that are appropriate 
for use without the supervision of a health care professional such as a 
physician, and which can be purchased by a consumer without a 
prescription (77 FR 5360 through 5361). These proposed revisions are 
discussed in more detail at 77 FR 5325. We received no comment 
concerning the proposed OTC drug definition at Sec.  447.502. For the 
reasons we noted in

[[Page 5199]]

the proposed rule, we are finalizing it as proposed.
17. Pediatric Indication
    Section 2501(a) of the Affordable Care Act established a minimum 
rebate percentage of 17.1 percent of AMP for single source and 
innovator multiple source drugs approved by FDA exclusively for 
pediatric indications. To implement this requirement, we proposed to 
clarify which drugs would be subject to this minimum rebate percentage 
(77 FR 5325). We proposed to apply this definition at proposed Sec.  
447.502 only to drug products whose FDA-approved labeling includes 
indications only for children from birth through 16 years of age or a 
subset of this group (77 FR 5325 through 5326). We also proposed to 
apply such a definition only when this specific pediatric population 
age cohort appears in the ``Indication and Usage'' section of FDA-
approved labeling. We received the following comments concerning the 
definition of pediatric indication:
    Comment: We received several comments regarding the application of 
the FDA prescription drug labeling regulation when determining a drug 
is pediatric indicated. The commenters requested that CMS define 
pediatric indications for purposes of the MDR provision to include 
indications for minors up to 17 or 18 years of age and not use the age 
cut-off described in FDA prescription labeling regulations at 21 CFR 
201.57 and 21 CFR 201.80. Some commenters noted that FDA and other HHS 
programs may have referred to a pediatric age group to include a 
population up to, and including, the age of 21. Another commenter 
stated that CMS acted without explanation, justification, or analysis 
when relying on FDA prescription labeling regulations at 21 CFR 201.57 
and 21 CFR 201.80 to support the definition of ``pediatric 
indications.'' Another commenter stated that CMS's proposed definition 
would create unjust and arbitrary outcomes by excluding certain drug 
products that are approved by FDA for pediatric indications, which are 
not rigidly restricted by a chronological age cut-off specified in the 
``Indications and Usage'' section of FDA labeling. Commenters opined 
that CMS's decision to select an old FDA standard of 16 years of age 
was arbitrary and capricious and that this standard is inconsistent 
with the statute and violates the APA.
    A few commenters indicated that CMS should not redefine terms that 
are inconsistent with FDA's application of what it interprets as 
pediatric so as to obtain additional Medicaid rebates. The commenters 
referenced debates leading up to the 2002 reauthorization of the Best 
Pharmaceuticals for Children Act (BPCA), Representative Stupak was 
quoted in the Congressional Record (Cong. Record p. 147562 (Oct. 31, 
2001)) as saying that, ``we created the pediatric exclusivity bill to 
make sure an opportunity was provided to have more studies done to make 
sure the proper dosage, the amount and the type of drug would be 
beneficial to young people, those under 18 years of age.'' The 
commenter discussed a drug which initially was approved by the FDA on 
the condition that the manufacturer perform pediatric studies under the 
Pediatric Research Equity Act (PREA) on pediatric patients 13 to 17 
years and stated that the FDA approved a second product for the same 
indication but required three post marketing studies in the pediatric 
population up to age 17. This commenter, as well as other commenters 
stated that FDA has approved drugs for ``pediatric use'' up to 18 years 
of age and CMS should be consistent with these approvals.
    A few commenters also stated that the proposed rule, if finalized, 
undermines the incentives the Congress created (under BPCA and PREA) to 
encourage development of drugs for children and adolescents. The 
commenters also noted that CMS's interpretation of pediatric 
indication, which uses a lower age limit, results in a manufacturer 
incurring a higher rebate obligation while FDA's higher age limit 
imposes more stringent testing requirements on the same manufacturer.
    Another commenter stated that FDA regulations cited by CMS were not 
designed to identify products approved ``exclusively for pediatric 
indications'' but rather used by the FDA to define the pediatric 
population for the purpose of distinguishing it from the adult 
population in which a product may be studied and approved. This 
commenter noted that although the FDA labeling regulations seem to 
establish the criteria of pediatric population to include up to age 16 
that is not how the regulations have been applied by the FDA when it 
comes to setting age criteria for required clinical trials.
    And finally, a commenter noted that adopting this definition of 
pediatric would not be consistent with the definition of pediatric 
patients in other CMS programs and rules, including the Pediatric 
Vaccine Distribution Program (definition of child as ``an individual 18 
years of age or younger''), CMS-Supported Pediatric Renal Facilities 
(``pediatric facility . . . a renal facility at least 50 percent of 
whose patient are individuals under age 18 years of age''), and the 
Medicare Hospital Inpatient Prospective Payment System interpreting 
``pediatric'' (up to the age of 18).
    Response: We appreciate these comments regarding the adoption of an 
age limit when defining pediatric indication, as well as comments 
addressing congressional concerns associated with the passage of PREA 
and BPCA, which concerned research in the pediatric populations to 
assure that drugs are safe to use in the pediatric populations. 
However, we are not persuaded by the commenters that our proposed 
adoption of a standard of birth through 16 years of age should be 
revised as part of this final rule. The age range in the proposed 
definition of pediatric indication is consistent with the age range 
contained within the FDA regulations at 21 CFR 201.57 and 21 CFR 201.80 
which define pediatric use to refer to usage by a pediatric age group 
from birth to 16 years of age. We further note that, contrary to the 
commenters' claims that FDA regulation is ``old,'' the FDA regulations 
at 21 CFR 201.57 and 21 CFR 201.80 are current and in force. FDA 
continues to refer to these regulations in its more recent guidance 
documents. See, for example, ``Draft Guidance for Industry and Review 
Staff, Pediatric Information Incorporated Into Human Prescription Drug 
and Biological Products Labeling,'' dated February 2013, http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM341394.pdf. Consistent with this draft guidance, the 
definitions of pediatric population found at 21 CFR 201.57 and 21 CFR 
201.80 encompass the age groups from birth through age 16 years 
(younger than 17 years of age.)
    Furthermore, we recognize that commenters referenced examples of 
when the FDA has required certain manufacturers to perform certain 
studies in pediatric patients, which includes populations' ages 13 to 
17 years of age, or up to 18 years of age, consistent with the 
requirements of PREA and BPCA. While FDA may have required an 
individual manufacturer to perform studies in age groups over the age 
of 16, we believe such decisions are driven by FDA's clinical and 
scientific reasoning (see ``Draft Guidance for Industry and Review 
Staff, Pediatric Information Incorporated Into Human Prescription Drug 
and Biological Products Labeling,'' dated February 2013) that the drug 
be evaluated in groups beyond age 16. While FDA may have required such 
studies, FDA has not revised Part 201's definitions of pediatric 
populations.

[[Page 5200]]

    We believe that adopting a definition of pediatric indication in 
this rule that contains the pediatric age groups specified in FDA's 
prescription drug labeling regulations is consistent with the statute 
at section 1927(c)(1)(B)(iii)(II)(bb) of the Act, which provides for 
the application of a minimum rebate percentage to drugs approved by the 
FDA exclusively for pediatric indications. We further believe that 
while some commenters noted that FDA and other HHS programs may have 
referred to a pediatric age group to include a population up to, and 
including, the age of 21, we do not agree that such a definition should 
be used in the MDR program. We see no reason to adopt a definition 
which would include age populations through 21 years of age; doing so 
would be inconsistent with the FDA regulations discussed previously.
    Therefore, we are finalizing our proposal to adopt a specific age 
range within our definition of pediatric indication in this final rule 
to indicate that the product is approved exclusively for use by the 
pediatric population age group, meaning the drug's label references 
from birth through 16 years of age, or a subset of this group, as 
specified in the ``Indication and Usage'' section of the FDA approved 
labeling, or an explanation elsewhere in the labeling that makes it 
clear that the drug is approved for use only in the pediatric age 
group, or a subset of this group.
    Comment: One commenter asked that CMS clarify whether the 
definition of pediatric indication meant that a patient has not reached 
their 16th birthday or they have not yet reached their 17th birthday.
    Response: The definition of pediatric indication means that a 
patient has not reached 17th birthday. This interpretation is 
consistent with the regulations, as discussed in our prior response.
    Comment: One commenter discussed a product that is prescribed to 
treat growth failure in children, stating that while the ``Indications 
and Usage'' section does not specifically state an age range, other 
information appears in the approved labeling stating that the drug 
should not be administered after the growth plates fuse at the end of 
puberty and is not to be used in adults. This commenter believed that 
these statements in the approved label along with information about the 
condition being treated make it clear that the product is intended for 
use exclusively in the pediatric population. The commenter urged that 
CMS be flexible and proposed that CMS adopt the following definition of 
pediatric indication at Sec.  447.502: ``a specifically stated 
indication for use by the pediatric age group, meaning either (1) from 
birth through 16 years of age, or a subset of this group, as specified 
in the ``Indications and Usage'' section of FDA approved labeling, or 
(2) language in the ``Indications and Usage'' section that, when 
combined with other information in FDA approved labeling about the 
product make it clear that the product is only for use in a pediatric 
population.''
    Another commenter believed that requiring the ``Indications and 
Usage'' section to contain an explicit age range is too rigid, when FDA 
approved a drug to prevent serious lower respiratory disease in 
children at high risk of developing that disease. The commenter noted 
that the FDA approved labeling states elsewhere that this product ``is 
not for adults or for children older than 24 months of age,'' thus 
supporting that an age-specific reference is not required in the 
indication statutorily.
    Response: We agree with the commenters that we need to consider 
other information in FDA approved labeling when determining whether a 
drug is exclusively pediatric. We recognize that there may be instances 
when the ``Indications and Usage'' section of the labeling may not 
contain a specific age range; however, other parts of the labeling 
includes a reference to an age range that the drug is indicated for use 
exclusively in the pediatric age group or a subset of this group. 
Therefore, we are amending the proposed definition of pediatric 
indication to state that manufacturers may consider other information 
in the FDA approved labeling; specifically, an explanation elsewhere in 
the labeling that makes it clear that the drug is for use in that 
pediatric age group (birth through 16 years of age), or subset of that 
group.
    Comment: Several commenters referenced dosage and administration to 
distinguish pediatric indication. One commenter attached FDA approved 
labeling (commonly known as package inserts) for several different 
products to illustrate that in these instances, the FDA approved 
labeling includes information for the use in adult and pediatric 
patients beyond the age of 16, and gives more specific information in 
the ``Dosage and Administration'' section of the label with further 
information in the ``pediatric use'' section.
    Another commenter provided an example of a product where in its 
``Indications and Usage'' section, there were dosages for several 
different indications; however, there was no upper age limit, only 
``X'' years and older. The dosage and administration section showed the 
higher strength product for use in 15 years and older. This commenter 
suggested that CMS revise the proposed definition to include the full 
product labeling, including, but not limited to the ``Dosage and 
Administration'' section to read ``pediatric indication means a 
specifically stated indication for use by the pediatric age group, 
meaning from birth through 16 years of age, or a subset of this group, 
as specified in the full FDA approved labeling.''
    Response: As previously stated, we have revised the definition of 
pediatric indication at Sec.  447.502 in this final rule to add that we 
will consider an explanation elsewhere in the labeling that clarifies 
that the drug is for use exclusively in the pediatric age group or 
subset of that group. However, we do not consider strengths or dosage 
forms of the same drug that are intended for use in the adult 
population to qualify as approved by the FDA for exclusively pediatric 
indications since it is indicated for use in the adult population.
    Comment: One commenter remarked that drug labeling and FDA 
approvals can change over time for a particular drug. A drug with a 
pediatric indication could become labeled for adult use, or a drug with 
adult and pediatric indications might lose labeling for the adult 
indication. The commenter requested that CMS clarify what would happen 
when a drug's status changes in the middle of a rebate period.
    Response: If a drug's labeling is changed resulting in that drug 
being exclusively pediatric for less than one rebate period, the 17.1 
percent minimum rebate amount would continue to be applicable for that 
rebate period consistent with section 1927(c)(1)(B)(iii)(II)(bb) of the 
Act, which does not require that the minimum rebate percentage of 17.1 
percent be applied to the drug more often than once a rebate period. We 
believe this is consistent with the rebate statute in section 
1927(c)(1)(B)(iii)(l) of the Act which provides that the minimum rebate 
amount is for ``rebate periods'' which is defined at section 1927(k)(8) 
of the Act as the calendar quarter or other period specified by the 
Secretary for payment of rebates under the drug rebate agreement.
    Comment: One commenter believed that Congress created the lower 
minimum rebate to incentivize manufacturers to invest in new therapies 
with pediatric indications, or expand use of existing therapies to 
pediatric populations.

[[Page 5201]]

    Response: While we appreciate the commenter's opinion, the 
regulations are not designed to create incentives; rather, they are 
designed to interpret the rebate provisions, as enacted.
    Comment: One commenter stated it was unclear whether certain 
strengths of a drug product would qualify as exclusively pediatric if 
there were multiple strengths of the product listed within the dosage 
and administration section of the label of the product. The commenter 
asked if a particular strength of a drug indicated for the pediatric 
population would qualify for pediatric exclusivity.
    A few commenters expressed dissatisfaction with CMS's proposed 
definition of Pediatric Indication, because it would exclude many 
strengths of a drug approved for pediatric indications and would 
potentially evaluate drugs at a different level than the level at which 
URAs are calculated. The commenter included labeling information for a 
few products and explained that one product had both adult and 
pediatric indications in the ``Indications and Usage'' section, noting 
that the pediatric products were approved under a separate NDA. 
However, there is only one label approved for all of the various dosage 
forms and age groups. The commenter referenced another product label 
which had separate adult and pediatric indications at the product level 
but does not specify which dosage forms apply to which age groups. The 
commenter stated that since these products are within the same product 
codes that were approved under a separate NDA, those products should be 
approved as exclusively for pediatric indication by CMS.
    Response: We agree that there may be a drug with multiple strengths 
that may have a particular strength that is effective for use only in 
the pediatric age group, or a dosage form used only by the pediatric 
age group. In such cases, only the specific dosage form or strength 
that is indicated exclusively for pediatric indication in the drug's 
FDA approved labeling would qualify for the lower rebate percentage. 
Our revision to the definition of pediatric indication to consider 
additional information in the drug's FDA approved labeling will permit 
manufacturers to consider such information when determining whether or 
not a drug meets the criteria to qualify for the lower minimum rebate 
percentage.
    After consideration of the public comments, and for the reasons we 
explained previously in this section, we are revising the proposed 
definition of pediatric indication under Sec.  447.502 to align with 
the FDA's interpretation of pediatric population to mean a specifically 
stated indication for use by the pediatric age group, from birth 
through 16 years of age, or a subset of this group, as specified in the 
``Indication and Usage'' section of the FDA approved labeling or in an 
explanation elsewhere in the labeling that makes it clear that the drug 
is for use only in the pediatric age group, or a subset of this group.
18. Professional Dispensing Fee
    We proposed in Sec.  447.502 to replace the term ``dispensing fee'' 
with ``professional dispensing fee'' as the drug ingredient cost is 
only one component of the two-part formula used to reimburse pharmacies 
for prescribed drugs dispensed to Medicaid beneficiaries (77 FR 5361). 
We also proposed to require states to reconsider the dispensing fee 
methodology consistent with the revised requirements (discussed in more 
detail at 77 FR 5326). We received the following comments concerning 
professional dispensing fee provisions:
    Comment: One commenter supported the change from dispensing fee to 
professional dispensing fee and supported CMS's position that 
pharmacies providing prescription medications are providing 
professional services, not merely dispensing drugs. Another commenter 
agreed with CMS that the professional dispensing fee should reflect the 
pharmacist's professional services and costs associated with ensuring 
that possession of the appropriate COD is transferred to a Medicaid 
beneficiary.
    Response: We appreciate the support that the commenters have 
expressed.
    Comment: One commenter requested that CMS provide stronger and more 
specific language to require the appropriate adjustment in professional 
dispensing fee to recognize the pharmacist's role. Several commenters 
noted that state and federal policymakers have focused on reimbursing 
pharmacies for the drug product, but there has been little discussion 
on the importance of reimbursing pharmacies accurately for the cost to 
dispense. Another commenter stated that states have traditionally shown 
little interest in determining actual dispensing costs and even less 
interest or ability to act on the information regarding such actual 
costs and the commenter stated that this practice must change to avoid 
impact on access. Several commenters stated that CMS must require that 
states can only use AAC if they increase their dispensing fees to 
reflect pharmacy's cost to dispense. Another commenter was concerned 
that a move to require states to use AAC for brand drugs without a 
requirement that dispensing fees be increased will negatively impact 
patient access.
    Response: Our proposal to revise the term dispensing fee to 
professional dispensing fee is designed to reinforce our position that 
the dispensing fee should reflect the pharmacist's professional 
services and costs to dispense the drug product to a Medicaid 
beneficiary. In light of the issues raised in the comments, we have 
clarified the language in Sec.  447.518(d) of this final rule to 
indicate that when states are proposing changes to either the 
ingredient cost reimbursement or professional dispensing fee 
reimbursement, they are required to evaluate their proposed changes in 
accordance with this final rule, and states must consider the impacts 
of both the ingredient cost reimbursement and the professional 
dispensing fee reimbursement when proposing such changes to ensure that 
total reimbursement to the pharmacy provider is in accordance with the 
requirements of section 1902(a)(30)(A) of the Act. Further, states must 
provide information supporting any proposed change to either the 
ingredient cost or dispensing fee reimbursement which demonstrates that 
the change reflects actual costs and does not negatively impact access.
    Comment: Many commenters agreed with our proposal, and stated that 
they appreciate the policy to require states to reconsider their 
dispensing fee methodology as states change their payment for 
ingredient cost based on AAC. Several commenters stated that in the 
states where AAC is currently in use, CMS has required a comprehensive 
review and adjustment of dispensing fees, and commenters believed that 
this practice should continue.
    Response: We appreciate the support the commenters expressed.
    Comment: Many commenters commended our recognition that 
reimbursement for drug ingredient cost and professional dispensing fee 
must be adjusted in tandem. Many commenters noted that if a cost-based 
product reimbursement (AAC) is utilized, it must be directly tied to an 
adequate and regularly updated (such as annually) dispensing fee. 
Several commenters stated that the two components of reimbursement, 
ingredient and the professional dispensing fee, should be linked and 
should not be allowed to independently change. A few commenters stated 
that rather than asking states to ``reconsider'' dispensing

[[Page 5202]]

fees, they requested that CMS require states to reevaluate dispensing 
fees to assure that they adequately cover costs and to include specific 
factors on assessing dispensing fess in the final rule.
    Another commenter stated that CMS should reflect congressional 
intent to provide adequate pharmacy reimbursement for retail pharmacies 
participating in the Medicaid fee-for-service (FFS) program by ensuring 
that states are adhering to an economically rational reimbursement 
methodology. Another commenter added that CMS recognizes this by 
stating in the proposed rule that both ingredient cost and professional 
dispensing fee need to be looked at in the total and this is why CMS is 
encouraging states to move toward an AAC payment with a corresponding 
higher professional dispensing fee (where appropriate) to cover costs 
and overhead.
    Response: We agree that pharmacy providers should be reimbursed 
adequately for their professional services within the requirements of 
this final rule. While we are not requiring states to update their 
professional dispensing fees at specific intervals or frequencies, such 
as on an annual basis, they will be required to evaluate each component 
when they propose changes. We afford the states the flexibility to 
adjust their professional dispensing fees when necessary to assure 
sufficient access in accordance with the requirements of section 
1902(a)(30)(A) of the Act.
    Comment: One commenter stated that the use of the new AMP-based 
FULs or any version of AAC should be limited to those states than can 
provide evidence of adequate professional dispensing fees based on 
services rendered. Another commenter stated that unless dispensing fees 
are raised at or prior to the time that AMP-based FULs are finalized, 
pharmacies will be reimbursed at less than their total cost.
    Response: As discussed previously in this section, and in 
accordance with the regulations text, states must provide adequate data 
in support of any proposed changes in payment methodology for 
prescription drugs which we will review through the formal review 
process. As discussed in more detail in the comments and responses in 
section II.K, we believe that our revised process by which a higher 
multiplier will be used to calculate the FUL will address concerns 
regarding pharmacies being reimbursed at their acquisition cost.
    Comment: Several commenters supported the inclusion of a 
professional dispensing fee but stated that the actual definition 
should be amended to include the cost of compounding prescriptions, 
that it should vary for different health care settings and that it 
should be based on an annual cost of dispensing study by the state. 
Several commenters also stated that the final rule should be modified 
to state that all costs, both professional and operational, should be 
considered when determining the dispensing fee. Another commenter 
requested that the final rule be revised to set forth a more complete 
and inclusive list of all of the categories of costs that can be 
included in the determination of the professional dispensing fee.
    Response: We appreciate the comment but we believe that the 
proposed definition of professional dispensing fee (77 FR 5361) is 
sufficient to capture the activities involved with the dispensing of a 
drug to a Medicaid beneficiary in that it specifies a number of 
activities, including, but not limited to, the pharmacist's time in 
performing drug utilization review activities, measurement and mixing 
of the drug, and patient counseling. We do not agree that the 
regulations text should be revised to require an annual cost of 
dispensing study or that fees should vary based on setting, but rather 
we will continue to allow the states the flexibility to adjust their 
dispensing fees as necessary.
    Comment: One commenter stated that the professional dispensing fee 
for home infusion pharmacies is unique and significantly different from 
and more intensive than the professional services performed at retail 
pharmacies and therefore, that CMS should establish a separate 
definition of professional dispensing fee for home infusion therapy 
pharmacies. Another commenter stated that the definition of 
professional dispensing fee must also include ``warehousing, 
refrigeration, repackaging, insurance fees, pharmacist consultation 
with beneficiary's health care providers, 24-hour access to a 
pharmacist, and self-infusion instruction'' to capture the additional 
professional dispensing fee services of the Hemophiliac Treatment 
Center (HTC) pharmacist.
    Response: We appreciate the comment but, at this time, we do not 
see a need to revise the definition of professional dispensing fee. 
States retain the flexibility to establish the professional dispensing 
fee that is representative of pharmacy costs associated with ensuring 
that possession of the appropriate COD is transferred to a Medicaid 
beneficiary, including establishing fees for specific pharmacy types 
overhead, and drugs dispensed. While we recognize that home infusion 
pharmacies and HTCs may offer services to Medicaid beneficiaries in 
addition to the activities related to dispensing a COD, such services 
would not be covered under the pharmacy benefit, but other service 
categories, such as home health. Therefore, we are not revising the 
definition of professional dispensing fee to include payment for these 
additional services.
    Comment: One commenter stated that the professional dispensing fee 
definition should include ``reasonable profit'' as an element of the 
definition.
    Response: We have not separately identified profit in the 
definition of professional dispensing fee, as we believe the components 
of the dispensing fee we have already identified include a reasonable 
profit.
    After considering the comments and for the reasons we discussed in 
this section, we are finalizing the definition of professional 
dispensing fee in Sec.  447.502 as proposed (77 FR 5361).
19. Single Source Drug
    As currently defined in Sec.  447.502, a single source drug refers 
to a COD that is produced or distributed under an original NDA approved 
by FDA, including a drug product marketed by any cross-licensed 
producers or distributors operating under the NDA. It also includes a 
COD approved under a BLA, PLA, ELA, or ADA.
    In the proposed rule (77 FR 5326, 5361), we proposed to define 
single source drug to mean a COD that is produced or distributed under 
an NDA approved by FDA and has an approved NDA number issued by FDA, 
including a drug product marketed by any cross-licensed producers or 
distributors operating under the NDA. It also includes a COD approved 
under a BLA, PLA, ELA, or ADA. We also proposed that for purposes of 
the MDR program, an original NDA is equivalent to BLA, PLA, ELA, or 
ADA. Additionally, proposed was that for purposes of the MDR program, 
an original NDA is equivalent to an NDA filed by the manufacturer for 
approval under section 505 of the FFDCA for purposes of approval by FDA 
for safety and effectiveness. These proposed provisions are discussed 
in more detail at 77 FR 5326.
    We received some comments regarding the definition of single source 
drug which included comments about the interpretation of the phrase 
``original NDA'' as well as comments regarding products approved under 
a BLA. However, the comments received regarding the proposed definition 
of

[[Page 5203]]

single source drug, and specifically regarding the interpretation of 
``original NDA'', as well as products approved under a BLA, were not 
unique to the single source drug definition and were made in 
association with or as part of the same comments regarding the 
definition of innovator multiple source drug. As the phrase ``original 
new drug application approved by the Food and Drug Administration'' is 
present in both definitions, to avoid providing the same comment 
summary and responses in both this section that discusses the proposed 
definition of single source drug and also in the section that discusses 
the proposed definition of innovator multiple source drug, the comments 
regarding the term ``original NDA'' have been addressed in the 
innovator multiple source definition section of this final rule since 
these comments pertain to both the definitions of innovator multiple 
source drug as well as single source drug. Additionally, as the 
proposed definitions of both single source drug as well as innovator 
multiple source drug include reference to BLA applications, to avoid 
duplicate discussion, we are summarizing the comments and responses 
that pertain to BLA applications as related to these definitions in the 
innovator multiple source drug section. We received no comments that 
exclusively applied to the definition of single source drug.
    Based on the comments received about the meaning of the term 
``original NDA'' that apply to the definition of single source and as 
summarized in the innovator multiple source drug definition section of 
this final rule, and for the reasons we articulated in our response to 
the comments about the meaning of that term in the innovator multiple 
source drug definition, we are finalizing the definition of single 
source drug under Sec.  447.502 by:
     Inserting the term ``original'' before the initial 
reference to ``NDA'' in the introductory sentence of the definition.
     Revising the final sentence to specify that for purposes 
of this definition and the MDR program, an original NDA means an NDA, 
other than an ANDA, approved by the FDA for marketing, unless CMS 
determines that a narrow exception applies.
     Replacing the word ``approval'' with ``application'' in 
the three instances in which it is used in this definition as the 
correct terminology is ``Product License Application (PLA)'', 
``Establishment License Application (ELA)'', and ``Antibiotic Drug 
Application (ADA)''. These changes are technical in nature and not 
intended to alter the meaning or intent of the definition.
     Changing the word ``biological'' to ``biologics'' as the 
correct terminology is ``Biologics License Application (BLA)''. This 
change is technical in nature and not intended to alter the meaning or 
intent of the definition.
20. States and United States
    We proposed to revise the definition of states to include the 50 
states, the District of Columbia, and the territories (defined as the 
Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern 
Mariana Islands and American Samoa), as discussed in more detail at 77 
FR 5326, 5361. We also proposed to add a definition of United States to 
include the 50 states, the District of Columbia, and the territories 
(the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the 
Northern Mariana Islands and American Samoa) (77 FR 5326, 5361). 
Because the effect of these two definitions is essentially the same for 
purposes of the MDR program, we are responding to the comments we 
received on them together as detailed in this section. Specifically, we 
received the following comments concerning the proposed definitions:
a. Legal Authority
    Comment: One commenter expressed support for expanding the MDR 
program to the territories. A commenter acknowledged that CMS may have 
the authority to reverse the position of excluding territories from the 
MDR program.
    Response: We appreciate these comments. We agree that we have the 
requisite authority to include the territories in the MDR program. We 
note that the authority to include the territories in the MDR program 
is based on section 1101(a)(1) of the Act which defines ``states'' to 
include the territories; and therefore, we are amending the regulatory 
definition of states under Sec.  447.502 to include the territories 
which also assures the regulatory definition of states is consistent 
with the definition of states under section 1101(a)(1) of the Act.
    Comment: Many commenters expressed strong opposition to the policy. 
Commenters stated that the rebate program extension to the territories 
is unexplained and not prompted by any change in the rebate statute. 
One commenter stated that never during the congressional debate for 
changes to the MDR program during the development of the Affordable 
Care Act did the Congress discuss expanding the program to the 
territories. Commenters stated that in light of the discounts that many 
manufacturers already provide in the territories, CMS has not explained 
the justification for this expansion of the scope of the MDR program, 
particularly inasmuch as these territories' Medicaid programs simply do 
not function in the same manner as those of the states and the District 
of Columbia. The commenter further stated that there are too many 
unanswered questions about this policy for CMS to proceed with its 
proposed expansion of the rebate program to the territories at this 
time. A commenter contended that CMS does not have the authority under 
the definition of ``states'' in the national rebate agreement to expand 
the program to the territories since all rebate agreements executed by 
manufacturers define the scope of the agreement as reaching only to 
drug sales in the 50 states and the District of Columbia and all 
prohibit any amendments without the written consent of both parties. 
Commenters stated that manufacturers cannot be required to pay rebates 
for utilization in the territories.
    One commenter requested that CMS provide the legal basis and 
rationale for this expansion prior to requiring companies to undergo 
extensive contract and pricing adjustments that would be necessary; 
stating that CMS should substantively demonstrate the need for this 
expansion beyond a generalized belief that doing so will benefit the 
territories. A few commenters also stated that a statutory change would 
be a prerequisite to expanding the MDR program to the territories. One 
commenter stated that this policy should be considered as part of a new 
rulemaking that sets forth detailed criteria for the operation of the 
Medicaid rebate program in the territories.
    Response: Our justification for including territories in the 
definitions of states and United States was not only related to rebates 
the territories may receive under section 1927 of the Act, but also 
whether the territories should be included in these definitions in 
light of the definitions in section 1101 of the Act. We note that while 
the territories may have some unique features in their respective 
programs, the rebates would be applied and be due in the same manner as 
in other states, consistent with the terms of section 1927 of the Act. 
We appreciate the comments and realize that the definition represents a 
change in policy; however, upon further consideration of the 
definitions in the statute, we believe that the territories should be 
included in the MDR program. As previously stated in this section, in 
this final rule we have decided to amend the definition of

[[Page 5204]]

states in Sec.  447.502 to align with the definition of states under 
section 1101(a)(1) of the Act. We further note that detailed criteria 
that states use to operate the rebate program has been provided through 
the statute, regulations, and subregulatory guidance; therefore, we 
believe it is not necessary to set forth additional detailed criteria 
for the operation of the MDR program in the territories as part of this 
final rule. We further emphasize that we are available to provide 
technical assistance to the territories during their participation in 
MDR program.
    In addition, in light of the comments and as discussed more in this 
section, we have decided to delay including the territories in the 
definitions of states and United States until 1 year after the final 
rule becomes effective. We also will consider allowing a territory to 
use existing waiver authority to elect not to participate in the MDR 
program consistent with the statutory waiver standards. For example, 
the Northern Mariana Islands and American Samoa may opt out under the 
broad waiver that has been granted to them in accordance with section 
1902(j) of the Act. Puerto Rico, Virgin Islands and Guam may use waiver 
authority under section 1115(a)(1) of the Act to waive section 
1902(a)(54) of the Act, which requires state compliance with applicable 
requirements of section 1927 of the Act.
    We further note that should a territory exercise its waiver option 
not to participate in the MDR program, the definitions of states and 
United States would still include the territories 1 year after the 
effective date of the final rule. We appreciate the comments; however, 
we continue to note that it is consistent with the definitions in 
section 1101(a) of the Act to include the territories in the definition 
of states under the MDR program.
    Comment: One commenter requested clarification regarding why the 
federal government should share in the value of any drug rebates paid 
for use by Medicaid enrollees in the territory. The commenter further 
stated that the territory should receive 100 percent of the rebate for 
the territory and not share a portion of the rebate payment with the 
federal government.
    Response: Similar to all other states, the territories receive 
federal matching payment for Medicaid expenditures. In accordance with 
section 1927(b)(1)(B) of the Act, the rebates paid under the MDR 
program shall be considered a reduction in the amount expended under 
the state plan in the quarter for medical assistance purposes under 
section 1903(a) of the Act. Because these rebates have the effect of 
reducing federal matching funds, the federal government, in accordance 
with section 1927(b) of the Act, will share in the rebates that the 
drug manufacturers pay to the territories.
    Comment: One commenter asked CMS to clarify whether there will be a 
separate CMS regional office to handle the territories or will they be 
assigned to one or more current regional offices.
    Response: The oversight of the territories' Medicaid programs are 
currently assigned to the following CMS regional offices: Puerto Rico 
and the Virgin Islands are assigned to the CMS regional office in New 
York, NY. American Samoa, Guam, and Northern Mariana Islands are 
assigned to the CMS regional office in San Francisco, CA. We also note 
that CMS Central Office staff are also available to provide technical 
assistance to the territories.
b. Implementation Timeframe
    Comment: We received many comments concerning the need for 
sufficient lead time prior to expanding the MDR program to the 
territories. Several commenters stated that CMS should provide 
manufacturers with a significant amount of lead time before the 
effective date of the expansion. The commenters stated that this change 
in policy, if finalized, represents a substantial financial impact to 
manufacturers and creates a significant number of operational 
complexities for both manufacturers and territories that require 
resolution prior to implementing the expansion to the territories.
    Similarly, several commenters noted that the proposed rule 
recognizes that the territories will need additional time to come into 
compliance with MDR program requirements but the proposed rule does not 
address that manufacturers may need similar lead time as the 
territories to implement aspects of this provision. Several commenters 
stated that the completion timeline for manufacturers to comply with 
CMS requirement should be 6 to 12 months after the approval of the 
ruling.
    Several commenters further stated that CMS should require that 
manufacturers are obligated to pay rebates on territory utilization on 
a prospective basis only as of the effective date. In addition, a few 
commenters stated that the proposed rule does not address the potential 
for territories to implement rebate liability on manufacturers on a 
voluntary basis and on an earlier timetable than the proposed rule's 
timeline, which could result in manufacturers facing the possibility 
that territories could submit rebate claims to them faster than the 
manufacturers are able to accomplish systems upgrades. Another 
commenter asked if CMS would provide manufacturers with drug 
utilization estimates if the territories are not prepared to do so by 
the time of the effective date.
    Many commenters also stated that the collection of data concerning 
drug sales in the territories require significant time for 
manufacturers and territories to revise, set up, and to operationalize 
price reporting policies and systems to collect, report, validate, 
test, track and perfect pricing data collections from those sales which 
are necessary to calculate and pay rebates for CODs utilized in the 
territories. Commenters further noted that lead time is needed to amend 
contracts, and implement software changes.
    Response: We appreciate these comments and recognize that the 
proposed rule only addressed a proposed delay concerning implementation 
of the state reporting requirements for territories until 1 year after 
the effective date of this final rule (77 FR 5345). Furthermore, we 
recognize that the proposed rule did not propose to delay inclusion of 
the territories in the definition of states and United States. After 
considering the comments, we recognize the need to delay the inclusion 
of the territories in the definitions of states and United States to 
give the territories and manufacturers additional time to implement 
provisions necessary to include territories in all aspects of the MDR 
program. Accordingly, we are finalizing the definitions of states and 
United States in the final rule as of the effective date of the final 
rule; however, neither definition of states or United States will 
include the territories until 1 year after the effective date of the 
final rule. We agree with commenters that delaying the inclusion of the 
territories in the MDR program for 1 year is necessary to give 
territories and manufacturers an adequate amount of time to make the 
necessary system changes and develop the mechanisms and processes 
necessary to comply with the requirements of the MDR program. We note 
that a 1 year implementation period is consistent with the delay we 
proposed for applying these requirements for states. We have received 
no compelling comments which support delaying implementation beyond the 
1 year period or which convince us that a different implementation 
timeframe would be more appropriate. Manufacturers will not be 
responsible for providing rebates prior to 1 year after the effective 
date of the final rule.

[[Page 5205]]

    As a result, the related requirements we are adopting in this final 
rule, including the Requirements for States in Sec.  447.511, will not 
apply to the territories until 1 year after the definitions for states 
and United States go into effect. As a result of using a later 
implementation date for the inclusion of the territories into the 
definitions of states and United States, the related requirements 
concerning these revised definitions that apply to the manufacturers, 
including the Determination of AMP in Sec.  447.504, the Determination 
of Best Price in Sec.  447.505, MDRs in Sec.  447.509, and the 
Requirements for Manufacturers in Sec.  447.510, will not immediately 
be applicable to the territories (the Commonwealth of Puerto Rico, the 
Virgin Islands, Guam, the Northern Mariana Islands and American Samoa) 
as of the effective date of the final rule.
    Comment: A few commenters noted concerns with the territories' 
ability to participate in the MDR program and asked CMS to consider 
delaying this provision to allow for further study. One commenter noted 
that the costs involved in developing and maintaining MDR systems 
within the territories may outweigh the incremental benefit of the 
program to the territories and recommended further study involving the 
territories before CMS moves forward with this proposal. Another 
commenter noted that there has been no public discussion of this policy 
in a territory, including the technical and complex questions that it 
raises. The commenter asked CMS to take additional time to consider the 
high costs of implementation and the dangerous precedent that it could 
serve.
    Response: We appreciate the concerns raised by these commenters and 
recognize that the territories may have challenges complying with these 
requirements. Our justification for including the territories in the 
definitions of states and United States was not only related to rebates 
the territories may receive under the Act, but also on our 
reexamination of the applicable definitions. As discussed previously in 
this section, after considering the comments, we decided to include the 
territories in the definitions of states and United States 1 year after 
the effective date of the final rule. We decided that delaying the 
inclusion of the territories in the MDR program for a 1 year period 
will give territories and manufacturers an adequate amount of time to 
make system changes and develop the mechanisms and processes necessary 
to comply with the requirements of the MDR program. We further note 
that, as discussed previously in this section, we will also consider 
allowing a territory to use existing waiver authority to elect not to 
participate in the MDR program consistent with the statutory waiver 
standards.
    In addition, we also disagree with the comment concerning the 
dangerous precedent that our definitions could set. As discussed 
previously in this section, our definitions are based on our 
reexamination of the applicable provisions and what we consider to be 
an appropriate definition of states and United States in light of the 
statute.
c. Financial and System Implications
    Comment: One commenter stated that manufacturers already offer 
voluntary rebates to the territories through a number of mechanisms and 
CMS has offered no basis for concluding that any additional rebate 
revenue through a Medicaid expansion will justify the burden on 
territories or manufacturers that will result from this expansion. The 
commenter believed that CMS should first substantively demonstrate the 
need for the expansion to territories beyond a generalized belief that 
doing so will benefit the territories.
    Response: We did not propose this change based only on the amount 
of additional rebates that would be generated to the territories. As 
discussed previously in this section, we believe that such rebates 
would be in the best interest of the program, so that territories 
achieve savings in their drug expenditures. As discussed in the 
proposed rule, territories over the years have expressed an interest in 
participating in the rebate program (77 FR 5326). After considering 
that interest, we reexamined our definitions and proposed this change 
to apply the statutory definition of states and the United States under 
section 1101(a)(1) of the Act in the context of the MDR program.
    Comment: One commenter stated that there is nothing in the rebate 
statute that allows for a ``rebates first--compliance later'' approach. 
The commenter further stated that the statute does not provide for CMS 
to grant participating states exemptions or deferrals of their 
obligations.
    Response: We did not propose a ``rebates first-compliance later'' 
approach in the proposed rule and are not including such an approach in 
the final rule. The territories will need to meet the same requirements 
as other states to collect rebates. If the territories need additional 
time to implement the MDR program in accordance with the requirements, 
we would consider allowing them to use existing waiver authority under 
section 1902(j) of the Act for the Northern Mariana Islands and 
American Samoa and section 1115(a)(1) of the Act for Puerto Rico, 
Virgin Islands and Guam, if they meet the necessary standards for such 
a waiver.
    Comment: One commenter expressed support for the rebate program 
expansion to a territory but stated that it is impossible to estimate 
the costs of implementation at this time and a detailed analysis of all 
systems and processes is required to estimate the administrative costs 
for this territory. The commenter further expressed concerns regarding 
the expected increase in administrative costs could adversely impact 
the territory's section 1108 cap unless CMS allows the territory to 
claim the systems and related contract costs necessary to set up the 
manufacturer and CMS reporting systems for the MDR as Medicaid 
Management and Information Systems' (MMIS) costs that are outside of 
the section 1108 cap and receive enhanced 90 percent and 75 percent 
matching rates.
    Response: We appreciate the commenter's support for the CMS MDR 
rebate program. We also recognize the challenges addressed by the 
commenter in trying to determine the costs that a territory would incur 
in establishing the systems necessary to comply with the MDR program. 
We further note that the territories may claim Title XIX MMIS funding 
that has been approved by CMS in an MMIS Advanced Planning Document 
(APD) under authority granted at section 1903(a)(3) of the Act. 
However, such advanced MMIS funding approval for the CMS MDR program is 
considered outside of the section 1108 limitations of total payments to 
each territory in accordance with section 1903(a)(3) of the Act; 
therefore, the territories' related improvements to their MMIS systems 
do not apply against the Medicaid funding cap in accordance with 
section 1108(g) of the Act. Once the territory implements and receives 
CMS certification for the MMIS, then the administrative costs could be 
paid at 75 percent federal share after a CMS approved APD. Additional 
economic impact information regarding this component is further 
discussed under the Regulatory Impact Analysis section of this rule.
    Comment: Many commenters expressed concern about financial and 
operational challenges for both the territories and manufacturers to 
establish the unique Medicaid program structure in the territories. The 
commenters stated that the pricing structure and systems in the 
territories

[[Page 5206]]

are different from the MDR program. One commenter noted that the MDR 
program does not capture sales to the territories and the proposed 
change would require financial and operational changes for the 
manufacturer to identify all territory sales and associated discounts 
(direct and indirect) for consideration in the calculations. The 
commenter further stated that pricing in one territory is, in many 
instances, government mandated and that prices mandated by government 
have historically been excluded from government pricing metrics.
    One commenter noted concerns with the territories' ability to 
capture accurate utilization data and the feasibility of a disputes 
process. Manufacturers' systems are not designed to process sales data 
generated in the territories, making compliance with the program very 
difficult. The commenter stated that the territories' foreign pricing 
structures would require an operational change in their Medicaid price 
reporting system and the calculations from which the URA is derived. 
The commenter also stated that many of the entities that sell in the 
territories do not conduct business in the United States; therefore, 
the commenter would need to purchase systems necessary to generate 
accurate indirect sales data to ensure the integrity of the data from 
foreign entities.
    Another commenter expressed concerns that the claims received from 
these newly included territories will not be valid or verifiable under 
the current sophisticated MDR reporting system. The commenter stated 
that combining the domestic and foreign operations for purposes of 
reporting sales in the territories would also require new databases for 
the manufacturers and additional staff to manage expanded reporting 
obligations.
    Response: We recognize that there are unique issues involving the 
financial and operational challenges for both the territories and 
manufacturers that pertain to the territories' pricing, utilization 
data and systems structure, as well as other differences between the 
manufacturers' and territories' operations. We believe that delaying 
the inclusion of the territories in the definitions of states and 
United States until 1 year after the effective date of the final rule 
will allow additional time for CMS to work with both the territories 
and manufacturers to address these concerns. We anticipate issuing 
additional guidance on implementation issues and will be available to 
provide technical assistance.
    Comment: A commenter stated that putting aside the potential for 
higher total Medicaid rebate liability, the requirement to process 
invoices for as many as five additional jurisdictions would represent 
approximately a 10 percent increase in the administrative burden 
associated with the preparation of quarterly remittance advices and 
other increases. The commenter also stated that drugs sold to customers 
in the territories may have different WACs than drugs sold in the 
United States due to territory-specific statutory caps. The commenter 
further noted that these caps apply to commercial, as well as 
government purchases. The commenter stated that the rule does not 
address how manufacturers are to account for these situations in their 
domestic government price reporting.
    Response: While we recognize that there may be various 
administrative needs that could result in potential increased 
administration costs for manufacturers, we have no reason to believe 
that these difficulties would be any different from those that 
manufacturers first encountered when the rebate program was 
established. As noted in this section, we anticipate issuing additional 
guidance on implementation issues and will be available to provide 
technical support to manufacturers.
d. Implications for Manufacturers
    Comment: One commenter stated that CMS offers no insight as to how 
manufacturers are to address the five territories' wide variation in 
outpatient prescription drug coverage, drug reimbursement methodology, 
preferred drug list, prior authorization and payments through a PBM 
that are currently receiving federal funding for their covered 
outpatient prescription drugs.
    Response: We note that the variation in the five territories' 
prescription drug coverage, reimbursement methodology, preferred drug 
list and prior authorization as well as payments through a PBM is 
essentially no different than the 50 states and District of Columbia 
who are currently participating in the MDR program. As for prices and 
payments made through PBMs, manufacturers are to treat such prices and 
payments to PBMs located in one of the territories in the same manner 
in which they treat such prices and payments to PBMs located within one 
of the 50 states and the District of Columbia. In addition, the 
treatment of sales to entities within the territories in AMP and best 
price is discussed further in the determination of AMP and best price 
sections of this final rule. We will continue to work with both the 
territories and manufacturers to address any technical concerns 
regarding implementation and their responsibilities under the MDR 
program.
    Comment: One commenter asked how manufacturers are to accrue on 
their domestic general ledger Medicaid rebate liabilities associated 
with sales to territories. The commenter further stated that different 
divisions within the manufacturer's international corporate structure 
could book sales to customers in the United States and customers in the 
territories separately which will complicate collection of data. A 
commenter noted that inclusion of sales or rebate liability across 
separate corporate, legal entities (that is, separate labelers) would 
be highly problematic from an accounting and legal perspective. Another 
commenter stated that manufacturers will need to establish a process to 
accrue rebate liability associated with sales to the territories.
    Response: We recognize that manufacturers will encounter challenges 
in identifying and including sales to the territories in their 
calculations of AMP and best price. As discussed previously in this 
section, we decided to provide a 1-year delayed implementation period 
regarding these provisions, which we believe will give territories and 
manufacturers an adequate amount of time to make the necessary systems 
changes and develop the mechanisms and processes necessary to comply 
with the requirements of the MDR program. We have received no 
compelling comments which support delaying implementation beyond the 1-
year period or which convince us that a different timeframe would be 
more appropriate.
    After considering the comments, we are finalizing the definition of 
states under Sec.  447.502 to mean the 50 states and the District of 
Columbia and beginning April 1, 2017, also includes the Commonwealth of 
Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands and 
American Samoa.
    We are also finalizing the definition of United States to mean the 
50 States and the District of Columbia and beginning April 1, 2017, 
also include the Commonwealth of Puerto Rico, the Virgin Islands, Guam, 
the Northern Mariana Islands and American Samoa.
21. Wholesaler
    Given the definition of ``wholesaler'' in section 1927(k)(11) of 
the Act, as added by the Affordable Care Act, we proposed to define 
wholesaler to mean a drug wholesaler that is engaged in wholesale 
distribution of prescription drugs to retail community pharmacies,

[[Page 5207]]

including but not limited to, manufacturers, repackers, distributors, 
own-label distributors, private-label distributors, jobbers, brokers, 
warehouses (including manufacturer's and distributor's warehouses, 
chain drug warehouses, and wholesale drug warehouses), independent 
wholesale drug traders, and retail community pharmacies that conduct 
wholesale distributions (77 FR 5326, 5361). We did not propose that a 
wholesaler be licensed by the state inasmuch as that is not a 
requirement of the Act, in comparison to the definition of retail 
community pharmacy, where state licensing is required. These proposed 
provisions are discussed in more detail at 77 FR 5326. We sought 
comments on our proposed definition, as well as additional information 
that may help further clarify the term wholesaler (77 FR 5326). We 
received the following comments concerning the proposed wholesaler 
definition:
    Comment: We received several comments supporting the definition of 
wholesaler which includes manufacturers that are engaged in wholesale 
distribution of prescribed drugs. One commenter believed that the 
definition as written in the proposed rule is sufficient to convey to 
manufacturers which merchant middlemen sales are to be considered for 
inclusion in AMP, assuming, if the buildup model is finalized, that the 
tracing information shows such sales flow through to retail community 
pharmacies or to entities included in the calculation of AMP for 5i 
drugs not generally dispensed through retail community pharmacies.
    Response: We appreciate the support and feedback regarding the 
definition of wholesaler. As discussed in more detail in the comments 
and responses in section II.C., the Determination of AMP, we have 
decided not to require manufacturers use a buildup methodology when 
calculating AMP. As will be discussed in the Determination of AMP 
section of this final rule (section II.C.), manufacturers may continue 
to make reasonable assumptions, in the absence of adequate 
documentation to the contrary, that prices paid to them by wholesalers 
are for CODs distributed to retail community pharmacies, or, in the 
case of AMP for 5i drugs not generally dispensed through retail 
community pharmacies, those eligible entities listed in Sec.  
447.504(d).
    Comment: One commenter urged CMS to provide specific guidance as to 
when a secondary manufacturer should be considered a wholesaler since 
including the term ``manufacturer'' in the definition of ``wholesaler'' 
leads to circular reasoning; a manufacturer is considered a wholesaler 
when it functions as a wholesaler, and a wholesaler is defined to 
include manufacturers. The commenter believed this may result in 
manufacturers treating dissimilar types of manufacturers (including 
entities whose primary purposes is redistributing products to retail 
community pharmacies or secondary manufacturers of authorized generics) 
in the same way and has resulted in different treatment of sales to 
secondary manufacturers in the AMP calculations of the primary 
manufacturer.
    Response: The proposed definition of wholesaler in the proposed 
rule is identical to the statutory definition of wholesaler found at 
section 1927(k)(11) of the Act. While this statutory definition 
indicates that the term wholesaler includes manufacturers, it does not 
mean all manufacturers are wholesalers. Manufacturers that are 
considered wholesalers under this definition must meet the first prong 
of this definition by being engaged in wholesale distribution of 
prescription drugs to retail community pharmacies. Therefore, a 
manufacturer will be considered a wholesaler when that manufacturer is 
engaged in wholesale distribution of prescription drugs to retail 
community pharmacies. If a manufacturer sells a drug to another 
manufacturer (a second manufacturer) and that second manufacturer is 
not engaged in wholesale distribution of prescription drugs to retail 
community pharmacies, then the second manufacturer will not be treated 
as a wholesaler, and the sales price of a COD from the first 
manufacturer to the second manufacturer should not be included in the 
primary manufacturer's AMP.
    Comment: We received several comments concerning the requirement 
for wholesalers to be licensed by the state to meet the definition of a 
wholesaler. One commenter applauded CMS's decision to not include the 
state licensure requirement, as not all states require wholesale 
distributors to be licensed and state requirements vary as to whether 
manufacturers are licensed as such or as wholesale distributors. 
Another commenter indicated that since wholesalers perform a variety of 
services for manufacturers and those services change with evolving 
business needs, the commenter supported allowing manufacturer 
flexibility in determining which services performed by another 
manufacturer constitutes ``acting as a wholesaler'' for purposes of the 
AMP calculation and the authorized generic provisions.
    Several commenters indicated that the definition of wholesaler 
should include the requirement for wholesaler to be licensed by the 
state. Commenters indicated that they did not understand why CMS would 
not require wholesaler licensure just because it is not in the statute 
and that licensure as a wholesaler should be considered when 
determining the status of an entity whose business is an intermediary 
between the original manufacturer of a drug and the dispensing 
pharmacy. Another commenter stated that chain pharmacy distribution 
centers are generally licensed as wholesalers in the states in which 
they are located.
    One commenter stated that reporting AMPs for products distributed 
through unlicensed wholesalers would not be reflective of prices that 
are available to retail community pharmacies from licensed wholesalers. 
The commenter recommended that manufacturer sales to unlicensed 
wholesalers should not be included in AMP, or alternatively, CMS should 
exclude manufacturer's transactions with unlicensed wholesalers for 
purposes of calculating FULs.
    A few commenters indicated that state licensure should permit a 
manufacturer to conclude that an entity does qualify as a wholesaler 
and asked that CMS confirm that state licensure is a reasonable basis 
for determining that an entity is a wholesaler for purposes of the MDR 
program.
    Response: We do not agree with restricting the definition of 
wholesaler to only include state licensed wholesalers as we believe it 
would be inconsistent with the definition of wholesaler at section 
1927(k)(11) of the Act. Section 1927(k)(11) of the Act does not include 
such a limitation, and in fact includes entities that may not 
necessarily be recognized by the state as a licensed wholesaler (for 
example, manufacturers acting as wholesalers). Therefore, we are not 
including a licensure requirement; rather, we are adopting the 
definition as proposed which mirrors the statutory definition at 
section 1927(k)(11) of the Act.
    Comment: One commenter stated that many of the national chain 
pharmacies place strict guidelines on their subsidiaries which mandate 
that they purchase drugs from their warehouses. The commenter continued 
to state that typically a chain warehouse is considered to be a 
separate entity within the national chain's corporate structure. Thus, 
when the chain warehouse buys the prescription drugs from a 
manufacturer, the chain's warehouse determines the ``wholesale prices'' 
which will be charged to the retail

[[Page 5208]]

community pharmacies owned by the chain. The commenter asked that CMS 
consider that inclusion of the chain drug warehouses will artificially 
inflate the AAC of the drugs at most, if not all locations.
    Response: The statutory definition of wholesaler includes 
warehouses and makes specific reference to chain drug warehouses that 
are engaged in wholesale distribution of prescription drugs to retail 
community pharmacies. Therefore, given the statutory definition and 
express inclusion of chain drug warehouses, we see no reason to alter 
the definition in this final rule.
    Comment: One commenter requested that CMS consider whether the 
definition of wholesaler should include a wholesaler that takes title 
to, or possession of, the drug(s) as to eliminate potential confusion 
regarding whether manufacturers would need to consider transfer of 
products to third party logistics providers (3PLs) in their 
calculations, if such 3PLs do not take title of the drug(s) but, 
instead, deliver the drug(s) to wholesalers for distribution to the 
manufacturers' end customers.
    Response: We do not believe it is necessary to further add that 
drug wholesalers must take title to, or possession of, the drugs to 
meet the definition of wholesaler since we are the definition of 
wholesaler as defined in section 1927(k)(11) of the Act, which does not 
add this level of specificity. We note, however, that we believe that 
it is implied in the AMP definition that a wholesaler takes possession 
or title to the drug because AMP includes the average prices paid by 
wholesalers for CODs distributed to retail community pharmacies. What 
is not clear from the comment is whether these 3PL entities pay a price 
for the drug, or are paid a service fee to provide packaging services 
to the manufacturer. In the event there is a price paid for the drug by 
the 3PL, this price should be included to the extent that the 3PL 
entity meets the definition of wholesaler at section 1927(k)(11) of the 
Act. Further discussion on the inclusion of sales to wholesalers in the 
calculation of AMP can be found in section II.C. of this final rule.
    After considering the comments, and for the reasons we articulated 
in this section and in the proposed rule, we are finalizing the 
definition of wholesaler under Sec.  447.502 without modification.
22. Existing Definitions Without Modifications
    In proposed Sec.  447.502, we included the existing definitions, 
without modification, for Brand Name Drug, Consumer Price Index-Urban, 
Lagged Price Concession, National Drug Rebate Agreement, Nominal Price, 
and Rebate period (77 FR 5359 through 5361). We did not receive any 
comments and we are finalizing these definitions in Sec.  447.502.

C. Determination of Average Manufacturer Price (Sec.  447.504)

1. AMP Historical Background
    The Omnibus Budget Reconciliation Act of 1990 (OBRA '90) (Pub. L. 
101-508) added section 1927 to the Act, which established the MDR 
program and defined the AMP for a COD of a manufacturer for a rebate 
period as the average unit price paid to the manufacturer for the drug 
in the United States by wholesalers for drugs distributed to the retail 
pharmacy class of trade. Manufacturers who entered into and had in 
effect a rebate agreement with CMS were required to report AMP on a 
quarterly basis. The AMP was used to calculate the rebates paid by 
manufacturers to the states for drugs dispensed to their Medicaid 
beneficiaries for which payments were made under their state plans.
    The DRA of 2005 made significant changes to the Medicaid 
prescription drug provisions of the Act. In particular, the DRA amended 
section 1927(k)(1) of the Act to revise the definition of AMP to 
exclude customary prompt pay discounts to wholesalers, effective 
January 1, 2007. The DRA defined AMP, in part, to mean, for a COD of a 
manufacturer for a calendar quarter, 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. CMS published the 
Medicaid Program; Prescription Drugs final rule (the AMP final rule) on 
July 17, 2007 (72 FR 39142) to implement the provisions of the Deficit 
Reduction Act of 2005 (DRA) pertaining to prescription drugs under the 
Medicaid Program.
    Following the enactment of the Affordable Care Act, in the November 
15, 2010 Federal Register (75 FR 69591), ``Withdrawal of Determination 
of Average Manufacturer Price, Multiple Source Drug Definition, and 
Upper Limits for Multiple Source Drugs,'' we withdrew Sec.  447.504 
``Determination of AMP'' from the AMP final rule following a period of 
notice and comment on the proposed withdrawal.
2. AMP Under the Affordable Care Act
    On March 23, 2010, the Affordable Care Act was enacted. Section 
2503 of the Affordable Care Act revised the definition of AMP in 
section 1927(k) of the Act to eliminate the reference to retail 
pharmacy class of trade and to identify specific entities that 
manufacturers should include or exclude when calculating AMP. In the 
proposed rule, we proposed a new Sec.  447.504 ``Determination of 
AMP,'' (discussed in more detail at 77 FR 5327), based on section 
1927(k)(1) of the Act, as amended by the Affordable Care Act, and 
further amended by section 202 of the Education Jobs and Medicaid 
Assistance Act.
    We received comments concerning the proposal to require 
manufacturers to report AMP based upon their actual sales to retail 
community pharmacies or wholesalers for drugs distributed to retail 
community pharmacies, the definition of retail community pharmacy, 
other terms used in the determination of AMP, the entities proposed for 
inclusion in and exclusion from AMP, and our proposed policy regarding 
the treatment of inhalation, infusion, instilled, implanted, or 
injectable drugs (also referred to as 5i drugs) that are not generally 
dispensed through a retail community pharmacy in the determination of 
AMP.
    We note that commenters used a variety of terms to distinguish AMP 
calculated for 5i drugs that are not generally dispensed through retail 
community pharmacies. With regard to the calculation of AMP and drugs 
generally dispensed through retail community pharmacies, some 
commenters referred to the ``standard AMP'' methodology, ``the non-5i 
methodology,'' ``the retail community pharmacy methodology'' or the 
``regular AMP methodology.'' Commenters also referred to ``5i AMP'' 
methodology, ``non-retail community pharmacy AMP'' methodology, and the 
``alternate'' or ``alternative AMP'' methodology when discussing the 
AMP methodology used to calculate AMP for 5i drugs that are not 
generally dispensed through retail community pharmacies.
    As discussed earlier in the definition of ``5i drug'' in section 
II.B., we have been using the term ``5i drug'' as an acronym to refer 
to all inhalation, infusion, instilled, implanted, or injectable drugs, 
regardless of whether they are or are not generally dispensed through a 
retail community pharmacy. Furthermore, we note that section 1927 of 
the Act only authorizes one AMP and we did not propose more than one 
AMP calculation. Therefore, for purposes of summarizing comments and 
providing responses to comments, when appropriate, we will specifically 
refer to AMP for 5i drugs not generally dispensed through retail 
community pharmacies when making a distinction

[[Page 5209]]

between which sales are to be included in or excluded from AMP.
    The following are general comments we received pertaining to the 
determination of AMP section:
    Comment: One commenter stated that the degree of specificity in the 
proposed rule's various classes of trade definitions is appropriate and 
that further details about class of trade classification questions 
should be spelled out and documented in manufacturers' reasonable 
assumptions. The commenter went on to state that while more specificity 
in the regulatory definitions may have some advantages, the commenter 
believed that the scope and pace of change in the pharmaceutical 
industry supports the adoption of regulatory definitions that are 
flexible enough to accommodate changes in the industry and in the 
functions of its participants with manufacturers' reasonable 
assumptions filling in the details needed as the industry evolves. One 
commenter requested that CMS acknowledge in the final rule that 
manufacturers may use reasonable assumptions for defining those classes 
of trade that are included in the requirement for AMP but are not 
explicitly defined by CMS.
    Another commenter noted that using reasonable assumptions is 
preferred because manufacturers are accustomed to using this approach 
for their current AMP reporting; small manufacturers often lack 
sophisticated customer master systems but generally are able to utilize 
reasonable assumptions that meet their business purposes and comply 
with the spirit of AMP rules; and the features and functions of 
healthcare providers are continually changing and the inherent 
flexibility of reasonable assumptions is appropriate for this reality.
    Another commenter stated that manufacturers' assumptions should 
address the categorization of companies that plausibly could fall into 
two or more classes of trade. For example, there are pharmacies that 
provide retail pharmacy services, compounding pharmacy services, 
infusion services, medical equipment and respiratory services so the 
class of trade will depend on the particular product. Therefore, the 
commenter suggested that CMS should confirm in the final rule the 
important role a manufacturer's documented reasonable assumptions have 
in making decision rules for class of trade issues.
    Response: We appreciate the support of our position and believe 
that with this final rule manufacturers will have an improved 
understanding as to which sales should be included in, or excluded from 
AMP, when calculating AMP consistent with section 1927(k)(1) of the 
Act. In this rule we have clarified that manufacturers may continue to 
make reasonable assumptions, in the absence of guidance and adequate 
documentation to the contrary, that prices paid to manufacturers by 
wholesalers are for drugs distributed to retail community pharmacies in 
their calculation of AMP, provided those assumptions are consistent 
with the requirements and intent of section 1927 of the Act and federal 
regulations. Such assumptions should be documented by each manufacturer 
and as applicable, consistently applied to all CODs reported in MDR.
    Comment: One commenter asked whether detailed instructions will be 
forthcoming for manufacturers, or will they be mostly on their own to 
interpret which sales to include or exclude from AMP.
    Response: Manufacturers must include or exclude sales in their 
determination of AMP consistent with the regulation and the statute. As 
noted in this section, in the absence of guidance and adequate 
documentation to the contrary, manufacturers may make reasonable 
assumptions that are consistent with the requirements and intent of 
section 1927 of the Act and federal regulations. We expect to issue 
further operational guidance, if needed, regarding various aspects of 
the MDR program including the reporting of AMP. Such guidance, when 
available, will be posted to the CMS Web site.
    Comment: One commenter stated that only sales that are consumer 
focused and delivered in a statutorily mandated packaging and labeling 
should be included in the determination of AMP and that there is no 
justification for supporting dual classes of trade when services and 
outputs are equal.
    Response: We disagree with the commenter. Section 1927(k)(1) of the 
Act does not include such limitations regarding the calculation of AMP 
such that it only includes consumer focused sales or statutorily 
mandated labeling or packaging.
    Comment: One commenter noted that AMP is an essential component of 
setting the 340B ceiling price calculation and applauds CMS for 
recognizing in the proposed rule the importance of generating an AMP 
for all CODs. The commenter requested that CMS keep in mind the 340B 
provisions of the Medicaid statute, and ensure that the final rule not 
render these provisions meaningless by allowing for a drug to not 
generate the AMP necessary to calculate a 340B price.
    Response: We appreciate the concerns regarding the need for a COD 
to generate an AMP and recognize the impact of the AMP calculation on 
the 340B ceiling price. As discussed in greater detail in section 
II.C.3., we have decided not to adopt a requirement that manufacturers 
use a buildup methodology to calculate AMP which we believe will 
generally result in AMP calculations for all CODs.
3. Presumed Inclusion vs. Buildup Methodology
    We proposed that, consistent with section 1927(k)(1)(A) of the Act, 
sales to wholesalers for drugs distributed to retail community 
pharmacies are to be included in the determination of AMP (77 FR 5330). 
As part of the discussion in the preamble to the proposed definition of 
retail community pharmacy within the Determination of AMP section, we 
considered two approaches manufacturers may take for determining which 
sales are included in AMP when such sales are made to wholesalers for 
drugs distributed to retail community pharmacies (77 FR 5328). One 
approach, referred to as the ``presumed inclusion'' approach, is that 
the manufacturer presumes, in the absence of adequate documentation to 
the contrary, that certain prices paid to manufacturers by wholesalers 
are for drugs distributed to retail community pharmacies, without data 
concerning that actual distribution (77 FR 5329). The other approach 
for determining AMP is when the manufacturer only includes in its AMP 
calculation those prices where there is adequate, verifiable 
documentation showing that the drug was actually distributed to a 
retail community pharmacy, either directly or indirectly through the 
wholesaler (77 FR 5330). This approach is referred to as the 
``buildup'' methodology. We sought comments regarding these approaches 
in the proposed rule.
    In response to our request, we received numerous comments 
requesting CMS's continued support of the presumed inclusion approach. 
These comments and our responses are summarized in this section. We 
note that commenters used a variety of terms to distinguish between 
these two approaches for calculating AMP. Some commenters referred to 
the ``presumed inclusion'' methodology as ``the default rule,'' ``the 
top down approach'' or the ``gross to net method'' for calculating AMP. 
Commenters also referred to the CMS ``buildup'' methodology as the 
``bottom up,'' and the ``presumed exclusion'' approach. For purposes of 
summarizing comments and providing responses, we will refer to either 
the

[[Page 5210]]

``presumed inclusion'' methodology or the ``buildup'' methodology.
    Comment: We received many comments expressing opposition to CMS's 
proposal that drug manufacturers use a ``buildup'' methodology in 
identifying sales to retail community pharmacies in the determination 
of AMP noting that the buildup methodology is a significant change from 
the way manufacturers have traditionally calculated AMP. Commenters 
noted that the presumed inclusion methodology provides the framework 
for historical AMP trends and methodological assumptions on which all 
other aspects of the proposed rule rely, and that the rejection of the 
presumed inclusion method would undermine the reasonableness and 
feasibility of the proposed rule as a whole. Several commenters 
believed that the presumed inclusion methodology should be preserved as 
it promotes stabilization of AMP from period to period, ensure greater 
consistency in AMP calculation methodologies across manufacturers, and 
allow AMPs to be calculated for products that might otherwise have no 
AMP-eligible sales. One commenter stated that a stable AMP benefits 
manufacturers, pharmacies, and CMS, because manufacturers are better 
able to predict their Medicaid liability and 340B pricing, pharmacies 
are better able to rely on predictable FUL reimbursement rates, and CMS 
is better able to predict its reimbursement cost and rebate revenue.
    Response: After consideration of the comments received, we are 
persuaded that an approach where manufacturers calculate AMP based 
solely upon their actual, documented sales to retail community 
pharmacies or wholesalers for drugs distributed to retail community 
pharmacies (the ``buildup approach'') is a less practical approach 
which would represent a significant change from the methodology 
manufacturers have traditionally used to calculate AMP. We have 
permitted manufacturers, in the absence of specific guidance, to make 
reasonable assumptions when calculating AMP, provided those assumptions 
are consistent with requirements and intent of section 1927 of the Act 
and federal regulations. We believe it is reasonable that manufacturers 
continue to make reasonable assumptions, consistent with these 
provisions, and presume in the absence of guidance and adequate 
documentation to the contrary, that prices paid to manufacturers by 
wholesalers are for drugs distributed to retail community pharmacies. A 
presumed inclusion approach is consistent with this policy, as well as 
the longstanding practice that permits manufacturers (using chargeback 
data) to make certain assumptions in the absence of guidance, when 
calculating AMP. As noted in the proposed rule (77 FR 5330), we 
expressed concerns regarding both the presumed inclusion and the 
buildup methodology, based primarily on our understanding of the 
adverse consequences resulting from manufacturers including non-retail 
community pharmacy sales data in their AMP calculations (77 FR 5329). 
Based on the comments, however, we realize that such concerns may have 
been overstated given that manufacturers have successfully calculated 
AMP using chargeback data and reasonable assumptions since the 
beginning of the program. For these reasons and based on the comments, 
we believe that a manufacturer's use of the presumed inclusion approach 
is a reasonable approach that is consistent with the pharmaceutical 
marketplace practices, where manufacturers often receive sales data 
based on chargeback arrangements that manufacturers have in place for 
institutional and other non-retail community pharmacy purchases. 
Therefore, as discussed more fully in this section, in response to 
further comments on the use of a buildup methodology, we have decided 
not to adopt the buildup approach.
    Comment: Commenters noted that the proposed rule expressly 
recognized that the presumed inclusion methodology is a reasonable 
alternate approach to implement AMP provisions and that it did not 
identify any considerations that could justify the substantial burdens 
of abandoning this time tested approach. One commenter believed that 
the Congress ratified CMS's longstanding interpretation of a presumed 
inclusion methodology because it merely changed the class of customers 
included in AMP without modifying the rule that sales to wholesalers 
are included in AMP except for sales that can be identified with 
adequate documentation as being subsequently sold to an excluded 
entity. Therefore, the commenter believed CMS cannot require 
manufacturers to change to the buildup methodology without further 
legislative change. Furthermore, a few other commenters stated that the 
rejection of the presumed inclusion methodology is contrary to all of 
the regulatory simplification mandates included in Executive Orders 
12866 and 13563.
    Response: We agree that manufacturers have had the option of making 
certain reasonable assumptions that prices paid to manufacturers by 
wholesalers are for drugs distributed to retail community pharmacies 
when calculating AMP and acknowledge the concerns raised by commenters 
that the buildup methodology may impose undue administrative burdens. 
As discussed in this section, in light of such concerns, we have 
decided not to adopt a requirement for a buildup methodology and will 
continue to allow manufacturers to make reasonable assumptions, and 
presume, in the absence of guidance and adequate documentation to the 
contrary, that prices paid to manufacturers by wholesalers are for 
drugs distributed to retail community pharmacies, provided those 
assumptions are consistent with the requirements and intent of section 
1927 of the Act and federal regulations.
    Comment: A few commenters stated that CMS rejected the presumed 
inclusion method because it would lead to inclusion of sales by a 
manufacturer to entities not contemplated in the statutory definition 
and further noted that CMS ignores the fact that a buildup methodology 
has the suboptimal result of excluding sales that are contemplated in 
the statutory definition because manufacturers do not have information 
on the end customer. The commenter stated that given both approaches 
are imperfect, there are good reasons to adopt presumed inclusion: It 
is familiar to manufacturers that have been operating on this basis for 
over 2 decades; their policies, procedures and automated systems are 
designed to implement a presumed inclusion methodology; and changing to 
a buildup method would require reconfiguring automated systems for 
manipulating sales and chargeback data and calculating AMP at a great 
expense, time and effort. Many commenters stated that the change from 
the presumed inclusion methodology to a buildup methodology would 
require manufacturers to invest significant time and financial 
resources in updating their government pricing systems to calculate AMP 
using this new methodology.
    Response: After reviewing the comments concerning the calculation 
of AMP using a buildup method versus presumed inclusion approach, as 
noted in prior responses, we believe the better alternative for 
calculating AMP is the presumed inclusion approach. As noted by this 
commenter, a buildup approach has its weaknesses as it would result in 
a manufacturer excluding sales that should be included in AMP as 
defined at section 1927(k)(1) of the Act, because the manufacturer does 
not have access to data on the end customer.
    We also appreciate the insight that commenters provided regarding 
the financial impact and operational

[[Page 5211]]

difficulties associated with manufacturers revising their government 
pricing and data collection systems to comply with the buildup 
approach. In light of these concerns, we have decided to retain the 
option that manufacturers may make reasonable assumptions and presume, 
in the absence of guidance and adequate documentation to the contrary, 
that prices paid to manufacturers by wholesalers are for drugs 
distributed to retail community pharmacies.
    Comment: One commenter explained that the presumed inclusion 
approach uses three data sources most manufacturers have available for 
the calculation of AMP: direct sales data, indirect sales data 
(identified by chargebacks submitted by the wholesaler to the 
manufacturer for contracted sales), and rebate payment data. With the 
presumed inclusion approach, direct sales are the starting point and 
the data can be reconciled to the manufacturer's financial system. The 
commenter noted that a branded manufacturer could have a large volume 
of sales, but only a small number of identifiable sales to retail 
pharmacies because they do not typically contract with retail community 
pharmacies but do have many non-retail contracts, such as contracts 
with hospitals, PBMs or GPOs. As a result, under the buildup approach, 
the AMP calculation would be skewed based upon the small number of 
identifiable sales and would not be representative of actual sales of 
the products to retail pharmacies. The commenter also stated that 
unlike its branded counterparts, generic manufacturers may have 
agreements with retail community pharmacies, such as chain retail 
stores and therefore, generic manufacturers may have a larger number of 
sales that are identifiable as retail. The commenter further explained 
that as a result of the larger volume of sales the generic 
manufacturers' calculated AMPs could be lower. The resulting calculated 
FUL, based on aggregate AMPs of both the branded and the generic AMPs 
could then be lower based upon the volume and weighting of the retail 
AMPs and could result in inconsistent and varying FULs from quarter-to-
quarter.
    Response: We appreciate the commenter's explanation of the sales 
data manufacturers use to calculate AMP, as well as the processes many 
manufacturers use to reconcile their sales data with their financial 
accounting system. We recognize that while the buildup approach could 
result in lower AMPs and rebates, manufacturers would prefer not to 
change their pricing systems to use a buildup methodology because of 
the manufacturer's cost and burden of tracking sales data and relying 
on third party data sources, as well as the additional contracts that 
would be required to generate the data needed to calculate AMP.
    We agree that inasmuch as the commenters urged a policy that would 
have the potential to raise their AMPs, their statements reflect the 
realities of the marketplace where data required by the buildup 
approach is not typically available to the manufacturer. Therefore, in 
light of the concerns raised and as discussed previously, we have 
decided not to require that manufacturers adopt the buildup approach 
when calculating AMP.
    Comment: A few commenters noted that retaining the presumed 
inclusion methodology could actually increase a manufacturer's AMP 
which would result in a higher rebate. Another commenter indicated that 
despite the possibility of having to pay higher rebates, they support 
the presumed inclusion methodology to calculate AMP, because of serious 
concerns with data collection and compliance issues, as well as the 
cost and burden associated with implementing the buildup methodology.
    Response: We appreciate the comments. As discussed previously in 
this section, and based upon the comments we have received regarding 
the two approaches, we have decided not to require that manufacturers 
adopt the buildup methodology.
    Comment: Many commenters were concerned that manufacturers would 
have to obtain third party data or CMS would require manufacturers to 
purchase data from third parties in an effort to attribute each 
wholesaler sale to an end-user customer. Commenters indicated that to 
do so would be costly and manufacturers would not be able to evaluate 
the accuracy of the data purchased or audit it in time to certify the 
AMP data on a monthly basis.
    Further, commenters noted that there is no commercially available 
data set which would provide sufficient information regarding 
wholesaler customers and stated that while there are commercial 
services that attempt to estimate blinded data concerning customer 
sales, their methodologies vary, resulting in different manufacturers 
potentially using different data standards, creating inconsistencies 
among the AMP calculations from manufacturer to manufacturer. A few 
commenters had concerns that the verification of reseller sales would 
require access to proprietary and confidential information that would 
be difficult if not impossible to obtain and could raise legal issues 
as well.
    Commenters also stated that CMS lacks the legal authority to 
require manufacturers to purchase data to participate in the Medicaid 
program and that such a requirement would reduce the reliability, 
stability, and accuracy of reported AMPs and cause a host of 
operational problems with no satisfactory solution. A few commenters 
believed this requirement to purchase data is not authorized by the 
Medicaid rebate statute and would be considered arbitrary and 
capricious and thus improper under the APA. Commenters were also 
concerned that intermediaries with access to the data would have 
significant negotiation leverage and could charge excessive fees for 
the data which would place manufacturers in a difficult position 
regarding government price reporting and federal and state fraud and 
abuse laws if they are required to purchase data that could readily 
exceed an objectively determined fair market value.
    Other commenters identified challenges to utilizing third party 
data for calculating AMP, including differentiating returns from sales 
because both returns and product transfers between wholesaler locations 
look like sales; fields on wholesaler records, which differ by 
wholesalers; and the classes of trade assigned by wholesalers do not 
always align with those of the manufacturer.
    Response: As noted by many commenters, adopting a buildup approach 
could have required manufacturers to purchase third party data, 
integrate such data into its government pricing systems (which include 
computer systems used by manufacturers to track sales and calculate 
government prices, such as AMP, Average Sales Price (ASP) and 340B 
sales), and consider such information when calculating AMP. We 
appreciate the many challenges noted by commenters associated with 
manufacturers' use of third party data to complete their AMP 
calculation. While we did not require that manufacturers use third 
party data to calculate AMP under the buildup approach, we agree with 
commenters that to calculate an accurate AMP it could have been 
necessary. Furthermore, we have been persuaded that the statutory 
revisions to section 1927(k)(1) of the Act made by the Affordable Care 
Act did not require that manufacturers obtain or purchase third party 
data in order to calculate AMP. Therefore, we have decided not to 
require that manufacturers change their methodology for calculating AMP 
to use

[[Page 5212]]

the buildup methodology, especially given the concerns regarding the 
need to purchase third party data.
    Comment: A few commenters believed that a buildup methodology 
shifts the Medicaid price reporting function from manufacturers to 
wholesalers and others. They state that a buildup methodology could 
expose wholesalers and others in the supply chain to False Claims Act 
allegations because of the role may play in the government pricing 
function.
    Response: As noted earlier we are not requiring that manufacturers 
adopt the buildup approach when determining AMP. We appreciate the 
concerns regarding the shift in the price reporting functions and note 
that it is the manufacturer's responsibility to determine which sales 
to include in AMP calculations and to make reasonable efforts to 
identify customer data in making such calculations.
    Comment: A few commenters indicated that as part of their overall 
compliance and certification process manufacturers generally tie all 
the data that they use in their government pricing calculations to the 
General Ledger in each reporting period. The commenters noted that this 
compliance best practice has been required by the HHS OIG in cases 
where the OIG has audited government pricing calculations. A few 
commenters recommended that CMS consult with the OIG before it 
considers adopting a rule that would prevent manufacturers from meeting 
the OIG audit requirements. A few commenters provided specific 
suggestions as to how the certification language would need to be 
revised to account for the use of third party data that they could not 
verify was complete and accurate.
    Response: We recognize that the compliance and certification 
process that manufacturers complete would be more burdensome to the 
extent that calculations are based on third party data. We also 
recognize the concerns regarding a manufacturer's ability to certify 
the accuracy of the data used to calculate AMP when based on such third 
party data. As previously discussed in this section, we are not 
adopting a requirement that the buildup methodology be used for 
calculating AMP. Therefore, we are making no changes to the 
certification language currently used by manufacturers when they submit 
and certify their AMP data and also see no conflict with OIG audit 
requirements.
    Comment: A few commenters believe that the buildup methodology will 
deliver AMP figures that are inferior both qualitatively and 
quantitatively and as a theoretical matter the buildup methodology will 
generate a lower AMP than the presumed inclusion methodology, even when 
the underlying manufacturer sales and discounts are exactly the same. 
The commenters believed this undermines CMS's proposal to use AMP as a 
basis for reimbursement through FULs, as well as AAC, and will lower 
pharmacy reimbursement rates. A few commenters noted that for AMP to 
serve reimbursement related purposes it is important for CMS to make 
reported AMPs align more closely with pharmacy acquisition costs and 
abandoning the presumed inclusion methodology would be step backward 
from that goal.
    Response: We agree that AMP serves two purposes--it is used by 
manufacturers to calculate rebates and by CMS to calculate FULs. 
Because of these two competing purposes, the definition of AMP and the 
sales included in or excluded from the calculation of AMP affects not 
only manufacturers, but also pharmacy groups, the federal and state 
governments, and Medicaid beneficiaries. As discussed previously in 
this section, we understand that manufacturers may face significant 
challenges when using the buildup approach to calculating their AMP. 
Therefore, as discussed previously, we are not adopting a requirement 
that manufacturers use a buildup methodology to calculate AMP. Rather, 
they may continue to use the presumed inclusion approach and make 
reasonable assumptions, provided those assumptions are consistent with 
the requirements and intent of section 1927 of the Act and federal 
regulations.
    Comment: Several commenters expressed concern that the buildup 
methodology would result in certain products having no AMP-eligible 
sales because manufacturers lack visibility into end users of some 
products. This in turn would lead to an increased number of zero-dollar 
AMPs. A few commenters requested that CMS provide guidance regarding 
zero-dollar AMPs and further suggested that manufacturers be required 
to report the most recent positive AMP so as to be consistent with the 
current guidance as to how manufacturers have been instructed to handle 
zero AMP values.
    Another commenter stated that it would not be necessary to 
establish a regulatory category for specialty pharmacies to have an AMP 
for oral drugs that are not dispensed primarily through retail 
community pharmacies if the presumed inclusion rule was retained 
because there would be some sales to wholesalers at WAC which would not 
be subsequently identified as excludable. These wholesaler WAC sales 
would form the basis for calculating AMP. The commenter believed that 
this solution, although imperfect, is less imperfect than using the 
buildup approach and establishing a new category of pharmacy not 
consistently recognized across the industry and directly contrary to a 
statutory mandate.
    Another commenter noted that with a presumed inclusion calculation 
these non-retail sales would have been included in the gross sales for 
the product and once chargeback detail from a doctor, clinic, or 
hospital was processed, a manufacturer could then remove those sales 
using a 12-month lagged calculation as ineligible sales. While 
theoretically there would never be an eligible sale, the lagged removal 
allows an AMP calculation to take place. If the buildup method is 
finalized, the commenter asked how manufacturers are to remain in 
compliance with reporting AMP for physician administered products that 
do not have any retail sales and are not 5i drugs as defined in the 
proposed rule (77 FR 5328).
    Response: Since we are not requiring that manufacturers use the 
buildup methodology, there would be no change in guidance regarding a 
manufacturer being permitted to carry forward the prior AMP which was 
established using its presumed inclusion methodology. Furthermore, we 
generally agree with commenters that the use of the build-up approach 
could result in some drugs with no AMP-eligible sales because 
manufacturers lack information about the ultimate purchaser of such 
products. However, with the presumed inclusion approach manufacturers 
may make certain reasonable assumptions when calculating AMP, even when 
such assumptions are based upon a small percentage of sales of such 
drugs to wholesalers that distribute to retail community pharmacies or 
sales directly to retail community pharmacies. This topic is discussed 
in more detail in section II.C.5.d. of this rule.
    Comment: Some commenters provided examples of AMP calculations 
using the buildup methodology compared to the presumed inclusion 
methodology demonstrating that the buildup method is more likely to 
result in the inappropriate exclusion of retail community pharmacy 
sales because such sales do not generate chargeback data. One commenter 
documented that under the buildup method, approximately 20 percent of 
the NDCs had no identifiable AMP-eligible sales and when only 
considering those

[[Page 5213]]

products for which they had records of direct or indirect sales to 
retail community pharmacies, the AMPs for 40 percent of the products 
were lower than those calculated using the presumed inclusion method 
while 27 percent of the products had AMPs that were higher.
    Response: As previously noted, in light of concerns raised by 
commenters, we are not requiring manufacturers to adopt the use of the 
buildup methodology for calculating AMP. Therefore, in light of this 
decision, we do not expect that manufacturers will exclude AMP eligible 
sales as the commenter noted.
    Comment: A few commenters also expressed concern that the buildup 
methodology would introduce a new need for restatement in reported AMPs 
and there would be no limit on the number of times a manufacturer might 
be required to restate AMP because of lagged sales. Furthermore, the 
commenter believed that a ``12 month lagged eligible no contracted 
sales ratio''--not to be confused with the 12-month lagged eligible 
price concession ratio--would have to be established and made part of 
every manufacturer's AMP calculation method if the buildup methodology 
were finalized.
    Response: As discussed in prior responses, we have decided not to 
require that manufacturers adopt the buildup methodology. Furthermore, 
the existing regulations do not presently require manufacturers to 
establish the 12-month lagged ratio and we are not implementing or 
requiring one in this final rule.
    Comment: One commenter believed that the statement in the proposed 
rule that ``there is a direct relationship between which entities are 
to be included in, and excluded from AMP calculations and the basis for 
determining the FUL'' is incorrect because the Affordable Care Act 
requires CMS to set the FULs at no less than 175 percent of the volume-
weighted AMP for a multiple source drug group. The commenter stated 
that the statute permits CMS to set a FUL that exceeds 175 percent of 
the volume-weighted AMP as CMS determines appropriate, thereby breaking 
the link between AMP and FULs.
    Response: We disagree and do not view the statute as only using AMP 
(based on a percentage) for purposes of setting the threshold floor for 
the FUL. We interpret section 1927 of the Act, as amended by the 
Affordable Care Act, as continuing to require that FULs be based on 
AMP, although we have discretion as to setting the percentage of AMP 
that would apply in the FUL calculation. Since the FUL is based upon a 
volume-weighted AMP for a multiple source drug group, there will always 
be a link between AMP and the FUL regardless of the percentage of AMP 
used to calculate the FUL. For more details on comments related to the 
proposal to establish the FUL at 175 percent of the volume weighted AMP 
for multiple source drugs, please refer to the summary and response to 
comments for proposed Sec.  447.514, ``Upper limits for multiple source 
drugs,'' found in section II.K. of this final rule.
    Comment: Several commenters noted that lower AMPs, as a result of 
the buildup approach, could have an adverse impact on Medicare Part B 
reimbursement because of the requirement for AMP substitution for ASP 
when ASP exceeds AMP by 5 percent, either in the 2 consecutive quarters 
immediately prior to the current pricing quarter, or in 3 of the 
previous 4 quarters immediately prior to the current quarter. The 
commenters noted that AMP calculated with the buildup approach would 
significantly increase the likelihood that AMP will be substituted for 
ASP which will not reflect actual pricing in the market and possibly 
result in lower Part B reimbursement. The commenters also noted that if 
AMP were to be calculated using fundamentally different methodologies 
from ASP the substitution of AMP for ASP would not be based on 
differential discounting, but based on the difference in methodology.
    Other commenters noted that the non-Federal Average Manufacturer 
Price (non-FAMP) also uses a presumed inclusion approach and requiring 
a manufacturer to implement an entirely different approach for a 
similar price point is the type of unnecessarily inconsistent and 
duplicative regulation that agencies are directed to avoid. Another 
commenter noted that the buildup model would result in an unknown and 
unanticipated impact on the 340B prices.
    Response: As previously noted in this section, we are not requiring 
manufacturers to adopt the buildup methodology for calculating AMP, and 
therefore, we believe the concerns raised about AMP being substituted 
for ASP, as well as the concerns regarding implementing a different 
approach for another government program price (non-FAMP), are no longer 
relevant. Furthermore, in light of our decision not to require that 
manufacturers adopt the buildup methodology, we believe we have 
addressed the concern regarding the potential impact of the buildup 
approach on the ceiling prices set under the 340B program.
    Comment: One commenter stated that CMS appears to follow the 
statute and intent of the Congress in creating AMP by excluding from 
the calculation of AMP many manufacturer sales that are obviously not 
appropriate. However, the commenter noted that the AMP would be higher 
under the presumed inclusion methodology and it is difficult to know 
which approach is correct given that the answer may depend on whether a 
product is a brand or generic drug.
    Therefore, the commenter suggested that CMS require manufacturers 
to submit their AMP calculations to CMS using both the presumed 
inclusion method and the buildup method before the rule is made final 
as this would allow CMS to better understand the pros and cons of both 
approaches. Another commenter asked CMS to extend the comment period on 
the adoption or rejection of the buildup methodology requirement until 
such time a better assessment of indirect sales data can be determined.
    Response: We do not believe either one of these suggestions 
(further analysis and extension of the comment period) is necessary 
given the feedback and concerns raised by commenters during this 
rulemaking process. As noted previously in this section, we received 
many comments regarding both approaches, including comments regarding 
the burden and cost associated with implementing the buildup approach 
and the need for manufacturers to purchase sales data to properly 
calculate an AMP. Based on the comments, we see no reason to require 
that manufacturers submit AMP calculations to CMS using both the 
approaches, given that such an option would be costly and burdensome 
and would not lead to a greater understanding of whether or not to 
finalize the buildup approach.
    Comment: One commenter supported CMS's proposal that manufacturers 
report AMP based only on actual sales to retail community pharmacies or 
wholesalers for distribution to retail community pharmacies. The 
commenter believed the new definition of AMP adopted in the Affordable 
Care Act requires such affirmative identification.
    Response: As discussed previously in this section, we have been 
persuaded by the many comments we received on this topic that the 
buildup method would create a significant administrative and financial 
burden on manufacturers given the extensive changes to manufacturer's 
government pricing systems and data collection processes. Specifically, 
as noted by commenters, the buildup approach may not reflect the sales 
eligible for exclusion from

[[Page 5214]]

AMP consistent with the definition of AMP at section 1927(k)(1) of the 
Act. Also, as noted by the commenters the statutory revisions to the 
AMP definition did not contemplate that manufacturers make significant 
revisions to their government pricing systems, especially given the 
effective date in section 2503 of the Affordable Care Act. Therefore, 
we have decided not to adopt in this rulemaking the requirement that 
manufacturers use the buildup approach.
    Comment: A few commenters stated that they were concerned about the 
potential of non-retail sales being included in AMP calculations which 
may result in AMP-based FULs below pharmacy acquisition cost. The 
commenters requested that CMS clarify that manufacturers are to include 
``non-contracted'' sales to wholesalers only when the manufacturers do 
not pay chargebacks and does not otherwise know or should know, whether 
the drugs will be distributed to entities that are not retail community 
pharmacies.
    Response: As stated earlier in this section of the preamble, 
manufacturers may adopt a presumed inclusion approach when calculating 
their AMP for covered outpatient drugs and presume that non-contracted 
sales to wholesalers (that is, non-contracted sales meaning those sales 
to entities in which the manufacturer has not entered a contractual 
relationship to provide discounts or special pricing) when there is no 
chargeback data or other data available that would demonstrate that the 
drugs were distributed to non-retail community pharmacies.
    After consideration of the comments and for the reasons discussed 
previously, we have decided not to make changes to the regulations text 
to require that manufacturers calculate AMP based on the buildup 
methodology.
4. Definitions
    The following is a discussion of the specific terms associated with 
AMP calculations that we proposed to define at proposed Sec.  
447.504(a) (77 FR 5327, 5330 through 5334):
a. Average Manufacturer Price (AMP)
    We proposed a new definition of AMP based on section 1927(k)(1) of 
the Act, as amended by section 2503 of the Affordable Care Act (77 FR 
5327). Consistent with the statutory definition, we proposed to define 
AMP to mean, for a COD of a manufacturer (including those sold under an 
NDA approved under section 505(c) of the FFDCA)) the average price paid 
to the manufacturer for the drug in the United States by wholesalers 
for drugs distributed to retail community pharmacies and retail 
community pharmacies that purchase drugs directly from the manufacturer 
(77 FR 5361). While we received comments, which are discussed in detail 
in this section, about which sales, discounts, rebates and other 
financial transactions are included in and excluded from AMP, we did 
not receive specific comments about the proposed definition itself. 
Therefore, we are finalizing the definition of AMP at Sec.  447.504(a), 
consistent with the statutory definition.
b. Average Unit Price
    We proposed to define average unit price to mean a manufacturer's 
quarterly sales included in AMP less all required adjustments divided 
by the total units sold and included in AMP by the manufacturer in a 
quarter (77 FR 5328, 5361). We did not receive any comments concerning 
the proposed definition of average unit price. Since AMP is calculated 
and reported to CMS on a per unit basis (for example, tablet, capsule, 
gram, milliliter) we believed it was important to include in the 
regulatory text the definition of average unit price to ensure 
consistent AMP reporting across all manufacturers and therefore, we are 
finalizing the definition at Sec.  447.504(a) as proposed.
c. Charitable and Not-for-Profit Pharmacies
    For the purposes of this subpart, we proposed to define charitable 
and not-for-profit pharmacies as organizations exempt from federal 
taxation as defined by section 501(c)(3) of the Internal Revenue Code 
of 1986 (77 FR 5328, 5361). We proposed to define charitable and not-
for-profit pharmacies using specific definitions in the Internal 
Revenue Code. These terms are referenced in the definition of retail 
community pharmacy at section 1927(k)(10) of the Act and we established 
these definitions to ensure that AMP is calculated consistently across 
all manufacturers in accordance with the definition of AMP in section 
1927(k)(1) of the Act. We received no comments concerning the proposed 
definition of charitable and not-for-profit pharmacies. Therefore, we 
are finalizing the definition at Sec.  447.504(a) as proposed.
d. Insurers
    As discussed in the proposed rule, the Affordable Care Act 
referenced the term ``insurers'' in section 1927(k)(1)(B)(IV) of the 
Act (77 FR 5328). Therefore, for the purposes of this subpart, we 
proposed to define insurers as entities that are responsible for 
payment of drugs dispensed to the insurer's members, and do not take 
actual possession of these drugs or pass on manufacturer discounts or 
rebates to pharmacies (77 FR 5328, 5361). We received no comments 
concerning the proposed definition of insurers and for the reasons we 
noted, we are finalizing the definition at Sec.  447.504(a) as 
proposed.
e. Net Sales
    In the preamble to the proposed rule, we proposed to define net 
sales to mean quarterly gross sales revenue to wholesalers for drugs 
distributed to retail community pharmacies and retail community 
pharmacies that purchase drugs directly from manufacturers less cash 
discounts allowed, and other price reductions (other than rebates under 
section 1927 of the Act or price reductions specifically excluded by 
statute or regulation) which reduce the amount received by the 
manufacturer (77 FR 5328). We note that we included language in the 
proposed regulations text which, while not identical to the preamble 
language, was designed to codify that proposal (77 FR 5361). 
Specifically, in the proposed regulatory text (77 FR 5361) we did not 
include the phrase ``to wholesalers for drugs distributed to retail 
community pharmacies and retail community pharmacies that purchase 
drugs directly from manufacturers'' which was erroneously included in 
the preamble discussion. We did not receive any comments concerning the 
proposed definition of net sales and thus we are finalizing the 
regulatory definition as proposed. In addition, because net sales for 
5i drugs is calculated to include sales in addition to sales to 
wholesalers and retail community pharmacies, it would not be 
appropriate to limit the gross sales from which the net sales are 
determined to only wholesalers and retail community pharmacies, as 
discussed in the preamble to the proposed rule (77 FR 5328). Therefore, 
we have not included such language in the final rule and are finalizing 
the definition at Sec.  447.504(a) as proposed in the regulatory text.
f. Retail Community Pharmacy
    We proposed to define retail community pharmacy to mean an 
independent pharmacy, a chain pharmacy, a supermarket pharmacy, or a 
mass merchandiser pharmacy that is licensed as a pharmacy by the state 
and that dispenses medications to the general public at retail prices 
(77 FR 5361). We further proposed to incorporate the requirement set 
forth in

[[Page 5215]]

section 1927(k)(10) of the Act that such term does not include a 
pharmacy that dispenses prescription medications to patients primarily 
through the mail, nursing home pharmacies, long-term care facility 
pharmacies, hospital pharmacies, clinics, charitable or not-for-profit 
pharmacies, government pharmacies, or pharmacy benefit managers 
(discussed in more detail at 77 FR 5328). We note that in the preamble 
of the proposed rule our proposal specified the words ``or a mass 
merchandiser pharmacy,'' (77 FR 5328) but in the proposed regulatory 
text, we inadvertently included the words ``and a mass merchandiser 
pharmacy'' (77 FR 5361). Given the explanation of our proposal in the 
preamble, our intent was to propose regulatory text consistent with 
section 1927(k)(10) of the Act, which defines retail community pharmacy 
to include the phrase ``or mass merchandiser pharmacy.'' Therefore, we 
are modifying the regulatory text in this final rule to specify ``or a 
mass merchandiser pharmacy,'' to be consistent with the statute. We 
received the following comments concerning the proposed definition of 
retail community pharmacy:
    Comment: One commenter expressed support for the proposed 
definition of retail community pharmacy because it reflects the 
definition of retail community pharmacy as provided in the Affordable 
Care Act.
    Response: We appreciate the support for this proposal and note that 
the definition we are finalizing in this final rule is based on the 
statutory definition of retail community pharmacy as set forth in 
section 1927(k)(10) of the Act.
    Comment: One commenter requested clarification regarding whether 
CMS expects manufacturers to validate the business licenses of entities 
before including any sales in their AMP calculations since the 
definition specifies, in part, that it is ``licensed as a pharmacy by 
the state.''
    Response: We did not propose that manufacturers make separate 
assurances regarding such licensure for Medicaid rebate purposes in the 
proposed rule and are not including such a provision in this final 
rule. Therefore, we expect manufacturers to use reasonable assumptions 
consistent with the requirements and intent of section 1927 of the Act 
and federal regulations.
    Comment: Several commenters requested further guidance as to the 
meaning of ``primarily through the mail'' as used in the definition of 
retail community pharmacy, including how it applies to hybrid entities 
that may operate as retail community pharmacies but also dispense 
products through the mail. Another commenter noted that business models 
continue to evolve and venture into models more akin to mail order 
business models. A few commenters suggested that CMS provide a 
threshold for determining when a pharmacy is dispensing prescription 
medications ``primarily through the mail'' to ensure consistent 
treatment of these entities across the industry. The commenters 
provided recommendations for a standard, such as 70 percent and 50 
percent, for classifying a pharmacy as one that dispenses primarily 
through the mail. These commenters stated that manufacturers should be 
able to presume that pharmacies will truthfully report whether they are 
mail order pharmacies when requested.
    Response: We are declining to set a percentage of sales that a 
pharmacy would have to attain to be considered a pharmacy that 
primarily dispenses through the mail as part of the regulations text in 
the final rule because it would not allow flexibility to recognize 
changes that take place in the pharmaceutical marketplace with regard 
to mail order business.
    However, we believe that there is a distinction between an entity 
that owns a retail community pharmacy and a mail order pharmacy and a 
retail community pharmacy that provides a delivery service. In those 
instances when a retail community pharmacy has a home delivery service, 
which is an additional service offered by the retail community pharmacy 
to send prescriptions directly to the patient's home, and the pharmacy 
does not offer prescriptions primarily through the mail, such drug 
sales would be included in AMP. However, if a single entity owns both a 
retail community pharmacy and a mail order pharmacy where medication is 
dispensed primarily through the mail, it is appropriate that 
manufacturers exclude the sales to the mail order pharmacy when 
determining AMP, and include the mail order sales when they are 
calculating AMP for a 5i drug not generally dispensed through retail 
community pharmacies. We further believe it is appropriate for the 
manufacturer to make reasonable assumptions that a pharmacy is a retail 
community pharmacy when the majority of the drugs are not dispensed 
through the mail. Should business models evolve to the extent that we 
need to address this in the future, we will issue additional guidance 
or engage in rulemaking, if needed.
    Comment: Several commenters expressed opposition to CMS's efforts 
to broaden the definition of retail community pharmacy to include 
specialty pharmacies, home infusion pharmacies, and home health care 
providers. One commenter stated these are entities that typically 
operate as closed door pharmacies, stock a limited number of drugs, are 
not open to the general public in the same manner as a retail community 
pharmacy, and are able to obtain discounts and price concessions not 
available to retail community pharmacies. Furthermore, the commenter 
indicated that the definition of retail community pharmacy as laid out 
in the Affordable Care Act is unambiguous and not open to 
interpretation or agency discretion. Therefore these additional 
entities should not be included in the definition of retail community 
pharmacy.
    One commenter stated that CMS included these entities as a way to 
provide a means of securing rebates for oral CODs that would not 
otherwise have an AMP because they do not have a 5i route of 
administration and are not generally dispensed through retail community 
pharmacies. The commenter stated that CMS must identify an alternate 
means to address AMP calculations for these products as its proposal to 
include specialty pharmacies, home infusion pharmacies and home health 
care providers in the definition of retail community pharmacy relies on 
a distorted understanding of the business practices of these entities 
and is contrary to congressional intent. The commenter stated that by 
proposing the amendment to section 2503 of the Affordable Care Act, 
Congress recognized that its own definition of retail community 
pharmacy excluded sales to specialty pharmacies, home infusion 
pharmacies and home health care providers and the commenter believed 
that CMS must do the same. Furthermore, the commenter stated that the 
agency's proposed interpretation of retail community pharmacy 
(including specialty pharmacies, home infusion pharmacies, and home 
health care providers) cannot be sustained under the APA and US Supreme 
Court precedent that specifies when the statute's language is plain it 
must be interpreted and enforced according to its terms. Furthermore, 
the Congress excluded from the definition of retail community pharmacy 
any pharmacy that ``dispenses prescriptions primarily through the 
mail'' therefore the commenter believed this demonstrates another 
reason why specialty pharmacies do not meet the definition of retail 
community pharmacy because they in particular

[[Page 5216]]

dispense prescriptions primarily through the mail.
    Yet another commenter stated that if all sales to these entities 
are included in AMP calculations, AMP based FULs may be insufficient to 
cover the purchasing cost of retail community pharmacies. The commenter 
stated that whether or not a rebate will continue to be calculated for 
a particular drug does not provide CMS with the authority to disregard 
the intent of Congress and that CMS should be clear that a ``retail 
community pharmacy'' is limited to the statutory definition.
    Response: We proposed to include in AMP those sales, discounts, 
rebates, payments, or other financial transactions that are received 
by, paid by, or passed through to entities that conduct business as 
wholesalers or retail community pharmacies, which includes but is not 
limited to specialty pharmacies, home infusion pharmacies and home 
health care providers (77 FR 5329). Based upon the comments received, 
we realize that adding a separate category of sales (sales to entities 
conducting business as wholesalers or retail community pharmacies) was 
unnecessary for purposes of AMP calculations given the definition of 
retail community pharmacy in section 1927(k)(10) of the Act. Consistent 
with section 1927 of the Act, we believe the definition of retail 
community pharmacy could include some home infusion, home health care 
or specialty pharmacies because in certain situations, they operate as 
an independent, chain, supermarket, or a mass merchandiser pharmacy 
that is licensed as a pharmacy by the state and that dispenses 
medications to the general public at retail prices. In addition, they 
do not dispense prescription medications to patients primarily through 
the mail. Therefore, in such situations, these entities would qualify 
as retail community pharmacies. Accordingly, we are not finalizing our 
proposal that manufacturers include in the determination of AMP a 
separate category of entities conducting business as wholesalers or 
retail community pharmacies. Furthermore, given the comments, we are 
not expanding the definition of retail community pharmacy to 
specifically include home infusion, home health care, and specialty 
pharmacies as we believe these pharmacies may or may not, depending on 
the business model adopted, qualify as retail community pharmacies in 
accordance with the definition at section 1927(k)(10) of the Act. 
Rather, we believe, based on comments received and as discussed further 
below, sales to home infusion, home health care, and specialty 
pharmacies should be included in AMP; but only to the extent these 
pharmacies actually meet the definition of retail community pharmacy as 
defined at section 1927(k)(10) of the Act.
    Retail community pharmacy is defined to mean an independent, chain, 
supermarket, or a mass merchandiser pharmacy that is licensed as a 
pharmacy by the state, dispenses medications to the general public at 
retail prices, and it does not include a pharmacy that dispenses 
prescription medications to patients primarily through the mail. 
Section 1927(k)(10) of the Act further excludes nursing home 
pharmacies, long-term care facility pharmacies, hospital pharmacies, 
clinics, charitable and not-for-profit pharmacies, government 
pharmacies, and pharmacy benefit managers. Nowhere in this list of 
exclusions are specialty pharmacies, home health care pharmacies or 
home infusion pharmacies specifically excluded by name. Therefore, 
specialty, home health care or home infusion pharmacies could meet the 
definition of retail community pharmacy at section 1927(k)(10) of the 
Act given such pharmacies are not primarily mail order pharmacies and 
may dispense medications to the general public. In those situations, 
where the business model is designed so that the pharmacy does not 
dispense medications primarily through the mail, the pharmacy may 
qualify as a retail community pharmacy to the extent that the pharmacy 
operates as an independent, chain, supermarket, or a mass merchandiser 
pharmacy that is licensed as a pharmacy by the state and that dispenses 
medications to the general public at retail prices. When these 
pharmacies do meet the definition of retail community pharmacy, sales 
to these pharmacies should be included in the manufacturer's 
calculation of AMP.
    For example, in those situations when a specialty, home infusion, 
or home health care pharmacy is an independent, chain pharmacy, or a 
mass merchandizer pharmacy that is licensed as a pharmacy by the state 
and dispenses medications to the general public at retail prices, and 
does not dispense drugs primarily through the mail, it meets the 
statutory definition of a retail community pharmacy and its sales 
should be included when calculating AMP. However, for example, if a 
specialty, home infusion, or home health care pharmacy does not 
dispense medications to the general public or provides medications to 
patients primarily through the mail, sales to such entities should be 
excluded from AMP. Further discussion as to which entities are included 
as retail community pharmacies or wholesalers for purposes of AMP can 
be found in sections II.C.5. and II.C.7. of this rule.
    Comment: One commenter thanked CMS for addressing certain drugs 
left without a methodology to calculate AMP by addressing specialty 
pharmacies, home health care and home infusion pharmacies. The 
commenter requested clarification as to whether it was CMS's intent to 
create three ``buckets'' to calculate AMP (that is wholesalers for 
direct distribution to retail community pharmacies, sales directly to 
retail community pharmacies, and sales to other entities acting as 
wholesalers and retail community pharmacies) or was CMS's intent to 
expand the retail community pharmacy definition to include specialty 
pharmacies, home health care providers and home infusion pharmacies.
    Response: As discussed previously in this section, we are not 
finalizing our proposal to include the sales of a separate category of 
entities that conduct business as retail community pharmacies or 
wholesalers in the AMP calculation. Instead, as previously discussed 
and after reviewing the comments, sales to specialty pharmacies, home 
health care providers and home infusion pharmacies, to the extent they 
meet the definition of a retail community pharmacy as defined in 
section 1927(k)(10) of the Act, or the definition of wholesaler as 
defined in section 1927(k)(11) of the Act, should be included in AMP. 
Further discussion about these entities can be found in the sections on 
sales included in AMP and sales included in AMP for 5i drugs (section 
II.C.5. and II.C.7. of this final rule).
    Comment: One commenter stated that home infusion pharmacies should 
not be included in the definition of retail community pharmacy. The 
commenter stated that home infusion therapy pharmacies are different 
than retail community pharmacies because they are primarily pharmacy-
based decentralized patient care facilities that provide care in 
alternate sites to patients with either acute or chronic conditions. 
Commenters believe they only treat specialized classes of patients who 
rely on these pharmacies for services that support their therapy 
regimen as a substitute for hospitalization. Commenters claim that 
patients who require retail drugs cannot get them from infusion 
pharmacies. In addition to infusion drugs, infusion pharmacies provide 
professional pharmacy services, care coordination, infusion nursing 
services, and supplies and equipment.

[[Page 5217]]

The commenter indicated that in regulatory and subregulatory documents 
for the Medicare Prescription Drug Benefit, CMS has recognized home 
infusion pharmacies as being different from retail pharmacies and the 
Healthcare Common Procedure Coding System (HCPCS) codes provides 
approximately 80 ``S'' codes for home infusion therapy services that 
may not be used by retail pharmacies for their drug claims. In 
addition, the National Uniform Claims Committee (NUCC), a coalition of 
industry and government representatives, has recognized that the home 
infusion therapy pharmacy and community/retail pharmacy are distinct. 
The commenter believed that the terminology or classification used by 
CMS to identify different pharmacies for the purposes of Medicaid 
payment polices for prescription drug should be consistent with the 
classification widely used by payers and providers. The commenter urged 
CMS to follow the classification established by the NUCC by defining 
home infusion therapy pharmacies separately and distinctly from retail 
community pharmacies.
    Response: As noted earlier in this section, we are not finalizing 
our proposal to establish a separate category for entities that conduct 
business as wholesalers or retail community pharmacies. Instead, 
manufacturers shall include the sales to home infusion pharmacies in 
AMP to the extent these pharmacies meet the definition of retail 
community pharmacy at section 1927(k)(10) of the Act. A home infusion 
pharmacy that is an independent, chain, supermarket or mass 
merchandiser licensed as a pharmacy in a state and dispenses 
medications to the general public at retail prices and does not 
dispense primarily through the mail meets the definition of retail 
community pharmacy at section 1927(k)(10) of the Act. While home 
infusion pharmacies may serve patients with certain medical conditions, 
or may provide drugs that require special handling or packaging, the 
definition of retail community pharmacy at section 1927(k)(10) of the 
Act does not specifically exclude such pharmacies. As discussed 
previously, the statutory definition of retail community pharmacy at 
section 1927(k)(10) of the Act may encompass home infusion pharmacies 
to the extent that such pharmacies qualify as independent pharmacies, 
chain pharmacies, supermarket pharmacies, or mass merchandizer 
pharmacies that are licensed by the state and that dispense to the 
general public.
    We also do not agree with the commenter that we adopt the same 
classification of retail pharmacy as established by the NUCC. The 
purpose of NUCC is to establish universal provider claim standards as 
it relates to third party reimbursement, whereas the statutory 
definition of retail community pharmacy at section 1927(k)(10) of the 
Act is specifically for the purpose of manufacturers' determination of 
AMP. As stated previously, the definition does not specifically exclude 
home infusion pharmacies. Therefore, to the extent home infusion 
pharmacies meet the statutory definition of retail community pharmacy 
at section 1927(k)(10) of the Act, sales to such pharmacies shall be 
included in the calculation of AMP.
    Comment: One commenter stated that expanding the definition of 
retail community pharmacy to include home infusion pharmacies and home 
health care providers puts an undue burden on manufacturers to 
determine who the end customer is. The commenter further stated that 
home infusion pharmacies or home health care providers may also service 
patients in long term care facilities which are excluded from AMP by 
statute. The commenter believed that including home infusion pharmacies 
or home health care providers in the definition of retail community 
pharmacy would cause greater fluctuations in AMP due to the continued 
changes to price factor calculation methodologies by including drugs 
most frequently used in inpatient settings to set AMPs.
    Response: As discussed in this section, specialty pharmacies, home 
infusion pharmacies or home health care providers are included in the 
definition of retail community pharmacy to the extent they meet the 
definition of retail community pharmacy at section 1927(k)(10) of the 
Act. We agree with the commenter that some patients that receive drugs 
sold to home infusion pharmacies may receive their drugs either while 
residing in an institutional setting or in their home. However, we do 
not believe, as the commenter suggests, that manufacturers should 
automatically presume that the home infusion pharmacy that dispenses to 
patients in an institutional setting does not dispense to the general 
public nor meet the other criteria provided in the definition of a 
retail community pharmacy at section 1927(k)(10) of the Act. A home 
infusion pharmacy that dispenses medications to the general public at 
retail prices and meets the other criteria for a retail community 
pharmacy at section 1927(k)(10) of the Act must have its sales included 
in the calculation of the manufacturer's AMP.
    For the reasons we articulated, we are finalizing the definition of 
retail community pharmacy at Sec.  447.504(a) to mean an independent 
pharmacy, a chain pharmacy, a supermarket pharmacy, or a mass 
merchandiser pharmacy that is licensed as a pharmacy by the state and 
that dispenses medications to the general public at retail prices. Such 
term does not include a pharmacy that dispenses prescription 
medications to patients primarily through the mail, nursing home 
pharmacies, long-term care facility pharmacies, hospital pharmacies, 
clinics, charitable or not-for-profit pharmacies, government 
pharmacies, or pharmacy benefit managers.
5. Sales Included in the Determination of AMP
    In proposed Sec.  447.504(b), we proposed to identify specific 
sales, nominal price sales, discounts, rebates, payments, and other 
financial transactions to include in the determination of AMP (77 FR 
5330, 5361). The following comments pertain to general observations 
regarding the regulatory text at proposed Sec.  447.504(b) and (c).
    Comment: A few commenters noted that CMS has not been consistent in 
the use of terminology in the determination of AMP section of the 
regulatory text. The commenters noted that in some areas of the 
proposed regulatory text it refers to ``Sales, Discounts, Rebates, 
Payments and Other Transactions'' while in other areas it just refers 
simply to ``sales.'' The commenters stated that they believe CMS 
intended to include in AMP all transactions involving the enumerated 
entities, not just sales to those entities. Therefore, the commenters 
requested that CMS revise the proposed regulatory language to refer 
consistently to the types of transactions that it intends to include in 
AMP.
    Response: We appreciate this comment and after reviewing the 
proposed regulatory text of this section, we agree. Consistent with 
section 1927(k)(1)(B)(ii) of the Act, when a sale to a retail community 
pharmacy is determined to be included in AMP, any rebate, discount, 
payment or other financial transaction associated with that sale should 
also be included in the determination of AMP, unless it is specifically 
excluded as outlined in Sec.  447.504(c). Accordingly, we are 
finalizing changes to Sec.  447.504(b) and (c) so that we are 
consistent in our reference to AMP, as well as the types of 
transactions that are included in or excluded from AMP. Specifically, 
we are revising the heading of Sec.  447.504(b) to read ``Sales, 
nominal price sales, and associated discounts, rebates, payments, or 
other financial transactions included

[[Page 5218]]

in AMP.'' In the introductory text of Sec.  447.504(b) we specify that 
AMP for CODs includes the sales, nominal price sales, and associated 
discounts, rebates, payments, or other financial transactions unless 
specifically excluded as outlined in paragraph (c) of the section. It 
is our intention that the addition of the term ``associated'' clarifies 
that it is the sales themselves, as well as the discounts, rebates, 
payment or financial transactions associated with the sales that are 
included in the AMP calculation, unless otherwise specifically 
excluded.
    At Sec.  447.504(c), we similarly are revising the heading to 
include Sales, nominal price sales, and associated discounts, rebates, 
payments, or other financial transactions excluded from AMP. In the 
introductory text of Sec.  447.504(c) we specify that AMP excludes 
sales, nominal price sales, and associated discounts, rebates, payments 
or other financial transactions. Again, we believe that the addition of 
the term ``associated'' clarifies that it is the sales or prices 
themselves, as well as the discounts, rebates, payment or other 
financial transactions associated with the sales or prices that are 
excluded from the AMP calculation. Similar changes are being made to 
Sec.  447.504(d) and (e) to ensure consistency in the AMP and AMP for 
5i drugs not generally dispensed through retail community pharmacies. 
The changes to Sec.  447.504(d) and (e) are discussed later in this 
section and in section II.C.7.d. of this final rule.
    Comment: One commenter requested confirmation that its 
interpretation of the regulatory language proposed at Sec.  447.504(b) 
is correct. Specifically, the commenter noted that it does not 
interpret the proposed rule as including particular transactions in AMP 
that are otherwise specifically excluded by the statute.
    Response: We agree with the commenter that proposed Sec.  
447.504(b) was intended to clarify which transactions are to be 
included in the calculation of AMP, not to include transactions that 
are otherwise excluded by statute. We believe the changes to Sec.  
447.504(b) discussed previously in this section, as well as other 
changes to this section (as discussed in this section) clarifies which 
transactions manufacturers are to include in the determination of AMP.
    Comment: One commenter asked CMS to confirm that the AMP for an 
oral product with any amount of retail community pharmacy sales may be 
based solely on those sales and not the sales through otherwise 
excluded entities. The commenter further requested that CMS revise 
Sec.  447.504(b) to read: ``(b) . . . Except for those sales, nominal 
price sales, rebates, discounts, and other financial transactions 
identified in paragraph (c) of this section, AMP for CODs includes all 
of the following sales, nominal price sales, rebates, discounts, and 
other financial transactions in any amount.''
    Response: While we appreciate the comment, AMP should include only 
sales to AMP-eligible entities. As specified in earlier responses, the 
AMP for oral CODs is to be based on the sales, nominal price sales, and 
discounts, rebates, payments, or other financial transactions 
associated with the sale to the named entities that are included in 
AMP, unless specifically excluded as outlined in Sec.  447.504(c). 
Furthermore, the commenter did not fully explain why they believed 
these changes would be beneficial and we do not believe it is necessary 
to add the level of specificity to Sec.  447.504(b) that was suggested 
by the commenter. We believe the changes we are making in this final 
rule to Sec.  447.504(b) address the concerns of commenters that 
requested clarification as to which transactions manufacturers should 
include in and exclude from the determination of AMP.
    Therefore, after considering the comments, and for the reasons 
discussed in this section, we are finalizing the heading and 
introductory text of Sec.  447.504(b) and (c) to more clearly specify 
the type of rebates and transactions that are included in or excluded 
from the calculation of AMP.
    Comments regarding sales excluded from AMP are discussed in more 
detail later in this section.
a. Sales to Wholesalers (Sec.  447.504(b)(1))
    Based on the definition of AMP in section 1927(k)(1) of the Act, as 
amended by the Affordable Care Act, we proposed that sales to 
wholesalers for drugs distributed to retail community pharmacies are to 
be included in the determination of AMP (77 FR 5330 and 5361). We 
received the following comment concerning this proposed provision:
    Comment: One commenter requested clarification regarding whether 
the wholesaler is to report to the manufacturer the sales that were 
made to retail community pharmacies as opposed to those sales made to 
other entities, such as inpatient hospitals, mail order pharmacies, 
etc., or is it the intention that the manufacturer must include all 
sales to a wholesaler that may resell products to retail community 
pharmacies.
    Response: Section 1927(k)(1)(A) of the Act defines AMP to mean, in 
part, the average price paid to the manufacturer for drugs in the 
United States by wholesalers for drugs distributed to retail community 
pharmacies, and retail community pharmacies that purchase drugs 
directly from the manufacturer. The rule does not impose any wholesaler 
reporting requirements, and it is the manufacturer's responsibility to 
calculate and report AMP to CMS. As part of their AMP calculation 
process, the manufacturer may have independent arrangements with 
wholesalers to collect sales and chargeback data that will be useful in 
determining the end customers. As noted previously, we are not 
requiring the use of the buildup model to calculate AMP; therefore, the 
manufacturer may continue to make reasonable assumptions and presume, 
in the absence of guidance and adequate documentation to the contrary, 
that prices paid to the manufacturer by the wholesaler are for drugs 
distributed to retail community pharmacies, provided those assumptions 
are consistent with the requirements and intent of section 1927 of the 
Act and federal regulations.
    After considering the comments, for the reasons discussed in this 
section, we are finalizing Sec.  447.504(b)(1), as proposed.
b. Sales to Other Manufacturers (Sec.  447.504(b)(2))
    We proposed at Sec.  447.504(b)(2) that sales to other 
manufacturers who act as wholesalers are to be included in the 
determination of AMP to the extent that such sales are for drugs 
distributed to retail community pharmacies, and noted that this 
provision should be read in concert with the definition of wholesaler 
in section 1927(k)(11) of the Act (77 FR 5330). We received a few 
comments concerning sales to manufacturers, but these comments focused 
on sales between primary and secondary manufacturers of authorized 
generic drugs. Therefore, we have included our responses to such 
comments in the discussion concerning authorized generic drugs at 
section II.E. of this final rule. Therefore, we are finalizing Sec.  
447.504(b)(2) as proposed which requires manufacturers to include their 
sales of CODs to other manufacturers in AMP when such manufacturers are 
acting as wholesalers in accordance with the definition of wholesaler 
at section 1927(k)(11) of the Act.
c. Retail Community Pharmacies (Proposed Sec.  447.504(b)(3))
    We proposed to include in the determination of AMP, sales, 
discounts, rebates (other than rebates under section 1927 of the Act), 
payments, or other

[[Page 5219]]

financial transactions that are received by, paid by, or passed through 
to, retail community pharmacies (77 FR 5330 and 5361). We further 
explained that we were unsure to what extent the manufacturer has 
knowledge that such transactions occur and clarified in the preamble to 
the proposed rule that the manufacturer is to include such discounts 
where it has evidence or documentation demonstrating that such 
discounts have been passed through to the pharmacy (77 FR 5330). We 
received the following comments concerning this proposed provision:
    Comment: A few commenters supported CMS's proposal that 
manufacturers are to include discounts, rebates, payments, or other 
financial transactions that are passed through to retail community 
pharmacies only when a manufacturer has evidence to that effect. One 
commenter indicated that given the limited information available to 
manufacturers in this area, this was a practical and realistic 
approach.
    Response: We appreciate the support for this provision and are 
clarifying that when manufacturers have evidence or knowledge of a 
discount, rebate, payment, or other financial transaction being passed 
through to a retail community pharmacy, the manufacturer must 
appropriately account for these transactions in its calculation of AMP, 
as described elsewhere in this final rule.
    Comment: One commenter indicated that CMS should interpret 
transactions received by, paid by, or passed through to retail 
community pharmacies as excluding: (1) Bona fide service fees; (2) any 
payment to retail community pharmacies that the pharmacy does not 
retain or benefit from (such as patient benefits); and (3) any payments 
made by retail community pharmacies to any party other than the 
manufacturer, or to an intermediary acting on the manufacturer's behalf 
because, while such payments are paid by a retail community pharmacy, a 
manufacturer would have no knowledge of the payment and they would not 
affect the sale between the manufacturer and the retail community 
pharmacy.
    Response: We agree with the commenter that financial transactions 
received by, paid by, or under certain conditions, passed through to 
retail community pharmacies that meet the definition of a bona fide 
service fee as defined in this final rule are not included in the 
determination of AMP. We also agree that any fees made by the 
manufacturer to retail community pharmacies that the pharmacy does not 
retain or benefit from (such as patient coupons or voucher programs) 
given section 1927(k)(1)(B)(i) of the Act, which specifically excludes 
bona fide service fees and fees associated with patient care programs. 
We also agree, that payments made by retail community pharmacies to any 
party other than the manufacturer, or to an intermediary acting on the 
manufacturer's behalf in the sale of the drug (such as the wholesaler), 
would be excluded from AMP as long as it does not affect the price paid 
to the manufacturer for the COD in accordance with the definition of 
AMP at section 1927(k)(1)(A) of the Act.
    Comment: Several commenters requested for CMS to clarify that the 
requirement to include amounts passed through to retail community 
pharmacies relates only to those pass-through amounts that are funded 
by the reporting manufacturer and provided to the wholesaler with the 
knowledge and the intention that the discounts will be passed through 
to the retail community pharmacy or other AMP-eligible entity. 
Commenters also requested for CMS to confirm that absent evidence to 
the contrary (such as chargeback records), manufacturers can presume 
that price concessions made by the manufacturer to an intermediary are 
not passed on to an indirect purchasing AMP-eligible customer. Another 
commenter stated that if a wholesaler or other intermediary 
unilaterally offers a retail community pharmacy or other AMP-eligible 
entity a discount, that discount should not be included in the 
manufacturer's AMP.
    Response: As discussed in previous responses, manufacturers may 
continue to make reasonable assumptions in their calculation of AMP 
including assumptions as to whether discounts are passed through to 
retail community pharmacies, provided those assumptions are consistent 
with the requirements and intent of section 1927 of the Act and federal 
regulations. Therefore, we believe the concerns regarding manufacturers 
having no knowledge of price concessions or other discounts that are 
passed through to retail community pharmacies have been addressed. 
However, where manufacturers have evidence or other knowledge of 
chargebacks or other discounts being passed through to a retail 
community pharmacy, the manufacturer must appropriately account for 
these transactions in their calculation of AMP, as described elsewhere 
in this final rule.
    Comment: A few commenters requested clarification regarding the 
reference in the proposed rule to other financial transactions paid by 
wholesalers and retail community pharmacies and noted those amounts 
would already be accounted for in the AMP calculation. The commenter 
requested clarification regarding whether this language was intended to 
capture transactions other than purchase payments.
    Response: Section 1927(k)(1)(B)(ii) of the Act provides, in part, 
for the inclusion of other discounts, rebates, payments, or other 
financial transactions that are received by, paid by, or passed through 
to retail community pharmacies in the calculation of AMP for a COD. We 
believe that by including a reference to other financial transactions, 
section 1927(k)(1)(B)(ii) of the Act provides for the inclusion of 
financial transactions (other than rebates, discounts, or payments, 
specifically excluded by section 1927(k)(1)(B)(i) of the Act) that 
affect the price realized by the manufacturer when those financial 
transactions or price concessions are provided to, or received by, the 
retail community pharmacy. Therefore, to give meaning to this part of 
the statute and ensure applicability to possible other price 
concessions in the marketplace, we intended the reference to ``other 
financial transactions'' to address those situations when financial 
transactions, other than those specifically identified in section 
1927(k)(1)(B)(i) of the Act, affect the price paid to the manufacturer 
for the COD.
    After considering the comments received and for the reasons we 
discussed, we are finalizing Sec.  447.504(b)(3) consistent with the 
revisions we are making to the introductory paragraph of Sec.  
447.504(b) (to add ``associated with'' as discussed in this section), 
and is not intended to change the general meaning of this provision; 
rather, to provide clarification and consistency throughout this 
section.
d. Entities Conducting Business as Retail Community Pharmacies or 
Wholesalers, Including But Not Limited to Specialty Pharmacies, Home 
Infusion Pharmacies and Home Health Care Providers (Proposed Sec.  
447.504(b)(4))
    In light of section 1927(k)(1)(B)(i)(IV) of the Act, we proposed 
that sales to entities that conduct business as wholesalers or retail 
community pharmacies should be included in the determination of AMP (77 
FR 5330, 5361). We proposed that manufacturers include in the 
determination of AMP the sales, as well as the associated discounts, 
rebates, payments, or other financial transactions that are received 
by, paid by, or passed through to entities conducting business as

[[Page 5220]]

wholesalers or retail community pharmacies, which include but are not 
limited to specialty pharmacies, home infusion pharmacies, and home 
health care providers (77 FR 5330, 5361). We received the following 
comments concerning these provisions:
    Comment: Many commenters requested clarification regarding the 
meaning of the phrase ``conduct business as'' in the context of 
including entities that conduct business as wholesalers or retail 
community pharmacies in the determination of AMP and requested guidance 
on how to identify other entity types (besides specialty pharmacies, 
home infusion pharmacies and home health care providers) that would 
qualify as entities conducting business as wholesalers or retail 
community pharmacies. One commenter stated that given the fluid and 
constantly evolving nature of the healthcare system, CMS was correct 
not to specify that the list of entities that conduct business as 
retail community pharmacies was an exhaustive list.
    Some commenters requested that CMS provide a separate definition of 
``conducting business as'' for wholesaler entities and retail entities. 
Another commenter favored adopting regulatory definitions that are 
flexible enough to accommodate changes in the industry, and indicated 
that manufacturers should be permitted to establish their own 
assumptions regarding what it means to conduct business as a wholesaler 
or retail community pharmacy.
    Response: We agree with the commenters that the pharmaceutical 
industry is a changing industry and that crafting an overly specific 
definition of retail community pharmacy or wholesaler may not 
accommodate the marketplace. However, as discussed earlier in response 
to comments about the definition of retail community pharmacy, we have 
decided not to finalize our proposal to add Sec.  447.504(b)(4) and 
therefore, we are not utilizing the term ``conducting business as'' in 
this provision. Rather, as previously discussed, we are clarifying that 
the sales, as well as the discounts, rebates, payments, or other 
financial transactions associated with the sales that are received by, 
paid by, or passed through to entities that meet the statutory 
definition of a retail community pharmacy at section 1927(k)(10) of the 
Act are included in the determination of AMP, which could include sales 
to home healthcare providers, home infusion pharmacies, and specialty 
pharmacies if these pharmacies meet the definition at section 
1927(k)(10) of the Act. Further discussion around ``conducting business 
as'' in the context of the determination of AMP for 5i drugs not 
generally dispensed through retail community pharmacies is addressed in 
section II.C.7. of this final rule.
    Additionally, we believe that the definition of retail community 
pharmacy in both the statute and regulation can accommodate potential 
changes to the pharmacy provider industry so that it ensures 
manufacturers' AMPs reflect the sales of their products in the retail 
community pharmacy market. In other words, by not specifying an 
exhaustive list of pharmacy providers which fall under the definition 
of retail community pharmacy, manufacturers must consider its sales to 
other types of pharmacy providers and wholesaler entities that should 
be reflected in AMP. And, as previously stated, manufacturers may make 
reasonable assumptions, in the absence of guidance and adequate 
documentation to the contrary, that prices paid to manufacturers by 
wholesalers are for drugs distributed to retail community pharmacies, 
provided those assumptions are consistent with the requirements and 
intent of section 1927 of the Act and federal regulations.
    Comment: A few commenters noted that broadening the definition of 
AMP has the potential to threaten drug price competition throughout the 
marketplace because a broad definition will not accurately reflect the 
price pharmacists pay for drugs as it includes price concessions not 
passed on to retail community pharmacies. A few commenters suggested 
that the inclusion of sales to entities other than retail community 
pharmacies was a back end way to allow potential mail-order sales in 
the calculation of AMP, which is prohibited by statute, and would lower 
AMPs and underpay pharmacies. Another commenter believed that the 
phrase ``or any other entity that does not conduct business as a 
wholesaler or a retail community pharmacy'' was included as a catch all 
to ensure that CMS did not find a loophole to include other 
manufacturer sales that would lower AMP and thus, underpay pharmacies 
and reduce rebates paid to states by manufacturers. The commenter 
stated that the law only permits one situation in which sales to non-
retail community pharmacies can be included in the calculation of AMP; 
namely, when the drug is a 5i drug not generally dispensed through a 
retail community pharmacy.
    Some commenters encouraged CMS to clarify in the final rule whether 
the instruction to include specialty pharmacy sales in AMP always 
overrules the instruction to exclude mail order sales or whether 
manufacturers are to capture only those specialty pharmacy sales that 
do not involve mail delivery. The commenters noted that failure to 
provide such a clarification will exacerbate problems with AMP 
variability because manufacturers will make different reasonable 
assumptions. The commenters also stated that the same consideration 
also arises in the context of sales to certain chain warehouses that 
distribute products to both the chain's retail outlets and its mail-
order operations. One commenter noted that mail-order pharmacies (which 
do act as specialty pharmacies) generally do not have store front 
operations where a patient could walk in and fill a prescription but 
instead provide home delivery. The commenter also stated that the 
provision falsely assumes that unless sales to specialty pharmacies are 
included in AMP, there would be certain drugs that would have no AMP at 
all. However, the commenter believed that all but a few drugs either 
are dispensed by retail community pharmacies or would be in the 
category of 5i drugs; both of which clearly have an AMP calculation.
    Conversely, some commenters supported the conclusion that specialty 
pharmacies take precedence over its mail order status when determining 
that pharmacy's AMP eligibility, because such a conclusion acts to 
ensure that non-5i products that are dispensed through the mail order 
specialty pharmacies have a base of sales to use in AMP calculation. 
One commenter urged CMS to include these mail-order sales and discounts 
in AMP as these entities are conducting business as retail community 
pharmacies and it would help ensure that all non-5i drugs that are 
dispensed through mail-order specialty pharmacies have a base of sales 
to use in calculating AMP. The commenter also stated that manufacturers 
should not have to evaluate the nature of every specialty pharmacy's 
business to which they sell to determine if they dispense primarily 
through the mail.
    Several commenters supported CMS's efforts to ensure that all CODs 
have AMP-eligible sales by including sales to specialty pharmacies, 
home infusion pharmacies, and home health care providers as entities 
that conduct business as retail community pharmacies. One commenter 
also noted that this policy should have no effect on retail community 
pharmacies because the types of products that are sold through 
specialty pharmacies are specialty drugs (medications with

[[Page 5221]]

particular features that complicate their use such as requiring 
physician administration, special handling or storage, or significant 
patient education or Risk Evaluation and Mitigation Strategy (REMS)) 
that ordinarily have very few retail community pharmacy sales. The 
commenter also stated that manufacturers must have flexibility to make 
reasonable assumptions in the process of identifying specialty 
pharmacies. Additionally, the commenter indicated that including sales 
to specialty pharmacies in AMP or AMP for 5i drugs not generally 
dispensed through retail community pharmacies should not impact FULs 
because the drugs that are sold through specialty pharmacies are 
generally innovator products, not multiple source products.
    Response: As discussed in earlier responses, we are not finalizing 
the provision at Sec.  447.504(b)(4) and the term ``conducting business 
as'' in this provision. Instead, as previously discussed, we have 
decided that sales to home health care, home infusion and specialty 
pharmacies may be included in the AMP calculation but only to the 
extent that they meet the definition of retail community pharmacy at 
section 1927(k)(10) of the Act, which specifically excludes entities 
that dispense medications primarily through the mail. It is not our 
intention that pharmacies that dispense medications primarily through 
the mail would meet the statutory definition of retail community 
pharmacy at section 1927(k)(10) of the Act. In addition, we do not 
believe that a retail community pharmacy must have a ``brick and 
mortar'' store front. Nowhere in section 1927 of the Act does it 
specify that a pharmacy must maintain such a store front to be 
considered a retail community pharmacy as defined at section 
1927(k)(10) of the Act.
    As to the commenter's concern regarding the potential for 
underpayment to pharmacies, we believe that our decision to include 
sales to home infusion, specialty, and home health care pharmacies when 
such pharmacies meet the definition of retail community pharmacies in 
section 1927(k)(10) of the Act will reflect the prices available in the 
retail marketplace for these drugs and will not lead to the 
underpayment of retail community pharmacies. Therefore, we are not 
convinced that including sales to such entities (such as specialty, 
home health care and home infusion pharmacies, where such entities 
qualify as retail community pharmacies) in the calculation of AMP will 
lead to the underpayment of retail community pharmacies. Furthermore, 
while it may be true that some 5i drugs will not have FULs because such 
drugs are typically single source innovator products, it may not be the 
case for all 5i drugs. For further discussion of the FULs please refer 
to section II.K. of this final rule.
    Comment: One commenter sees no statutory basis for CMS to include 
sales to specialty pharmacies, home infusion pharmacies and home health 
care providers in the AMP calculation, nor does the commenter see the 
basis for CMS's belief that the Congress suggested or intended 
otherwise. The commenter stated that even if the belief that specialty 
pharmacies, home infusion pharmacies and home health providers 
``dispense medications to the general public at retail prices'' were 
shown to be true, it is not a sufficient foundation to qualify these 
entities as retail community pharmacies since this is not the only 
basis on which the Congress defined the term retail community pharmacy. 
The commenter recommended that consistent with the statute, specialty 
pharmacy, home infusion pharmacy, and home health provider transactions 
should not be included in AMP calculations since these are not retail 
community pharmacies.
    Response: As discussed in more detail in prior responses, we 
disagree with the commenter that there is no statutory basis to include 
sales to home health, home infusion, and specialty pharmacies in the 
AMP calculation in those situations when they may meet the definition 
of a retail community pharmacy at section 1927(k)(10) of the Act. While 
we are not finalizing Sec.  447.504(b)(4), manufacturers should include 
sales to such pharmacies in their calculation of AMP when the 
pharmacies actually qualify as retail community pharmacies in 
accordance with section 1927(k)(10) of the Act.
    Comment: One commenter requested confirmation from CMS that sales 
to entities that conduct business as wholesalers or retail community 
pharmacies are included in AMP for all CODs, not just CODs that 
otherwise may not have AMP-eligible sales. The commenter noted that a 
different approach would create three different AMP calculations which 
would be confusing and burdensome to manufacturers. The commenter also 
requested clarification as to whether sales to entities that conduct 
business as wholesalers must be resold to retail community pharmacies.
    Another commenter encouraged CMS to clarify in the final rule that 
only those sales and discounts for oral CODs approved by FDA that are 
required by a REMS to be dispensed to patients by specialty certified 
pharmacies, resulting in manufacturers utilizing a restricted network 
of certified specialty and home infusion pharmacies to dispense those 
drugs to patients are included. Yet another commenter stated that if 
CMS does include these classes of trade in the AMP calculation, it 
should only do so in the cases where the oral COD would not otherwise 
have an AMP and cannot have an AMP for 5i drugs not generally dispensed 
through retail community pharmacies because of its route of 
administration. Finally, one commenter stated that the proposed 
language at Sec.  447.504(b)(4) could be interpreted as including all 
of the sales the rest of the rule excludes or at least leaving 
manufacturers with significant doubt as to the includable and 
excludable entities. The commenter indicated that the final rule should 
more clearly implement CMS's intent and eliminate conflict and 
confusion of the scope of sales included within AMP and suggested 
revisions to Sec.  447.504(b)(4) to add that an exemption to the 
exclusion when the conditions of FDA restrict sales of a product solely 
to certain entities that would not otherwise be deemed a Retail 
Community Pharmacy.
    Response: As we have discussed in earlier responses, we are not 
finalizing the provision at Sec.  447.504(b)(4). As to the commenters 
concerns that the proposed language at Sec.  447.504(b)(4) is not clear 
and that manufacturers may have doubts as to which sales or prices are 
to be included and which are to be excluded, we believe that the 
changes we made to the regulatory text at Sec.  447.504(b) and (c), as 
described in detail in the earlier responses, clarify which 
manufacturer COD sales (sales to entities that meet the definition of 
retail community pharmacy at section 1927(k)(10) of the Act or 
wholesaler as defined at section 1927(k)(11) of the Act) are to be 
included in the determination of AMP. To that end, the definition of 
wholesaler would include only those entities that engage in wholesale 
distribution of prescription drugs to retail community pharmacies in 
accordance with section 1927(k)(11) of the Act.
    Furthermore, we are not applying a different standard for certain 
drugs not generally dispensed to retail community pharmacies (for 
example, oral drugs with REMS) to permit the inclusion of sales to a 
specialty, home infusion or home health care pharmacy for those drugs, 
because, as noted previously, we are not finalizing that manufacturers, 
when calculating AMP, include entities that conduct business as retail 
community pharmacies. Instead, we are

[[Page 5222]]

specifying that to the extent a pharmacy, whether it is a specialty, 
home infusion, or home health care pharmacy, meets the definition of 
retail community pharmacy at section 1927(k)(10) of the Act, that those 
sales be included in the calculation of the manufacturer's AMP.
    Comment: One commenter stated that CMS's belief that specialty 
pharmacies, home infusion pharmacies and home health care providers are 
entities that conduct business as wholesalers or retail community 
pharmacies is flawed and indicated that a more accurate and reasonable 
interpretation of this phrase is simply a congressional acknowledgement 
to the potential for new business models to emerge in the healthcare 
marketplace. Furthermore, the commenter emphasized that by using the 
word ``means'' rather than ``such as'' or ``including'' when defining 
retail community pharmacies, Congress strictly limited the universe of 
retail community pharmacies in a way that excludes specialty 
pharmacies, home infusion pharmacies, and home health care providers.
    Response: As noted previously in response to comments, we have 
decided not to finalize our proposal at Sec.  447.504(b)(4). Rather, as 
we have discussed previously, sales of CODs to only those entities 
which actually qualify as wholesalers or retail community pharmacies 
should be included in the AMP calculation. As previously discussed, 
this may include specialty pharmacies, home health care pharmacies, and 
home infusion pharmacies but only to the extent that such entities 
qualify as retail community pharmacies as set forth in section 
1927(k)(10) of the Act.
    By making these changes in the final rule, we recognize that there 
are other entities that may meet the definition of a retail community 
pharmacy or wholesaler, which will affect which manufacturer sales 
shall be included in AMP. The effect of this final change to the 
regulations text on whether manufacturer sales of oral drugs dispensed 
by specialty pharmacies will depend upon whether such pharmacies meet 
the definition of retail community pharmacy at section 1927(k)(10) of 
the Act.
    Comment: One commenter supported CMS's proposal not to define 
specialty pharmacy because the specialty pharmacy class of trade is so 
dynamic and fast evolving, and any regulatory definition would likely 
be obsolete shortly after it were finalized. The commenter indicated 
that manufacturers should be permitted to document reasonable 
assumptions regarding the criteria they use to determine whether an 
entity qualifies as a specialty pharmacy. Another commenter noted that 
it is appropriate and necessary to include specialty pharmacy sales in 
AMP and that it is practical and more logical to include specialty 
pharmacies as entities that conduct business as retail community 
pharmacies because these pharmacies are generally not traditional brick 
and mortar locations, but can distribute products through many 
different routes, including the mail.
    Conversely, several commenters requested that CMS provide 
additional guidance and define specialty pharmacy. One commenter noted 
that most state boards of pharmacy do not have a separate regulatory 
category for specialty pharmacy; and while there is no common 
definition of specialty pharmacy that can be used to normalize 
classifications across the industry, if manufacturers are to include 
specialty pharmacy sales in AMP, CMS has to provide an appropriate 
definition to ensure consistent treatment across AMP calculations for 
all manufacturers and all products. Another commenter noted that the 
term ``specialty pharmacy'' is a term of art in the industry and is 
characterized by a pharmacy (mail or retail) that serves a very small 
patient population with chronic, rare and/or life threatening 
conditions and can dispense medications through the mail, as well as 
retail and provides patients with the tools to care for themselves at 
home when clinically appropriate. The commenter further contended that 
patient support is also provided 24 hours a day, 7 days a week via home 
visits or telephone consultation with health professional.
    One commenter noted that third party data companies that collate 
and provide information on sales channels segregate retail and mail 
order pharmacies but do not have a separate category for specialty 
pharmacies; instead, specialty pharmacies are generally included with 
mail order pharmacies. The commenter stated that without a consistent 
and specific definition of specialty pharmacy applied to all industry 
stakeholders, the inclusion of these transactions in AMP would be 
inconsistent. Furthermore, the commenter stated that CMS cannot 
override a statutory directive to exclude mail order pharmacies with a 
regulatory directive to include a subset of pharmacies that are mail 
order in nature. Another commenter provided the Utilization Review 
Accreditation Commission's (URAC) definition of specialty pharmacy and 
noted that because of their complexities, specialty pharmaceuticals 
flow through a variety of distribution channels, and these channels may 
vary according to a product's administration requirements, a payer's 
benefit design, and a provider's service availability. Additionally, 
manufacturers may control distribution through select distributors due 
to limited production capacity and special handling requirements.
    Response: We are not further defining the term specialty pharmacy 
for the purposes of this final rule, since, as we found, there is no 
standard set of characteristics associated with specialty pharmacies. 
Rather, as discussed previously, specialty pharmacies may be determined 
to meet the statutory definition of retail community pharmacy or not 
qualify as a retail community pharmacy because the pharmacy dispenses 
prescriptions primarily through the mail. Consistent with section 
1927(k)(10) of the Act, specialty pharmacies that dispense prescription 
medications to patients primarily through the mail would not qualify as 
a retail community pharmacy. We note that other forms of home delivery 
that specialty pharmacies may use, such as delivery by a home health 
aide, delivery by a pharmacy employee or delivery by a courier service, 
which may be an additional service offered by any type of pharmacy when 
specialized packaging and handling of the drug is required, would not 
necessarily qualify the specialty pharmacy as a pharmacy that primarily 
dispenses prescription medications through the mail. As discussed 
previously in this section, we are not finalizing our proposal to 
include sales to entities conducting business as wholesalers or retail 
community pharmacies. Furthermore, and as discussed previously, to the 
extent that these pharmacies actually qualify as retail community 
pharmacies, sales to them should be included in AMP.
    Comment: One commenter stated that it should be sufficient for 
manufacturers to query specialty and chain pharmacy customers no more 
frequently than annually about the percentage of their overall 
purchases that are going to retail and non-retail operations and to use 
the information to allocate sales to the appropriate class of trade. 
The commenter recognized that CMS may be hesitant to allow the use of 
such data given that AMPs are drug specific and calculated monthly, but 
the administrative burden of routinely tracking NDC-specific data would 
be inordinate for the manufacturer's pharmacy customers.
    Response: We are not mandating that manufacturers query specialty 
and

[[Page 5223]]

chain pharmacies to determine the overall percentage of purchases that 
are mail order or retail or non-retail. We believe, based on comments 
received regarding the contracted versus non-contracted sales, that a 
manufacturer often has documentation (such as chargeback data), that 
will assist in verifying that drugs sold to wholesalers were 
subsequently sold to excluded entities, such as a mail order pharmacy. 
When this information is known, the manufacturer must appropriately 
exclude those sales, rebates, discounts or other financial transactions 
that are excluded by statute from its determination of AMP. In 
addition, as we have previously discussed, we have decided not to 
finalize the buildup methodology requirement, and will continue to 
allow manufacturers to make reasonable assumptions, provided those 
assumptions are consistent with the requirements and intent of section 
1927 of the Act and federal regulations.
    Comment: One commenter noted that a specialty pharmacy can be both 
a re-seller and a retail community pharmacy, and for each entity, 
manufacturers will have no way of distinguishing whether the 
transactions by the pharmacy were made in its role as a re-seller or as 
a retail community pharmacy. Therefore, the commenter requested 
clarification as to whether manufacturers would be required to allocate 
sales to specialty pharmacies depending on the type of business they 
conduct and noted that it would be very difficult to distinguish 
whether the transactions by the pharmacy were made in its role as a re-
seller or as a retail community pharmacy.
    Response: The manufacturer should consider all sales to a 
wholesaler or retail community pharmacy for inclusion in AMP, in 
accordance with the requirements of Sec.  447.504(b) and section 
1927(k)(1) of the Act. Therefore, if the specialty pharmacy referenced 
in this comment, be it a re-seller or retail community pharmacy, meets 
the definition of a retail community pharmacy at section 1927(k)(10) of 
the Act or wholesaler at section 1927(k)(11) of the Act, the sales to 
this entity would, in all likelihood, be included in the determination 
of AMP.
    Therefore, for the reasons discussed previously in this section, we 
have decided not to finalize Sec.  447.504(b)(4). To the extent that 
home health care, home infusion, or specialty pharmacies qualify as 
retail community pharmacies in light of the statutory definition of 
retail community pharmacy, sales to such entities should be included in 
AMP; however, where they do not qualify as retail community pharmacies, 
manufacturers should not include such sales in AMP.
6. Sales Excluded From the Determination of AMP
    Section 1927(k)(1)(B) of the Act excludes a number of prices, 
sales, discounts, rebates, payments and other financial transactions 
from AMP. Section II.C.6.a. includes a discussion of which prices, 
sales, nominal price sales, applicable discounts, rebates, payments, or 
other financial transactions we proposed to exclude from the 
determination of AMP at proposed Sec.  447.504(c), as well as a summary 
the issues raised in the comments we received and our responses. These 
proposed exclusions from the determination of AMP are discussed in more 
detail in the proposed rule (77 FR 5330 through 5334).
a. Prices to Other Federal Programs Including TRICARE (Sec.  
447.504(c)(1) Through (3))
    We proposed that prices to federal programs, including the Indian 
Health Service (IHS), the Department of Veterans Affairs (DVA), a state 
home receiving funds under 38 U.S.C. 741, the Department of Defense 
(DoD), the Public Health Service (PHS), a covered entity described in 
section 1927(a)(5)(B) of the Act (including inpatient prices charged to 
hospitals described in section 340B(a)(4)(L) of the PHSA), the FSS of 
the General Services Administration (GSA); or any depot prices 
(including TRICARE) and single award contract prices of any agency of 
the federal government should be excluded from AMP (77 FR 5331, 5361). 
We received the following comments concerning the prices to other 
federal programs including TRICARE.
    Comment: Many commenters requested that CMS clarify whether all 
TRICARE transactions, including sales transactions, are excluded from 
AMP or is the proposed rule only limited to the refund paid to DoD for 
TRICARE utilization as was the policy under the DRA regulation. A few 
commenters noted that it would be logical to include the sales of goods 
that are dispensed to TRICARE beneficiaries, since those sales are to 
retail community pharmacies and to exclude the refunds paid to TRICARE 
for management activities as those are excluded by statute. The 
commenters indicated that this approach would resolve operational 
problems that they would face if they were required to exclude TRICARE 
sales from AMP, namely the job of estimating TRICARE utilization when 
that data delivery routinely occurs long after monthly and quarterly 
AMP must be filed. Some commenters suggested that CMS clarify that in 
AMP, TRICARE ``prices'' are the rebates (or ``refunds'') manufacturers 
pay quarterly to the DoD. If CMS requires the exclusion of drugs sold 
directly and indirectly to pharmacies when later reimbursed by TRICARE, 
a commenter requested that manufacturers be able to smooth the excluded 
units and remove an allocated percent each month and to devise a 
reasonable methodology for placing a dollar value on the units removed 
from the wholesaler and pharmacy sales. One commenter agreed with the 
CMS's position that TRICARE Retail Pharmacy Program prices should be 
excluded from AMP calculations because these discounts are not shared 
with retail pharmacies and do not impact the purchasing costs of retail 
pharmacies.
    Response: We appreciate the comments and in light of section 
1927(k)(1)(A) of the Act, we agree with commenters that manufacturer 
sales to retail community pharmacies or wholesalers that distribute 
drugs to retail community pharmacies that are later reimbursed by 
TRICARE as a third party payer are included in the calculation of AMP. 
However, the rebates or refunds manufacturers pay to TRICARE as a third 
party payer are excluded from AMP, because such rebates or refunds do 
not typically adjust the prices paid to manufacturers by retail 
community pharmacies or wholesalers for drugs distributed to retail 
community pharmacies.
    Therefore, for the reasons discussed in this section and the 
proposed rule that prices available to federal programs do not reflect 
prices paid by retail community pharmacies or wholesalers for drugs 
distributed to retail community pharmacies (77 FR 5331), we are 
finalizing the provisions in Sec.  447.504(c)(1) through (3) as 
proposed (77 FR 5331 and 5361).
b. Sales Outside the 50 States, the District of Columbia and 
Territories (Sec.  447.504(c)(4) and Sec.  447.505(c)(18))
    The proposed definition of ``states'' in Sec.  447.502 was expanded 
to mean the 50 states, the District of Columbia and the territories 
(the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the 
Northern Mariana Islands and American Samoa). We also proposed to add a 
definition of ``United States'' that would mean the 50 states, the 
District of Columbia and the territories (the Commonwealth of Puerto 
Rico, the Virgin Islands, Guam, the Northern Mariana Islands and 
American Samoa) (77 FR 5326). Therefore, in proposed Sec.  
447.504(c)(4), we proposed that sales to entities outside the 50 
states, the

[[Page 5224]]

District of Columbia and the territories are not within the scope of 
the definition of sales to retail community pharmacy, and that drugs 
sold to entities outside the 50 states, the District of Columbia and 
the territories would not be considered eligible sales within the 
definition of AMP (77 FR 5331). Please note that in some instances the 
comments we received referenced both AMP and best price in the context 
of our proposal to exclude sales outside of the United States. 
Therefore, where appropriate, we have included in the summaries 
reference to both AMP and best price. We received the following 
comments concerning our proposal in Sec.  447.504(c)(4) to exclude from 
AMP calculations those sales outside of the United States (which as 
discussed previously we have defined to be include 50 states, the 
District of Columbia and the territories):
    Comment: Many commenters expressed opposition to the inclusion of 
sales to territories in the calculation of AMP and best price because 
of the enormous burden and compliance concerns that such an expansion 
would pose. The commenters stated that in many cases the related but 
distinct foreign entities do not participate in the MDR program and are 
not signatories to the National rebate agreement. A few commenters 
stated that class of trade assignments will be difficult to make 
because manufacturers are generally unfamiliar with the dispensaries 
and other providers in the territories. One commenter believed that CMS 
should retain its current treatment of sales to the territories in the 
calculation of AMP and best price because drugs sold to customers in 
the territories may have different WAC prices than drugs sold in the 
United States due to government imposed territory specific statutory 
caps.
    Response: As discussed in more detail in the discussion of the 
definitions of states and United States at section II.B.25. of this 
final rule, we have reconsidered the definitions of states and United 
States and believe that the revised definitions of states and United 
States in this final rule are more consistent with section 1101(a)(1) 
of the Act. We recognize the potential complexities that this change in 
definition creates for both the territories and the manufacturers and, 
as discussed previously at section II.B.25. of this final rule, we have 
decided to delay the inclusion of the territories in the definitions of 
states and United States until 1 year after the effective date of the 
final rule. This will allow the territories and the manufacturers an 
additional year to implement the revised definitions of states and 
United States. This means that any changes drug manufacturers need to 
make to their government pricing systems to account for sales to the 
territories in their AMP and best price calculations would not be 
required until the territories are included in the definitions and this 
additional year will allow for the needed time to make this transition. 
We expect to provide additional guidance to manufacturers regarding the 
inclusion of territory sales within their calculation of AMP and best 
price, including additional guidance regarding the treatment of sales 
to territories that have government imposed statutory caps.
    Comment: Several commenters urged CMS to limit a manufacturer's 
responsibility to that of paying rebates to the territories only, and 
not to require manufacturers to include sales to territories in their 
calculation of AMP and best price. Instead their calculation of AMP and 
best price would be based on the geographic sales to the 50 states and 
the District of Columbia, which are the only sales that the MDR program 
has previously included. One commenter stated that AMP and best price 
cannot be calculated based on prices in an economy with pharmaceutical 
price controls and that the Congress only intended the statute to apply 
in the 50 states and the District of Columbia.
    Response: We disagree with the suggestion that we limit 
manufacturers' responsibility to rebate liability only, and that we 
allow manufacturers to continue to exclude all sales of CODs in the 
territories from their AMP and best price calculations. As discussed 
previously in this section, because sections 1927(c)(1)(C) and 
1927(k)(1)(A) of the Act define best price and AMP to reflect certain 
prices paid in the United States, and section 1101(a) of the Act 
defines United States, for purposes of these provisions, to include the 
territories, we believe that manufacturers should be responsible for 
including territories in their rebate calculations.
    Comment: Several commenters believed that deeply discounted 
commercial prices to the territories may need to be terminated to avoid 
an impact on a manufacturer's best price. Furthermore, the commenters 
stated that expansion of the AMP and best price calculations to include 
prices to the territories is inappropriate because the discounted 
prices may be subject to regulation and would distort AMP and best 
price calculations. Specifically, a few commenters indicated that 
Puerto Rico, through pricing regulations, retains the power to set the 
maximum sales price for medicinal products at the distributor and 
pharmacy level. Furthermore, many commenters indicated that including 
the territories in best price could have the unintended effect of 
disrupting commercial arrangements that benefit the territories because 
manufacturers have been required to engage in aggressive discounting to 
enter these markets, but they would have to reconsider this practice if 
these discounted prices were to affect their best price. One commenter 
noted that historically the extension of rebates and inclusion of more 
drug sales in the best price calculation has led to higher prices for 
other consumers, such as safety net providers. A few commenters stated 
that any value of the proposed expansion of the MDR program to 
territories could be severely undercut by the changes manufacturers 
would make in the pricing practices currently used in the territories 
and CMS should specify in the final rule that sales to the territories 
are not included in best price.
    Response: We recognize that manufacturers may have to evaluate 
their current business practices in regards to sales to territories. 
However, as discussed previously in this section, the statute requires 
that manufacturers calculate best price and AMP based on certain prices 
in the United States. Given the definition of United States in section 
1101(a) of the Act, we believe that it would be inappropriate to 
establish a separate definition of United States for purposes of 
calculating rebates. Therefore, effective with the definition of 
``United States'' which we are finalizing, manufacturers should treat 
prices paid by entities located in one of the territories in the same 
manner in which they treat prices paid by entities located within one 
of the 50 states and District of Columbia. That is, manufacturers 
should calculate AMP consistent with section 1927(k)(1) of the Act 
which provides, in part, that AMP include the average price paid to the 
manufacturer for the drug in the United States, which as discussed 
previously includes the territories.
    Comment: Some commenters encouraged CMS to adopt the same practice 
established for manufacturers for purposes of non-FAMP, which is to 
require manufacturers to include such sales in their AMP and best price 
only if the manufacturer treats the territories as part of the United 
States for financial accounting purposes.
    Response: We disagree with the commenter's suggestion. We believe 
that, in light of the definition of AMP at section 1927(k)(1) of the 
Act, manufacturers should calculate AMP based on the average price paid 
to the

[[Page 5225]]

manufacturer in the United States, which we have defined to include the 
territories. Manufacturers are required to comply with this definition, 
regardless of how they treat the territories for financial accounting 
purposes.
    Comment: Many commenters indicated that the inclusion of sales to 
the territories in the AMP and best price calculations may have 
unintended consequences for Medicare Part B because manufacturers have 
traditionally excluded prices to the territories from the calculation 
of ASP because they have been excluded from best price. If 
manufacturers are now required to include prices to territories in AMP 
and best price, the commenter indicated that CMS must address whether 
those prices must also be included in ASP. If sales to the territories 
are treated differently in AMP and ASP, the commenters noted that this 
could lead to inappropriate substitution of AMP for ASP.
    Response: We understand that changes to how manufacturers calculate 
AMP could have potential implications for ASP and Medicare payment. 
However, we believe given the small percentage of sales in the 
territories to total sales throughout the United States, the impact on 
the manufacturer's AMP and ASP will be minimal. However, we will keep 
the commenters' concerns in mind as we move forward with our revised 
AMP policy and may consider issuing additional guidance or rulemaking, 
if necessary.
    Comment: Several commenters expressed specific concern about 
including sales to territories in the calculation of AMP if the buildup 
model were to be finalized because obtaining the necessary data from 
territories would be even more challenging than obtaining such data for 
sales within the 50 states and the District of Columbia. One commenter 
stated that the integrity of data from foreign entities is unknown and 
the inclusion of these transactions could skew both the AMP used to pay 
retail pharmacies in the states and the rebate amount paid on the 
majority of Medicaid utilization.
    Response: As discussed previously in this section, we have decided 
not to adopt a buildup methodology requirement and therefore, we 
believe concerns raised by these commenters have been addressed.
    Therefore, after considering the comments received and for the 
reasons we previously discussed in this section, we are finalizing 
Sec.  447.504(c)(4), as proposed.
c. Hospitals and Hospital Pharmacy Sales (Sec.  447.504(c)(5))
    Section 1927(k)(1)(B)(i)(IV) of the Act specifically excludes from 
the determination of AMP, payments received from and rebates or 
discounts provided to hospitals. Therefore, we proposed at Sec.  
447.504(c)(5) that direct and indirect sales to hospitals are excluded 
from AMP calculations (77 FR 5362). We stated in the preamble 
discussion that such sales include direct and indirect sales where the 
drug is used in either the inpatient setting or the outpatient setting 
(77 FR 5331). We received no comments specific to the exclusion of 
sales to hospitals; however, as discussed earlier in this section, 
commenters did note that CMS has not been consistent in the use of 
terminology in the determination of AMP section of the regulatory text. 
Therefore, based on these general comments discussed earlier in this 
section, as well as the statutory requirement to exclude hospital 
transactions from the determination of AMP we have revised Sec.  
447.504(c)(5) to include the phrase ``Sales to hospitals'' rather than 
``Direct and indirect sales to hospitals,'' as we proposed. This change 
to the regulatory text is not meant to be substantive nor meant to 
change the meaning of the text.
d. Sales to Health Maintenance Organizations (HMOs) (Including MCOs) 
(Sec.  447.504(c)(6))
    We proposed at proposed Sec.  447.504(c)(6) that sales to HMOs and 
MCOs, including sales and associated rebates and discounts to HMO/MCO 
operated pharmacies, are excluded from the determination of AMP (77 FR 
5331, 5362) and received the following comment concerning our proposal.
    Comment: A commenter expressed support for the proposal to exclude 
from AMP manufacturer rebates to MCOs, while including in AMP all sales 
to retail community pharmacies, regardless of whether the pharmacies 
are later paid by MCOs.
    Response: We appreciate the support.
    Therefore, consistent with section 1927(k)(1)(B)(i)(IV) of the Act 
and the exclusion of payments received from and rebates or discounts 
provided to MCOs and HMOs, we are finalizing Sec.  447.504(c)(6) as it 
was proposed.
e. Long-Term Care Facility Pharmacies (Proposed Sec.  447.504(c)(7))
    We proposed at proposed Sec.  447.504(c)(7) that consistent with 
the exclusions from AMP at section 1927(k)(1)(B)(i)(IV) of the Act, 
sales and associated rebates and discounts to long-term care providers, 
including nursing facility pharmacies, nursing home pharmacies, long-
term care facilities, long-term care facilities pharmacies, contract 
pharmacies for the nursing facility where these sales can be identified 
with adequate documentation, and other entities where the drugs are 
dispensed through a nursing facility pharmacy, such as assisted living 
facilities, be excluded from the determination of AMP (77 FR 5331, 
5362). We further note that the exclusion of such nursing home and 
long-term care facility pharmacies is consistent with the entities 
specifically excluded from the definition of retail community pharmacy 
at section 1927(k)(10) of the Act. We received the following comment 
concerning our proposal to exclude sales to long-term care facility 
pharmacies.
    Comment: One commenter requested that CMS provide guidance 
regarding what type of documentation qualifies as ``adequate'' in 
regards to the exclusion of sales to contract pharmacies from AMP.
    Response: If a long-term care facility contracts with a pharmacy to 
provide drugs to its population, manufacturers may exclude those sales 
from AMP because the manufacturer has documented knowledge of the 
arrangement to support the exclusion. Otherwise, the manufacturer may 
make reasonable assumptions provided those assumptions are consistent 
with the requirements and intent of section 1927 of the Act and federal 
regulations.
    Therefore, in regards to the exclusion of sales to long-term care 
facility pharmacies, for the reasons discussed in this section, and in 
compliance with sections 1927(k)(1)(B)(i)(IV) and 1927(k)(10) of the 
Act, we are finalizing Sec.  447.504(c)(7), as proposed.
f. Mail Order Pharmacies (Sec.  447.504(c)(8))
    We proposed at proposed Sec.  447.504(c)(8) that sales to mail 
order pharmacies are excluded from the determination of AMP (77 FR 
5331, 5362) consistent with sections 1927(k)(1)(B)(i)(IV) and 
1927(k)(10) of the Act, which exclude such pharmacies from the 
definition of AMP and retail community pharmacies. We received the 
following comment on our proposal:
    Comment: One commenter stated that CMS should clarify that drugs 
dispensed at a PBM's mail order facility are delivered primarily 
through the mail and therefore, should be excluded from the calculation 
of AMP.
    Response: If the PBM's mail order facility is a mail order 
pharmacy, it is excluded from the definitions of retail

[[Page 5226]]

community pharmacy, as well as AMP. Therefore, sales to these mail 
order pharmacies shall be excluded from the calculation of AMP. Please 
see section II.C.6.o. for further discussion on PBMs including their 
mail order facilities.
    Therefore, in regards to the exclusion of sales to mail order 
pharmacies from the AMP calculation, we are finalizing Sec.  
447.504(c)(8) as proposed because such sales are excluded from the 
definition of AMP in section 1927(k)(1)(B)(i)(IV) of the Act and the 
definition of retail community pharmacies in section 1927(k)(10) of the 
Act.
g. Clinics and Other Outpatient Facilities (Sec.  447.504(c)(9))
    As discussed in the proposed rule, we proposed at proposed Sec.  
447.504(c)(9) to exclude sales and associated rebates and discounts to 
clinics and outpatient facilities from the determination of AMP (77 FR 
5331 and 5362). We received no comments pertaining to this provision 
and because section 1927(k)(1)(B)(i)(IV) of the Act specifically 
excludes clinics from the calculation of AMP, we are finalizing Sec.  
447.504(c)(9) as proposed.
h. Government Pharmacies (Sec.  447.504(c)(10))
    We proposed at proposed Sec.  447.504(c)(10) to exclude sales to 
government pharmacies from the determination of AMP (77 FR 5331 through 
5332 and 5362) since government pharmacies are specifically excluded 
from the definition of retail community pharmacies as defined at 
section 1927(k)(10) of the Act. We received no comments pertaining to 
this provision. Because section 1927(k)(1)(A) of the Act specifies that 
AMP shall include sales to wholesalers for drugs distributed to retail 
community pharmacies and retail community pharmacies that purchase 
drugs directly from the manufacturer; and because government pharmacies 
are excluded from the definition of retail community pharmacies as 
defined at section 1927(k)(10) of the Act, we are finalizing Sec.  
447.504(c)(10) as proposed.
i. Sales to Charitable and Not-For-Profit Pharmacies (Sec.  
447.504(c)(11) and (12))
    We proposed to exclude sales to charitable and not-for-profit 
pharmacies from the determination of AMP (77 FR 5332) because such 
pharmacies are specifically excluded from the definition of retail 
community pharmacies as defined at section 1927(k)(10) of the Act. We 
received the following comments concerning sales to charitable and not-
for-profit pharmacies:
    Comment: Several commenters noted that the proposed rule did not 
provide any guidance as to the lengths CMS expects manufacturers to go 
to determine if a pharmacy customer is a tax exempt organization or how 
to identify such charitable or not-for-profit pharmacies. Therefore, 
the commenters indicated that CMS should stipulate that manufacturers 
are entitled to presume their pharmacy customers are for-profit unless 
they are asked in writing by a particular pharmacy to extend discounts 
based on the entity's 501(c) non-profit status and are provided with 
copies of the documentation the pharmacy has from the IRS 
substantiating that status. The commenters indicated that if a not-for-
profit pharmacy is not receiving pricing discounted from that which 
would otherwise be available to it in the commercial marketplace, 
including sales to such an entity in the calculation of AMP should have 
no meaningful negative or downward impact on AMP values. One commenter 
expressed opposition to the exclusion from AMP of sales to charitable 
and not-for-profit pharmacies due to the extreme challenges that 
manufacturers will face in maintaining an accurate and up-to-date list 
of such pharmacies. Furthermore, the commenter also indicated that 
systems will require significant upgrades to track entities and 
properly treat these transactions in AMP calculations.
    Response: Section 1927(k)(10) of the Act specifically excludes 
charitable and not-for-profit pharmacies from the definition of retail 
community pharmacy and in light of that exclusion, such sales, as well 
as applicable rebates, discounts, or other transactions to charitable 
and not-for-profit pharmacies are to be excluded from determination of 
AMP consistent with section 1927(k)(1) of the Act. The IRS has an on-
line search tool called Exempt Organization Select Check that is 
publically accessible on the IRS Web site at http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check and is 
updated monthly. Therefore, manufacturers would not be required to 
contact all pharmacies to determine their status. Using this readily 
available information, manufacturers may make certain reasonable 
assumptions, in the absence of specific guidance, in their 
determinations of whether or not their pharmacy customer is a 
charitable or not-for-profit pharmacy, provided those assumptions are 
consistent with the requirements and intent of section 1927 of the Act 
and federal regulations.
    Therefore, in regards to the exclusion of sales to charitable and 
not-for-profit pharmacies, we are finalizing the provisions in Sec.  
447.504(c)(11) and (12) as proposed since section 1927(k)(10) of the 
Act specifically excludes charitable and not-for-profit pharmacies from 
the definition of retail community pharmacy and in light of that 
exclusion, such sales, as well as applicable rebates, discounts, or 
other transactions to charitable and not-for-profit pharmacies are 
excluded from the determination of AMP as specified at section 
1927(k)(1) of the Act.
j. Insurers (Sec.  447.504(c)(13))
    Section 1927(k)(1)(B)(i)(IV) of the Act specifically excludes 
payments received from and rebates or discounts provided to insurers 
from the determination of AMP. Therefore, at proposed Sec.  
447.504(c)(13), we proposed to exclude from the determination of AMP 
sales to payments received from, and any rebates, discounts, or 
payments that are provided directly to insurers and that are not passed 
on to retail community pharmacies (77 FR 5332). We received the 
following comments concerning insurers.
    Comment: One commenter noted that the proposed rule was not clear 
on the treatment of sales to pharmacies when the pharmacy is later paid 
by a federal health plan (for example, Medicare, Medicaid, TRICARE, 
SPAPs, and ADAPs) that operates in a similar manner as an insurer. The 
commenter requested that CMS clarify that sales of covered drugs to 
retail community pharmacies are included in AMP, regardless of whether 
a rebate is later provided to a health plan, and that this rule applies 
consistently whether the payer is a commercial or government 
organization functioning as an insurer.
    Response: As discussed in the proposed rule (77 FR 5332), except 
for specific exclusions specified in section 1927(k)(1)(B) of the Act, 
manufacturer sales of CODs to retail community pharmacies and 
wholesalers for drugs distributed to retail community pharmacies are 
included in AMP, regardless of whether a separate rebate is later 
provided to a health plan. Section 447.504(c)(13) provides that rebates 
paid by manufacturers directly to insurers are excluded from AMP, 
regardless of whether the insurer is a commercial or governmental 
organization. As discussed in the section on prices to other federal 
programs for the purposes of the AMP calculations, programs such as 
Medicare, TRICARE, SPAPs, and ADAPs should be treated in the same 
manner as Medicaid. That is, consistent with section 1927(k)(1)(A) of 
the Act, rebates or refunds for these other federal

[[Page 5227]]

programs are excluded given that they are not prices paid to the 
manufacturer by wholesalers or retail community pharmacies, as those 
terms are defined in sections 1927(k)(11) and 1927(k)(10) of the Act. 
Furthermore, a manufacturer's sales of drugs to retail community 
pharmacies and wholesalers for drugs distributed to retail community 
pharmacies that are eventually reimbursed by programs such as Medicaid, 
SPAPs, and Medicare Part D, are included in the determination of AMP, 
but the rebates or refunds paid to these programs are to be excluded 
from the determination of AMP. Further discussion around the exclusion 
of rebates and refunds made to government programs is provided in this 
section.
    Comment: One commenter noted that many insurers are now partnering 
with retail community pharmacies to dispense products to their 
beneficiaries (such as Safeway contracting with Express Scripts to 
dispense products to Express Script members). The commenter asked if it 
is CMS's intention that manufacturers back out these transactions and 
payments from their retail sales within their AMP calculations. The 
commenter requested that CMS keep in mind the complications this would 
add to manufacturers' AMP calculations.
    Response: Regardless of the arrangement the retail community 
pharmacy (in this example, Safeway) has with an insurer, manufacturer 
rebates or discounts provided directly to the insurer would be excluded 
from AMP (under section 1927(k)(1)(B)(i)(IV) of the Act) while sales to 
the pharmacy would be included in AMP to the extent that the pharmacy 
qualifies as a retail community pharmacy, as defined in section 
1927(k)(10) of the Act.
    Therefore, in regards to the exclusion of sales, associated 
rebates, discounts, or other price concessions paid directly to 
insurers, we are finalizing Sec.  447.504(c)(13) as proposed since it 
is consistent with the exclusion provisions in section 
1927(k)(1)(B)(i)(IV) of the Act regarding payments received from and 
rebates or discounts provided to insurers.
k. Administrative Fees, Including Bona Fide Service Fees, as Well as 
the Treatment of Group Purchasing Organizations (GPOs) (Sec.  
447.504(c)(14))
    We proposed at proposed Sec.  447.504(c)(14) that bona fide service 
fees paid by manufacturers to wholesalers, retail community pharmacies, 
or any other entity that conducts business as a wholesaler or retail 
community pharmacy should be excluded from the calculation of AMP (77 
FR 5332, 5362). Furthermore, we proposed that such fees include, but 
are not limited to, inventory management fees, product stocking 
allowances, and fees associated with administrative agreements and 
patient care programs (such as medication compliance programs and 
patient education programs), including bona fide service fees paid to 
GPOs. We also proposed that to the extent that fees to GPOs meet the 
definition of ``bona fide service fee,'' such fees should be excluded 
from the determination of AMP and are not considered price concessions 
(77 FR 5332, 5362). We received the following comments regarding the 
exclusion of bona fide service fees.
    Comment: One commenter noted that proposed Sec.  447.504(c)(14) 
tracks the statutory text calling for the exclusion of bona fide 
service fees in all respects except one; it has omitted reference to 
``distribution service fees.'' The commenter requested that CMS correct 
this oversight in the final rule.
    Response: We agree and in this final rule are revising Sec.  
447.504(c)(14) to cross-reference to the definition of bona fide 
service fees in the Sec.  447.502 instead of relisting all the examples 
in Sec.  447.504(c)(14). The definition of bona fide service fees in 
Sec.  447.502 includes distribution service fees.
    Comment: We received several comments that disagreed with the 
proposed rule's exclusion of GPO bona fide service fees from AMP. 
Commenters noted that it seems illogical to exclude a bona fide service 
fee paid to GPOs from AMP and best price but not apply the exclusion to 
other entity types such as PBMs and insurers that, like GPOs, are 
outside the supply chain in that they do not purchase prescription 
drugs from manufacturers. One commenter stated that the proposed rule 
goes beyond the statute by excluding bona fide service fees paid by 
manufacturers to GPOs since these fees do not affect the price a retail 
community pharmacy pays for a drug, nor are they passed on to a retail 
community pharmacy.
    Response: Any fees for services outside of the supply chain are 
typically excluded from the manufacturer's AMP as such fees do not 
affect prices paid to the manufacturer for the COD itself as required 
by section 1927(k)(1) of the Act. Furthermore, to the extent 
manufacturer fees paid to GPOs do not represent discounts, rebates, 
payments or other financial transactions that are received by, paid by 
or passed through to, retail community pharmacies in accordance with 
section 1927(k)(1)(B)(ii) of the Act such fees are excluded from AMP.
    Comment: A few commenters believe that including PBM bona fide 
service fees would result in a lower AMP, which would not be an 
accurate reflection of the prices retail community pharmacies pay for 
prescription drugs. The commenter stated that they do not believe all 
these transactions (which include entities conducting business as a 
wholesaler or retail community pharmacy, secondary manufacturer for 
authorized generics and a wide spectrum of entities that dispense drugs 
subject to the AMP calculation for 5i drugs not generally dispensed 
through a retail community pharmacy) should be included in the 
calculation of AMP; however, when sales to any other entities (entities 
that do not conduct business as either retail community pharmacies or 
wholesalers) are included in AMP, any bona fide service fees paid to 
such entities should be excluded.
    Response: It was not our intent to require manufacturers to include 
in the calculation of AMP service fees paid to PBMs. Section 
1927(k)(1)(B)(i)(IV) of the Act excludes such fees from AMP 
calculations for drugs dispensed by retail community pharmacies 
(regardless of whether the fees meet the bona fide service definition). 
For 5i drugs that are not generally dispensed by retail community 
pharmacies, section 1927(k)(1)(B)(i)(IV) of the Act requires 
manufacturers to calculate an AMP for such drugs by including payments 
received from, and rebates or discounts provided to a list of entities, 
including PBMs. However, given the language in this provision, we do 
not believe that service fees paid by the manufacturer to PBMs 
represent the types of payments, or discounts or rebates that section 
1927(k)(1)(B)(i)(IV) of the Act requires that manufacturers include 
when calculating AMP for such 5i drugs. We discuss this further in 
section II.C.7.d. of this final rule.
    Comment: Several commenters stated that CMS should revise the 
current exception at Sec.  447.504(c)(14) by replacing ``to 
wholesalers, retail community pharmacy, or any other entity that 
conducts business as a wholesaler or retail community pharmacy'' with 
``to any AMP-eligible entity,'' before the phrase ``including but not 
limited to inventory management fees'' to broaden the application of 
bona fide service fee exception to include additional customer types. 
One commenter recommended that to the extent sales to entities other 
than retail community pharmacies and wholesalers are used to calculate 
AMP or best price, bona fide

[[Page 5228]]

service fees to these entities should be excluded.
    Response: As provided in the previous response, a manufacturer's 
AMP for a COD should exclude any bona fide service fees paid to 
wholesalers and retail community pharmacies in accordance with section 
1927(k)(1)(B)(i)(II) of the Act. The revised AMP definition at section 
1927(k)(1)(B)(i)(IV) of the Act requires manufacturers to calculate an 
AMP for 5i drugs that are not generally dispensed through retail 
community pharmacies by including payments received from, and rebates 
or discounts provided to a list of entities that do not conduct 
business as wholesalers or retail community pharmacies. We do not 
believe inventory management fees paid by the manufacturer to the 
entities listed in section 1927(k)(1)(B)(i)(IV) of the Act represent 
the type of payments, discounts or rebates that this provision requires 
that manufacturers must include when calculating AMP for such 5i drugs.
    As discussed in detail in section II.C.7.d. of this final rule, we 
have addressed those discounts, rebates and payments included in, and 
excluded from, the determination of AMP for 5i drugs not generally 
dispensed through retail community pharmacies (Sec.  447.504(d) and 
(e)).
    Furthermore, as discussed in the Definitions section (section 
II.B.4.) of this final rule, based on comments we received, we have 
replaced the limiting phrase ``to wholesalers or retail community 
pharmacies'' with ``an entity'' in the definition of bona fide service 
fee at Sec.  447.502. In response to comments and to be consistent with 
the definition of AMP and the sales included in and excluded from that 
definition, as set forth in section 1927(k)(1)(B)(i)(II) of the Act, in 
this final rule we are revising Sec.  447.504(c)(14) and amending Sec.  
447.504(e) to add a new paragraph (5) to clarify that the bona fide 
service fees, as defined in Sec.  447.502, are excluded from the AMP 
calculation. We believe these changes provide clarification and 
consistency to the application of bona fide service fees in the 
determination of AMP. We further discuss the determination of best 
price and the effect of bona fide service fees on a manufacturer's 
determination of best price in section II.D.3. of this final rule.
    Comment: One commenter stated that the position taken by CMS in the 
proposed rule regarding price appreciation credits is improperly vague; 
is not an accurate interpretation of existing law; is inconsistent with 
CMS's approach to other fee arrangements (in this proposed rule and the 
AMP Final Rule); and assumes that the term price appreciation credit is 
a defined and standardized across the industry. The commenter stated 
that manufacturers and their direct purchasers enter into a multitude 
of diverse arrangements that may take into account changes in inventory 
valuation and the facts and circumstances of each arrangement determine 
the appropriate price reporting treatment in the AMP, best price, or 
ASP calculations. Another commenter requested that CMS clarify what is 
meant by ``price appreciation credits'' as used in the definition of 
bona fide service fee.
    One commenter requested that CMS provide guidance as to how 
manufacturers should properly value the ``benefit'' that wholesalers 
may receive by being in possession of inventory that has undergone a 
price increase as a discount in their calculation. The commenter 
further noted that manufacturers do not generally issue actual credits 
to wholesalers for inventory/price appreciation. This commenter 
provided examples to illustrate their concerns with the operational 
issues surrounding this obligation.
    One commenter agreed that price appreciation credits do not qualify 
as bona fide service fees and indicated that CMS misrepresented price 
appreciation credits as retroactive price appreciation credits. The 
commenter specified that retroactive price appreciation credits do not 
impact prices to customers and urged CMS to review or remove the 
incorrect statements regarding retroactive price appreciation credits 
from the final rule.
    Response: We continue to believe that price appreciation credits 
would likely not meet the definition of bona fide service fee. Based on 
our experience with the program, it is our understanding that price 
appreciation credits are not issued for the purposes of payment for any 
service or offset for a bona fide service performed on behalf of the 
manufacturer, but rather are issued by the manufacturer to adjust 
(increase) the wholesaler's purchase price of the drugs in such 
instances when the drugs were purchased at a certain price and are 
remaining in the wholesaler's inventory at the time the manufacturer's 
sale price of the drug increased. In such situations, these credits 
would amount to a subsequent price adjustment affecting the average 
price to the manufacturer and should be recognized for purposes of AMP 
in accordance with Sec.  447.504(f).
    Comment: One commenter stated that different manufacturers' 
treatment of bona fide service fees in their calculations of AMP is an 
underlying root cause of volatility in the draft FULs that have been 
released.
    Response: While it is possible that inconsistent application of 
what is included in and excluded from AMPs, such as bona fide service 
fee treatment may lead to AMP volatility, it is not the sole reason for 
the AMP volatility. Based on the discussions we have had with 
manufacturers regarding the variability in monthly AMP reporting, such 
volatility may be reflective of the trends in sales of drugs in the 
marketplace. For example, seasonal changes in drug sales can impact the 
AMP reporting from month-to-month. We further note that with the 
clarification provided in this section of the final rule (section 
II.C.) of what manufacturers should include in, and exclude from AMP in 
this rule, we believe AMPs will become less volatile.
    Comment: One commenter noted that there are times when a 
manufacturer may agree to undertake bona fide services for pharmacies, 
such as providing stock and inventory management (for example, a 
distributor or manufacturer provides technology or services to manage 
and ensure pharmacy on-site inventories and supply, product 
requirements forecasting and inventory analysis, and/or patient 
reminder and compliance management). The commenter stated that when 
these activities are those that the wholesaler or retail community 
pharmacy must otherwise perform and the services are reasonable and 
priced at fair market value, then those fees should be excluded from 
AMP. This commenter recommended changes to Sec.  447.504(c)(14) to 
specify that the exclusion of bona fide service fees should not be 
limited only to those paid by manufacturers to wholesalers and retail 
community pharmacies, but should also include bona fide service fees 
paid to manufacturers by wholesalers, retail community pharmacies, or 
any other entity that conducts business as a wholesaler or retail 
community pharmacy.
    Response: We do not agree with the commenter that Sec.  
447.504(c)(14) needs to be changed to exclude from AMP service fee 
payments made by a wholesaler or retail community pharmacy to the 
manufacturer. Such fees that are paid by the wholesaler or retail 
community pharmacy to the manufacturer are excluded from AMP because 
these fees do not represent the average price paid to the manufacturer 
for a COD in accordance with the definition of AMP in section 
1927(k)(1)

[[Page 5229]]

of the Act but rather payments for services rendered by the 
manufacturer.
    After consideration of comments received and for the reasons 
discussed in this section, we have revised Sec.  447.504(c)(14) to 
specify that bona fide service fees, as defined in Sec.  447.502, paid 
by manufacturers to wholesalers or retail community pharmacies are 
excluded from AMP.
l. Customary Prompt Pay Discounts (Sec.  447.504(c)(15))
    We proposed at proposed Sec.  447.504(c)(15) that, consistent with 
section 1927(k)(1)(B)(i)(I) of the Act, customary prompt pay discounts 
extended to wholesalers should be excluded from the determination of 
AMP (77 FR 5332, 5362). We received the following comments regarding 
customary prompt pay discounts:
    Comment: A few commenters noted that the statute contemplates that 
some sales are made directly to retail community pharmacies, and not to 
wholesalers, and as such, commenters urged CMS to clarify in the final 
rule that to the extent customary prompt pay discounts are offered to 
retail community pharmacies which purchase directly from the 
manufacturer, such discounts should also be excluded from the AMP 
calculation.
    Response: We disagree. Section 1927(k)(1)(B)(i)(I) of the Act only 
excludes from the calculation of AMP customary prompt pay discounts 
extended to wholesalers. In accordance with section 1927(k)(1)(B)(ii) 
of the Act, if a manufacturer extends a customary prompt pay discount 
to a retail community pharmacy that purchases drugs directly from the 
manufacturer, such discount is included in the determination of AMP.
    Comment: A few commenters expressed support for the exclusion of 
customary prompt pay discounts to wholesalers and encouraged CMS to 
finalize this proposal.
    Response: We appreciate the support for the provision.
    Therefore, after considering the comments and for the reasons we 
explained, we are finalizing Sec.  447.504(c)(15) as proposed (77 FR 
5362).
m. Returned Goods (Sec.  447.504(c)(16))
    In the proposed rule, we proposed to incorporate the statutory 
requirement found at section 1927(k)(1)(B)(i)(III) of the Act at Sec.  
447.504(c)(16) which requires that reimbursement by manufacturers for 
recalled, damaged, expired, or otherwise unsalable returned goods, 
including (but not limited to) reimbursement for the cost of the goods 
and any reimbursement of costs associated with return goods handling 
and processing, reverse logistics and drug destruction be excluded from 
AMP. We further proposed that such reimbursement would be excluded only 
to the extent it covers only the costs associated with the returned 
goods, handling, and processing (77 FR 5332, 5362). We did not define 
the terms recalled, damaged, expired or unsalable, but we did request 
comments regarding whether we should define these terms or further 
define how these industry standards for these terms should be set. We 
also requested examples of what would qualify as unsalable. We received 
the following comments concerning our proposal.
    Comment: Several commenters expressed support for CMS's continued 
exclusion of returned goods from AMP. One commenter agreed that the 
proposed limit on what may be excluded from AMP is a reasonable 
safeguard to prevent price concessions from being disguised as 
reimbursement for returns, and indicated that manufacturers should be 
able to conclude that this standard has been met where the manufacturer 
reimburses the returning party under a return goods policy that the 
manufacturer has established in good faith. Another commenter supported 
CMS's decision not to define returned goods or the other terms used in 
the statute because such terms are self-explanatory within the standard 
industry practice.
    Response: We appreciate the support for this proposed policy and 
our decisions not to further define recalled, damaged, expired, or 
unsalable goods. As discussed in the proposed rule, we believe that 
these terms are self-explanatory within the standard industry practice 
(77 FR 5332).
    Comment: Several commenters stated that the proposed rule refers to 
the ``good faith'' standard but does not elaborate on it and asked CMS 
to readopt the good faith standard from the AMP final rule. Another 
commenter noted that the proposed rule adds that ``the returned goods 
themselves'' can be excluded from AMP ``when returned in good faith.'' 
However, the commenter indicated that CMS did not explain whether or 
how this is a distinct exclusion from that which CMS is incorporating 
from the statutory definition of AMP, or whether the good faith 
requirement applies to all return transactions. The commenter further 
stated that CMS should clarify that manufacturers may use their own 
written and established company policies and procedures to define 
returns made in good faith and incorporate this standard at Sec.  
447.504(c)(16) by including the following sentence: ``Goods returned 
under manufacturer policies established in good faith.''
    Response: While we stated in the preamble to the proposed rule that 
returned goods can be excluded from AMP when ``returned in good 
faith,'' we did not propose, nor have we included in this final 
regulation this standard as part of Sec.  447.504(c)(16). We believe 
the proposed exclusion from AMP of reimbursement for returned goods is 
consistent with section 1927(k)(1)(B)(i)(III) of the Act as the 
exclusion shall only include reimbursement for recalled, damaged, 
expired, or otherwise unsalable returned goods, including (but not 
limited to) reimbursement for the costs of goods and the costs 
associated with return goods handling and processing, reverse 
logistics, and drug destruction but only to the extent the payment 
covers only those costs. We believe proposed Sec.  447.504(c)(16) as 
proposed clarifies that the exclusion of reimbursement for returns 
designed to adjust prices or disguise price concessions would not be a 
return made in good faith because the reimbursement would cover more 
than the costs of goods and goods handling and processing, reverse 
logistics, and drug destruction. Therefore, we are adopting Sec.  
447.504(c)(16) as proposed. We further note that manufacturers 
typically have established internal policies regarding returned 
purchases and to the extent that the reimbursement by the manufacturer 
for returned goods is consistent with the requirements of section 1927 
of the Act and federal regulations, such reimbursement made by the 
manufacturer shall be excluded from AMP.
    Comment: A commenter explained that while a returned product may 
not technically be within the manufacturer's return policy, there may 
be extenuating circumstances whereby the manufacturer will accept the 
returned product and provide credit accordingly. The commenter stated 
that they believe that the intent is that returned goods not intended 
to manipulate pricing, provide discounts or any other incentive should 
be excluded from AMP and best price. Therefore, the commenter asked 
that CMS clarify the language in the final rule to state the clear 
intent of these terms. Additionally, the commenter noted that 
manufacturers may accept returned goods within 3 to 6 months of the 
expiration date and while they are not technically expired when 
returned, received and destroyed, the commenter requested confirmation 
that these

[[Page 5230]]

returned goods, not intended to manipulate pricing, may continue to be 
excluded from AMP and best price.
    Response: We are not establishing additional standards as there are 
a number of business-related reasons for how manufacturers process and 
accept returns. To the extent a return is made consistent with the 
statute and the criteria established in the final rule at Sec.  
447.504(c)(16), it may be excluded from the AMP calculation.
    We recognize that there may be extenuating circumstances that 
precipitate the need for products to be returned. If such a return does 
not manipulate prices, the manufacturer would exclude those return-
related prices from the AMP calculation for the cost of goods and any 
costs associated with the return, consistent with section 
1927(k)(1)(B)(i)(III) of the Act. Furthermore, if a manufacturer allows 
for goods to be returned within 3 to 6 months of the expiration date, 
we would agree that such returns, when not intended to manipulate 
pricing, may be excluded from AMP and best price.
    Comment: Some commenters indicated that while they support 
excluding reimbursement for returned goods from AMP, they disagree with 
CMS's proposal to limit the reimbursement for returned goods to the 
``cost of the goods.'' The commenters explained that in many cases the 
manufacturer is unable to determine the cost of the returned goods to 
customers because they may receive returns from indirect customers or 
the product is returned long after it was purchased. Therefore, it 
would be administratively burdensome for the manufacturer to determine 
the price paid for a particular unit or product by a particular 
customer months or even years later. The commenters suggested that CMS 
exclude from AMP reimbursement by the manufacturer for recalled, 
damaged, expired, or otherwise unsalable returned goods, where such 
reimbursement is provided under terms of a returned goods policy that 
the manufacturer has established in good faith. The commenter urged CMS 
to clarify the regulatory text in the final rule.
    Response: As discussed in our previous response, to the extent a 
return is consistent with the statute and the criteria established at 
Sec.  447.504(c)(16), it may be excluded from the AMP calculation. We 
understand that manufacturers may not be able to determine the purchase 
price of the returned goods because they are received from indirect 
customers, or the product is returned several months or even years 
after the initial purchase. However, we believe manufacturers have 
company records that record the price allowance for such goods when 
returned as part of their accounting procedures. Using such records, 
manufacturers may make reasonable assumptions when establishing the 
value of such goods to be excluded from AMP.
    Comment: In response to CMS's request for comments on what would be 
considered an unsalable product, a few commenters urged CMS to consider 
short-dated products as unsalable products and therefore, exclude from 
AMP any reimbursement or credit received by retail community pharmacies 
or wholesalers for these products. The commenters explained that short-
dated products are those within 6 months of their expiration dates that 
a pharmacy is either unwilling to purchase from the wholesaler or that 
the pharmacy purchased but believes it will be unable to dispense 
before the expiration date. A few commenters indicated that unsalable 
products also include those that a manufacturer had requested be 
returned for a variety of reasons meant to maintain product integrity 
and integrity of the distribution chain. The commenters indicated that 
standard industry practices and manufacturer policies should govern the 
determination of what is unsalable and urged CMS to adopt that 
standard. Another commenter explained that pharmacies often return 
short-dated products to ensure these products are not dispensed to 
patients and therefore, these products should be considered unsalable 
to minimize patients receiving or storing products that are about to 
expire. One commenter noted that it is important for CMS to recognize 
that what is ``unsalable'' can vary by product based on each product's 
shelf life. Another commenter stated that they do not believe a 
specific definition of ``unsalable'' is required and manufacturers 
should be permitted to rely upon prevailing business standards and 
their own good faith return policies to determine circumstances where 
products are unsalable.
    Response: We appreciate the comments concerning what would be 
considered an unsalable product and agree that standard industry 
practices and manufacturer policies should govern the determination of 
what is unsalable, provided such practices are not inconsistent with 
section 1927 of the Act and federal regulations. It is not possible for 
us to generate a ``one size fits all'' standard as to what is unsalable 
given the varying and unpredictable characteristics of drug products 
(for example, potency, shelf life, or packaging). That is, what is 
``unsalable'' can vary by the product and manufacturers should be 
permitted to rely upon prevailing business standards to determine 
circumstances when their products are unsalable.
    Comment: A few commenters requested that CMS clarify that a 
manufacturer's issuance of replacement product for a returned good, 
rather than a refund or credit, remains excluded from AMP. The 
commenters noted that CMS adopted this policy under the DRA and believe 
there is nothing in the Affordable Care Act to prohibit the same 
approach now. The proposed rule does not address replacement product 
specifically, so the commenters requested that CMS make this 
clarification in the final rule.
    Response: The definition of AMP at section 1927(k) of the Act for 
CODs is defined as the average price paid to the manufacturer for the 
drug in the United States by wholesalers for drugs distributed to 
retail community pharmacies and retail community pharmacies that 
purchase directly from the manufacturer. Therefore, we agree with the 
commenter that when a manufacturer issues a replacement product for a 
returned good and does not receive payment for the replacement drug, 
there is no price paid to be included in the manufacturer's calculation 
of AMP.
    As a result of comments received and for the reasons we explained 
in this section, in this final rule we are adopting Sec.  
447.504(c)(16) as proposed to specify that reimbursement for recalled, 
damaged, expired or otherwise unsalable returned goods, including (but 
not limited to) reimbursement for the costs of goods and any 
reimbursement of costs associated with return goods handling and 
processing, reverse logistics, and drug destruction but only to the 
extent that such payment covers only those costs are excluded from AMP.
n. Medicare Coverage Gap Discount (Sec.  447.504(c)(17))
    We proposed that discounts, rebates or other price concessions 
provided under the Medicare coverage gap discount program should be 
excluded from AMP (77 FR 5333, 5362) consistent with section 
1927(k)(1)(B)(i)(V) of the Act which requires the calculation of AMP 
exclude discounts provided by manufacturers under section 1860D-14A of 
the Act. We received no comments pertaining to this provision, and in 
compliance with section 1927(k)(1)(B)(i)(V) of the Act, we are 
finalizing Sec.  447.504(c)(17) as proposed.

[[Page 5231]]

o. PBM Sales and Price Concessions (Sec.  447.504(c)(18))
    We proposed at Sec.  447.504(c)(18) to exclude from the calculation 
of AMP, sales to PBMs including their mail order pharmacy's purchases 
(77 FR 5333, 5362) consistent with section 1927(k)(1)(B)(i)(IV) of the 
Act which excludes payments received from, and rebates or discounts 
provided to pharmacy benefit managers (PBMs) and mail order pharmacies 
(77 FR 5333). We received the following comments concerning PBM and PBM 
mail order sales and price concessions:
    Comment: One commenter noted several concerns with the proposed 
language regarding exclusion of payments received from, and rebates or 
discounts provided to, PBMs from the determination of AMP. The 
commenter was concerned that the statute requires the exclusion of 
transactions with PBMs and mail order pharmacies irrespective of 
whether the mail order pharmacies are owned by or affiliated with PBMs 
and therefore, they should be treated separately for AMP purposes, and 
the sale to each should be excluded as provided in the statute. The 
commenter also stated that in the preamble CMS noted that the statute 
requires the exclusion of payments received from, and rebates or 
discounts provided to PBMs, but proposed Sec.  447.504(c)(18) simply 
requires the exclusion of ``sales'' to PBMs. The commenter further 
noted that PBMs generally negotiate and receive rebates on behalf of 
their health plan clients that purchase the drugs, and so the sale 
would not be to the PBM. Thus, limiting the exclusion to ``sales'' to 
PBMs would improperly include these PBM rebates in AMP. Therefore, the 
commenter recommended that the language in the regulatory text be 
revised to align with the statutory exclusion of rebates and other 
discounts paid to PBMs.
    Response: Consistent with the exclusions listed in the definition 
of AMP at section 1927(k)(1)(B)(i)(IV) of the Act, we agree with the 
commenter that mail order pharmacy sales are excluded from AMP 
irrespective of whether the pharmacy is owned by a PBM and as such, 
agree that it is not necessary to address the specific situation where 
a mail order pharmacy is owned by a PBM. Therefore, we are revising 
Sec.  447.504(c)(18) to refer only to PBMs and remove the reference to 
mail order pharmacy purchasing given that mail order pharmacies are 
already excluded from AMP under section 1927(k)(1)(B)(i)(IV) of the 
Act. We have also removed the reference to ``sales'' at proposed Sec.  
447.504(c)(18) and replaced it with payments received from and rebates 
and discounts provided to PBMs to be consistent with section 
1927(k)(1)(B)(i)(IV) of the Act which provides that ``payments received 
from, and rebates or discounts provided to pharmacy benefit managers . 
. .'' are excluded from AMP. We made this change because we agree with 
the commenter that it is not likely manufacturers will sell directly to 
PBMs unless the sale is for its pharmacy line of business (for example, 
mail order pharmacy). In such cases, when the sale is to the PBM for 
its pharmacy line of business, the manufacturer will need to determine 
if such sales would be included or excluded, based upon section 
1927(k)(1)(B) of the Act and the definition of retail community 
pharmacy in accordance with section 1927(k)(10) of the Act.
    Comment: One commenter noted that the preamble language of the 
proposed rule limited the exclusion of sales to PBMs, including their 
mail order pharmacies, ``to the extent that no part of the rebates, 
discounts, or payments are received by, paid by or passed through to 
retail community pharmacies'' but stated that the statute did not 
condition the exclusion on the payments not being passed through to 
retail community pharmacies. It was not clear what CMS intended with 
this limitation and the commenter expressed concern that it could 
potentially be misconstrued or interpreted so broadly to mean that 
simply because the PBM and retail community pharmacy are part of the 
same corporate enterprise, discounts obtained by the PBM are viewed as 
``passed through'' to the retail community pharmacy. The commenter 
recommended that CMS exclude all sales to corporate enterprises that 
own both excluded entities, such as PBMs and mail order pharmacies, and 
retail community pharmacies as this is the only way to ensure that 
their transactions do not influence AMP in a way that would not be 
reflective of prices available to unaffiliated retail community 
pharmacies.
    Response: We disagree with the commenter's suggestion that all 
sales to corporate enterprises that own both excluded entities, such as 
PBMs and mail order pharmacies, and included entities, such as retail 
community pharmacies should be excluded from AMP. Such an action is 
contrary to the statutory definition of AMP at section 1927(k)(1) of 
the Act which requires manufacturer sales of CODs to retail community 
pharmacies and wholesalers to be included in AMP. We further note that 
the AMP definition at section 1927(k)(1)(B) of the Act does not provide 
for the exclusion of retail community pharmacy or wholesaler sales when 
those sales are provided to a retail community pharmacy or wholesaler 
that is part of a corporate enterprise that may also own an entity with 
sales that have been excluded from AMP (for example, PBMs). In 
addition, section 1927(k)(1)(B)(ii) of the Act provides, in part, that 
notwithstanding the exclusions in section 1927(k)(1)(B)(i) of the Act, 
any other discounts, rebates, or payments that are passed through to 
retail community pharmacies should be included in AMP. Therefore, we 
disagree with the commenter's approach to excluding all corporate 
entity sales from AMP because doing so would result in excluding sales 
that should be included in the determination of AMP consistent with 
section 1927(k)(1) of the Act.
    Comment: A few commenters requested specific direction regarding 
how manufacturers are to treat rebates paid to an AMP-ineligible entity 
that owns an AMP-eligible entity, such as a PBM that owns a retail 
community pharmacy, or an insurer that owns a specialty pharmacy. A few 
of the commenters asked if is it reasonable for manufacturers to assume 
that rebates paid to the PBM are passed down to the retail community 
pharmacy, and therefore, should be included in the manufacturer's 
calculations, or are manufacturers required to obtain documentation 
specifically indicating that the rebates paid to PBMs are passed down 
to the retail community pharmacy before such rebates can be deducted 
from their AMP calculation. If it is the latter, a few commenters asked 
if such a requirement to obtain documentation would also apply to best 
price calculations. Additionally, the commenters asked if CMS would 
expect similar treatment of rebate payments to PBMs that own specialty 
pharmacies. One commenter requested that CMS clarify that manufacturers 
can and should make reasonable assumptions regarding the treatment of 
PBM owned retail community pharmacy and specialty pharmacy utilization. 
Another commenter supported the approach where the transaction would be 
treated as a sale to an AMP-eligible entity since the fact of ownership 
does not change the characterization of the subsidiary as an AMP-
eligible entity and the sales and discounts to the AMP-eligible entity 
should be included in the AMP calculation.
    Response: Section 1927(k)(1)(B)(i)(IV) of the Act specifies that 
payments received from, and rebates or discounts provided to PBMs are 
excluded from AMP. However, if a PBM owns an entity

[[Page 5232]]

that meets the definition of a retail community pharmacy or wholesaler, 
manufacturer sales to the retail community pharmacy or wholesaler are 
included in AMP as required by section 1927(k)(1) of the Act. If a 
manufacturer knows the PBM is passing the price concessions or 
discounts on to the retail community pharmacy or wholesaler, the 
manufacturer should include the price concessions in its AMP. We 
recommend that manufacturers maintain the documentation that supports 
the inclusion of this price concession. Otherwise, the manufacturer may 
make reasonable assumptions that PBM discounts or price concessions are 
not passed on, and exclude such price concessions from the 
determination of AMP. As discussed in the Determination of Best Price 
section of this final rule (section II.D.2.), PBM discounts are 
excluded, but only to the extent such discounts are not designed to 
adjust prices at the retail level.
    Therefore, for the reasons we discussed in this section, we are 
finalizing Sec.  447.504(c)(18) to refer only to payments received 
from, and rebates and discounts provided to PBMs instead of sales to 
PBMs.
p. Treatment of Medicaid Rebates in AMP (Sec.  447.504(c)(19))
    We proposed to exclude rebates under the national rebate agreement 
or a CMS-authorized state supplemental rebate agreement paid to state 
Medicaid agencies from the determination of AMP (77 FR 5333) consistent 
with section 1927(k)(1)(A) of the Act. In addition, we have excluded 
such rebates because section 1927(k)(1)(B)(ii) of the Act requires 
inclusion of other discounts and rebates when such rebates are received 
by, paid by, or passed through to retail community pharmacies. Medicaid 
rebates are paid by manufacturers directly to the states and are not 
passed through to retail community pharmacies. We received no comments 
pertaining to this provision and for the reason stated previously, we 
are finalizing Sec.  447.504(c)(19) as proposed.
q. Sales to Hospices (Sec.  447.504(c)(20))
    We proposed to exclude inpatient and outpatient hospice sales from 
the determination of AMP (77 FR 5333) since the definition of AMP at 
section 1927(k)(1) of the Act includes only those sales from the 
manufacturer to a retail community pharmacy as defined at section 
1927(k)(10) of the Act or a wholesaler as defined at section 
1927(k)(11) of the Act. We received no comments pertaining to this 
provision and for the reasons specified previously, we are finalizing 
Sec.  447.504(c)(20) as proposed.
r. Sales to Prisons (Sec.  447.504(c)(21))
    We proposed to exclude sales to prisons from the determination of 
AMP (77 FR 5333) since the definition of AMP at section 1927(k)(1) of 
the Act includes only sales from the manufacturer to a retail community 
pharmacy as defined at section 1927(k)(10) of the Act or a wholesaler 
as defined at section 1927(k)(11) of the Act. Prisons do not dispense 
medications to the general public and therefore do not meet the 
statutory definition of retail community pharmacy. Nor is a prison 
engaged in the wholesale distribution of drugs to retail community 
pharmacies. We received no comments pertaining to this provision and 
for the reasons stated previously, we are finalizing Sec.  
447.504(c)(21) as proposed.
s. Direct Sales to Physicians (Sec.  447.504(c)(22))
    We proposed that direct sales to physicians be excluded from the 
determination of AMP (77 FR 5333) since the definition of AMP at 
section 1927(k)(1) of the Act includes only sales from the manufacturer 
to a retail community pharmacy as defined at section 1927(k)(10) of the 
Act or a wholesaler as defined at section 1927(k)(11) of the Act and 
sales to a physician does not meet either of these statutory 
definitions. We received one comment pertaining to sales to physicians 
in the context of AMP for 5i drugs not generally dispensed through 
retail community pharmacies.
    Comment: One commenter indicated that there are discrepancies in 
the regulatory language of Sec.  447.504(c) and (d) and provided as an 
example that Sec.  447.504(c) excludes ``direct sales to physicians'' 
from the determination of AMP while Sec.  447.504(d) includes ``Sales 
to Physicians'' to AMP for 5i drugs not generally dispensed through 
retail community pharmacies. To avoid confusion, the commenter 
recommended that where CMS intends to include in AMP for 5i drugs not 
generally dispensed through retail community pharmacies transactions 
excluded from AMP, CMS should revise the inclusions at Sec.  447.504(d) 
to match the precise language in Sec.  447.504(c).
    Response: We agree that there may have been some ambiguity between 
the language in Sec.  447.504(c) and (d), and we have made revisions to 
the regulatory text at Sec.  447.504(c) and (d), where applicable, to 
align these sections and address the concerns of the commenter, to the 
extent that such revisions are consistent with section 1927(k) of the 
Act. Therefore, we have revised Sec.  447.504(c)(22) to specify that it 
is ``Sales to physicians'' that are excluded from the calculation of 
AMP and have retained at Sec.  447.504(d)(1) that it is ``Sales to 
physicians'' that are included in the calculation of AMP for 5i drugs 
not generally dispensed through retail community pharmacies.
    Therefore, for the reasons noted, we are finalizing Sec.  
447.504(c)(22) to specify that it is ``Sales to physicians'' that are 
excluded from the calculation of AMP.
t. Direct Sales to Patients (Sec.  447.504(c)(23))
    We proposed that direct sales to patients be excluded from the 
determination of AMP (77 FR 5333) since the definition of AMP at 
section 1927(k)(1) of the Act includes only sales from the manufacturer 
to a retail community pharmacy as defined at section 1927(k)(10) of the 
Act or a wholesaler as defined at section 1927(k)(11) of the Act and 
direct sales to patients do not meet either of these statutory 
definitions. We received the following comments concerning direct sales 
to patients:
    Comment: We received a few comments in support of our proposal to 
exclude direct sales to patients from the determination of AMP for all 
drugs (including 5i drugs not generally dispensed through retail 
community pharmacies). One commenter noted that patients are not within 
the list of purchasers included in AMP-eligible entities (including the 
expanded list of AMP-eligible entities for 5i drugs not generally 
dispensed through retail community pharmacies) and transactions with, 
and benefits provided to, patients should be irrelevant to both 
calculations.
    Response: We appreciate the support for this proposal that direct 
patient sales be excluded from a manufacturer's determination of AMP. 
Further discussion regarding the exclusion of patient sales from AMP 
for 5i drugs not generally dispensed through retail community 
pharmacies is discussed in section II.C.7.d. of this final rule.
    Therefore, because AMP is defined, in part, as the average price 
paid to manufacturers by wholesalers and retail community pharmacies 
and patients are not included in the definitions of retail community 
pharmacy at section 1927(k)(10) of the Act or wholesaler at section 
1927(k)(11) of the Act, we are finalizing Sec.  447.504(c)(23), as 
proposed.
u. Free Goods (Sec.  447.504(c)(24))
    We proposed that when a drug or any other item is given away, but 
not

[[Page 5233]]

contingent on any purchase requirement, there is no sale. Therefore, 
the transaction would be excluded from the determination of AMP (77 FR 
5333) because there is no price paid to the manufacturer for the drug 
consistent with the definition of AMP at section 1927(k)(1) of the Act. 
We received no comments pertaining to this proposed provision and for 
the reasons noted, we are finalizing Sec.  447.504(c)(24) as proposed.
v. Manufacturer Coupons, Voucher Programs, Manufacturer-Sponsored Drug 
Discount Card Programs, Manufacturer-Sponsored Patient Refund/Rebate 
Programs, and Copayment and Patient Assistance Programs (Sec.  
447.504(c)(25) Through (29))
    We proposed that five categories of discounts or benefits to 
patients are to be excluded from the determination of AMP (77 FR 5333 
through 5334, 5362). Because such discounts or benefits are not passed 
through to retail community pharmacies, we proposed in accordance with 
section 1927(k)(1)(B)(ii) of the Act that: (1) Manufacturer coupons to 
a consumer redeemed by the manufacturer, agent, pharmacy, or another 
entity acting on behalf of the manufacturer should be excluded from 
AMP, but only to the extent that the full value of the coupon is passed 
on to the consumer and the pharmacy, agent or other entity does not 
receive any price concession; (2) manufacturer vouchers should be 
excluded from the determination of AMP; (3) prices negotiated under 
manufacturer-sponsored drug discount programs should be excluded from 
the determination of AMP; (4) goods provided free of charge under 
manufacturer-sponsored patient refund or rebate programs should be 
excluded from the determination of AMP; and (5) goods provided free of 
charge under manufacturer copayment assistance programs and patient 
assistance programs should be excluded from the determination of AMP 
(77 FR 5362). As discussed in the preamble, such discounts or benefits 
are excluded only to the extent that the full value of the discount/
coupon is passed on to the customer, and the pharmacy, agent or other 
entity does not receive any price concession (77 FR 5333 through 5334).
(1) Comments Regarding Manufacturer-Sponsored Patient Assistance 
Programs
    We have grouped the comments and responses for these five 
categories together as many of the comments we received pertained to 
more than one of the categories and thus they are interrelated. We 
received the following comments concerning these programs that provide 
discounts or benefits for patients:
    Comment: A few commenters expressed support for CMS's exclusion of 
discounts or benefits provided under patient assistance programs from 
the determination of AMP, as it is consistent with the view that 
patients are not a type of customer that is eligible for consideration 
in the AMP calculation. One commenter stated that since manufacturer 
discount (patient assistance) programs that assist customers are not 
designed to provide discounts to retail community pharmacies, discounts 
or benefits provided under such programs should be excluded from AMP 
without caveats or conditions.
    Response: We agree because we believe the discount or benefits 
provided under these programs generally do not affect the prices paid 
by wholesalers or retail community pharmacies and therefore, should be 
excluded from AMP in accordance with section 1927(k)(1) of the Act.
    Comment: One commenter noted that proposed regulatory text for 
these five categories in AMP and best price is not consistent with the 
discussion of each in the preamble. The commenter provided a detailed 
chart outlining the differences between AMP exclusions in the proposed 
rule preamble and in the proposed rule regulatory text.
    For Patient Refund/Rebate Programs, the commenter stated that the 
inconsistency between the preamble and the regulatory text makes the 
regulatory text read like it only involves free goods, but in the 
preamble it reads like payments to reimburse some or all of a patient's 
out-of-pocket costs. Furthermore, the commenter noted that the language 
describing the copayment and Patient Assistance Programs (PAPs) in the 
regulatory text leaves out part of the details described in the 
preamble and stated that CMS should clarify that discounts or benefits 
provided under manufacturer-sponsored copayment and PAPs are excluded 
from AMP even if they do not involve goods provided free of charge (as 
long as the program benefits are provided entirely to the patient).
    Similarly, the commenter noted that the proposed regulatory text 
for manufacturer coupons excludes coupons ``but only to the extent the 
full value is passed on to the consumer and the pharmacy, agent, or 
other entity [that redeems the coupon] does not receive any price 
concession,'' but does not specify that the pharmacy must not receive 
price concessions in describing the manufacturer vouchers, drug 
discount card programs or patient refund/rebate programs. By contrast 
the preamble does specify that the pharmacy not receive price 
concessions in discussing all four categories of programs. With regard 
to Voucher Programs and Drug Discount Card Programs, the commenter 
noted that the preamble provides details not included in the regulatory 
text regarding the qualifications for discounts or benefits provided 
under vouchers and Drug Discount Card Programs to be excluded from AMP.
    The commenter recommended that CMS clear up the discrepancies in 
the final rule and suggested that CMS adopt a simple provision 
specifying that ``discounts or benefits to patients are excluded from 
AMP and best price.'' The commenter explained that because patients are 
not AMP-eligible or best price-eligible customers, one general 
exclusion is appropriate and further complexity should be avoided. 
However, the commenter stated that if CMS wished to adopt a more 
complex approach with multiple exclusions related to patient discounts, 
then the commenter encouraged CMS to specify in the regulatory text all 
of the conditions that must be satisfied to make discounts or benefits 
provided under a particular program excluded and to describe them 
consistently in the final rule's regulatory text and preamble. 
Furthermore, CMS should define these programs so that manufacturers can 
be sure what conditions for exclusion apply to a particular 
arrangement, otherwise a manufacturer may have difficulty determining 
under which rules a certain arrangement should be evaluated. 
Additionally, the commenter requested that CMS clarify the 
circumstances in which a discount, rebate, or price concession is 
``received'' by a retail community pharmacy. The commenter stated that 
a benefit provided to a patient at the pharmacy counter is not 
``received by'' the pharmacy even though it may be temporarily 
channeled through the pharmacy and therefore is excluded from AMP and 
best price.
    Response: We appreciate these comments and have reviewed the 
proposed regulatory text for these provisions. We do not agree with the 
commenter's recommendation to adopt one general provision specifying 
that discounts or benefits to patients are excluded from AMP and best 
price because there are variations and nuances about how each program 
is treated within AMP and best price; thus, each should be addressed in 
its respective provision regarding

[[Page 5234]]

exclusions. However, we do agree that there are some discrepancies 
between what was proposed in the preamble language and the regulatory 
text and believe that, as suggested by the commenter, revisions are 
needed to the regulatory text to more fully describe all of the 
conditions that must be satisfied to make discounts or benefits 
provided under a particular program excluded as discussed in the 
proposed rule (77 FR 5330 through 5338). Therefore, we are making 
revisions to the AMP and best price sections of the final rule in 
response to these comments.
    First, we are finalizing proposed Sec.  447.504(c)(25) which 
pertains to manufacturer coupons as it was proposed, except we are 
adding AMP eligible before the term ``entity'' to clarify to which 
types of entities we are referring since similar changes are being made 
to proposed Sec.  447.504(c)(26) through (29), as described in detail 
in this section.
    Second, we removed reference to Patient Assistance Programs (PAPs) 
from proposed Sec.  447.504(c)(29) and have grouped them with vouchers 
at Sec.  447.504(c)(26). We have grouped these types of programs 
together because they are specifically designed to offer free goods. 
Additionally, we are clarifying that the voucher or benefit provided by 
the PAPs or other manufacturer-sponsored program must not be contingent 
on any other purchase requirement to be consistent in our treatment of 
free goods within AMP. We recognize that we included some discussion in 
the proposed rule regarding future purchase contingencies associated 
with patient assistance programs (77 FR 5333); however, we see no 
reason that we should establish a different standard for discounts or 
benefits provided under such programs. As discussed previously, we 
proposed and are finalizing at Sec.  447.504(c)(24) that AMP shall 
exclude free goods, not contingent upon any purchase requirement. 
Therefore, we have included a similar standard with these manufacturer-
sponsored programs because we see no reason that manufacturers should 
treat the free goods provided under these patient assistance and 
voucher programs any differently from how such goods are treated in 
Sec.  447.504(c)(24). Furthermore, we are clarifying that for the 
discount or benefit of the voucher or manufacturer-sponsored program to 
be excluded from AMP, then the full value of the voucher or benefit of 
the manufacturer-sponsored program must be passed on to the consumer, 
and that the retail community pharmacy, its agent, or other AMP 
eligible entity must not receive any price concession. These changes 
are designed to provide clarification and consistency in the regulatory 
text as was requested by the commenters, as well as to ensure 
manufacturer compliance with section 1927(k)(1)(B)(ii) of the Act, 
which essentially requires that any price adjustments passed on to 
retail community pharmacies be included in AMP. Similar changes are 
being made to the AMP for 5i drugs not generally dispensed through 
retail community pharmacies exclusions at Sec.  447.504(e)(14), as well 
as the best price exclusions at Sec.  447.505(c)(12) to ensure 
consistency in the treatment of these programs.
    Third, proposed Sec.  447.504(c)(27), which pertains to discounts 
or benefits provided under manufacturer-sponsored drug discount card 
programs, has been revised to add the contingency that the full value 
of the discount is passed on to the consumer, and the pharmacy, its 
agent or other AMP-eligible entity does not receive any price 
concession. We also removed the reference to ``prices negotiated 
under'' to reduce redundancy in this section of the rule. These changes 
are being made to provide clarification and consistency in the 
regulatory text, as was requested by the commenters, as well as to 
ensure manufacturer compliance with section 1927(k)(1)(B)(ii) of the 
Act which essentially requires that any other price adjustments passed 
on to retail community pharmacies shall be included in AMP. Similar 
changes are being made to the AMP for 5i drugs exclusions at Sec.  
447.504(e)(15), as well as the best price exclusions at Sec.  
447.505(c)(8) to ensure consistency in the treatment of these programs.
    Fourth, we have revised proposed Sec.  447.504(c)(28), in light of 
the comment about the inconsistency between the proposed regulatory 
text reference to goods provided free of charge (77 FR 5362) and the 
preamble reference to full or partial refunds of a patient's out-of-
pocket costs (77 FR 5333). Additional discussion regarding this 
discrepancy and the subsequent revision is provided in this section in 
the response to other comments. However, we wish to acknowledge here 
that we agree with the commenters that manufacturer-sponsored patient 
refund/rebate programs typically offer refunds or discounts, not free 
goods to patients, and therefore, we have revised Sec.  447.504(c)(28), 
to remove the language ``provided free of charge.'' Furthermore, we 
have added to the regulatory text of Sec.  447.504(c)(28), the 
contingency included in the preamble reference (77 FR 5333) that the 
manufacturer may exclude the discount or benefit provided under such 
refund/rebate programs where the manufacturer provides a full or 
partial refund or rebate to the patient for out-of-pocket costs and the 
pharmacy, agent, or other AMP-eligible entity does not receive any 
price concessions. While this condition was discussed in the preamble 
regarding the exclusion of manufacturer-sponsored patient refund/rebate 
programs, it was inadvertently omitted from the regulatory text of the 
proposed rule (77 FR 5333 and 5362).
    As indicated from the preamble discussion in the proposed rule (77 
FR 5333), it was our intention that this contingency language apply to 
the exclusion of the discount or benefit provided under manufacturer-
sponsored patient refund/rebate programs, but as noted by the 
commenters the proposed regulatory text did not provide the same level 
of detail (77 FR 5362). Therefore, we are adding this detailed language 
to the regulatory text of this final rule to provide clarification 
about the exclusion of the discount or benefit provided under 
manufacturer-sponsored patient refund/rebate programs from the 
determination of AMP to ensure compliance with section 
1927(k)(1)(B)(ii) of the Act, which as discussed previously, 
essentially requires that any price adjustments passed on to retail 
community pharmacies shall be included in AMP. Similar changes are 
being made to the AMP for 5i drugs not generally dispensed through 
retail community pharmacies exclusions at Sec.  447.504(e)(16), as well 
as the best price exclusions at Sec.  447.505(c)(11) to ensure 
consistency in the treatment of these programs.
    Fifth, Sec.  447.504(c)(29), now pertains solely to discounts or 
benefits provided under Manufacturer copayment assistance programs 
because we are moving Patient Assistance Programs to Sec.  
447.504(c)(26) as discussed in this section. Proposed section Sec.  
447.504(c)(29) was also revised to remove the language ``provided free 
of charge'' as these types of programs typically offer copayment 
assistance, which may or may not result in free goods to patients and 
to include discussion from the preamble discussion in the proposed rule 
that discounts or benefits provided under such programs may only be 
excluded from AMP to the extent that the pharmacy, agent, or other AMP 
eligible entity does not receive any price concession (77 FR 5333 
through 5334). Additional discussion regarding this discrepancy and the 
subsequent revision is provided in this section in the response to 
other comments.

[[Page 5235]]

However, we wish to acknowledge that we agree with the commenters that 
the language describing the copayment assistance programs in the 
regulatory text leaves out details described in the preamble regarding 
Manufacturer copayment assistance programs; specifically that 
Manufacturer copayment assistance programs typically offer copayment 
assistance or discounts, not free goods, to patients. Therefore, we 
have revised proposed Sec.  447.504(c)(29) to remove language 
concerning goods provided free of charge.
    Furthermore, we have added the contingency, consistent with section 
1927(k)(1)(B)(ii), that the program benefits are provided entirely to 
the patient, and that the pharmacy, its agent, or other AMP-eligible 
entity does not receive any price concessions. As pointed out by the 
commenter, this condition was discussed in the preamble regarding the 
exclusion of discounts or benefits provided under Manufacturer 
copayment assistance programs, but it was inadvertently omitted from 
the regulatory text of the proposed rule (77 FR 5333 and 5362). As 
indicated in the preamble discussion in the proposed rule (77 FR 5333 
through 5334), it was our intention that this contingency language 
apply to the exclusion of discounts or benefits provided under 
Manufacturer copayment assistance programs, but as noted by the 
commenters the proposed regulatory text did not provide the same level 
of detail (77 FR 5362). Therefore, we are adding this detailed language 
to the regulatory text of final rule to provide clarification about the 
exclusion of discounts or benefits provided under Manufacturer 
copayment assistance programs from the determination of AMP to ensure 
manufacturer compliance with section 1927(k)(1)(B)(ii) of the Act, 
which requires, essentially, that any price adjustments passed on to 
retail community pharmacies shall be included in AMP. Similar changes 
are being made to the AMP for 5i drugs not generally dispensed through 
retail community pharmacies exclusions at Sec.  447.504(e)(17), as well 
as the best price exclusions at Sec.  447.505(c)(10) to ensure 
consistency in the treatment of these programs.
    In addition, we do not agree with the commenter's request that we 
define each of these programs, because there is no one industry 
standard definition for each of these types of programs. Instead we 
believe that the level of specificity that we have added to the 
regulatory text provides sufficient detail for manufacturers to be able 
to determine under which ``program'' their manufacturer specific 
program should be categorized. Once a manufacturer has made that 
determination, it will need to determine if the discounts or benefits 
provided under its program meets the specific regulatory requirements 
as set forth in Sec.  447.504(c) to be excluded from the determination 
of AMP.
    As to the commenter's request that CMS clarify the circumstances in 
which a discount, rebate or price concession is ``received'' by a 
retail community pharmacy, we agree with the commenters assessment that 
a benefit provided to a patient, even if it is provided at the pharmacy 
counter, is not a discount, rebate, payment or other financial 
transactions received by or passed through to the retail community 
pharmacy that must be included in AMP in accordance with section 
1927(k)(1)(B)(ii) of the Act. As stated in this section, once the 
manufacturer determines under which ``program'' their manufacturer 
specific program should be categorized, the manufacturer must then 
determine if the discounts or benefits provided under the program meets 
the specific regulatory requirements of Sec.  447.504(c) to be excluded 
from the determination of AMP or best price.
    Furthermore, we want to ensure consistent treatment of discounts or 
benefits provided under manufacturer-sponsored programs that provide 
free goods or subsidies to patients in the calculation of AMP and best 
price, such as those described in the AMP exclusions at Sec.  
447.504(c)(26), Sec.  447.504(e)(14), as well as the best price 
exclusions at Sec.  447.505(c)(12).
    We intend to issue guidance to provide consistency among 
manufacturers treatment of the ``any purchase requirement'' of the free 
goods provision and to ensure that the discounts or benefits provided 
under programs being excluded from AMP and best price are programs that 
are designed to benefit or assist only the patient, without any 
purchase contingencies, rather than designed to increase manufacturer 
sales or profits.
    Comment: One commenter noted that typically after a pharmacy 
processes a voucher it receives a payment from the manufacturer to make 
it whole for the product dispensed plus a fee that is tantamount to a 
dispensing fee. The commenter indicated that this transaction is 
separate from the discount that is passed on to the patient and should 
be evaluated independently for inclusion in AMP or best price under the 
proposed four-part test for bona fide service fee.
    Response: We would agree that a fee paid to the retail community 
pharmacy from the manufacturer for the pharmacy to process a voucher 
should be considered separately and would likely be a bona fide service 
fee; however, we would need to know the facts and circumstances 
surrounding the arrangement to fully evaluate whether the fee is a bona 
fide service fee in accordance with section 1927(k)(1)(B)(i)(II) of the 
Act and this final rule.
    Comment: A few commenters requested that CMS clarify that if a 
patient program does generate price concessions to an AMP-eligible 
entity, such as a service fee to a retail community pharmacy that does 
not satisfy the bona fide service fee definition, that the appropriate 
treatment is to include that price concession in AMP but to continue to 
exclude the cost of the program benefits to the patient from AMP. The 
commenters requested that CMS clarify in the final rule that the 
patient remains excluded from the calculation and therefore, the 
manufacturer program benefits provided to the patient should be 
excluded as well.
    Response: In instances when a retail community pharmacy is 
receiving a service fee paid by a manufacturer to assist with the 
administration of a patient program, such fees would be excluded to the 
extent the fees meet the bona fide service fee definition as being a 
fee paid by the manufacturer that represents fair market value for a 
bona fide, itemized service actually performed on behalf of the 
manufacturer that the manufacturer would otherwise perform in the 
absence of the service arrangement and that is not passed on in whole 
or in part to a client of customer of an entity. When the manufacturer 
is providing a price concession (discount) to a patient under its 
patient assistance program via a retail community pharmacy, it is 
typically not a fee to which the bona fide service fee test would be 
applied, but rather a price concession being provided to the patient as 
part of the patient assistance program. Since the price concession is 
passed on to the patient, the patient program's discount is excluded 
because the pharmacy does not receive the price concession. We note 
that such determinations about patient programs are based on the facts 
of each program and the program's compliance with section 1927 of the 
Act and federal regulations.
    Comment: Commenters requested that CMS clarify that vouchers for 
free goods provided to a patient by a provider are exempt from AMP 
whether or not the

[[Page 5236]]

provider is made whole through payment in cash or in kind.
    Response: We agree that vouchers for free goods, which are not 
contingent upon any purchase requirement, that are provided by a 
provider to a patient should be excluded from AMP regardless of whether 
the provider is made whole (reimbursed for the cost of the product) 
through payment in cash or in kind.
    Comment: A few commenters indicated that CMS may have mistakenly 
limited the exclusion from AMP for copayment assistance to the 
provision of goods free of charge. The commenters explained that free 
goods are typically provided to patients under a patient assistance 
program or through vouchers, whereas copayment assistance programs do 
not provide free goods, but rather help cover the insured patient's 
share of the payment for the drug at the point of sale. To avoid 
confusion, the commenters requested that CMS change Sec.  
447.504(c)(29) to remove copayment assistance programs as free goods 
are not provided under these programs and to clarify that payment 
assistance provided under a copayment assistance programs is excluded 
from AMP. One of these commenters also suggested changing the 
regulatory exclusion for patient refund or rebate programs at 
Sec. Sec.  447.504(c)(28) and 447.505(c)(11) to read ``full or partial 
refunds or rebates to patients under manufacturer-sponsored patient 
refund/rebate programs.''
    Response: We agree with the commenters regarding the differences 
between copayment assistance programs and patient assistance programs 
or vouchers. As discussed in earlier responses, we have revised 
proposed Sec.  447.504(c)(29) to remove mention of patient assistance 
programs in this provision and focus instead only on manufacturer 
copayment assistance programs. Furthermore, we have revised proposed 
Sec.  447.504(c)(26) to include manufacturer-sponsored programs that 
provide free goods, including but not limited to vouchers and patient 
assistance programs. In addition, as discussed previously, we have 
revised proposed Sec.  447.504(c)(28) to remove the reference to goods 
provided free of charge and to include an exclusion for manufacturer-
sponsored patient refund/rebate programs to the extent that the 
manufacturer provides a full or partial refund or rebate to the patient 
for out-of-pocket costs and the pharmacy, agent, or other AMP eligible 
entity does not receive any price concessions. We believe these 
revisions address the concerns of these commenters as we have 
established separate categories of manufacturer programs to distinguish 
between those that provide free goods versus those that provide 
copayment assistance. In addition, as discussed in the preamble to the 
proposed rule, these revisions address section 1927(k)(1)(B)(ii) of the 
Act, which requires, in part, that manufacturers include in AMP, such 
discounts, rebates, and payments to the extent that they are passed 
through to retail community pharmacies. As discussed in section II.D., 
we are making similar changes to the regulatory language of the 
determination of best price section as well.
    Comment: A few commenters requested that CMS specifically confirm 
that the detailed criteria for identifying patient programs under the 
AMP Final Rule are no longer applicable if a particular transaction 
meets the standards of the proposed rule.
    Response: The revisions to Sec.  447.504(c)(25) through (29), Sec.  
447.504(e)(13) through (17), and Sec.  447.505(c)(8) through (12) in 
this final rule clarify the criteria for identifying when discounts or 
benefits provided under patient programs are to be included in or 
excluded from the determination of AMP and best price. Furthermore, as 
stated in an earlier response, we want to ensure consistent treatment 
of manufacturer-sponsored programs that provide free goods or subsidies 
to patients in the calculation of AMP and best price. The criteria that 
the commenter referenced from the July 27, 2007 AMP Final Rule (72 FR 
39189) was provided as guidance regarding criteria that should be 
considered when determining which manufacturer-sponsored programs that 
provide free goods are eligible for exclusion from AMP and best price. 
This guidance was part of a regulation that was withdrawn. We expect to 
issue new guidance in the future.
(2) Commenter Regarding State Pharmacy Assistance Programs (SPAPs)
    We received comments about other patient assistance programs that 
are established by entities other than manufacturers. Specifically, we 
received comments pertaining to SPAPs and have chosen to address the 
comment in this section because SPAPs can be a form of patient 
assistance programs.
    Comment: Several commenters noted that the proposed rule does not 
specifically mention SPAP sales or prices in the context of AMP even 
through it instructs manufacturers that such sales do not set a price 
point for the determination of best price. Since the discounts enjoyed 
by SPAPs are not available to retail community pharmacies that dispense 
prescriptions to SPAP enrollees, the commenters requested that CMS add 
an SPAP-specific exclusion to the final rule for both retail community 
pharmacy AMP and AMP for 5i drugs not generally dispensed through 
retail community pharmacies. The commenters also requested that CMS 
clarify that SPAP sales through retail community pharmacies are to be 
included in AMP and only SPAP rebates are to be excluded from AMP. One 
commenter requested that CMS rectify this oversight by adding rebates 
paid to SPAPs to the list of exclusions from AMP.
    Response: For the purpose of calculating AMP, we agree that rebates 
paid to SPAPs are to be excluded from the calculation of AMP and AMP 
for 5i drugs not generally dispensed through retail community 
pharmacies, because the definition of AMP in section 1927(k)(1) of the 
Act does not contemplate the inclusion of such rebates. As discussed 
for manufacturer-sponsored programs, rebates, discounts, or price 
concessions provided to entities other than retail community pharmacies 
and wholesalers, as defined in sections 1927(k)(10) and 1927(k)(11) of 
the Act, should not be included in AMP. Such rebates, discounts, or 
price concessions do not adjust prices paid to the manufacturer by 
wholesalers or retail community pharmacies and thus, in accordance with 
section 1927(k)(1) of the Act, should be excluded by the manufacturer 
when calculating AMP. Therefore, we are adding Sec.  447.504(c)(30) to 
clarify that rebates, discounts, or price concessions paid to SPAPs are 
excluded from the calculation of AMP. We have included a similar 
provision at Sec.  447.504(e)(10) in the AMP for 5i drugs not generally 
dispensed through retail community pharmacies as further discussed in 
section C.II.7.d of this preamble.
    Therefore, in response to comments and for the reasons discussed in 
this section, we are finalizing the provisions pertaining to patient 
assistance programs as follows:
     Proposed Sec.  447.504(c)(25) pertaining to manufacturer 
coupons is finalized as proposed, except to add ``AMP eligible'' before 
the term ``entity'' to clarify to which types of entities we are 
referring.
     Proposed Sec.  447.504(c)(26) is revised to include a 
reference to manufacturer-sponsored programs that provide free goods 
and patient assistance programs, but only to the extent that the 
voucher or benefit of such a program is not contingent on any other 
purchase requirement; the full value of the

[[Page 5237]]

voucher or benefit of such program is passed on to the consumer; and 
the pharmacy, agent, or other AMP eligible entity does not receive any 
price concession.
     Proposed Sec.  447.504(c)(27) is revised to delete the 
reference to ``prices negotiated under'' and to include a reference to 
the requirements that the full value of the discount is passed on to 
the consumer, and that the pharmacy, agent, or other AMP eligible 
entity does not receive any price concession.
     Proposed Sec.  447.504(c)(28) is revised to delete the 
reference to ``goods provided free of charge'' and to include a 
reference to the requirements that the manufacturer provides a full or 
partial refund or rebate to the patient for out-of-pocket costs, and 
that the pharmacy, agent, or other AMP eligible entity does not receive 
any price concession.
     Proposed Sec.  447.504(c)(29) is revised to delete the 
reference ``to goods provided free of charge'' and ``patient assistance 
programs'', and to include a reference to the requirements that the 
program benefits are provided entirely to the patient and that the 
pharmacy, agent, or other AMP eligible entity does not receive any 
price concession.
     Adding Sec.  447.504(c)(30) to clarify that rebates, 
discounts, or price concessions paid to designated SPAPs are excluded 
from the calculation of AMP.
7. Inhalation, Infusion, Instilled, Implanted, and Injectable Drugs 
(Sec.  447.502, Sec.  447.507, and Sec.  447.504(d) Through (e))
    We proposed to add a definition of 5i drug in the regulatory text 
of Sec.  447.502 and we proposed to add new Sec.  447.507 
(Identification of 5i drugs) to indicate how 5i drugs are to be 
identified and how the term ``not generally dispensed'' is to be 
interpreted for 5i drugs. We also proposed to add Sec.  447.504(d) to 
specify which sales, associated discounts, rebates, payments, and other 
financial transactions should be included in the determination of AMP 
for 5i drugs. These proposed provisions are discussed in more detail at 
77 FR 5327, 5334 through 5336, 5359, 5362, and 5363. As discussed in 
more detail in the definition section of this final rule (section 
II.B.), we have decided not to finalize the definition of 5i drug that 
was proposed in the definition section of the proposed rule (77 FR 
5359). Instead, we will use the acronym of ``5i drug'' to refer to 
inhalation, infusion, instilled, implanted, or injectable drugs. We 
received numerous comments concerning the proposed 5i drug provisions. 
These comments and responses are detailed later in this section.
a. Identification of 5i Drugs (Sec.  447.507(a))
    At Sec.  447.507(a), we proposed to use FDA's Routes of 
Administration posted on the CMS Web site to identify 5i drugs (77 FR 
5334 and 5363). We received the following comments pertaining to this 
proposal.
    Comment: Several commenters expressed opposition to utilizing FDA 
SPL Routes of Administration to identify 5i drugs because it would add 
an unnecessary layer of complexity to an otherwise simple process, be 
burdensome to manufacturers, and increase the time required to update 
and maintain their product masters. A few commenters believed that 
manufacturers should be able to make the 5i determination based on the 
label of the product itself and that CMS should not mandate 
consultation with FDA guidance. One commenter stated that FDA's Routes 
of Administration are not published through formal rulemaking but are 
updated through sub-regulatory guidance and if CMS finalizes its 
proposal to require that manufacturers consult FDA's Routes of 
Administration to determine 5i status, CMS should assume responsibility 
for notifying manufacturers when FDA's information has been updated or 
revised. Another commenter noted that CMS does not have oversight of 
FDA information and cannot ensure that the information being used is 
current and up to date. The commenter requested that CMS clearly state 
how it will ensure that information relied on by states for 
administration of pharmacy benefits will be maintained in a current 
fashion so that payments and delivery of pharmacy benefits to Medicaid 
recipients are not affected.
    Response: In light of the comments, we decided to revise our 
proposal regarding using the FDA SPL Routes of Administration file 
referenced in the proposed rule (77 FR 5334, 5363). The Routes of 
Administration list (77 FR 5334) which we included in the proposed rule 
is a list that we established based upon routes of administration 
identified from the FDA SPL Routes of Administration file. It was our 
intention that manufacturers should use the Routes of Administration 
list as a reference tool when determining whether a drug meets the 
definition of a 5i drug. However, after careful review and 
consideration of the comments received, we are not finalizing our 
proposal that manufacturers use this list when identifying 5i drugs.
    Furthermore, since manufacturers are knowledgeable as to how their 
drug is administered, manufacturers will have the flexibility to 
determine whether their drug is a 5i drug based on reasonable 
assumptions. They may make such determinations, using resources such as 
the manufacturer's prescribing information, drug package insert, or the 
FDA SPL Routes of Administration; however, we will not mandate the use 
of any specific resource. As discussed previously, manufacturers may 
continue to make reasonable assumptions in the calculation of AMP, 
provided such assumptions are consistent with the requirements and 
intent of section 1927 of the Act and federal regulations, and a 
written or electronic record outlining these assumptions is maintained.
    Additionally, we note that manufacturers are responsible for 
reporting AMP and AMP for 5i drugs that are not generally dispensed 
through a retail community pharmacy on a monthly basis. We will provide 
such information to states to ensure that they have current information 
regarding such drugs.
    Therefore, we are revising proposed Sec.  447.507(a) to specify 
that manufacturers must identify to CMS each COD that qualifies as a 5i 
drug, and are removing the specific reference to the list of FDA's 
Routes of Administration.
    Comment: One commenter noted that the routes of administration from 
FDA SPL file do not always correspond with the 5i administration 
methods cited in the statute (that is, inhaled, infused, instilled, 
implanted, or injected). As an example, the commenter cited 
``transmucosal'' which is listed on FDA SPL list and found in the 
proposed rule. FDA defines transmucosal as a drug that is 
``administered across the mucosa,'' meaning the drug passes through a 
mucosal membrane. However, there are some ``transmucosal'' drugs that 
are tablets that a patient holds on the inside of their cheek and the 
tablet is absorbed as it dissolves. The commenter noted that a drug 
administered in this manner does not necessarily fall into one of the 
five enumerated categories for 5i drugs found in the statute. The 
commenter believed that due to overlapping meanings of the definitions 
of certain routes of administration, the use of FDA's list could 
misguide manufacturers into treating certain types of drugs as 5i when 
categorizing them as such is inconsistent with the statute. Therefore, 
the commenter recommended that CMS should affirm that manufacturers are 
capable of deciding based on the (1) the dictionary

[[Page 5238]]

definition of such term, and (2) FDA-approved prescribing information 
and the product labeling for their product, if their drug is inhaled, 
infused, instilled, implanted, or injected and thus appropriately 
classified as a 5i drug.
    Response: As previously stated in this section, in light of the 
comments, we decided not to finalize our proposal to use the FDA SPL 
Routes of Administration file referenced in the preamble discussion, as 
well as the regulations text of the proposed rule (77 FR 5334 and 
5363). Instead, we are revising proposed Sec.  447.507(a) to specify 
that manufacturers must identify which CODs qualify as 5i drugs and are 
removing the specific reference to the list of FDA's Routes of 
Administration. Additionally, as previously discussed in this section, 
manufacturers have the flexibility to use reasonable assumptions when 
determining whether their drug is a 5i drug.
    Comment: One commenter noted that errors do occur with FDA posting 
and database maintenance and believed it would be helpful if the final 
rule laid out a procedure that manufacturers should follow when such 
situations arise to minimize any adverse impact on patient access 
stemming from inappropriate changes in Medicaid coverage and/or payment 
of the affected product. Additionally, since the technology surrounding 
drug delivery is evolving and new dosage forms are being developed, the 
commenter asked that the final rule address the procedures 
manufacturers should follow to determine whether a novel new product 
would qualify as a 5i drug.
    Response: As discussed in this section, we have reconsidered our 
proposal regarding using the FDA SPL Routes of Administration file 
referenced in the preamble discussion of the proposed rule (77 FR 5334) 
and are revising proposed Sec.  447.507(a) to specify that 
manufacturers identify which CODs are 5i drug(s). Manufacturers, when 
identifying 5i drugs, are not required to use any particular FDA file 
or publication. Therefore, the FDA posting errors and database 
maintenance issues raised by the commenter should not be an issue 
affecting a manufacturer's timely identification of 5i drugs. 
Furthermore, as discussed previously, since manufacturers have the 
flexibility to use reasonable assumptions when determining whether 
their drug is a 5i drug, we do not believe it is necessary to specify 
in this final rule the procedures manufacturers should follow to 
determine whether a novel new product qualifies as a 5i drug.
    Comment: One commenter expressed support for CMS's premise to not 
require states to identify 5i drugs. However, to achieve consistency in 
identification of 5i products, the commenter requested that CMS 
identify such products rather than manufacturers. The commenter stated 
that whether the manufacturer or CMS identifies the 5i products, they 
request that the quarterly tape and DDR list the products as a common 
point of reference. Should CMS finalize the proposed policy without 
revisions, the commenter requested that CMS establish in this rule a 
dispute resolution policy. The commenter believed that such a process 
is necessary since states would be relying on manufacturers to 
correctly identify 5i drugs.
    Response: We disagree that CMS, instead of manufacturers, should 
identify which CODs are 5i drugs. As previously discussed, 
manufacturers are knowledgeable about their products and are in the 
best position to identify which CODs are 5i drugs. We believe that once 
manufacturers identify those drugs that are 5i in our system, both 
states and manufacturers that use the DDR system will have access to 
view this product information on the quarterly rebate files. States 
should notify CMS if it has specific concerns regarding the 
identification of a product as 5i in the DDR system.
    We do not believe a formal dispute resolution process regarding the 
identification of 5i drugs is necessary because we decided to 
reconsider our proposed policy that manufacturers identify 5i drugs 
using the FDA SPL Routes of Administration file referenced in the 
proposed rule (77 FR 5334 and 5363).
    Comment: One commenter that also supports inclusion of drugs sold 
to physicians in the AMP calculation of 5i drugs suggested that CMS 
modify Sec.  447.507(a) to require the collection of NDCs for AMP to be 
calculated and federal rebates to be available and collected.
    Response: The NDC is already collected for each COD in our DDR 
system (including 5i drugs) when a manufacturer reports its product 
information to CMS.
    Comment: One commenter expressed support of the proposed rule's use 
of the drug's route of administration to determine if the drug is a 5i 
drug.
    Response: We appreciate this support. However, as discussed in this 
section, in light of comments received on this proposal, we decided to 
revise our proposal regarding the Routes of Administration list 
referenced in the proposed rule (77 FR 5334).
    After consideration of the comments and for the reasons discussed 
in this section, we have revised proposed Sec.  447.507 to remove the 
reference in Sec.  447.507(a) that manufacturers use the list of FDA's 
Routes of Administration posted on the CMS Web site, to insert a 
requirement that manufacturers must identify their 5i drugs to CMS, and 
to delete the first paragraph in this provision.
b. Determination of 5i Drug's Status as ``Not Generally Dispensed''--
the 90/10 Rule (Sec.  447.507(b)(1))
    Section 1927(k)(1)(B)(i)(IV) of the Act provides, in part, that 
manufacturers are to exclude from the determination of AMP for a COD 
for a rebate period, payments received from, and rebates or discounts 
provided, to any other entity that does not conduct business as a 
wholesaler or retail community pharmacy. Section 202 of the Education, 
Jobs and Medicaid Funding Act (Pub. L. 111-226), enacted on August 10, 
2010 and effective on October 1, 2010, amended this provision to 
include sales for 5i drugs that are not generally dispensed through 
retail community pharmacies. This provision was added to ensure that an 
AMP could be calculated and Medicaid rebates could be collected from 
manufacturers for 5i drugs that are not generally dispensed through 
retail community pharmacies, as discussed in the proposed rule (77 FR 
5334 through 5336, 5363). To effectuate this provision, we proposed in 
Sec.  447.507(b)(1) to use a 90 percent standard to determine when a 
drug is not generally dispensed through a retail community pharmacy. We 
received the following comments pertaining to this proposal.
    Comment: Many commenters expressed opposition to our proposal to 
consider a 5i drug not generally dispensed through a retail community 
pharmacy if 90 percent or more of its sales were to entities other than 
retail community pharmacies and thought it was too stringent and would 
increase the possibility that products would shift in and out of the 
AMP calculation for 5i drugs not generally dispensed through retail 
community pharmacies; create the potential for AMP volatility and 
instability; inappropriately exclude products that should be viewed as 
5i drugs not generally dispensed through retail community pharmacies; 
and product FULs that are less predictable. Several commenters agreed 
that there should be a quantitative method to determine when a drug is 
``not generally dispensed'' as it would be more

[[Page 5239]]

meaningful than a qualitative approach, but the commenters recommended 
that CMS lower the threshold percentage.
    One commenter was troubled by the 90/10 rule for products which 
barely qualify for AMP treatment because too few transactions would be 
included in the AMP calculation to generate reliable results and the 
commenter stated that if the proposed rule were to be finalized as 
drafted, they would expect the AMPs for some 5i drugs not generally 
dispensed through retail community pharmacies to be lower than the AMP 
currently being reported. The commenter also stated that Congress, by 
amending the statute to provide an alternative AMP calculation, sought 
to improve the accuracy of AMP calculations, and the proposal to adopt 
a 90 percent standard would undercut this aim. One commenter believed 
that CMS's interpretation of ``not generally dispensed'' goes beyond 
the plain reading of the statute and a lower percentage of such sales 
would be more appropriate.
    Several commenters suggested that CMS establish thresholds at the 
80/20, 75/25, 70/30, 65/35, or 51/49 because these levels would 
minimize fluctuation and promote stability as products tend to 
consistently be above or below the threshold. A few of these commenters 
specifically stated that a 75/25 or 70/30 threshold would be a more 
appropriate interpretation of the statutory language, and would ensure 
there are an adequate number of sales in the appropriate category to 
support the calculation of a reasonably accurate AMP. One of these 
commenters performed an analysis of the proposed threshold and 
alternative thresholds and found that a 75 percent threshold would 
minimize fluctuation and promote stability as products tend to 
consistently be above or below the threshold. The commenter further 
indicated that its analysis of the proposed 90 percent threshold caused 
more frequent variation in whether or not a product met the threshold. 
Another one of the commenters indicated that using the 90/10 threshold 
would cause many of its 5i drugs to flip-flop between the two AMP 
calculations on a month-to-month basis. The commenter further indicated 
that its history showed that a 70-75/30-25 threshold would provide a 
more consistent pattern.
    Other commenters suggested that CMS should allow manufacturers the 
flexibility to consider qualitative factors when making the 
determination of whether a 5i drug is not generally dispensed through 
retail community pharmacies and indicated that CMS should permit 
manufacturers to make reasonable assumptions on whether a particular 
product is subject to the AMP calculation for 5i drugs not generally 
dispensed through retail community pharmacies. The commenters believed 
that a qualitative approach consisting of documented reasonable 
assumptions would ensure that more accurate AMPs are calculated for 
each product, without imposing the significant burden and costs that 
would result if manufacturers had to obtain potentially incomplete or 
otherwise inaccurate data to comply with the proposed policy.
    Another commenter stated that allowing manufacturers flexibility to 
make reasonable assumptions for the inclusion of drugs in this 
quantitative standard, based on objective drug characteristics, could 
further reduce AMP volatility.
    Response: When we proposed the 90 percent threshold, we thought 
that this measure would be appropriate for determining when a drug is 
not generally dispensed through a retail community pharmacy because it 
would ensure that drugs not otherwise included in the AMP calculation 
would be included and reflected in the AMP for such 5i drugs. However, 
the comments we received have overwhelmingly brought to light concerns 
regarding this high threshold leading to AMP volatility and 
fluctuations, as well as not concerns regarding our interpretation of 
what it means to be ``not generally dispensed.'' We agree with the 
commenters that a 90 percent threshold would likely result in a limited 
amount of the product's overall sales being used by the manufacturer to 
establish an AMP. Given the comments that raised concerns regarding 
inclusion of an inadequate amount of overall product sales to establish 
an AMP and volatility of the AMP, we have reconsidered our proposal and 
agree with commenters that a 90 percent threshold may not accurately 
reflect what it means to be not ``generally'' dispensed through retail 
community pharmacies.
    We recognize, in light of the comments, that the 90 percent 
threshold is overly restrictive and sets a threshold that is indicative 
of instances when most, if not all, of the sales would be to entities 
other than retail community pharmacies. However, as discussed in the 
proposed rule (77 FR 5335), we have concerns about setting a lower 
threshold, such as 50 percent because half of the manufacturer's sales 
would have been to retail community pharmacies.
    Therefore, to address the concerns of commenters for more 
flexibility, to reduce volatility of AMP, and to ensure sufficient 
sales to be included in AMP while at the same time appropriately 
restricting the inclusion of 5i drugs to those that are not generally 
dispensed through retail community pharmacies, we have decided to adopt 
the suggestion of the commenters and establish the threshold at 70 
percent. Based on the comments received including the analyses 
performed by the commenters, we believe that a threshold of 70 percent 
of sales to entities other than retail community pharmacies is more 
likely than a 90 percent threshold to allow for an AMP calculation 
based on a sufficient number of sales, which would promote stability 
and consistency in the AMP calculation, consistent with section 1927(k) 
of the Act. Thus, a 5i drug would be considered not generally dispensed 
through a retail community pharmacy when the manufacturer determined 
that 70 percent or more of its sales, in units (the choice of ``unit'' 
is discussed later in this section), are to entities other than retail 
community pharmacies. However, we will continue to consider this issue 
and will issue additional guidance or rulemaking, if needed, regarding 
any concerns with implementation of this standard.
    Furthermore, as discussed later in this section, we are permitting 
manufacturers to make reasonable assumptions, and include a smoothing 
process to determine if the percent of sales (in units) were sufficient 
to meet the ``not generally dispensed'' threshold.
    Comment: Several commenters requested that CMS clarify whether 
manufacturers are to determine whether the threshold is based on units 
or dollars and whether the calculation would be made at the NDC-9 or 
NDC-11 level. Additionally, the commenter indicated that CMS should 
provide manufacturers the flexibility as to which data should be used 
for conducting the ``not generally dispensed determination,'' provided 
that the methodology is otherwise consistent with the company's 
business practices.
    Response: We agree with the commenters that suggested that the not 
generally dispensed determination should be based on units, not 
dollars, and that it should be calculated at the NDC-9 level as this is 
inclusive of all package sizes. While section 1927(k)(1)(B)(i)(IV) of 
the Act provides for inclusion of payments, rebates, or discounts, for 
the 5i drugs that are not generally dispensed through retail community 
pharmacies, it does not mandate that manufacturers use units, as 
opposed to pricing data, to determine if a 5i drug is not generally 
dispensed through retail community pharmacies.

[[Page 5240]]

However, we believe that manufacturers use of units will ensure 
consistency in the data being reported to CMS, and will not cause undue 
burden on the manufacturers as they are already required to report unit 
data to CMS in accordance with section 1927(b)(3)(A)(iv) of the Act and 
the requirements outlined in Sec.  447.510(d)(6). Additionally, we 
believe that the use of pricing data, instead of units, could lead to 
distortions based on price fluctuations, as noted in the comments, and 
would not necessarily allow for making determinations based on whether 
the drug is dispensed through retail community pharmacies.
    Comment: A few commenters recommended that manufacturers be 
permitted to review data within the last 12-months to make the ``not 
generally dispensed'' determination, noting that end-customer sales 
data are not available in time to support a determination for the 
current period, and that analysis be based on sales units rather than 
sales dollars to avoid distortions due to price changes over time. 
Another commenter suggested that CMS should adopt a smoothing approach 
whereby the manufacturer would apply the ``not generally dispensed'' 
test based on data from the last 12-months, inclusive of the current 
reporting period, which would help to even out any seasonal or other 
temporary changes in the distribution of sales, increasing the 
consistency of AMP reporting.
    Response: We agree with the commenters and have decided to allow 
the use of a smoothing process, as we believe such a process would 
permit manufacturers to determine general dispensing patterns of a drug 
over a period of time, such as a 12-month period, resulting in more 
consistency in the AMP calculation as there should be a reduction in 
the number of instances when the AMP methodology would need to be 
revised to account for different sales required to be included in or 
excluded from the AMP calculation. While we will not be mandating the 
use of a smoothing process in regards to the calculation of AMP for 
such 5i drugs, we believe that a smoothing process could be beneficial 
to manufacturers who might experience fluctuations in sales throughout 
the year. We believe that permitting manufacturers the option to use 
data from a current, yet longer, period of time to make the ``not 
generally dispensed'' determination is reasonable given that section 
1927(k)(1)(B)(i)(IV) of the Act does not specify the use of data from a 
specific length of time. The provision provides for inclusion of sales 
for the 5i drugs that are not generally dispensed through retail 
community pharmacies to help ensure that rebates are collected for 
these 5i drugs; however, it does not prescribe a specific length of 
time for the ``not generally dispensed'' determination. Therefore, a 
manufacturer may consider the use of smoothing process as part of its 
reasonable assumptions so long as the manufacturer documents those 
reasonable assumptions and consistently applies them across all 
products included in the AMP calculation for such 5i drugs.
    Comment: One commenter believed that the application of the non-
FAMP standard to identify a 5i drug for purposes of performing an 
alternative AMP calculation is misplaced and goes beyond the plain 
language of the statute. One commenter noted that the draft Amended 
Master Agreement (9/7/00 draft) cited by CMS to justify a 90 percent 
threshold has not been finalized, nor is it available to the general 
public and is therefore not an authoritative basis for CMS regulatory 
action. Moreover, the commenter indicated that the language in the 
Amended Master Agreement relates to a different issue and is designed 
to enable manufacturers to calculate a non-FAMP where it does not 
ordinarily distribute through wholesalers.
    Response: As previously discussed in this section, we have decided 
not to adopt the 90 percent threshold and believe that a threshold at 
70 percent will provide for more flexibility, reduce volatility of AMP, 
and ensure sufficient sales to be included in AMP while appropriately 
restricting the inclusion of 5i drugs to those that are not generally 
dispensed through retail community pharmacies.
    Comment: One commenter expressed support for the Medicare Part B 
standard because it would be more stable, more transparent, and more 
reflective of the market for 5i drugs. The commenter believed that by 
starting with Medicare Part B, the significant majority of 5i products 
would be captured. To ensure no products are missed, that commenter 
suggested that CMS could allow manufacturers to employ reasonable 
assumptions related to unit types, units of measure and/or dosage form 
that relate to products that are 5i. The commenter disagreed that the 
lack of an all-inclusive Part B list would result in miscategorization 
and stated that even under the 90/10 rule there would be no independent 
all inclusive list to reference and the determination would need to be 
made by the manufacturer based on their own calculations. The commenter 
urged CMS to reconsider the Part B qualitative approach.
    Response: As discussed in the preamble to the proposed rule (77 FR 
5335), we did consider adopting the Medicare Part B guidelines used to 
determine if a drug is to be classified as self-administered under the 
physician administered drugs requirement. In accordance with sections 
1861(s)(2)(A) and 1861(s)(2)(B) of the Act, the Medicare Benefit Policy 
Manual, Chapter 15--Covered Medical and Other Services, section 
50.2(C), a drug is considered to be ``usually'' self-administered if it 
is self-administered more than 50 percent of the time. We chose not to 
adopt the 50 percent standard given that it would result in an AMP 
calculation for those drugs that have a significant number of units 
sold to wholesalers for distribution to retail community pharmacies and 
to retail community pharmacies. Additionally, Congress did not define 
``not generally dispensed''; thus, we have used our discretion to 
establish a standard which manufacturers can use when making 
determinations for such 5i drugs.
    Comment: One commenter suggested a two-step approach for 
determining whether a 5i drug is not generally dispensed through a 
retail community pharmacy. Step one--if a manufacturer can determine 
that at least a minimum percentage of sales of a product were to retail 
community pharmacies or to wholesalers for distribution to retail 
community pharmacies then the manufacturer must conclude that the drug 
is ``generally dispensed'' through retail community pharmacies. Step 
two--if a manufacturer cannot make this determination, the manufacturer 
should make and document reasonable assumptions that a 5i drug is, or 
is not, generally dispensed by retail community pharmacies and should 
document the basis for the assumption (by factors such as drug's 
labeling, REMS, patient population, or other relevant characteristics).
    Response: We appreciate the comment but have decided to establish a 
more objective standard for manufacturers to use when making 
determinations as to whether a 5i drug is not generally dispensed 
through retail community pharmacies. We agree that manufacturers may 
make reasonable assumptions, in the absence of guidance and adequate 
documentation to the contrary, when determining whether prices paid to 
manufacturers by wholesalers are for drugs distributed to retail 
community pharmacies or are for drugs distributed to the entities 
eligible for inclusion in the calculation of AMP

[[Page 5241]]

for 5i drugs not generally dispensed through retail community 
pharmacies, provided those assumptions are consistent with the 
requirements and intent of section 1927 of the Act and federal 
regulations. As discussed previously, we believe an objective approach 
will lead to more consistency among manufacturers when making 
determinations about whether a 5i drug is not generally dispensed 
through retail community pharmacies.
    Comment: The commenter stated any quantitative approach that 
requires distinction between retail community pharmacy and non-retail 
community pharmacy customers is problematic because manufacturers do 
not have reliable, verifiable data to identify end user customers. The 
commenter also noted that this approach would generate unnecessary 
contracting simply for the sake of purchasing traceable sales data.
    Response: We want the AMP data reported by manufacturers to be as 
accurate and reliable as possible; however, we understand that in 
certain circumstances the manufacturer may not have verifiable data to 
determine the end customer. Therefore, as discussed previously, 
manufacturers may make reasonable assumptions, to determine if the 
percent of sales (in units) were sufficient to meet the ``not generally 
dispensed'' threshold, provided those assumptions are consistent with 
the requirements and intent of section 1927 of the Act and federal 
regulations.
    Comment: One commenter believed that if a product is determined to 
be a 5i drug for the first quarter and it dips just below the threshold 
for the second quarter, rather than a switch in AMP calculation 
methodology, the manufacturer should have the discretion to look at 
other factors, such as purchasing patterns, to determine whether the 
product has actually switched or whether the dip below the threshold is 
an anomaly. The commenter also suggested that CMS could add a ``buffer 
zone'' as to when this analysis would be appropriate--such as when a 
product dips within 5 percent of the threshold. The commenter also 
suggested that CMS could provide that only after a certain period of 
time (perhaps 3 consecutive quarters within the ``buffer'' on the sale 
side of the threshold) would manufacturers switch to the AMP for 5i 
drugs. The commenter believed this approach would provide more 
stability to AMP calculations and, much like the smoothing methodology, 
account for unusual purchasing patterns.
    Response: As discussed previously in this section, we recognize 
that prices and dispensing patterns fluctuate. Therefore, manufacturers 
may use a smoothing process that could address the concerns raised 
about the possibility that the AMP will shift between AMP and AMP for 
5i drugs not generally dispensed through retail community pharmacies. 
Furthermore, manufacturers may use the same principle of making 
reasonable assumptions, in the absence of guidance and adequate 
documentation to the contrary, when determining whether prices paid to 
manufacturers by wholesalers are for drugs distributed to retail 
community pharmacies or are for drugs distributed to the entities 
eligible for inclusion in the calculation of AMP for 5i drugs not 
generally dispensed through retail community pharmacies consistent with 
section 1927(k)(1)(B)(i)(IV) of the Act. As such, we believe the 
commenters concerns will be addressed by these two options available to 
manufacturers.
    Comment: The commenter stated that the 5i drugs they manufacture 
are virtually all, with few exceptions, not generally dispensed at 
retail community pharmacies. The commenter recommended that CMS permit 
manufacturers to identify 5i products by mere reference to the method 
of administration exclusively as noted on a product label and also 
suggested that CMS require all ASP-eligible products be mandated to use 
the AMP for 5i drugs not generally dispensed through retail community 
pharmacies methodology, so that differences in methodologies do not 
artificially create the perception of pricing differences for the 
Medicare Part B Program and Medicaid.
    Response: While manufacturers may use the product labeling when 
identifying 5i drugs, we believe that, as discussed previously, 
manufacturers should use a more objective measure based on sales data, 
which would allow for a uniform approach when determining whether a 5i 
drug is, or is not generally dispensed through retail community 
pharmacies. We believe that leaving the interpretation of this ``not 
generally dispensed'' phrase to the discretion of each manufacturer may 
create excessive variability in the calculation of AMP, especially 
because manufacturers could use varied methodologies to establish that 
the drug was either dispensed, or ``not generally dispensed'' through 
retail community pharmacies. Therefore, we have established a 70 
percent threshold, but as noted previously, we will continue to 
consider this standard and will issue additional guidance or 
rulemaking, if needed.
    Furthermore, for the reasons discussed in the proposed rule 
regarding our consideration of the Part B methodology (77 FR 5335), we 
have decided not to adopt a requirement to use all ASP-eligible 
products in determining if a drug should be included in the calculation 
of AMP for 5i drugs not generally dispensed through retail community 
pharmacies, because we believe that under this methodology some 5i 
drugs which are generally dispensed through retail community pharmacies 
would inappropriately be included in the calculation of AMP for such 5i 
drugs.
    Comment: Several commenters expressed support for our proposal to 
consider 5i drugs not generally dispensed through a retail community 
pharmacy if 90 percent or more of its sales were to entities other than 
retail community pharmacies. Another commenter believed that any 
substantial decrease to the 90 percent threshold would undermine the 
basic intentions of the 5i methodology, which is to ensure that drugs 
meeting the threshold are truly non-retail in nature, and could create 
unplanned and unexpected methodology changes for many existing drugs, 
which could alter the resulting AMP levels.
    Response: As previously discussed, we are not finalizing the 90/10 
rule for determining when a drug is not generally sold through a retail 
community pharmacy. Rather, after considering the analysis provided by 
commenters, we have decided to adopt a threshold at 70 percent and 
allow manufacturers to use a smoothing process for monthly sales from 
the preceding 12-month period, which will further reduce variability to 
AMP, ensure sufficient sales are included in AMP, and appropriately 
restrict the inclusion of 5i drugs to those that are not generally 
dispensed through retail community pharmacies.
    Comment: Another commenter noted that under the proposed process 
for assessing whether a 5i drug is not generally dispensed through 
retail community pharmacies, the universe of sales to what the 90 
percent benchmark would be applied would include, for example, sales to 
federal governmental agencies and entities enrolled in the 340B 
program, which the commenter stated would always be excluded from AMP 
calculations, regardless of whether the standard or the 5i AMP 
methodology was used. The commenter believed that the assessment of 
whether a 5i drug is not generally dispensed through a retail community 
pharmacy should only be on sales to retail community pharmacies and to 
those

[[Page 5242]]

entities that are functional equivalents to retail community 
pharmacies, in that they dispense CODs to members of the general 
public, albeit by different means. Furthermore, the commenter noted 
that federal agency and 340B program sales should not categorically be 
included in the non-retail community pharmacy sales to which the 90 
percent benchmark would be complied. The commenter recommended that CMS 
revise its proposed process for assessing whether a 5i drug is not 
generally dispensed through retail community pharmacies to direct 
manufacturers, as a threshold matter, to exclude sales that would be 
AMP-ineligible under either the standard or 5i AMP calculation 
methodology, and then assess whether, of the remaining sales, if 90 
percent were to entities other than retail community pharmacies.
    Response: We believe that with this final rule, manufacturers will 
have a clearer understanding as to which unit sales are associated with 
drugs generally dispensed through retail community pharmacies versus 
sales not generally dispensed through retail community pharmacies. That 
is, the manufacturer should use the definition of retail community 
pharmacy at section 1927(k)(10) of the Act as established in this rule 
to determine if the 5i drug met the threshold for not generally 
dispensed through retail community pharmacies, which does not include 
sales, such as 340B sales and sales to government pharmacies.
    A complete discussion of the sales, discounts, rebates and other 
financial transactions to be included in or excluded from AMP for 5i 
drugs is provided in section II.C.7.d., including additional discussion 
about sales to 340B entities and rebates or discounts provided to 
government programs.
    Comment: A few commenters expressed confusion and requested 
clarification regarding whether entities conducting business as retail 
community pharmacies (which were proposed to include specialty, home 
infusion and home health pharmacies) would be treated as retail 
community pharmacies for purposes of determining when a drug is ``not 
generally dispensed'' through a retail community pharmacy, as that 
would be consistent with the treatment of such entities in the AMP 
calculation. Conversely, many other commenters requested confirmation 
that sales to entities that conduct business as retail community 
pharmacies are not considered sales to retail community pharmacies for 
the purposes of determining whether a 5i drug is not generally 
dispensed through a retail community pharmacy.
    Another commenter believed it is reasonable to construe the AMP 
calculation rules and the ``not generally dispensed'' 5i status rules 
differently. By adopting an approach that includes specialty pharmacy 
sales in AMP but excludes them from the ``not generally dispensed'' 
test, the commenter believed that CMS will be doing less harm than if 
it were to adopt an erroneous interpretation of two statutory 
provisions rather than one. The commenter recognized that CMS is in a 
predicament because the current statutory definitions leave some 
products without sales necessary to calculate AMP, and the commenter 
cautions CMS not to use flawed reasoning to rectify the problem.
    One commenter indicated that if the ``not generally dispensed'' 
evaluation were extended to include specialty pharmacies, home infusion 
pharmacies, and home health care providers, the exception that Congress 
created for 5i drugs would be effectively nullified, particularly if 
CMS adopts the proposed 90 percent standard. One commenter stated that 
neither the proposed rule nor the statute require manufacturers to 
consider sales to entities conducting business as retail community 
pharmacies under proposed Sec.  447.504(b)(4) in the ``not generally 
dispensed'' determination.
    Response: As discussed earlier in this section, we are not 
finalizing provisions at proposed Sec.  447.504(b) which provided that 
manufacturers include within AMP those sales to entities that ``conduct 
business as wholesalers or retail community pharmacies.'' Rather, as 
discussed previously, we have defined AMP, in part, to include sales to 
wholesalers and retail community pharmacies, which may include certain 
home infusion, home health care, and specialty pharmacies to the extent 
these pharmacies meet the definition in section 1927(k)(10) of the Act. 
Therefore, manufacturers, when determining whether 5i drugs met the 
threshold for ``not generally dispensed'' through retail community 
pharmacies, will need to determine if these entities meet the 
definition of retail community pharmacy at section 1927(k)(10) of the 
Act and then apply the threshold test. Additional discussion as to 
which entities may be included as retail community pharmacies or 
wholesalers for purposes of AMP can be found in sections II.C.5 and 
II.C.7 of this rule.
    Comment: One commenter noted that a number of 5i drugs are not 
covered under Medicare Part B, but are also not generally dispensed 
through retail community pharmacies. Therefore, the commenter believed 
that 5i drugs that are generally dispensed through specialty pharmacies 
should be subject to the 5i AMP calculation as those are not 
transactions through retail community pharmacies.
    Response: We do not believe that we should subject all 5i drugs 
that are generally dispensed through specialty pharmacies to the 
calculation of AMP for 5i drugs not generally dispensed through retail 
community pharmacies, because there may be instances when a specialty 
pharmacy would meet the statutory definition of retail community 
pharmacy at section 1927(k)(10) of the Act and those drug sales would 
be included in the AMP calculation. In those situations where the 
specialty pharmacy does not meet the statutory definition of a retail 
community pharmacy at section 1927(k)(10) of the Act, but rather is 
included as one of the providers listed at section 1927(k)(1)(B)(i)(IV) 
of the Act (because, for example, it is a mail order pharmacy), then 
the pharmacy would be included on the non-retail community pharmacy 
side of the 70/30 equation for determining when a 5i drug is not 
generally dispensed through a retail community pharmacy.
    Comment: A few commenters stated that even though the current 
proposed rule permits the Affordable Care Act base data AMP revision on 
a product by product basis, CMS will need to provide further 
clarification on how to determine which method to use for the 5i 
products that fluctuate between AMP and AMP calculated for 5i drugs not 
generally dispensed through retail community pharmacies during the base 
date AMP period.
    Another commenter noted that if a manufacturer calculated the base 
date AMP believing the drug is (or is not) a 5i drug, and the status of 
the drug changes for a particular quarter, the calculation of the 
additional rebate would be based on a comparison of a base date AMP and 
a current-quarter AMP based on different methodologies. A few 
commenters expressed concern because it does not appear that 
manufacturers can maintain both two base date AMPs. Even if they were 
able to do so, the commenter noted that such an option would require 
major changes to manufacturer's government pricing systems and CMS's 
DDR system and it would be impossible to implement because 
manufacturers do not have data needed to establish the missing baseline 
information. One commenter noted that because the proposed rule only 
contemplates a product having one baseline AMP calculated in one way,

[[Page 5243]]

the additional rebates due on products could be skewed. The commenter 
also stated they doubt they would have the end customer tracing data 
necessary to establish a baseline AMP for 5i drugs not generally 
dispensed through retail community pharmacies for their older 5i 
products under the buildup methodology.
    Response: As discussed further in the base date AMP comments and 
responses found in section II.H.3. of this rule, the statutory 
definition of the base date AMP found at sections 1927(c)(2)(A) and (B) 
of the Act provides that manufacturers report an AMP for a COD. 
Further, the statute specifies that for drugs originally marketed 
before the inception of the rebate program, the base date AMP means the 
AMP for the 7/1/90 to 9/30/90 quarters, for purposes of computing the 
URA. For those drugs approved by FDA after October 1, 1990, the base 
date AMP should be calculated based on the AMP for the first full 
calendar quarter after the day on which the drug was first marketed. 
Based on these statutory definitions, we believe that a drug should 
only have one base date AMP as this section of the statute does not 
contemplate the calculation of two base date AMPs.
    In addition, we believe it will not be necessary for manufacturer 
establishment of two base date AMPs because a manufacturer may make 
certain reasonable assumptions when determining AMP and has the option 
to use a smoothing process for determining when a drug is not generally 
dispensed through retail community pharmacies. We believe such options 
will result in more stable AMPs since the calculation methodology for 
5i drugs should remain relatively consistent from month-to-month and 
quarter-to-quarter. The establishment of the base date AMP and the 
effect of the 5i drug statutory provisions on the base date AMP is 
further discussed in section II.H.3. of this final rule.
    Comment: A few commenters believed that the final rule should 
exempt 5i products from the establishment of FULs, or if it does not 
exempt 5i products from the establishment of FULs then the FUL 
multiplier should be higher than the general multiplier in recognition 
of the fact that the AMP for these products will be significantly lower 
due to the inclusion of sales to entities other than retail community 
pharmacies. The commenters urged CMS to work with the Congress to 
develop a more workable solution to Medicaid pharmacy reimbursement for 
both 5i products and products that are neither 5i nor generally 
dispensed through retail community pharmacies. A few commenters 
indicated that the inclusion of non-retail pharmacy sales will lower 
AMPs, and a multiplier of only 175 percent for the FULs will not cover 
retail community pharmacy acquisition costs for these drugs.
    Response: As further discussed in the Upper limits for multiple 
drugs section (section II.K.) of this final rule, in light of the 
requirement in section 1927(e)(5) of the Act, we will calculate a FUL 
for multiple source drugs that are available for purchase by retail 
community pharmacies on a nationwide basis. Furthermore, in light of 
the criteria set forth in section 1927(k)(1)(B)(i)(IV) of the Act 
regarding the calculation of the AMP, we have decided that we will not 
include 5i drugs that are not generally dispensed through retail 
community pharmacies in the FUL calculations, nor apply the FUL to 5i 
drugs that are not generally dispensed through retail community 
pharmacies.
    Comment: One commenter noted that AMP is an essential component of 
setting the 340B ceiling price calculation and was pleased that CMS 
addressed the importance of generating an AMP for all CODs, including 
those characterized as 5i drugs. The commenter requested that CMS keep 
in mind that AMP data is necessary for HRSA to calculate the 340B price 
since the percentage of sales required to classify a drug as not 
generally dispensed through a retail community pharmacy may be too 
high.
    Response: We appreciate the comments and are aware of the role that 
AMP plays in establishing the 340B ceiling prices. In light of the 
revisions in this final rule, we believe that an AMP will be generated 
for most, if not all CODs, including 5i drugs not generally dispensed 
through retail community pharmacies.
    Comment: One commenter requested clarification that, if a drug is 
determined to be generally dispensed through a retail community 
pharmacy (because it is dispensed more than 10 percent of the time), 
the AMP rule (and rebate) applies to those drugs.
    Response: If a drug is determined to be generally dispensed through 
a retail community pharmacy (because it is dispensed through a retail 
community pharmacy more than 30 percent of the time based upon the 
revised threshold in this final rule), the manufacturer, in accordance 
with section 1927(k)(1) of the Act, would use the AMP methodology for 
calculating the AMP of that drug.
    Comment: One commenter stated that if a product is not generally 
dispensed through a retail community pharmacy but is delivered directly 
to the consumer after it is supplied to a practitioner, that drug 
should be available for rebates, determination of best price, and the 
determination of AMP.
    Response: Section 1927(a) of the Act generally requires that 
manufacturers enter into rebate agreements for federal payment to be 
made available under the Medicaid program for most CODs. Section 
1927(b) of the Act requires that manufacturers entering into such 
rebate agreements provide rebates for CODs for which payment was made 
under the state plan.
    Therefore, we agree that if the drug in the commenter's example 
meets the definition of a COD at section 1927(k)(2) of the Act, and the 
manufacturer of the drug has signed an agreement to participate in the 
MDR program, then the manufacturer must report the AMP (and/or best 
price) for the drug and be responsible for paying rebates on the units 
dispensed of the drug. As discussed previously, manufacturers have the 
option to make reasonable assumptions, which we expect will allow 
manufacturers to make AMP and best price calculations consistent with 
the requirements and intent of section 1927(b) of the Act.
    After considering the comments and for the reasons we discussed 
previously in this section, we have decided to revise proposed Sec.  
447.507(b)(1) to remove the references to 90 percent and during the 
reporting period and to insert references to 70 percent and to note 
that the determination is based on units at the NDC-9 level.
c. Frequency of Determination of 5i Drug's Status as ``Not Generally 
Dispensed'' (Sec.  447.507(b)(2))
    At Sec.  447.507(b)(2), we proposed that the determination of a 5i 
drug's status as not generally dispensed through a retail community 
pharmacy will be evaluated by a manufacturer on a monthly and quarterly 
basis (77 FR 5336). We received the following comments on this 
proposal.
    Comment: Several commenters expressed opposition to the requirement 
that manufacturers determine whether a drug is not generally dispensed 
through a retail community pharmacy on a monthly and quarterly basis 
stating that the requirement to reassess the ``not generally 
dispensed'' determination on such a frequent basis is unnecessary, 
labor intensive, administratively burdensome, and would increase AMP 
volatility. Other commenters stated that requiring monthly and 
quarterly 5i eligibility determinations, for drugs ``not generally 
dispensed'' through retail community pharmacies, would present

[[Page 5244]]

significant calculation issues for manufacturers such as how to 
estimate lagged price concessions if a drug changes categories from 
period to period, and how to calculate quarterly AMP for quarters when 
the drug flips categories between months within the quarter. The 
commenters recommended that CMS revise its proposal by deleting the 
requirement that manufacturer perform quarterly assessments. Commenters 
noted that a monthly or quarterly determination could distort pharmacy 
reimbursement for states which have adopted or will adopt an AMP-based 
reimbursement methodology and it could also lead to fluctuation in 340B 
prices. Additionally, some commenters requested that CMS provide 
guidance to manufacturers as to how they should calculate the quarterly 
AMP when a 5i drug may have been calculated using the 5i AMP 
methodology in 2 of the 3 months in a quarter. One commenter stated 
that even requiring manufacturers to perform the not generally 
dispensed assessment on a monthly basis would be problematic because of 
the potential for drugs with sales to retail community pharmacies that 
oscillate around 10 percent month-to-month could potentially lead to 
monthly AMPs in one quarter being calculated based on different 
methodologies. The commenter recommended that CMS revise its proposed 
process for assessing whether a 5i drug is not generally dispensed 
through a retail community pharmacy to require manufacturers only 
perform the assessment after the first month of each quarter.
    Many commenters recommended that CMS allow manufacturers to 
designate a 5i product not generally dispensed through retail community 
pharmacies for a minimum period of at least 1 year to reduce burdens on 
manufacturers, particularly those with large numbers of NDCs, as well 
as reduce the risk of AMP volatility. Many commenters recommended CMS 
allow manufacturers to adopt specific procedures when determining 
whether a 5i drug is not generally dispensed through retail community 
pharmacies, for example, if the 5i drug's retail distribution 
percentage is within 5 percent of the not generally dispensed threshold 
during an annual review, the manufacturer could maintain the current 
classification of the drug instead of switching to a new AMP 
calculation.
    Response: Since the quarterly AMP is reported as a weighted average 
of the 3 monthly AMPs, we agree with commenters that it is not 
necessary to require manufacturers to determine the ``not generally 
dispensed'' requirement on both a monthly and quarterly basis. 
Accordingly, we have revised proposed Sec.  447.507(b)(2) to remove the 
reference to the quarterly determination of the ``not generally 
dispensed'' requirement.
    As to the commenters question regarding how to calculate quarterly 
AMP for quarters when the drug flips between AMP and AMP for 5i drugs 
not generally dispensed through retail community pharmacies within the 
months of that quarter, we note that the quarterly AMP is reported as a 
weighted average of the 3 monthly AMPs reported by the manufacturer; 
thus, manufacturers are to calculate the quarterly AMP as a weighted 
average of the 3 monthly AMPs irrespective of the methodology used to 
calculate each monthly AMP. We expect to issue operational guidance in 
the future providing additional instructions clarifying how 
manufacturers may identify and calculate monthly AMPs for 5i drugs not 
generally dispensed through retail community pharmacies. Until that 
guidance is issued, as noted previously, manufacturers may continue to 
make reasonable assumptions consistent with the requirements and intent 
of section 1927 of the Act and federal regulations.
    As discussed previously, manufacturers may also use a smoothing 
process, where manufacturers may use a 12-month rolling average of 
their monthly sales (in units) to determine whether a 5i drug is not 
generally dispensed through a retail community pharmacy. As previously 
discussed in this section, we believe that since manufacturers may use 
data from a longer period of time other than the current month to make 
this determination and make reasonable assumptions consistent with the 
requirements and intent of section 1927 of the Act and federal 
regulations, we believe the monthly determination will not be overly 
burdensome on manufacturers, as suggested by the commenters.
    We do not agree with the commenter's suggestion that CMS allow 
manufacturers to maintain the current classification of the drug 
instead of switching to a new AMP calculation if the retail 
distribution percentage is within 5 percent of the threshold. Again, we 
believe that the option to use the smoothing process and our decision 
not to finalize the buildup methodology but instead allow manufacturers 
to make reasonable assumptions in the calculation of AMP will 
contribute to more stable AMPs and that once a drug is determined to be 
generally dispensed, or not generally dispensed through retail 
community pharmacies, it will not flip-flop between the 5i and AMP 
methodologies.
    Comment: One commenter urged CMS to develop a standard that would 
allow manufacturers to make the determination of whether a 5i drug is 
generally dispensed through retail community pharmacies prospectively, 
when the drug is first marketed, and that will result in the drug 
having the same 5i status thereafter.
    Response: We believe that allowing a manufacturer to make a one-
time prospective determination without having actual sales data to 
support that determination is inconsistent with the requirement that 
manufacturers report AMP based on data for the reporting period, as 
required by section 1927(b)(3) of the Act. Therefore, as previously 
discussed in this section, we have retained the requirement that 
manufacturers determine on a monthly basis when the 5i drug is not 
generally dispensed through retail community pharmacies although, 
manufacturers may make reasonable assumptions regarding this 
determination.
    Comment: One commenter did not think that the proposed rule 
adequately addressed the issue of the buildup methodology for the 
calculation of AMP for 5i drugs not generally dispensed through retail 
community pharmacies. Therefore, if CMS were to adopt the buildup model 
in the final rule, the commenter believed that CMS must clarify that 
manufacturers cannot utilize the presumed inclusion policy for the AMP 
calculation for such 5i drugs.
    Response: As discussed in the definition of retail community 
pharmacy at section II.C.4.f., we have reconsidered our proposed 
buildup methodology requirement and have decided not to finalize that 
proposal. We believe it is reasonable that manufacturers presume, using 
reasonable assumptions, in the absence of guidance and adequate 
documentation to the contrary, that prices paid to manufacturers by 
wholesalers are for drugs distributed to retail community pharmacies, 
consistent with the requirements and intent of section 1927 of the Act 
and federal regulations.
    Comment: One commenter supported the addition in DDR of a flag to 
designate under which methodology, standard or 5i, that a manufacturer 
used to calculate AMP for a given quarter. The commenter stated that 
this flag should be set by the manufacturer at the time AMP data is 
submitted to DDR, and should be subject to unilateral change by the 
manufacturer within the 12-quarter window if subsequent information/
corrections compel

[[Page 5245]]

restatement. The ``flag'' would also allow CMS to identify the 
appropriate base date AMPs to be used when calculating the URA 
transmitted to the states.
    Response: We agree with the commenter's recommendation regarding 
the addition of an indicator, such as a flag in DDR, to designate the 
methodology used to calculate the monthly AMP. This will assist us in 
identifying which methodology was used to calculate monthly AMP and to 
be able to track whether there is substantial fluctuation based on the 
methodology used by a manufacturer to calculate the monthly AMP, as 
well as assist with the FUL calculation. We have already added an 
indicator to DDR to assist in identifying which methodology the 
manufacturer used to calculate AMP for a given month. Furthermore, if a 
manufacturer discovers that an AMP data change would prompt a change to 
a 5i drug's AMP methodology, the manufacturer would be permitted to 
report revisions to monthly AMP within 36 months in accordance with 
Sec.  447.510(d)(3).
    Therefore, for the reasons discussed in this section, we are 
revising proposed Sec.  447.507(b)(2) to remove the reference to 
determinations on a ``quarterly'' basis and to insert a requirement 
that a manufacturer is responsible for determining ``and reporting to 
CMS'' whether a 5i drug is not generally dispensed through a retail 
community pharmacy on a monthly basis.
d. The Specific Sales, Discounts, Rebates, Payments and Other Financial 
Transactions Included In, and Excluded From, the Determination of AMP 
for 5i Drugs Not Generally Dispensed Through Retail Community 
Pharmacies (Sec.  447.504(d) and (e))
    In proposed Sec.  447.504(d), we discussed the specific sales, 
discounts, rebates, payments and other transactions that we proposed to 
include in the determination of AMP for 5i drugs not generally 
dispensed through retail community pharmacies. These proposed 
provisions are discussed at 77 FR 5334 through 5336 of the proposed 
rule. We received the following comments on this provision.
    Comment: A few commenters noted that some provisions of the 
proposed regulatory text refer to ``Sales, Discounts, Rebates, Payments 
and Other Transactions'' while other provisions just refer simply to 
``sales.'' The commenters stated that CMS intended to include in AMP 
all transactions involving the enumerated entities, not just sales to 
those entities. The commenters requested that CMS revise the proposed 
regulatory language to refer consistently to the types of transactions 
that it intends to include in AMP.
    Response: As discussed in the ``Sales Included in the Determination 
of AMP'' section (II.C.5) of this final rule, after reviewing the 
proposed regulatory text of this section, we agree with commenters 
regarding the need for consistency. Accordingly, we are finalizing 
changes to Sec.  447.504(d) and (e) so that we are consistent in our 
reference to AMP, as well as the types of transactions that are 
included in or excluded from AMP for 5i drugs not generally dispensed 
through retail community pharmacies. Specifically, we are revising the 
heading of Sec.  447.504(d) to include sales, nominal price sales, and 
associated discounts, rebates, payments, or other financial 
transactions included in AMP for 5i drugs that are not generally 
dispensed through retail community pharmacies. In the introductory text 
of Sec.  447.504(d), we specify that AMP for 5i drugs identified in 
accordance with Sec.  447.507 shall include sales, nominal price sales, 
and associated discounts, rebates, payments or other financial 
transactions to all entities specified in paragraph (b) of the section, 
as well as the sales, nominal price sales, and discounts, rebates, 
payments or other transactions associated with the sales to the named 
entities that are specified in in paragraph (d), unless specifically 
excluded as outlined in paragraph (e) of the section. As specified 
earlier in the Sales Included in the Determination of AMP section 
(II.C.5) of this final rule, it is our intention that the addition of 
the term ``associated'' clarifies that it is the sales themselves, as 
well as the discounts, rebates, payments, or other financial 
transactions associated with the enumerated sales that are included in 
the AMP calculation, unless otherwise specifically excluded.
    At Sec.  447.504(e) we similarly are revising the heading to 
include sales, nominal price sales, and associated discounts, rebates, 
payments, or other transactions excluded from AMP for 5i drugs that are 
not generally dispensed through retail community pharmacies. In the 
introductory text of Sec.  447.504(e), we specify that AMP excludes the 
following sales, nominal price sales, and associated discounts, 
rebates, payments, or other financial transactions listed in Sec.  
447.504(e)(1) through (17). As stated in this section, it is our 
intention that the addition of the term ``associated'' clarifies that 
it is the sales or prices themselves, as well as the discounts, 
rebates, payment or other financial transactions associated with those 
prices or sales specified in Sec.  447.504(e) that are excluded from 
the AMP calculation for 5i drugs that are not generally dispensed 
through retail community pharmacies.
    Comment: One commenter noted an apparent drafting error in the list 
of sales eligible for inclusion in the 5i AMP calculation at Sec.  
447.504(d). As proposed, the 5i AMP calculations at proposed Sec.  
447.504(d)(10) included sales to other manufacturers who conduct 
business as wholesalers or retail community pharmacies. The commenter 
stated that the language in the statute upon which this inclusion is 
based calls for the inclusion of sales to manufacturers, or any other 
entity that does not conduct business as wholesaler or a retail 
community pharmacy.
    Response: We agree with the commenter that as originally proposed, 
Sec.  447.504(d)(10) was not consistent with section 
1927(k)(1)(B)(i)(IV) of the Act, because it referenced sales to other 
manufacturers who conduct business as wholesalers or retail community 
pharmacies as included in AMP for 5i drugs. Section 
1927(k)(1)(B)(i)(IV) of the Act, however, references payments received 
from and rebates or discounts provided to manufacturers, or any other 
entity that does not conduct business as a wholesaler or a retail 
community pharmacy. This was a drafting error in proposed Sec.  
447.504(d)(10) and we are correcting this error in the final rule in 
Sec.  447.504(d)(10) to replace ``manufacturer'' with ``manufacturer or 
any other entity'' and further include the term ``not'' before 
``conduct business as . . .'', which we believe is consistent with the 
statute at section 1927(k)(1)(B)(i)(IV) of the Act. We believe this 
clarifies that sales, nominal price sales, and associated discounts, 
rebates, payments or other financial transactions associated with sales 
to manufacturers, or any other entity that does not conduct business as 
a wholesaler or a retail community pharmacy are included in the 
determination of the AMP for 5i drugs not generally dispensed through 
retail community pharmacies.
    Comment: One commenter believed that the amendments made to the 
Affordable Care Act by the Education Jobs and Medicaid Assistance Act 
(creating the alternate 5i AMP calculation) unintentionally included in 
AMP for 5i drugs all payments from and discounts and rebates provided 
to government and 340B purchasers. The commenter requested that CMS 
address this language and clarify that discounts provided to government 
and 340B entities are excluded from AMP for 5i drugs. The commenter 
also believes that

[[Page 5246]]

the Education Jobs and Medicaid Assistance Act failed to amend the 
Affordable Care Act to include in AMP for 5i drugs any prices paid by 
wholesalers for drugs distributed to entities other than retail 
community pharmacies. The commenter indicated that as amended the 
statute precludes the inclusion of prices paid by wholesalers when 
drugs are sold to non-retail end customers, but at the same time 
requires inclusion of discounts and rebates provided to these 
purchasers. The commenter noted that even if direct sales to non-retail 
customers were included in the calculation, if price concessions were 
netted against eligible gross sales, because these products are not 
generally sold to retail customers, it could produce a negative number. 
Therefore, to prevent skewed results, the commenter requested that CMS 
address this problem and clarify that AMP for 5i drugs includes 
identifiable indirect sales to non-retail customers other than 
government and 340B entities.
    Response: We do not believe that by adding the 5i drug provision, 
the statute should be read to disregard CMS's longstanding position to 
exclude prices made available only through certain State and Federal 
government providers and programs from AMP and include those prices in 
AMP for 5i drugs not generally dispensed through retail community 
pharmacies.
    First, government programs, and charitable and not-for-profit 
pharmacies are not included in the list of entities identified in 
section 1927(k)(1)(B)(i)(IV) of the Act, and we do not believe that 
they qualify as the additional entities (which do not conduct business 
as wholesalers or retail community pharmacies), which as discussed 
previously we have defined to include physicians and hospices. 
Therefore, based upon the comments and our reading of section 
1927(k)(1)(B)(i)(IV) of the Act, we are excluding sales to these 
government, charitable, and not-for-profit pharmacies by adding these 
pharmacies to the exclusions at Sec.  447.504(e)(18) through (20).
    In addition, as we discussed in the proposed rule (77 FR 5328-
5331), manufacturers are required to calculate AMP to reflect net 
sales, which is calculated, in part, based on prices paid and discounts 
provided to, retail community pharmacies and wholesalers, as defined in 
sections 1927(k)(10) and 1927(k)(11) of the Act. Manufacturers that 
provide discounts or rebates to government programs and payers 
generally do not make these discounts or rebates available to retail 
community pharmacies or wholesalers that distribute to retail community 
pharmacies, as those terms are defined in section 1927(k) of the Act. 
Therefore, the manufacturer's determination of AMP shall exclude the 
payments received from, as well as the discounts or rebates provided to 
government programs and payers, because they are not retail community 
pharmacies or wholesalers that distribute drugs to retail community 
pharmacies, in accordance with section 1927(k)(1) of the Act. We see no 
reason that manufacturers should adopt a different policy for 5i drugs 
not generally dispensed through retail community pharmacies. Prices, 
including manufacturer rebates and discounts, provided to government 
programs and payers do not represent the type of payments received 
from, and rebates or discounts provided to the entities listed at 
section 1927(k)(1)(B)(i)(IV) of the Act because, as discussed 
previously, government programs and payers are not included in the list 
of entities identified in section 1927(k)(1)(A) or 1927(k)(1)(B)(i)(IV) 
of the Act, and we do not believe that they qualify as the additional 
entities which do not conduct business as wholesalers or retail 
community pharmacies. Therefore, we have revised proposed Sec.  
447.504(e) to exclude prices provided to government programs, 
pharmacies, charitable pharmacies, and not-for-profit pharmacies from 
the determination of AMP for 5i drugs not generally dispensed through 
retail community pharmacies.
    Therefore, we are revising proposed Sec.  447.504(e) to clarify 
which prices should be excluded from the calculation of AMP for 5i 
drugs not generally dispensed through retail community pharmacies. 
Specifically, given our reading of section 1927(k) of the Act, as 
discussed previously, we have revised proposed Sec.  447.504(e)(1) to 
provide for the exclusion of any prices on or after October 1, 1992, to 
the IHS, the DVA, a State home receiving funds under 38 U.S.C. 1741, 
the DoD, the PHS, or a covered entity described in section 
1927(a)(5)(B) of the Act (including inpatient prices charged to 
hospitals described in section 340B(a)(4)(L) of the PHSA). We have also 
revised proposed Sec.  447.504(e)(2) to provide for the exclusion of 
prices charged under the FSS and proposed Sec.  447.504(e)(3) to 
provide for the exclusion of any depot prices (including TRICARE) and 
single award contract prices, as defined by the Secretary, of any 
agency of the federal government.
    We are also revising proposed Sec.  447.504(d)(10) to include 
prices paid by wholesalers when the wholesaler distributes drugs to 
entities other than retail community pharmacies, by including a 
reference to ``any entity'' that does not conduct business as a 
wholesaler. As indicated in the comment, the statute is ambiguous 
regarding the inclusion of prices in AMP for 5i drugs paid by 
wholesalers when drugs are distributed by the wholesaler to non-retail 
community pharmacy customers, such as those entities listed at section 
1927(k)(1)(B)(i)(IV) of the Act (for example, hospitals, clinics, and 
long-term care pharmacies). The term wholesaler is defined at section 
1927(k)(11) of the Act to mean a drug wholesaler engaged in the 
wholesale distribution of prescription drugs to retail community 
pharmacies. Section 1927(k)(1)(B)(i)(IV) of the Act provides that a 
manufacturer calculate an AMP for 5i drugs not generally dispensed 
through retail community pharmacies to include sales to entities that 
do not conduct business as a wholesaler. Therefore, we have interpreted 
the phrase ``not conducting business as a wholesaler'' to provide that 
manufacturers shall include sales to a wholesaler that is engaged in 
wholesale distribution of prescription drugs to the listed entities in 
section 1927(k)(1)(B)(i)(IV) of the Act, as implemented in Sec.  
447.504(d), to be included in AMP for 5i drugs not generally dispensed 
through retail community pharmacies. It is our position, in light of 
these provisions, that the sales that manufacturers should include in 
AMP for such 5i drugs are the sales to the wholesaler when distributing 
drugs to those listed entities, because that wholesaler is not 
conducting business as a wholesaler as defined in section 1927(k)(11) 
of the Act. Therefore, for the purposes of calculating the AMP for such 
5i drugs, sales to wholesalers distributing to the entities at section 
1927(k)(1)(B)(i)(IV) of the Act, as implemented in Sec.  447.504(d), 
shall be included.
    Accordingly, as discussed previously, we are revising Sec.  
447.504(d)(10) to include a reference to ``manufacturers, or any other 
entity, that does not conduct business as a wholesaler or a retail 
community pharmacy'' to clarify that such entities are included in the 
calculation of AMP for such 5i drugs.
    Comment: Many commenters expressed concern that the proposed rule 
did not detail any exclusion from 5i AMP beyond customary prompt pay 
discounts. These commenters expressed concern about the proposed rule's 
lack of a subsection detailing exclusions from the 5i AMP calculation 
and hoped it was an inadvertent oversight and

[[Page 5247]]

believe that it is essential that CMS require manufacturers to exclude 
federal government sales, TRICARE, SPAPs, rebates, non-contingent free 
goods, sales to government, not-for-profit, or charitable pharmacies, 
sales to 340B covered entities, and all forms of patient assistance 
eligible for exclusion from AMP from 5i AMP as well. Several commenters 
expected 5i AMP to be extraordinarily low because deeply discounted 
prices would be included in the calculation. The commenters encouraged 
CMS to ensure the regulatory instructions for calculating 5i AMPs would 
provide for exclusions that would lead to 5i AMP values reflective of 
net pricing actually available to non-retail community pharmacy 
prescription drug purchases in the commercial marketplace. These 
commenters hoped this was an inadvertent oversight that would be 
corrected in the final rule; otherwise, pharmacies and physicians would 
be underpaid for 5i drugs furnished to Medicaid recipients.
    Response: As discussed previously, it was our intention that the 
sales, rebates, discounts or other financial transactions that were not 
specifically referenced at proposed Sec.  447.504(d) would remain 
excluded from the determination of AMP for 5i drugs not generally 
dispensed through retail community pharmacies. Therefore, we have 
revised proposed Sec.  447.504(d) to more clearly specify the sales 
that are included in the determination of AMP for such 5i drugs and 
redesignated the paragraph on ``Further clarification of AMP 
calculation'' set forth in proposed Sec.  447.504(e) to Sec.  
447.504(f), so that we could add a new Sec.  447.504(e) clarifying 
which sales, nominal price sales, and associated discounts, rebates, 
payments, or other transactions are excluded from AMP for 5i drugs not 
generally dispensed through retail community pharmacies. We added this 
section to address the concerns expressed by commenters that the 
proposed rule did not detail any exclusions from AMP for such 5i drugs 
and to provide the requested clarification to ensure accurate 
calculation of AMP across all manufacturers, consistent with section 
1927(k)(1) of the Act.
    The payments from those entities listed in section 
1927(k)(1)(B)(i)(IV) of the Act as implemented in Sec.  447.504(d), 
which include payments by, and discounts or rebates provided to, PBMs, 
MCOs, HMOs, insurers, hospitals, clinics, mail order pharmacies, long 
term care providers, manufacturers, or any other entity that does not 
conduct business as a wholesaler or a retail community pharmacy are 
included in AMP for 5i drugs not generally dispensed through retail 
community pharmacies. As discussed previously, we have also identified 
those sales, rebates, and discounts that should be excluded from the 
AMP calculation for such 5i drugs, which consistent with our 
interpretation of section 1927(k)(1) of the Act, shall continue to 
exclude customary prompt payments to wholesalers; bona fide service 
fees to retail community pharmacies and wholesalers; reimbursement for 
recalled, damaged, expired, or otherwise unsalable returned goods; and 
discounts provided under the Medicare Coverage Gap Discount program. 
Therefore, we have revised proposed Sec.  447.504(e) to provide that 
manufacturers shall continue to exclude from AMP calculations for such 
5i drugs, those prices, rebates, or discounts provided to federal 
government payers and programs (such as the 340B program, TRICARE, 
SPAPs), non-contingent free goods, patient assistance programs, because 
such prices, rebates, or discounts do not represent the type of prices, 
discounts and rebates contemplated in section 1927(k)(1)(B)(i)(IV) of 
the Act.
    Comment: Several commenters urged CMS to broaden the application of 
the bona fide service fee exception in the rule to include the 
additional customer types that are eligible in the AMP calculation for 
5i drugs that are not generally dispensed through retail community 
pharmacies. A few commenters indicated that not broadening the bona 
fide service fee exception from AMP for 5i drugs not generally 
dispensed through retail community pharmacies would greatly increase 
the potential for ASP to exceed AMP by the threshold amount, thus 
triggering AMP substitution for ASP. One commenter expressed concern 
that the differential treatment of bona fide service fees in AMP and 
ASP could side-step the statutory requirement to use ASP as the 
reimbursement metric for most prescription drugs covered by Medicare 
Part B and physicians will be reimbursed at levels below their 
acquisition cost for products administered to Medicare Part B patients.
    Response: Since section 1927(k)(1)(B)(i)(II) of the Act references 
only bona fide service fees paid by manufacturers to wholesalers or 
retail community pharmacies as being excluded from AMP, the exclusion 
of bona fide service fees cannot be expanded to apply to the entities 
other than wholesalers or retail community pharmacies, for purposes of 
the calculation of AMP for 5i drugs not generally dispensed through 
retail community pharmacies. However, we believe that the payments 
provided by manufacturers for such service fees (including distribution 
service fees, inventory management fees, product stocking fees, and 
administrative service and patient care program fees) may be excluded 
from AMP with regard to such 5i drugs, because such fees do not 
represent type of payments from, or discounts or rebates provided to, 
the entities listed in section 1927(k)(1)(B)(i)(IV) of the Act as 
implemented in Sec.  447.504(d). Therefore, such fees should not be 
included in the determination of AMP for 5i drugs not generally 
dispensed through retail community pharmacies.
    We further note that because manufacturers should exclude such 
service fees and bona fide service fees from their AMP calculations, 
the AMP calculated for such 5i drugs would not be reduced by such fees. 
Therefore, we believe the commenters' concern about AMP substitution 
for Medicare's ASP, which would likely occur if the manufacturer 
included such fees as discounts in AMP, is addressed by the fee 
exclusion. Furthermore, because these payments are not included in the 
AMP calculation for such 5i drugs, there is no need to add a specific 
exclusion of such service fees to the regulatory text.
    Comment: One commenter stated that, assuming transactions that are 
expressly excluded from AMP (at Sec.  447.504(c)), but not specifically 
included in AMP for 5i drugs not generally dispensed through retail 
community pharmacies, are also to be excluded from AMP for such 5i 
drugs (at Sec.  447.504(d)), then the proposed definition of AMP for 5i 
drugs not generally dispensed through retail community pharmacies 
creates ambiguity because some exclusions from AMP at Sec.  447.504(c) 
do not match exactly with the inclusions at Sec.  447.504(d). For 
example, the commenter noted that Sec.  447.504(c) excludes ``direct 
sales to physicians'' while Sec.  447.504(d) includes ``Sales to 
Physicians.'' To avoid confusion, the commenter recommended that where 
CMS intends to include in AMP for 5i drugs not generally dispensed 
through retail community pharmacies transactions excluded from AMP, CMS 
should revise the inclusions at Sec.  447.504(d) to match the precise 
language in Sec.  447.504(c).
    Response: We agree that there may have been some ambiguity between 
the language in Sec.  447.504(c) and (d), and we have made revisions to 
the regulatory text at Sec.  447.504(c) and (d), where applicable, to 
align these sections and address the concerns of the commenter

[[Page 5248]]

based upon section 1927(k) of the Act, as discussed in the prior 
comments and responses. Section 447.504(d)(1) includes a reference to 
``Sales to physicians,'' which we have included in the AMP for 5i drug 
not generally dispensed through retail community pharmacies, because 
physicians do not conduct business as a retail community pharmacy or 
wholesaler as provided in section 1927(k)(1)(B)(i)(IV) of the Act. 
Additionally, as discussed earlier in this section, we have revised 
Sec.  447.504(c)(22) to specify that ``sales to physicians'' (as 
opposed to direct sales to physicians) should be excluded from the 
calculation of AMP. In the proposed rule, we proposed to include sales 
to hospices in the calculation of AMP for 5i drugs that are not 
generally dispensed through retail community pharmacies, because they 
do not conduct business as a retail community pharmacy or wholesaler 
(77 FR 5336). However, we did not specify inpatient and outpatient 
hospice sales in the regulatory text at proposed Sec.  447.504(d)(9). 
To address the commenter's concerns with consistency between the two 
sections (AMP and AMP for 5i drugs not generally dispensed through 
retail community pharmacies), we have revised proposed Sec.  
447.504(d)(9) to specify the inclusion of ``Sales to hospices 
(inpatient and outpatient)'' to be consistent with the description of 
such hospice sales in the exclusions from AMP at Sec.  447.504(c)(20). 
These revisions are designed as a clarification to make these AMP 
calculation provisions consistent with our reading of the sections 
1927(k)(1)(A) and 1927(k)(1)(B)(i)(IV) of the Act.
    Comment: A few commenters requested that CMS clarify that indirect 
sales to hospitals, physicians, etc., are included in the definition of 
AMP for 5i drugs not generally dispensed through retail community 
pharmacies. The proposed rule does not explicitly include in AMP for 5i 
drugs not generally dispensed through retail community pharmacies sales 
of 5i drugs to wholesalers that are subsequently sold to a doctor or 
hospital. However, direct sales of 5i drugs to doctors or hospitals 
will be included in AMP for 5i drugs not generally dispensed through 
retail community pharmacies. Also chargebacks paid to wholesalers for 
5i drugs distributed to these customers will be included in AMP for 5i 
drugs not generally dispensed through retail community pharmacies as 
discounts provided to these customers. The commenters indicated that 
because direct sales and chargebacks generated from wholesaler sales to 
these customers will be included in AMP for 5i drugs not generally 
dispensed through retail community pharmacies, sales to wholesalers of 
5i drugs resold to these customers should likewise be included. The 
commenters strongly urged CMS to incorporate within the final rule a 
detailed section that specifically identifies excluded transactions for 
the calculation of AMP for 5i drugs not generally sold through retail 
community pharmacies, comparable to that which is proposed for the AMP 
calculations.
    Response: Section 1927(k)(1)(B)(i)(IV) of the Act provides that 
``payments received from, and rebates or discounts provided to, 
pharmacy benefit managers . . . hospitals . . . or any other entity 
that does not conduct business as a wholesaler or a retail community 
pharmacy . . .'' should be included in AMP when the drug is a 5i drug 
that is not generally dispensed through a retail community pharmacy. 
Therefore, the AMP for such 5i drugs should include direct sales (sales 
for those drugs sold directly from the manufacturer to the listed 
entity, such as PBMs, and hospitals) and indirect sales (sales for 
those drugs sold through a wholesaler that does not conduct business as 
a wholesaler, as defined at section 1927(k)(11) of the Act, because it 
is engaged in the wholesale distribution of the drug to entities other 
than retail community pharmacies, such as PBMs and hospitals). As 
discussed previously, we have revised proposed Sec.  447.504(d) to 
identify which sales and other transactions should be included in the 
AMP for 5i drugs not generally dispensed through retail community 
pharmacies.
    Comment: One commenter noted that sales to patients were identified 
as excluded from the AMP calculation and were not identified as being 
included in the calculation of AMP for 5i drugs not generally dispensed 
through retail community pharmacies. The commenter requested 
clarification on whether manufacturers should assume that sales to 
patients are also excluded from the calculation of AMP for 5i drugs not 
generally dispensed through retail community pharmacies.
    Response: Sales to patients are excluded from AMP for 5i drugs not 
generally dispensed through retail community pharmacies since patient 
sales are not included in the definition of AMP at section 
1927(k)(1)(A) of the Act and do not represent payments received from, 
or rebates or discounts provided to, the list of entities listed at 
section 1927(k)(1)(B)(i)(IV) of the Act, as implemented in Sec.  
447.504(d). Therefore, we have added revised Sec.  447.504(e) to add a 
paragraph to specify that sales to patients are excluded from the 
calculation of AMP for 5i drugs not generally dispensed through retail 
community pharmacies.
    Comment: A few commenters noted that the broad inclusion of 
insurers in the calculation of AMP for 5i drugs not generally dispensed 
through retail community pharmacies could be read to include discounts 
to entities that are ineligible for best price, such as Medicare Part D 
plans and SPAPs. The commenters urged CMS to exclude all best price 
exempt discounts from the calculation of AMP for 5i drugs not generally 
dispensed through retail community pharmacies to ensure that the 
resulting AMP figure is not skewed lower by these best price exempt 
transactions. Furthermore, the commenter stated that this clarification 
would be consistent with CMS's proposed policy to conform the AMP and 
best price definitions.
    Response: As we have discussed previously, we believe payments 
received, and discounts and rebates provided to, government programs, 
including Part D and SPAPs, should be excluded from the determination 
of AMP for 5i drugs not generally dispensed through retail community 
pharmacies. As discussed earlier in this section, manufacturers should 
exclude government programs when determining AMP for such 5i drugs. As 
discussed previously, we also believe that section 1927(k)(1)(B)(i)(IV) 
of the Act does not require the inclusion of payments, discounts or 
rebates, typically provided by manufacturers under government programs. 
Therefore, manufacturers should exclude Medicare Part D and SPAP 
government prices, discounts, and rebates when determining AMP for 5i 
drugs because they do not represent payments received from, and rebates 
or discounts provided to PBMs, MCOs HMOs, insurers, hospitals, clinics, 
mail order pharmacies, long term care providers, manufacturers, or any 
other entity that does not conduct business as a wholesaler or a retail 
community pharmacy in accordance with section 1927(k)(1)(B)(i)(IV) of 
the Act.
    Therefore, as discussed previously, we have moved the paragraph on 
``Further clarification of AMP calculation'' to Sec.  447.504(f) and 
have created a separate provision to identify those sales, rebates, 
discounts, and other financial transactions excluded from AMP for 5i 
drugs not generally dispensed through retail community pharmacies at 
Sec.  447.504(e)(1) through (21), which include specific exclusions for 
any prices charged by Part D plans

[[Page 5249]]

and any rebates provided to designated SPAPs.
    Comment: One commenter noted that while CMS did not specifically 
list PBMs as an example of an insurer, it is the commenter's belief 
that based on the proposed definition of insurer that CMS intended for 
rebates paid to PBMs are to be included in AMP for 5i drugs not 
generally dispensed through retail community pharmacies. In addition, 
the commenter requested that CMS provide specific guidance as to 
whether manufacturers should include rebates paid to PBMs that own 
specialty and/or retail community pharmacies in the calculation of AMP 
for such 5i drugs.
    Response: Section 1927(k)(1)(B)(i)(IV) of the Act includes both 
PBMs and insurers in the list of payments, rebates and discounts 
excluded from AMP, except in the case of 5i drugs that are not 
generally dispensed through retail community pharmacies. Therefore, in 
the case of 5i drugs that are not generally dispensed through retail 
community pharmacies, payments received from, and rebates or discounts 
provided to PBMs and insurers are to be included in the AMP 
calculation. Furthermore, based on our interpretation of section 
1927(k)(1)(B)(i)(IV) of the Act, all rebates or discounts provided to 
PBMs and insurers should be included in the AMP for 5i drugs not 
generally dispensed through retail community pharmacies, regardless of 
whether the PBM is acting as an insurer or if it owns its own 
pharmacies. In light of these provisions, we have revised proposed 
Sec.  447.504(d)(2) to refer to all PBMs without further conditions.
    Comment: One commenter believed that sales to prisons (and closed 
door pharmacies that serve prisons) should be included in AMP for 5i 
drugs not generally dispensed through retail community pharmacies and 
indicated that CMS offered no rationale for the exclusion of sales and 
discounts to prisons (and closed door pharmacies that serve prisons) 
which operate much like long-term care providers (which are included in 
AMP for such 5i drugs). The commenter encouraged CMS to clarify the 
calculation of AMP for 5i drugs not generally dispensed through retail 
community pharmacies by adding prisons and closed door prison 
pharmacies.
    Response: As stated previously, we do not believe that Congress by 
adding the 5i drug provision intended that the statute should be read 
to disregard CMS's longstanding position that manufacturers should 
exclude prices from AMP that are made available only through certain 
state and federal government providers and programs and that 
manufacturers should now include those prices in AMP for 5i drugs not 
generally dispensed through retail community pharmacies. Consistent 
with that understanding, we believe that section 1927(k)(1)(B)(i)(IV) 
of the Act does not require the inclusion of payments, discounts or 
rebates, typically provided by manufacturers to prisons in AMP for 5i 
drugs not generally dispensed through retail community pharmacies as 
prison pharmacies are not included in the list of entities identified 
in section 1927(k)(1)(B)(i)(IV) of the Act. In addition, we do not 
believe that they qualify as the other entities, referenced in the 
statute, that do not conduct business as wholesalers or retail 
community pharmacies, which as discussed previously we have defined to 
include physicians and hospices. Therefore, based upon the comments and 
our reading of section 1927(k)(1)(B)(i)(IV) of the Act, we are not 
including sales to prison pharmacies in AMP for 5i drugs not generally 
dispensed through retail community pharmacies.
    Comment: One commenter noted that the AMP calculation defined for 
5i drugs not generally dispensed through retail community pharmacies 
would include transactions already proposed for inclusion in the 
determination of AMP, as well as non-retail customer transactions. The 
commenter stated that this approach seemed inconsistent with the goal 
of trying to identify the average retail price for the AMP and an 
average non-retail price for the non-retail, 5i drugs. (The commenter 
referred to this as the ``retail community pharmacy plus approach.'') 
The commenter believed a more logical method would be to utilize the 
classes of trade relevant to either the retail community pharmacy drugs 
or the non-retail drugs.
    Response: We disagree with this comment. Section 1927(k)(1)(A) of 
the Act defines AMP based, in part, on prices paid by retail community 
pharmacies and wholesalers, and section 1927(k)(1)(B) of the Act 
identifies specific exclusions from AMP. Section 1927(k) of the Act 
makes a distinction between AMP and AMP for 5i drugs not generally 
dispensed through retail community pharmacies, by providing that AMPs 
for such 5i drugs include, rather than exclude, payments made by (and 
rebates or discounts provided to) the specific entities listed in 
section 1927(k)(1)(B)(i)(IV) of the Act. Section 1927(k)(1)(B)(i)(IV) 
of the Act provides for the exclusion of payments received from, and 
rebates or discounts provided to PBMs, MCOs, HMOs, insurers, hospitals, 
clinics, mail order pharmacies, long term care providers, 
manufacturers, or any other entity that does not conduct business as a 
wholesaler or a retail community pharmacy from AMP, but it includes 
such payments, rebates, or discounts when the drug is a 5i drug that is 
not generally dispensed through a retail community pharmacy. Therefore, 
a manufacturer is required to calculate and report only one AMP for a 
drug consistent with sections 1927(k)(1)(A) and 1927(k)(1)(B)(i)(IV) of 
the Act.
    For the reasons discussed in this section, we have revised proposed 
Sec.  447.504(d) and (e) to provide as follows:
     Proposed Sec.  447.504(d) has been revised to more clearly 
specify the sales, nominal price sales, and associated discounts, 
rebates, payments, or other financial transactions that are included in 
the determination of AMP for 5i drugs not generally dispensed through 
retail community pharmacies.
     The paragraph on ``Further clarification of AMP 
calculation'' has been moved from proposed Sec.  447.504(e) to Sec.  
447.504(f).
     Proposed Sec.  447.504(e) has been revised to specify the 
sales, nominal price sales, and associated discounts, rebates, payments 
or other financial transactions excluded from AMP for 5i drugs not 
generally dispensed through retail community pharmacies at Sec.  
447.504(e)(1) through (20).
e. AMP for Oral CODs Not Generally Dispensed Through Retail Community 
Pharmacies
    We received several comments regarding the calculation of AMP for 
certain oral drugs that meet the definition of a COD, but are not 
generally dispensed through retail community pharmacies, nor included 
in the AMP for 5i drugs not generally dispensed at retail community 
pharmacies.
    Comment: Several commenters recommended that CMS address the AMP 
methodology for other product forms or package configurations that are 
not generally sold into retail channels but are not 5i drugs as they 
could benefit from an alternate AMP calculation. These commenters 
requested guidance as to how to calculate and report AMP for these non-
5i drugs with little or no retail sales and does not believe that CMS 
has adequately addressed this issue in the proposed rule. A few 
commenters believed that many manufacturers have been utilizing the 
same methodology for calculating AMP for 5i drugs not

[[Page 5250]]

generally dispensed through retail community pharmacies for these non-
retail, non-5i drugs and believed that the Congress intended to provide 
a calculation pathway for all drugs subject to the MDR program when it 
amended the Affordable Care Act with section 202 of the Education Jobs 
and Medicaid Assistance Act that created the 5i provision.
    Response: We recognize that there may be instances when oral drugs, 
such as certain REMS drugs, may only be dispensed through non-retail 
community pharmacy entities such as physician offices or hospital 
clinics. As discussed earlier in this final rule, we are not finalizing 
our proposal that manufacturers include entities that conduct business 
as retail community pharmacies within AMP; however, we understand that 
entities such as home health care, home infusion and specialty 
pharmacies may qualify to be included in the definition of retail 
community pharmacies, in light of the statutory definition of a retail 
community pharmacy at section 1927(k)(10) of the Act. Therefore, we 
believe that in such circumstances, there will be AMP sales for those 
oral drugs at least to the extent that they are sold through those 
pharmacies that meet the statutory definition of a retail community 
pharmacy. Additionally, because we are permitting manufacturers to use 
a presumed inclusion approach when calculating AMP, and to make 
reasonable assumptions, we believe that an AMP will be generated for 
such drugs. We will continue to consider this issue and will provide 
additional guidance or rulemaking, if needed.
    Comment: A few commenters recommended that, in the case of drugs 
with little or no retail sales, that they should default to the AMP 
calculation for 5i drugs not generally dispensed through retail 
community apply the AMP calculation methodology to this un-addressed 
class of products by stating that hospitals (or other applicable 
entities) are deemed to be ``conducting business as retail community 
pharmacies'' for a non-5i drug where there is effectively no other 
option for the general public to purchase that drug, or by creating a 
new AMP calculation methodology for non-5i drugs that do not have any 
eligible sales for the AMP methodology. Another commenter recommended 
that CMS add to the end of regulatory text for Sec.  447.507(a) ``Each 
drug purchased by a physician's office must have an AMP reported so 
that federal rebates can be collected.''
    Response: Section 1927(k)(1)(B)(i)(IV) of the Act specifically 
refers to inhalation, infusion, instilled, implanted or injectable drug 
sales that are not generally dispensed through a retail community 
pharmacy that would be included in the AMP for 5i drugs not generally 
dispensed through retail community pharmacies. While the distribution 
channels for some oral drugs may be very similar to that of the 5i 
drugs, we do not find a basis for making this exception in the statute. 
Therefore, when there are any AMP eligible sales, the calculation 
should be made based on those sales to entities that meet the 
definition of a retail community pharmacy at section 1927(k)(10) of the 
Act. As discussed previously in this section, manufacturers have the 
option to make reasonable assumptions in their AMP calculations, in the 
absence of guidance, and may make certain presumptions consistent with 
the requirements and intent of section 1927 of the Act and federal 
regulations. We believe, in light of this option, manufacturers have 
some flexibility to calculate AMP for those oral drugs that do not 
qualify as 5i drugs.
    Comment: A commenter recommended the inclusion of non-340B covered 
entity outpatient clinics, family planning clinics, city/county/state 
entities and hospitals in the definition of ``entities that conduct 
business as wholesalers or retail community pharmacies'' as these 
entities dispense medications to the general public at retail prices 
and are typically licensed as pharmacies.
    Response: Manufacturers must include payments from, and rebates or 
discounts provided to clinics and hospitals when calculating AMP for 5i 
drugs not generally dispensed through retail community pharmacies as 
required by section 1927(k)(1)(B)(i)(IV) of the Act. As discussed 
earlier in this section, payments from, and discounts or rebates 
provided to government pharmacies and SPAPs are excluded from AMP for 
such 5i drugs consistent with our reading of section 
1927(k)(1)(B)(i)(IV) of the Act. As discussed previously, manufacturers 
may continue to make reasonable assumptions when calculating AMP.
    Comment: A commenter stated that there is an arguable basis for 
limited use of sales to certain non-excluded pharmacies to be included 
in the determination of AMP for those drugs for which AMP could not 
otherwise be calculated. For example, if greater than 90 percent of the 
manufacturer's sales for the respective drug were to an entity other 
than a wholesaler for distribution to an retail community pharmacy or a 
retail community pharmacy that directly purchases from the 
manufacturer, then the drug would be classified as not generally 
dispensed though a retail community pharmacy and to calculate an AMP 
for rebate purposes, sales to pharmacies on the edge of the definition 
of retail community pharmacy could be used to provide a more robust 
pricing measure.
    Response: As the commenter did not specifically identify the types 
of pharmacies ``on the edge'' of the definition of retail community 
pharmacy, we are unable to specifically address whether the types of 
pharmacies to which the commenter referred would qualify as a retail 
community pharmacy. However, when there are any AMP-eligible sales, the 
calculation should be made based on those sales and, as we have 
previously stated in this section, manufacturers have the option to 
make reasonable assumptions in their AMP calculations consistent with 
the requirements and intent of section 1927 of the Act and federal 
regulations.
    Comment: One commenter noted that many 5i drug products are covered 
under Medicare Part B and have pricing established by CMS for the 
Medicare program based on ASP. The commenter noted that since many 
states already rely on ASP quarterly pricing published by CMS to price 
these products for their Medicaid programs, the commenter requested 
that CMS clarify the expected differences between ASP and AMP pricing 
for these products.
    Response: We appreciate the comment, but at this time, we do not 
have the Medicaid data available to make such a comparison between AMP 
and ASP for 5i drugs.
8. Further Clarification on the Calculation of AMP (Sec.  447.504(f)--
Proposed Sec.  447.504(e))
    We proposed to include proposed Sec.  447.504(e)(1) through (3) to 
provide further clarification of AMP calculation. As discussed in a 
previous response in section II.C.7. of this rule, in this final rule 
we are moving this provision on ``Further clarification of AMP 
calculation'' from proposed Sec.  447.504(e)(1) through (3) to Sec.  
447.504(f)(1) through (3).
a. Chargebacks and Other Discounts (Sec.  447.504(f)(1)--Proposed Sec.  
447.504(e)(1))
    We proposed that AMP would include cash discounts, except customary 
prompt pay discounts extended to wholesalers, free goods that are 
contingent on any purchase requirement, volume discounts, chargebacks 
that can be identified with

[[Page 5251]]

adequate documentation, incentives, administrative fees, service fees, 
distribution fees, and any other rebates, discounts or other financial 
transactions, other than rebates under section 1927 of the Act, which 
reduce the price received by the manufacturer for drugs distributed to 
retail community pharmacies (discussed in more detail at 77 FR 5336). 
We received the following comments concerning chargebacks and other 
discounts.
    Comment: Several commenters noted that CMS has proposed to include 
certain previously withdrawn regulatory language that may cause further 
confusion. Specifically, proposed Sec.  447.504(e)(1) provides, in 
part, that AMP includes incentives, administrative fees, service fees, 
distribution fees, and any other rebate, discounts or other financial 
transactions which reduce the price received by the manufacturer for 
drugs distributed to retail community pharmacies. This appears to be in 
conflict with the bona fide service fee exclusion and the commenter 
recommended that CMS withdraw this language.
    Another commenter stated that while CMS parenthetically excludes 
fees that constitute bona fide service fees in the preamble, the 
proposed regulatory language creates no such exception and implies that 
administrative, service and distribution fees are in fact discounts. 
CMS should clarify that all these fees will not be included in AMP as 
long as they qualify as bona fide service fee or in the case of GPO 
services meet the anti-kickback safe harbor. Alternatively, CMS could 
clarify that such fees will be included in AMP to the extent they do 
not qualify as bona fide service fees or meet the GPO safe harbor.
    Response: We agree that there was inconsistency between the 
language in the preamble and the language in the regulatory text. 
Therefore, we have amended the discussion proposed Sec.  447.504(e)(1), 
which is now codified at Sec.  447.504(f)(1), to add the parenthetical 
containing the words ``other than bona fide service fees'' to be 
consistent with the preamble discussion. Also, as we discussed 
previously in this section these manufacturer fees, including bona fide 
service fees, are excluded from AMP with regard to 5i drugs not 
generally dispensed through retail community pharmacies because, such 
fees do not represent the type of payments from, or discounts or 
rebates provided to, the entities listed in section 
1927(k)(1)(B)(i)(IV) of the Act as implemented in Sec.  447.504(d). 
Therefore, such fees should not be included in the determination of AMP 
for such 5i drugs. Additionally, to provide consistency between the AMP 
and best price sections, we are making the same revision to proposed 
Sec.  447.505(d)(1). As discussed in more detail in the definition of 
bona fide service fee (section II.B.4. of this final rule), we believe 
that to adopt a categorical exclusion of administrative fees if they 
fall within the GPO safe harbor provisions would be inconsistent with 
our guidance regarding an actual determination as to whether the fee is 
bona fide or not, therefore we are not providing the requested 
clarification.
    For the reasons discussed in this section, we are finalizing the 
provisions originally at proposed Sec.  447.504(e)(1), redesignated at 
Sec.  447.504(f)(1), except as noted, to add the phrase ``other than 
bona fide service fees.''
b. Quarterly AMP (Sec.  447.504(f)(2)--Proposed Sec.  447.504(e)(2))
    We proposed at Sec.  447.504(e)(2) that quarterly AMP is to be 
calculated as a weighted average of monthly AMPs in the quarter 
(discussed in more detail at 77 FR 5336). We received the following 
comments concerning quarterly AMP provisions.
    Comment: One commenter requested that CMS clarify that when the 
rule calls for quarterly AMP to be calculated as a weighted average of 
monthly AMPs in that quarter, that the rule means the sum across the 3 
months of the quarter of each month's reported AMP multiplied by the 
reported units of that month divided by the sum of the reported units 
for the 3 months of the quarter. The commenter noted that other types 
of weighting are possible and would yield different results. Another 
commenter noted that the language in the proposed rule seems to raise 
doubt about how many manufacturers are doing their quarterly 
calculation. The commenter asked if CMS expects all manufacturers to 
calculate their quarterly AMP by adding all sales for the quarter and 
dividing that result by the total number of units in that quarter (for 
example, month 1 sales + month 2 sales + month 3 sales/month 1 units + 
month 2 units + month 3 units); or does CMS intend to have the 
calculation be the 3 monthly AMPs divided by 3 (month 1 AMP + month 2 
+AMP + month 3 AMP/3). The commenter asked if it is the latter, does 
CMS recognize that the AMPs will be artificially inflated by that 
formula.
    Response: While we appreciate the commenter's question, neither of 
the calculation methods suggested by the commenter are entirely 
consistent with the calculation method we expect manufacturers to 
follow. For purposes of the MDR program, a weighted quarterly AMP 
should equal total sales across the 3 months divided by total units 
across the 3 months. To complete this calculation, we expect that 
manufacturers would calculate the sum of the 3 monthly AMPs times 
monthly units divided by total sum of units across the 3 months or sum 
[(month 1 AMP X month 1 units) + (month 2 AMP X month 2 units) + (month 
3 AMP X month 3 units)]/sum (month 1 units + month 2 units + month 3 
units). This methodology, which is designed to show how an average 
price is calculated, is consistent with section 1927(k)(1) of the Act 
as it represents the average price paid to the manufacturer for the 
drug.
    Comment: One commenter asked if there has been a study done of 
averaging monthly AMPs to get the quarterly AMPs versus making the 
quarterly AMP a separate calculation. The commenter stated that spikes, 
primarily due to seasonal product sales will cause an ``averaged'' 
quarterly AMP to be far different from one calculated using the actual 
quarterly sales dollars and units and indicated this was especially 
true of multiple package size products. The commenter requested that 
CMS address this issue in the final rule.
    Response: We are not aware of any studies that have been done in 
this area. We have reviewed monthly AMP submissions from manufacturers 
and recognize that seasonal product sales can affect the monthly and 
quarterly AMPs. However, by requiring manufacturers to smooth lagged 
price concessions we believe the monthly and quarterly AMPs will 
stabilize. Therefore, we have provided that manufacturer should 
calculate a weighted AMP, consistent with our reading of section 
1927(k)(1) of the Act as it represents the average price paid to the 
manufacturer for the drug in the United States.
    Therefore, for the reasons stated in this section, we are 
finalizing the provisions pertaining to the calculation of quarterly 
AMP as proposed, at redesignated Sec.  447.504(f)(2).
c. Manufacturer Adjustments (Sec.  447.504(f)(3)--Proposed Sec.  
447.504(e)(3))
    To account for discounts, rebates or other price concessions that 
may not be available during the rebate reporting period (meaning they 
are available on a lagged basis), we provided at proposed Sec.  
447.504(e)(3) that the manufacturer must adjust the AMP for the 
applicable rebate period if cumulative discounts, rebates, or other 
arrangements subsequently adjust the prices actually realized, to the 
extent that these discounts, rebates or arrangements are

[[Page 5252]]

not excluded from the determination of AMP by statute or regulation (77 
FR 5336). We received no comments on this provision and for the reasons 
specified in the proposed rule (77 FR 5336) and this section, are 
finalizing our proposal at redesignated Sec.  447.504(f)(3).

D. Determination of Best Price (Sec.  447.505)

1. Definitions of Best Price and Providers
    We proposed to codify the definitions for the terms ``best price'' 
and ``provider'' under proposed Sec.  447.505(a) (77 FR 5336, 5362). 
Additionally, we proposed to revise the definition of the term ``best 
price'' at Sec.  447.505(a) so that it is consistent with the 
definition of best price found in section 1927(c)(1)(C) of the Act (77 
FR 5336, 5362). We received no comments regarding our proposal to 
codify and define ``best price'' and ``providers.'' Therefore, we are 
including these definitions under Sec.  447.505(a) and finalizing the 
definition of ``provider'' as proposed. We are also finalizing the 
definition of best price as proposed, except that we are including a 
reference to ``an authorized generic drug'' and deleting the phrase 
``for any such drug of a manufacturer that is sold under an NDA 
approved under section 505(c) of the FFDCA,'' to be consistent with the 
definition of authorized generic drug that we are finalizing at Sec.  
447.502. This technical modification is designed to simplify the 
reference to those drugs sold under an NDA approved under section 
505(c) of the FFDCA (for example, authorized generic drugs); it is not 
designed to substantively change the proposed definition of best price 
that we are finalizing.
2. Prices Included in Best Price
    We proposed the ``Prices included in best price'' section, 
currently located at Sec.  447.505(c)(1) through (11), be redesignated 
to proposed Sec.  447.505(b) and that it be revised to remove the list 
of prices included in best price, so that the definition is consistent 
with the statute. As discussed in the proposed rule, we believe this 
revision provides sufficient detail as to the prices included in best 
price (as discussed in more detail at 77 FR 5336). We received the 
following comments concerning the proposed redesignation and revisions 
to the rule to remove the list of prices included in best price:
    Comment: Many commenters appreciated CMS's efforts to conform the 
best price regulatory definition to the statutory definition of best 
price. However, the commenters were concerned that the proposed 
language leaves some room for ambiguity regarding the treatment of 
prices and associated discounts or other price concessions to entities 
that are not best price-eligible entities as defined by the statute. 
Specifically, proposed Sec.  447.505(b) provides that best price 
includes all prices and associated rebates, discounts, or other 
financial transactions that adjust the price either directly or 
indirectly unless specifically excluded from best price, but does not 
expressly limit those prices to the entities listed in paragraph (a), 
and thus creates ambiguity regarding the treatment of prices and 
associated discounts or other price concessions to customers, such as 
patients, that are not included in the statutory definition of best 
price.
    Commenters recommended that CMS revise the proposed language in 
paragraph (b) to clarify that the prices described in paragraph (b) are 
eligible for consideration in best price only if they are prices to one 
of the best price-eligible entities listed in paragraph (a). The 
commenters suggested that CMS revise paragraph (b) to state, ``Best 
price for CODs includes all prices and associated rebates, discounts, 
or other transactions that adjust prices either directly or indirectly, 
provided to any entity described in paragraph (a), unless such prices 
are otherwise excluded as provided in paragraph (c) of this section.'' 
The commenters believed this revision is necessary to ensure that the 
rule does not unlawfully expand the statutory definition to include 
prices to entities other than those identified in the statutory 
definition of best price.
    A few commenters stated that to be consistent with the statute and 
the definition in proposed Sec.  447.505(a), the proposed language at 
Sec.  447.505(b) should include ``to any wholesaler, retailer, 
provider, health maintenance organization, nonprofit entity or 
government entity'' after ``. . . that adjusted prices . . .'' and 
before ``either directly or indirectly.'' Otherwise, the commenter 
believed that the proposed language at Sec.  447.505 could be read to 
include in best price sales to non-entities such as patients.
    Response: In accordance with the Sec.  447.505(c), we are 
finalizing under notice and comment rulemaking, that best price 
includes prices and associated rebates, discounts, or other price 
concessions that adjust prices either directly or indirectly. We 
believe this language, which should be familiar to manufacturers when 
calculating best price, is designed to require that manufacturers 
include those adjustments made to an eligible entity but not to require 
an accumulation of adjustments provided to all entities. Additionally, 
we do not believe it is necessary to relist the best price-eligible 
entities already identified in the definition of best price, but agree 
with the suggestion to further revise proposed Sec.  447.505(b) to 
clarify that best price includes all prices, applicable discounts, 
rebates, or other transactions that adjust prices either directly or 
indirectly to the best price-eligible entities listed in Sec.  
447.505(a). In light of the comments, we have decided to include a 
reference to these best price eligible entities.
    Comment: One commenter noted that unlike the AMP final rule, which 
suggested that manufacturers must ``stack'' price concessions provided 
to any single best price-eligible entity on a single unit of a product, 
neither the preamble nor the regulatory text of the proposed rule 
specifically address stacking. The commenter requested that CMS adopt a 
policy with regard to the requirement to stack in best price when two 
different price concessions are provided to two different contracted 
entities. Specifically, the commenter believed that CMS should adopt a 
policy where the manufacturer would only be required to combine price 
concessions on a single unit when it has actual knowledge of, or 
documentation that reflects that the price concessions will flow to a 
single entity. Further, the commenter requested guidance as to what 
degree of relationship that two separate but related entities must have 
for them to be deemed a ``single entity'' for best price stacking 
purposes.
    Another commenter was concerned that the proposed rule would 
redefine best price to include within a single price to a particular 
customer all rebates and payments ``associated'' with that transaction. 
The commenter believed this to be a vague term which does not clearly 
state that the associated payment must be provided to the same entity 
to which the product is sold. The commenter further noted that this 
would be a significant change to the definition of best price in 
statute and the national rebate agreement. Therefore, the commenter 
objected to the definition as it would require manufacturers to include 
in the best price available to one customer, as a price concession to 
that customer, a payment made to a completely different entity and the 
commenter believed this was a significant change to the statutory and 
contract definition.
    Response: A manufacturer is responsible for including all price 
concessions that adjust the price realized by the manufacturer for the

[[Page 5253]]

drug in its determination of best price. If a manufacturer offers 
multiple price concessions to two entities for the same drug 
transaction, such as rebates to a PBM where the rebates are designed to 
adjust prices at the retail or provider level and discounts to a retail 
community pharmacy's final drug price, all discounts related to that 
transaction which adjust the price available from the manufacturer 
should be considered in the manufacturer's final price of that drug 
when determining the best price to be reported for the drug. We believe 
this policy is consistent with current Sec.  447.505(e)(3), which 
requires that if cumulative discounts subsequently adjust the price 
available from the manufacturer, they should be included in the best 
price calculation.
    Furthermore, the requirement to include all discounts that 
subsequently adjust the price available from the manufacturer is also 
consistent with the provisions we are finalizing in this rule at Sec.  
447.505(c)(17), which specifies that best price includes PBM rebates, 
discounts or other financial transactions, including their mail order 
pharmacy purchases, where such rebates, discounts or price concessions 
are designed to adjust prices at the retail or provider level. In 
addition, we are finalizing, as proposed, at Sec.  447.505(d)(3), that 
manufacturers must adjust the best price if cumulative discounts, 
rebates, or other arrangements subsequently adjust the prices available 
from the manufacturer. We do not believe it is necessary to specify the 
degree of the relationship between two separate but related entities 
since the manufacturer's price concessions or discounts that are passed 
on to best price-eligible entities are not predicated upon a 
relationship existing between the two entities.
    We also do not believe it is necessary that this regulation detail 
every arrangement that may subsequently adjust the prices available 
from the manufacturer. With the recent introduction of value based 
purchasing arrangements in the pharmaceutical marketplace, we recognize 
the value of such arrangements especially when they benefit patients. 
We are also interested in assuring that states and Medicaid programs 
have clarity as to how these arrangements might exist in Medicaid. 
Therefore, since these arrangements are unique, we are considering how 
to provide more specific guidance on this matter, including how such 
arrangements affect a manufacturer's best price.
    While we are making some minor revisions, as discussed in this 
section, there are no substantive changes being adopted in this final 
rule regarding a manufacturer's treatment of financial transactions 
that subsequently adjust prices to best price-eligible entities.
    In response to the comments and for the reasons discussed in this 
section, we are revising proposed Sec.  447.505(b) to delete the 
reference to ``associated'' rebate and discounts, and to insert a 
reference to ``applicable discounts, rebates'' and to the best price-
eligible entities listed in Sec.  447.505(a). Specifically, we have 
revised Sec.  447.505(b) to provide that the best price for CODs 
includes all prices, including applicable discounts, rebates or other 
transactions that adjust prices either directly or indirectly to the 
best price-eligible entities listed in Sec.  447.505(a).
3. AMP Methodology Applied to Best Price
    For consistency, we proposed to apply the same methodology to best 
price that we are applying to AMP, where applicable (77 FR 5336). To do 
so, we proposed the ``Prices excluded from best price'' section, 
currently located at Sec.  447.505(d)(1) through (13), be revised and 
redesignated to Sec.  447.505(c)(1) through (18) (as discussed in more 
detail at 77 FR 5336). We also proposed in the regulatory text to 
expand the list of prices excluded from best price to include 
manufacturer copayment assistant programs (Sec.  447.505(c)(10)), 
manufacturer-sponsored patient refund/rebate programs (Sec.  
447.505(c)(11)), manufacturer vouchers (Sec.  447.505(c)(12)), 
reimbursement by the manufacturer for recalled, damaged, expired, or 
otherwise unsalable returned goods (Sec.  447.505(c)(14)), and sales 
outside the United States (Sec.  447.505(c)(18)) to apply the same 
methodology to best price that is used for the determination of AMP (77 
FR 5336, 5363). We also proposed to redesignate Sec.  447.505(e) 
``Further clarification of best price'' to proposed Sec.  447.505(d). 
Because we did not propose changes to the current language of Sec.  
447.505(e), the proposed redesignation was only proposed in the 
regulatory text and not discussed in the preamble (77 FR 5363). 
Therefore, in this section we address comments regarding the proposed 
exclusions from best price section (Sec.  447.505(c)), as well as the 
proposed further clarification of best price (Sec.  447.505(d)). Some 
of these changes were proposed to provide consistency between the AMP 
and best price sections, while others were retained from the rule 
finalized with the AMP final rule in 2007. For example, in the preamble 
to the proposed rule (77 FR 5336), we proposed to expand the list of 
prices excluded from best price that were not identified previously in 
regulations to more closely mirror the exclusions from AMP, where 
applicable, consistent with section 1927(c)(1)(C) of the Act; including 
vouchers, manufacturer-sponsored patient refund/rebate programs, and 
sales outside of the United States. In the proposed rule (77 FR 5363), 
we also proposed to expand the list of prices excluded from best price 
to include manufacturer copayment assistant programs (Sec.  
447.505(c)(10)) and reimbursement by the manufacturer for recalled, 
damaged, expired, or otherwise unsalable returned goods (Sec.  
447.505(c)(14). In some instances, commenters generalized their 
comments so that they were applicable to both AMP and best price. In 
those cases we have chosen to respond to the comments in the 
Determination of AMP section (section II.C.) of this final rule and 
have noted, where applicable, any changes to best price that are being 
finalized as a result of comments within the AMP section of this final 
rule. We are therefore not repeating those comments that were specific 
to both AMP and best price within this section of the final rule. 
Please note that when referring to AMP in the context of AMP 
methodology applied to best price, we are referring to AMP in general 
and are not making any distinctions between AMP for 5i drugs versus AMP 
for non-5i drugs. We received the following comments related to the 
best price calculation:
    Comment: Some commenters supported CMS's efforts to better align 
the methods for determining AMP and best price. One of these commenters 
believed this will streamline and clarify manufacturer's price 
reporting responsibilities.
    Response: We agree that revising the best price provisions to more 
closely align with AMP will help with streamlining and clarifying 
manufacturer's price reporting responsibilities.
    Comment: Several commenters supported the exclusion of patient 
transactions from AMP and suggested that we apply these same exclusions 
to the best price definition. The commenters' stated that patients are 
not entities and cannot be best price-eligible purchasers and 
manufacturer-funded benefits to patients are irrelevant to the best 
price calculations.
    Response: We agree that best price excludes direct sales to 
patients because patients are not one of the entities described in the 
statutory definition of best price, and therefore, we are adding direct 
patient sales to the list of sales

[[Page 5254]]

excluded from best price at Sec.  447.505(c)(19).
    Comment: Several commenters supported CMS's proposal to exclude 
from best price patient programs (such as manufacturer coupons, 
vouchers, manufacturer drug discount programs, manufacturer rebate or 
refund programs and copayment and patient assistance programs) to the 
same extent as those programs are excluded from AMP, provided that all 
program benefits go to the patients and no best price-eligible entity 
receives a discount, rebate or other price concession. The commenters 
also requested that CMS explicitly confirm that the 2007 AMP final rule 
prohibition of purchase contingencies to patients when receiving free 
goods no longer applies and that discounts to patients are excluded 
from AMP and best price regardless of any purchase contingencies. 
Another commenter stated that in instances when price concessions go to 
a best price-eligible entity in relation to a patient transaction, the 
price concessions do count in best price.
    Response: As discussed in this section, in this final rule we are 
adding Sec.  447.505(c)(19) to list direct patient sales as prices 
excluded from best price because patients are not one of the entities 
described in the statutory definition of best price at section 
1927(c)(1)(C) of the Act. However, the requirements at section 
1927(c)(1)(C)(ii)(I) of the Act further provides that best price shall 
be inclusive of free goods that are contingent on any purchase 
requirement. Since this statutory language does not link the 
availability of free goods to only those purchases made by the entities 
listed in section 1927(c)(1)(C)(i) of the Act, a manufacturer that 
provides a free good that requires a purchase be made to receive the 
free good would be an included transaction. In other words, if a 
manufacturer provides a free good directly to the patient and there is 
a purchase requirement that direct to patient sale would no longer be 
excluded from the manufacturer's determination of best price.
    Therefore, we are revising Sec.  447.505(c)(12) to exclude from the 
best price calculation manufacturer-sponsored programs that provide 
free goods, including but not limited to vouchers and patient 
assistance programs, but only to the extent that the voucher or benefit 
of such a program is not contingent on any other purchase requirement; 
the full value of the voucher or benefit of such a program is passed on 
to the consumer; and the pharmacy, agent, or other entity does not 
receive any price concession. These revisions ensure that the treatment 
of these programs are in line with the statutory requirements at 
section 1927(c)(1)(C)(ii)(I) of the Act and provides consistency 
between AMP and best price.
    Furthermore, as discussed in more detail in the Determination of 
AMP section of the final rule (II.C.6.v) we have also made the 
following revisions to best price to accurately reflect the exclusion 
of patient programs from best price. First, proposed Sec.  
447.505(c)(8), which pertains to manufacturer-sponsored drug discount 
card programs, has been revised to add the contingency that the full 
value of the discount is passed on to the consumer and the pharmacy, 
agent or other entity does not receive any price concession. These 
changes are being made to provide clarification and consistency as was 
requested by the commenters, as well as to more accurately describe all 
of the conditions that must be satisfied to make a particular program 
excluded from AMP and best price, consistent with sections 1927(k) and 
1927(c)(1)(C) of the Act, as applicable. Additional discussion of this 
revision is provided in the Determination of AMP section of this final 
rule (section II.C.6.v.).
    Second, we have revised proposed Sec.  447.505(c)(10) to pertain 
solely to Manufacturer copayment assistance programs because Patient 
Assistance Programs have been moved to Sec.  447.505(c)(12), as 
discussed previously in this section and the Determination of AMP 
section (II.C.6) of this final rule. We have also revised proposed 
Sec.  447.505(c)(10) to remove the language ``provided free of charge'' 
because these types of programs typically offer copayment assistance, 
which may or may not result in free goods to patients. Additional 
discussion of this revision is provided in the Determination of AMP 
section of this final rule (section II.C.6.v.). Furthermore, we have 
revised proposed Sec.  447.505(c)(10) to add the contingency that the 
program benefits are provided entirely to the patient, and the 
pharmacy, agent, or other entity does not receive any price 
concessions. These changes are being made to provide clarification and 
consistency, as well as to more accurately describe all of the 
conditions that must be satisfied to make a particular program excluded 
from AMP and best price, consistent with sections 1927(k) and 
1927(c)(1)(C) of the Act, as applicable.
    Third, proposed Sec.  447.505(c)(11), which pertains to 
manufacturer-sponsored patient refund/rebate programs, has been revised 
to remove the language ``provided free of charge'' because these types 
of programs typically offer discounts that may or may not result in 
patients receiving the drug for free. Additional discussion of this 
revision is provided in the Determination of AMP section of this final 
rule (section II.C.6.v.). Furthermore, we have added the contingency 
that the manufacturer provides a full or partial refund or rebate to 
the patient for out-of-pocket costs and the pharmacy, agent, or other 
entity does not receive any price concessions. These changes are being 
made to provide clarification and consistency, as well as to more 
accurately describe all of the conditions that must be satisfied to 
make a particular program excluded from AMP and best price, consistent 
with sections 1927(k) and 1927(c)(1)(C) of the Act, as applicable. 
Furthermore, we are finalizing Sec.  447.505(c)(13) to provide that 
free goods, not contingent upon any purchase requirement, are excluded 
from best price. Additionally, manufacturers must include the value of 
the discount, coupon, rebate, or voucher in the determination of best 
price if the program generates a price concession to a best price-
eligible entity. Finally, we are also finalizing Sec.  447.505(c)(9) 
pertaining to manufacturer coupons, as it was proposed (77 FR 5363), 
since no comments were received on this proposal and it remains 
unchanged from the present regulations.
    Comment: One commenter requested that CMS clarify the proper 
treatment of financial transactions with AMP or best price-eligible 
entities that are generated as part of the administration of excluded 
patient programs. For example, the commenter requested that CMS confirm 
that when a pharmacy extends a manufacturer-sponsored discount to a 
patient, and the manufacturer then reimburses the pharmacy for the 
exact amount of that patient discount, the reimbursement transactions 
with the pharmacy should be excluded from AMP and best price because 
the entire benefit of the discount flows through to the patient and 
there is no discount to the pharmacy. Similarly, where a manufacturer 
pays a pharmacy a bona fide service fee for administering a discount 
program that otherwise can be excluded from AMP and best price, the 
commenter believed that the fee paid to the pharmacy is also properly 
excluded from AMP and best price. The commenter requested that CMS 
expressly address the proper treatment of these specific examples in 
the final rule.
    Response: We agree that when a pharmacy is simply a conduit to 
passing

[[Page 5255]]

a discount through to the beneficiary, those manufacturers-to-pharmacy 
transactions are excluded from AMP and best price. Furthermore, those 
fees that meet the requirements of our definition of bona fide service 
fee at Sec.  447.502 shall be excluded. Further discussion regarding 
the definition and application of bona fide service fee when 
determining AMP and best price is found at sections II.B., II.C., and 
II.D. of this final rule (Sec. Sec.  447.502, 447.504(c), 447.504(e), 
and 447.505(c)).
    Comment: One commenter noted that CMS does not explicitly provide 
that discounts to SPAPs or other best price-exempt transactions are 
excluded from the determination of best price.
    Response: When prices paid by certain entities, such as SPAPs, are 
exempt or excluded from best price, the excluded price shall be 
inclusive of all associated transactions to those entities such as 
subsequent discounts and rebates eventually paid for by the 
manufacturer. However, as discussed in prior response, when there is a 
contingency arrangement related to the provision of free goods, such 
transactions are generally included in the best price. We have decided 
to further clarify the proposed rule regarding prices paid to SPAPs, 
because we agree with the commenter that our proposed rule was not 
clear regarding the exclusion of such prices, because SPAPs typically 
do not pay for drugs directly to manufacturers, but rather act as an 
insurer that may receive additional price concessions from the 
manufacturer. Therefore, instead of specifying ``any prices'' provided 
to designated SPAPs, in this final rule we are revising proposed Sec.  
447.505(c)(4) to clarify that ``any prices, rebates or discounts'' 
provided to designated SPAPs are excluded from best price. As we stated 
earlier, reference to prices is ``typically'' meant to include 
associated discounts or rebates which reduce the price available from 
the manufacturer. We believe this revision further clarifies which 
specific SPAP transactions are excluded from best price.
    Comment: A few commenters requested that CMS explicitly confirm 
that prices to other manufacturers for products sold for use in 
clinical trials are not included in best price. The commenters noted 
that according to the plain language of the statute, a manufacturer is 
a best price-eligible entity only in the specific, limited case of 
sales of authorized generics. The commenters believed that a 
manufacturer that purchases drugs from another manufacturer for use in 
clinical trials does not satisfy the definition of wholesaler or any 
other best price-eligible entity, and prices associated with such sales 
should not be included in best price.
    Response: There is no explicit exclusion in section 1927(c) of the 
Act for drugs used in clinical trials. Therefore, in instances when a 
manufacturer sells drugs to another manufacturer for use specifically 
in a clinical trial, those prices are included in a manufacturer's 
determination of best price, but only to the extent the other 
manufacturer qualifies as a best-price eligible entity as provided at 
Sec.  447.505(c). A manufacturer, as defined at section 1927(k)(5) of 
the Act, is a best price-eligible entity if it meets the definition of 
a wholesaler at section 1927(k)(11) of the Act. That is, the 
manufacturer is engaged in wholesale distribution of prescription drugs 
to retail community pharmacies. We believe in instances when the 
purchasing manufacturer is using the drug as part of a clinical trial, 
that manufacturer is likely not engaged in wholesale distribution of 
prescription drugs to retail community pharmacies, and in such 
situations, such sales would not be included in best price.
    Comment: One commenter supported CMS's conforming exclusion of 
returns from the best price calculation. The commenter believed returns 
do not impact the price realized by a customer.
    Response: We appreciate the support and note that in this final 
rule we are finalizing, with some revisions, proposed Sec.  
447.505(c)(14) (``Reimbursement by the manufacturer for recalled, 
damaged, expired, or otherwise unsalable returned goods'') to align 
with the regulations text found in the AMP section at Sec.  
447.504(c)(16) by changing ``it only covers these costs'' to ``such 
payment covers only these costs.'' We believe this will ensure 
consistency regarding how manufacturers treat returns in their 
determinations of AMP and best price.
    Comment: Many commenters noted that the best price proposed rule 
failed to delete language providing that best price is ``net of . . . 
returned goods.'' The commenters stated that this provision is not 
consistent with the new language on returns that CMS proposes to add to 
the best price definition and should be removed. Another commenter 
urged CMS to clarify that returned goods may be excluded from best 
price to the extent that the return is made from any best price-
eligible customer, not just wholesalers, where the transaction 
otherwise satisfies the qualitative criteria for exclusion.
    Response: We agree, and for the reasons commenters noted, in this 
final rule, we are amending proposed Sec.  447.505(d)(1) by removing 
the word ``returns'' to be consistent with the proposed Sec.  
447.505(c)(14), which, as specified in this section, is being finalized 
to specify that reimbursement by the manufacturer for recalled, 
damaged, expired, or otherwise unsalable returned goods is excluded 
from best price.
    Comment: Several commenters did not agree with the limitation of 
entities eligible for the bona fide service fee exclusion as it applies 
to best price and indicated that CMS should expand the bona fide 
service fee exception to include any best price-eligible entity (and 
any entity that does not trigger best price consideration). The 
commenters added that CMS should revise the regulatory text to exclude 
from best price those bona fide service fees paid to any ``wholesaler, 
retailer, provider, health maintenance organization, nonprofit entity, 
or governmental entity in the United States.'' Commenters indicated 
that without this expansion, fees that are bona fide under the proposed 
rule's substantive definition would be inappropriately counted as 
adjusting the price realized by the best price-eligible entity and has 
the potential to inappropriately increase manufacturers' rebate 
liabilities on brand drugs since it could require manufacturers to 
recognize the same fee as a discount in some contexts (when the fee is 
provided to best price-eligible entities other than wholesalers and 
retail community pharmacies) but as a legitimate fee in others (when 
the fee is provided to wholesalers and retail community pharmacies).
    A few commenters noted that it seems illogical to exclude a bona 
fide service fee paid to GPOs from AMP and best price but not apply the 
exclusion to other entity types such as PBMs and insurers that, like 
GPOs, are outside the supply chain in that they do not purchase 
prescription drugs. One commenter stated, in certain instances, the 
change in definition of bona fide service fee could require 
manufacturers to stack PBM or MCO service fees with rebates when 
determining best price. The commenter maintained the likely unintended 
consequences of this type of stacking requirement would be a reduction 
in the fees and/or rebates that manufacturers would be willing to offer 
insurers and their agents for formulary placement, which could lead to 
increases in insurance premium or brand copayments to the commercially 
insured public. The commenter also noted that long term care and mail 
order pharmacies, like retail community pharmacies, do on occasion 
provide services to manufacturers that deserve

[[Page 5256]]

to be treated as compensation for work performed and not discounts on 
products when best price is determined. The commenter stated that CMS 
has authority to require the exclusion of fees that satisfy the four-
part test for a bona fide service fees from best price regardless of 
the recipient.
    Response: We agree with the commenters and have revised the 
proposed Sec.  447.505(c)(16), which referenced the exclusion of bona 
fide service fees to wholesalers, retail community pharmacies, or 
entities that conduct business as wholesalers or retail community 
pharmacies. We did not intend to change our current policy in Sec.  
447.505(d)(12), which provides for a broad exclusion of bona fide 
service fees for purposes of the best price calculation. This was an 
unintended drafting error in the proposed rule. Furthermore, we agree 
with the commenters that for purposes of best price calculations, we 
specifically distinguish GPOs from best price-eligible entities when 
applying the bona fide services fee exclusion for MDR purposes. GPOs 
may function as negotiators for prices on behalf of pharmacies, 
hospitals, or physician practices, with GPOs receiving service fees for 
their services, or they may function as distributors of price 
concessions from manufacturers to their members after volume sales 
benchmarks have been attained. To the extent that service fees are paid 
to a GPO and those fees qualify as bona fide service fees, they should 
be excluded from best price.
    Therefore, we have revised proposed Sec.  447.505(c)(16) to specify 
that the bona fide service fees, as defined in Sec.  447.502 are 
excluded from the determination of best price and we have removed the 
specific references to wholesalers, retail community pharmacies, 
entities that conduct business as wholesalers or retail community 
pharmacies, and GPOs. As discussed in the definition of Bona Fide 
Service Fee in section II.B.4. of this final rule, we are no longer 
specifically referencing GPOs in the regulatory text because we do not 
believe it is necessary with the revised definition of bona fide 
service fee. We believe this revision will maintain CMS's current 
policy which provides for a broad exclusion of bona fide service fees 
for purposes of the best price calculation. In addition, we have 
revised proposed Sec.  447.505(d)(1) by adopting the reference to bona 
fide service fee in current Sec.  447.505(e)(1). Specifically, we have 
revised proposed Sec.  447.505(d)(1) by adding the parenthetical 
reference ``except bona fide service fees'' to clarify that such fees 
should be excluded from best price calculations.
    Therefore, for the reasons discussed in this section, we are 
finalizing proposed Sec.  447.505(c) and (d), including the following 
revisions:
     Proposed Sec.  447.505(c)(4) is revised to specify that 
``any prices, rebates or discounts'' provided to designated SPAPs are 
excluded from best price.
     Proposed Sec.  447.505(c)(8) is revised to specify that 
manufacturer-sponsored drug discount card programs, but only to the 
extent that the full value of the discount is passed on to the consumer 
and the pharmacy, agent, or other entity does not receive any price 
concession are excluded from best price.
     Proposed Sec.  447.505(c)(10) is revised to specify that 
Manufacturer copayment assistance programs, to the extent that the 
program benefits are provided entirely to the patient and the pharmacy, 
agent, or other entity does not receive any price concession are 
excluded from best price.
     Proposed Sec.  447.505(c)(11) is revised to specify that 
manufacturer-sponsored patient refund or rebate programs, to the extent 
that the manufacturer provides a full or partial refund or rebate to 
the patient for out-of-pocket costs and the pharmacy, agent, or other 
entity does not receive any price concession are excluded from best 
price.
     Proposed Sec.  447.505(c)(12) is revised to specify that 
manufacturer-sponsored programs that provide free goods, including but 
not limited to vouchers and patient assistance programs, but only to 
the extent that the voucher or benefit of such a program is not 
contingent on any other purchase requirement; the full value of the 
voucher or benefit of such program is passed on to the consumer; and 
the pharmacy, agent, or entity does not receive any price concession 
are excluded from best price.
     Proposed Sec.  447.505(c)(14) is revised to replace ``it 
only covers these costs'' with ``such payment covers only these costs'' 
to further ensure consistency in how returns are treated in AMP and 
best price.
     Proposed Sec.  447.505(c)(15) is revised to remove the 
reference to ``of this subpart'' given the regulatory cite is specified 
(Sec.  447.508) within the paragraph.
     Proposed Sec.  447.505(c)(16) is revised to reference bona 
fide service fees ``as defined at Sec.  447.502,'' and to delete 
language from the proposed rule describing types of fees (inventory 
fees, distribution service fees, etc.) because such fees are included 
in the definition of bona fide service fee at Sec.  447.502.
     We have added direct patient sales to the list of sales 
excluded from best price at Sec.  447.505(c)(19).
     Proposed Sec.  447.505(d)(1) is revised to delete the 
reference to ``returns'' and to include ``except bona fide service 
fees'' after the reference to ``service fees'' and before distribution 
fees.
4. 340B Expanded List of Covered Entities Exempt From Best Price
    In accordance with sections 1927(a)(5)(B) and 1927(c) of the Act, 
we proposed at Sec.  447.505(c)(2) that manufacturers should exclude 
from best price the prices charged under the 340B program to a covered 
entity described in section 1927(a)(5)(B) of the Act and any inpatient 
prices charged to hospitals described in section 340B(a)(4)(L) of the 
PHSA (77 FR 5363). In accordance with section 340B(a)(4) of the PHSA, 
we proposed to clarify how manufacturers are to treat orphan drugs sold 
to new covered entities described in sections 340B(a)(4)(M), (N), and 
(O) of the PHSA for best price. These requirements were proposed at new 
Sec.  447.505(c)(2)(i) and (ii) (see 77 FR 5337 for additional 
information). We received the following comments concerning these 
provisions:
    Comment: Many commenters opposed our proposal that manufacturers 
can exclude only drugs purchased under the 340B Drug Pricing Program 
from their best price calculation. One commenter stated that by 
narrowing the 340B best price exemption to prices charged ``under the 
340B Drug Pricing Program'' and inpatient prices to disproportionate 
share hospitals (DSH), the proposed rule would depart from the rebate 
statute's plain language, which expressly exempts ``any prices'' to 
covered entities. Another commenter noted that the term ``any'' is 
commonly defined as ``every'' and therefore includes all prices 
offered, whether at a 340B price or not. Many commenters indicated that 
CMS should incorporate the plain meaning of the statutory language in 
the final rule because not allowing manufacturers to exclude these 
sales from best price would be inconsistent with the Medicaid statute. 
Commenters also noted that nowhere in the law is the best price 
exclusion limited to sales under the 340B Drug pricing program.
    Another commenter stated that this broad exception to best price 
has been enshrined in the statute and has governed the intersection of 
Medicaid and 340B since the 340B program's inception.
    Response: We are not finalizing the changes to the best price 
calculation proposed for Sec.  447.505(c)(2). Instead, in light of the 
comments and section 1927(c)(1)(C)(i) of the Act, we are

[[Page 5257]]

revising proposed Sec.  447.505(c)(2) to provide that any prices 
charged to a covered entity described in section 1927(a)(5)(B) of the 
Act (including inpatient prices charged to hospitals described in 
section 340B(a)(4)(L) of the PHSA) shall be excluded from best price. 
We have considered the numerous comments received regarding our 
proposed interpretation of what any price means in the context of the 
best price exemption and we agree with the commenters that as long as 
the entity meets the definition of a ``covered entity,'' which 
(consistent with section 1927(a)(5)(B) of the Act) is defined in 
section 340B(a)(4) of the PHSA to include a requirement that the 
covered entity meet the requirements described in section 340B(a)(5) of 
the PHSA, any prices charged by manufacturers and paid for by covered 
entities, consistent with these provisions, shall be excluded from best 
price.
    Comment: One commenter stated that federally qualified health 
centers (FQHCs) and other covered entities are by definition safety net 
health care providers and if a manufacturer is willing to sell drugs to 
FQHCs at a price lower than the 340B ceiling price (but higher than the 
nominal price) it should be encouraged to do so without concern that it 
will set a new best price for the product.
    Response: We agree with the commenter that including in best price 
a price charged by a manufacturer and paid for by the covered entity 
that is lower than a 340B ceiling price (sub-ceiling prices) should not 
reset the manufacturer's best price for a COD. We believe that any 
prices for drugs sold to covered entities (as described in section 
340B(a)(4) of the PHSA) may be excluded from best price. This policy is 
further supported by section 340B(a)(10) of the PHSA which allows 
manufacturers to charge a price for a drug that is lower than the 
maximum price that may be charged under 340B(a)(1) of the PHSA.
    Comment: Several commenters asked for clarification about whether 
sub-ceiling prices, particularly those not offered through the 340B 
Prime Vender Program and inpatient prices offered to hospitals not 
described in PHSA 340B(a)(4)(L) under the 340B program would be exempt 
from best price. Specifically, several commenters requested that CMS 
expressly clarify whether the following prices are considered prices 
under the 340B program: voluntary ceiling prices on orphan drugs 
offered to entities newly added to the 340B program by the Affordable 
Care Act, sub-ceiling discounts offered to covered entities, regardless 
of whether those discounts are offered through the 340B Prime Vendor 
program, and prices for commercial sales offered to covered entities 
that elect to ``carve out'' Medicaid patients and purchase non-340B 
products for those patients, and inpatient prices to entities other 
than those described in section 340B(a)(4)(L) of the PHSA.
    The commenters noted that without clarity, manufacturers would 
likely interpret the provision differently and some could be putting 
themselves at risk for best price restatements and potentially False 
Claims liability. One of these commenters stated that without 
effectively explaining in the preamble or regulatory text how to 
interpret the concept, CMS would place restrictions on the prices 
excluded from best price that are extended to 340B entities.
    Response: As discussed previously, we are removing the phrase 
``under the 340B drug pricing program'' from proposed Sec.  
447.505(c)(2)(i) in this final rule to be consistent with section 
1927(c)(1)(C) of the Act and instead revising proposed Sec.  
447.505(c)(2) to provide that any prices charged to a covered entity 
described in section 1927(a)(5)(B) of the Act (including inpatient 
prices charged to hospitals described in section 340B(a)(4)(L) of the 
PHSA) shall be excluded from best price. We have taken into 
consideration the number of comments regarding our proposed 
interpretation of what any price means in the context of the best price 
exemption and agree that as long as the entity meets the definition of 
a covered entity described in section 1927(a)(5)(B) of the Act, which 
defines such entities in section 340B(a)(4) of the PHSA, any prices 
charged by manufacturers and paid for by covered entities shall be 
excluded from best price. Furthermore, we believe that this change 
clarifies that manufacturers may exclude any prices offered at or below 
the 340B ceiling price (subceiling prices).
    Comment: One commenter would like to understand if the current 
regulation issued under the Medicare Prescription Drug, Improvement, 
and Modernization Act (MMA) of 2003 that allows manufacturers to 
exclude from the calculation of best price any inpatient sales to DSH 
hospitals still remains in effect and can continue to exclude from best 
price inpatient drug purchases to disproportionate share hospitals.
    Response: Those prices for drugs purchased for inpatient use by DSH 
hospitals described in section 340B(a)(4)(L) of the PHSA are excluded 
from best price as long as such hospitals meet the definition of a 
covered entity as defined in section 340B(a)(4) of the PHSA.
    Comment: One commenter believed that, even when a covered entity 
carves out its Medicaid drugs from the 340B program, CMS should still 
allow manufacturers to exclude these drug prices from their best price 
calculation as to do otherwise would be inconsistent with the Medicaid 
statute. The commenter stated that even if a covered entity chooses to 
carve out its Medicaid drugs from the 340B program, it should be able 
to negotiate a discounted price, and by not allowing this practice, it 
could create reluctance on the part of manufacturers to provide 
discounted prices to safety net providers. The commenter suggested that 
this final rule clarify that manufacturers may exclude from their best 
price calculations their sales to covered entities, even when the 
entity takes advantage of the Medicaid carve-out option.
    Response: As discussed previously, we have revised our proposal to 
provide that manufacturers should exclude from their determination of 
best price any drug prices charged to a covered entity as described in 
section 1927(a)(5)(B) of the Act.
    Comment: One commenter stated that the ``Orphan Drug Exclusion'' 
prevents hospitals from accessing 340B prices on certain orphan drugs 
and indicated that many manufacturers are not offering 340B prices on 
orphan drugs to rural and freestanding cancer hospitals based on a 
concern that such a price would lower their best price. Several 
commenters urged CMS to clarify in the final rule that manufacturers 
can sell orphan drugs at 340B prices to 340B hospitals including rural 
and freestanding cancer hospitals and the newly covered entities added 
by the Affordable Care Act without affecting their best price. Another 
commenter stated that the inability to exclude from best price 
voluntary discounts prices (outside of the 340B program) for orphan 
drugs to covered entities could deter manufacturers from offering such 
discounts.
    Another commenter stated that because the statutory 340B best price 
exclusion applies to covered entities and not CODs, the commenter 
believed the orphan drug exclusion does not impact the best price 
exclusion. The commenter further stated that a voluntary 340B price on 
an orphan drug to an entity affected by the orphan drug exclusion is 
still a price to the 340B covered entities, which is the statutory 
requirement for best price exclusion.
    Response: As discussed in the prior responses, we have revised 
proposed

[[Page 5258]]

Sec.  447.505(c)(2) to delete the provision limiting the exclusion to 
prices charged ``under the 340B program.'' The orphan drug exclusion 
does not affect the best price provision in section 1927(c)(1)(C) of 
the Act. Therefore, as discussed previously in this section, any prices 
charged by manufacturers to a covered entity that meets the definition 
of a covered entity as described in section 1927(a)(5)(B) of the Act, 
which defines such an entity in section 340B(a)(4) of the PHSA to 
include a reference to the entity meeting the requirements described in 
section 340B(a)(5) of the PHSA, should be excluded from best price.
    Comment: One commenter noted that while the statute specifically 
allows manufacturers to exclude from best price sales of inpatient 
drugs to DSH hospitals, the recent addition of other hospitals to the 
list of 340B covered entities (children's hospitals, critical access 
hospitals, rural referral centers, sole community hospitals, and 
freestanding cancer hospitals) were not included because of a statutory 
drafting convention. The commenter stated this has led to confusion as 
to whether manufacturers may exclude from their best price calculations 
the sale of inpatient drugs to the newly-added hospitals. Another 
commenter supported the proposal by CMS to limit best price exception 
to the DSH hospital enrolled in 340B programs, which include children's 
hospitals, rural hospitals and freestanding cancer hospitals.
    Response: As discussed previously in this section, we have revised 
proposed Sec.  447.505(c)(2) to delete the provision limiting the 
exclusion to prices charged ``under the 340B program.'' Therefore, any 
prices charged by manufacturers to an entity that meets the definition 
of a covered entity, as described in section 1927(a)(5)(B) of the Act, 
which defines such an entity in section 340B(a)(4) of the PHSA to 
include a reference to the entity meeting the requirements described in 
paragraph 340B(a)(5) of the PHSA, should be excluded from best price. 
With regard to the comment that a DSH hospital can include children's 
hospitals, rural hospitals, and freestanding cancer hospitals, we 
recognize that a single provider may qualify for the 340B program under 
one or more covered entity types. If the covered entity is described at 
section 340B(a)(4) of the PHSA and meet the requirements at section 
340B(a)(5) of the PHSA, any prices to these entities shall be excluded 
from best price. In cases when a single provider may qualify for more 
than one 340B hospital covered entity type, HRSA has directed the 
provider to choose which authority under which it will enroll in the 
340B program and would need to abide by the requirements that apply to 
that hospital covered entity type. (See HRSA guidance regarding meeting 
the criteria for more than one covered entity type at http://www.hrsa.gov/opa/eligibilityandregistration/hospitals/disproportionatesharehospitals/index.html).
    Comment: Many commenters stated that the HRSA guidance specifically 
prohibits manufacturers from conditioning pricing to covered entities 
on assurance that the entity is in compliance with 340B program 
requirements and manufacturers should be able to rely on the list of 
340B entities (maintained by the Office of Pharmacy Affairs (OPA)) that 
are participating in the 340B Drug Pricing Program to determine whether 
an entity participates based on that information. One commenter added 
that if that covered entity fails to comply with program requirements, 
it should have no bearing on the manufacturer's exclusion of the 340B 
price transaction for best price calculation.
    Another commenter stated that CMS should clarify that manufacturers 
can exclude ``prices charged under the 340B Drug Pricing Program'' so 
long as the covered entity is listed as participating in the program on 
the 340B Web site for the relevant period.
    Many commenters urged CMS not to adopt this proposal because it 
would place a burden on manufacturers because it unreasonably shifts 
the responsibility for monitoring covered entity compliance with 340B 
program requirements from HRSA to manufacturers, which is beyond the 
scope of CMS's authority.
    A few commenters stated that such a shift in in burden on the 
manufacturers would discourage manufacturers from offering such price 
concessions to these entities, which runs counter to the general policy 
behind the 340B Drug Pricing Program.
    Another commenter stated that the 340B covered entities may not 
``double dip'' (purchase at a 340B price and then submit for 
reimbursement that would give rise to a manufacturer Medicaid rebate). 
The covered entities are also prohibited from reselling or transferring 
any drug purchased at 340B pricing to a patient who is not a patient of 
the covered entity.
    Response: A provider's compliance with the covered entity 
requirements under the 340B program is not a direct subject of this 
final rule. We are not requiring that manufacturers enforce HRSA 
requirements in this final rule, nor are we imposing a requirement for 
manufacturers to oversee whether a covered entity is compliant and/or 
conducting business in accordance with the 340B program's requirements 
in accordance with section 340B(a)(4) and (5) of the PHSA. As 
previously discussed in this section, we have revised our proposal to 
note that manufacturers may exclude from best price any prices charged 
to a covered entity described in section 1927(a)(5)(B) of the Act. This 
final rule addresses the exclusion from best price and the 
applicability of this exclusion to entities that qualify as covered 
entities, as defined at section 1927(a)(5)(B) of the Act.
    Manufacturers should be able to determine which entities qualify as 
covered entities by accessing HRSA's online database of covered 
entities that is publically accessible on the HRSA Web site at http://opanet.hrsa.gov/OPA/CESearch.aspx. Any questions regarding this 
database and/or the eligibility of certain providers as covered 
entities under the 340B drug pricing program should be directed to 
HRSA.
    Comment: One commenter encouraged CMS and OPA to discuss how their 
different policies can be coordinated and made consistent. The 
commenter recommended that CMS consider retracting its proposal that 
340B best price exemption be contingent on the 340B provider 
compliance, because of HRSA lack of 340B enforcement, the noncompliance 
of 340B providers, and manufacturers inability to police at 340B 
program, because they are prohibited from doing so by the current 340B 
guidance.
    Response: CMS and HRSA continue to maintain open communication in 
regards to the 340B best price exclusion and we do not believe our 
policies are inconsistent in this regard. As previously stated in this 
section we would like to clarify that we are not imposing a requirement 
for manufacturers to oversee whether a covered entity is compliant with 
the 340B program's requirements. Manufacturers should be able to 
determine which entities qualify as covered entities by accessing 
HRSA's online database of covered entities that is publically 
accessible on the HRSA Web site at http://opanet.hrsa.gov/OPA/CESearch.aspx. Any questions that manufacturers may have regarding the 
qualifications of providers either listed or not listed on this data 
base should be directed to HRSA. We also note that the issue of HRSA's 
oversight of the 340B program is beyond the scope of this rule.

[[Page 5259]]

    Comment: One commenter stated that although the 340B drug pricing 
program only pertains to drugs administered or dispensed in outpatient 
setting that are eligible for the 340B price, there are many drugs that 
are administered or dispensed in an outpatient setting that also have 
inpatient uses. Because the drug may end up being used in the 
outpatient setting, the commenter believed that CMS should clarify in 
the final rule that manufacturers may exclude from best price any sale 
to a 340B covered entity of any drugs that have both inpatient and 
outpatient uses by virtue of the purchaser being a covered entity.
    Response: We agree with the commenter that manufacturers may 
exclude from best price any prices charged to a covered entity as 
described in section 1927(a)(5)(B) of the Act. We are not requiring the 
manufacturer to keep track of whether the drug is used for inpatient or 
outpatient purposes. We note that the issue of a covered entity that 
purchases a 340B COD and subsequently uses that drug in an inpatient 
setting is an issue that should be raised to HRSA and is beyond the 
scope of this final rule.
    Comment: One commenter requested clarification as to whether or not 
an orphan drug not sold to a 340B entity and used in an outpatient 
setting, would qualify the product as a COD, and therefore require that 
the orphan drug to be included in best price. The commenter also asked 
CMS to provide guidance on the audit procedures for this or similar 
situations.
    Response: If the orphan drug is sold to an entity that is not a 
340B entity as defined at section 340B(a)(4) of the PHSA, then the sale 
would not be excluded from best price based on the covered entity 
provisions in section 1927(c)(1)(C)(i)(I) of the Act. Audit procedures 
related to the requirements of a covered entity under the 340B statute 
are outside the scope of this final rule.
    Therefore, based on the comments received, and for the reasons 
discussed in this section, we are revising proposed Sec.  447.505(c)(2) 
to delete the phrase in Sec.  447.505(c)(2)(i) ``under the 340B drug 
pricing program,'' to delete proposed Sec.  447.505(c)(2)(ii), and to 
include a reference in Sec.  447.505(c)(2) to provide that any prices 
charged to a covered entity described in section 1927(a)(5)(B) of the 
Act (including inpatient prices charged to hospitals described in 
section 340B(a)(4)(L) of the PHSA) shall be excluded from a 
manufacturer's determination of best price.
5. Medicare Coverage Gap Discount Program (The Discount Program)
    The Discount Program established under section1860D-14A of the Act 
makes manufacturer discounts available to applicable Medicare 
beneficiaries receiving applicable covered Part D drugs while in the 
coverage gap. In general, as discussed in the proposed rule (77 FR 
5337), the discount on each applicable covered Part D drug is 50 
percent of an amount that is equal to the negotiated price. In 
accordance with the section 1927(c)(1)(C)(i)(VI) of the Act, we 
proposed that manufacturer discounts attributed to the Discount Program 
should be excluded from the determination of best price, in proposed 
Sec.  447.505(c)(6) (77 FR 5337, 5363). We did not receive any comments 
concerning this best price exemption and therefore, for the reasons 
stated in this section, we are finalizing the provision as proposed.
    In Sec.  447.505(a), we also proposed a definition of ``provider''; 
and in Sec.  447.505(d)(2) we proposed that best price is to be 
determined on a unit basis without regard to package size, special 
packaging, labeling, or identifiers on the dosage form or product or 
packaging and did not receive any comments on these provisions. Thus, 
for the reasons discussed in the proposed rule (77 FR 5336-5337), and 
consistent with section 1927(c)(1)(C) of the Act, we are finalizing 
those provisions, as proposed.

E. Authorized Generic Drugs (Sec.  447.506)

    We proposed to move the definition of authorized generic drugs from 
Sec.  447.506(a) to proposed Sec.  447.502 (Definitions) (77 FR 5337), 
as discussed in the proposed rule.
    In proposed Sec.  447.506(a), we proposed to define the term 
``Primary manufacturer'' to mean a manufacturer that holds the NDA of 
the authorized generic drug (77 FR 5337, 5363). We also proposed to 
define the term ``Secondary manufacturer of an authorized generic 
drug'' to mean a manufacturer that is authorized by the primary 
manufacturer to sell the drug but does not hold the NDA. We proposed at 
proposed Sec.  447.506(b) to specify that sales of an authorized 
generic should be included in the AMP calculation of the primary 
manufacturer holding title to the NDA when the drug is sold directly to 
a wholesaler, or to a secondary manufacturer when that secondary 
manufacturer is acting as a wholesaler (77 FR 5363). In proposed Sec.  
447.506(c), as discussed in the preamble to the proposed rule (77 FR 
5337), we proposed to specify that a primary manufacturer holding the 
NDA must include the best price of an authorized generic drug in its 
computation of best price for a single source or an innovator multiple 
source drug during a rebate period to any manufacturer, wholesaler, 
retailer, provider, HMO, non-profit entity, or governmental entity in 
the United States, only when such drugs are being sold by the 
manufacturer holding the NDA (77 FR 5363). We also proposed to add 
Sec.  447.506(d), which specifies that a secondary manufacturer must 
provide a rebate based on its sales of the authorized generic drug (77 
FR 5363). The secondary manufacturer must calculate AMP and best price 
consistent with the requirements in proposed Sec. Sec.  447.504 and 
447.505 (77 FR 5363). We received the following comments:
    Comment: A number of commenters expressed support for the 
definitions of primary and secondary manufacturer of an authorized 
generic drug as set forth in the proposed rule and agreed with CMS's 
position on the treatment of authorized generic drugs requiring the 
primary manufacturer of the brand drug to include in its calculation of 
AMP all sales of its authorized generic drug sold or licensed to a 
secondary manufacturer when the secondary manufacturer is acting as a 
wholesaler. Another commenter supported CMS position taken in the 
proposed rule that a secondary manufacturer is considered to be 
``acting as a wholesaler'' when it engages in the wholesale 
distribution of prescription drugs to retail community pharmacies and 
that the transfer price of authorized generic product by a primary 
manufacturer should be included in the brand drug's AMP when the 
authorized generic company (secondary manufacturer) is engaged in the 
distribution of drugs to retail community pharmacies.
    However, a few commenters indicated that CMS does not explain when 
the secondary manufacturer would be viewed as ``acting as a 
wholesaler.'' A commenter supported CMS's position allowing 
manufacturer flexibility in determining whether the services performed 
by another manufacturer qualify that manufacturer to be ``acting as a 
wholesaler'' for purposes of the AMP calculation and the authorized 
generic provisions by not limiting the wholesaler definition at Sec.  
447.502 to only those entities licensed as wholesalers in the state.
    Response: As the commenters noted, we rely on the statutory 
definition of wholesaler to determine whether the secondary 
manufacturer is acting as a wholesaler. Therefore, to further 
understand when a secondary manufacturer is ``acting as a

[[Page 5260]]

wholesaler,'' the secondary manufacturer must meet the definition of 
wholesaler, which is further detailed in Definitions (Sec.  447.502) 
section (section II.B.) of this final rule. We believe that primary 
manufacturers have the responsibility to determine whether a secondary 
manufacturer is acting as a wholesaler, and that such determination 
should be made in accordance with the definition of wholesaler in Sec.  
447.502, which, as discussed in the definition of wholesaler in section 
II.B., does not include a requirement that the wholesaler be licensed 
by a state.
    Comment: A few commenters requested clarification regarding the 
calculation of the primary manufacturer's AMP when a corporate 
relationship exists between the primary and secondary manufacturer 
stating that the proposed rule does not specifically address the 
situation where a corporate relationship exists between these entities. 
The proposed rule also does not provide guidance on how the AMP should 
be calculated if the primary manufacturer owns the secondary 
manufacturer, or if the primary and secondary manufacturers are 
affiliated under the same corporate ownership and asked how the parties 
can establish an acceptable transfer price if there is not an arm's 
length transaction. The commenters further noted that complex corporate 
structures may warrant additional guidance from CMS regarding the 
calculation of AMP.
    Response: There are many different corporate ownership arrangements 
that exist among pharmaceutical manufacturers which may impact how 
their AMPs and best prices are calculated. We do not believe it is 
necessary at this time to further define arrangements in the context of 
authorized generic sales and note that manufacturers may make 
reasonable assumptions. We would not consider the conveyance of the 
authorized generic drug to the secondary manufacturer to be a sale 
included in AMP unless the secondary manufacturer qualifies as a 
wholesaler engaged in the wholesale distribution of the prescription 
drugs to retail community pharmacies, consistent with the definition of 
wholesaler at section 1927(k)(11) of the Act. Section 1927(k)(11) of 
the Act defines wholesaler as a drug wholesaler that is engaged in 
wholesale distribution of prescription drugs to retail community 
pharmacies and states that manufacturers are included within that 
definition to the extent the manufacturer ``acts as a wholesaler.'' In 
light of sections 1927(k)(1) and 1927(k)(11) of the Act, in the context 
of authorized generic sales, we proposed at Sec.  447.506(b) to require 
that the primary manufacturer of an authorized generic include in its 
calculation of AMP, all sales of its authorized generic drug products 
sold or licensed directly to a wholesaler or to a secondary 
manufacturer, acting as a wholesaler, or when the primary manufacturer 
sells directly to a wholesaler (77 FR 5337, 5362). This would include 
transfer prices and fees paid by the secondary manufacturer to the 
primary manufacturer for the authorized generic product. If the 
secondary manufacturer is not engaged in the wholesale distribution of 
prescription drugs to retail community pharmacies; for example, it 
relabels or repackages the drug and sells the repackaged authorized 
generic to wholesalers (as opposed to engaging in the wholesale 
distribution to retail community pharmacies) the price of the drug paid 
by the secondary manufacturer would not be included in the primary 
manufacturer's AMP. This is consistent with section 1927(k)(1)(C) of 
the Act, which requires that, in the case of a manufacturer that 
approves, allows, or otherwise permits any drug of the manufacturer to 
be sold under an NDA approved under section 505(c) of the FFDCA, AMP 
shall be inclusive of the average price paid for such drug by 
wholesalers for drugs distributed to retail community pharmacies, as we 
discussed in the proposed rule (77 FR 5337).
    And finally, we note that as discussed previously, since CMS may 
not be able to address every arrangement that exists among 
manufacturers, manufacturers may continue to make reasonable 
assumptions regarding their AMP and best price calculations, provided 
their assumptions are consistent with the requirements and intent of 
section 1927 of the Act and federal regulations.
    Comment: Another commenter stated that the proposed rule does not 
address the case where a single manufacturer sells both an innovator 
multiple source drug and a second version of the innovator multiple 
source drug at a lower price point (perhaps using the chemical name or 
a generic package but both products are sold under the same NDA). The 
commenter questioned whether AMPs should be blended or calculated 
separately for the different NDC-9s, if the primary and the secondary 
manufacturer are the same company.
    Response: Section 1927(k)(1)(C) of the Act requires that in the 
case of a manufacturer that approves, allows, or otherwise permits any 
drug of the manufacturer to be sold under an NDA approved under section 
505(c) of the FFDCA, AMP shall be inclusive of the average price paid 
for such drug by wholesalers for drugs distributed to retail community 
pharmacies. When a single manufacturer is selling two versions of a 
product under the same NDA, section 1927(k)(1)(C) of the Act provides 
that the AMP be inclusive of the authorized generic product when the 
manufacturer sells the product to a wholesaler who distributes to the 
retail community pharmacies. In such cases, the price of the drug would 
be blended for AMP even if, as noted by the commenter, the manufacturer 
may have given the drug a different product code.
    Comment: A commenter asked whether the best price for both products 
of the same company should be the lowest price at which either product 
is offered to a customer or whether the brand and the authorized 
generic should maintain separate best prices, if the primary and the 
secondary manufacturer are the same company. The commenter believed 
pricing should be treated separately, and requested that we provide 
clarification on these issues.
    Response: In the case where both the primary and secondary 
manufacturer are the same company, selling two versions of the drug 
marketed under the same NDA, both manufacturers are responsible for 
determining a best price based on the lowest price available from the 
manufacturers for the sales of both versions of the drugs sold. In 
other words, we do not believe the manufacturers in this example should 
determine a separate best price for each NDC simply because the two 
manufacturers of the same company identify the same drug using 
different NDCs.
    Comment: A commenter requested that CMS confirm that the primary 
manufacturer should include the transfer sales price of the authorized 
generic in the AMP calculation and several commenters noted that there 
is no obligation for the manufacturer to determine the ultimate 
purchaser in the secondary manufacturer resales. The commenter also 
sought confirmation that the primary manufacturer will include in AMP 
and best price the transfer sales price of all sales of authorized 
generic drugs to the secondary manufacturer of an authorized generic 
drug. The commenter showed support for this approach, but noted that 
there is some confusion in light of the proposed change in definition 
of primary and secondary manufacturer.
    Another commenter believed that CMS should not include the transfer 
prices paid by the secondary

[[Page 5261]]

manufacturer to the primary manufacturer for the authorized generic and 
requested clarification on this issue. The commenters recommended that 
the primary manufacturer only report those AMP units related to the 
branded drug itself and not include any authorized generic units. The 
commenters noted that primary manufacturers who include the transfer 
price in AMPs by concluding or presuming that the secondary 
manufacturer acts as a wholesaler have lower AMPs than companies who do 
not consider the secondary manufacturer to be a wholesaler. Another 
commenter believed that including the transfer price will lower AMPs 
and impact FULs for any product grouping that includes an authorized 
generic and has the three or more equivalent products required to set a 
FUL.
    Response: When a transfer price is established between a primary 
manufacturer and secondary manufacturer for the authorized generic 
drug, the primary manufacturer is responsible for determining whether 
the transfer price associated with the authorized generic sale to the 
secondary manufacturer is an AMP or BP eligible sale in accordance with 
sections 1927(k)(1)(C) and 1927(c)(1)(C) of the Act. As noted earlier, 
the transfer price for an authorized generic drug should only be 
included in AMP when the secondary manufacturer is acting as a 
wholesaler and does not relabel the product and engages in the 
wholesale distribution of the of prescription drugs to retail community 
pharmacies. If the secondary manufacturer does not qualify as a 
wholesaler (for example, the secondary manufacturer relabels the 
product and then sells it to wholesalers or directly to retail 
community pharmacies) the sale of the drug to the secondary 
manufacturer would not be included in the primary manufacturer's AMP. 
Furthermore, the secondary manufacturer would be responsible for 
providing rebates (for the relabeled product) consistent with Sec.  
447.506.
    As for best price, the transfer price paid by the secondary 
manufacturer (except for those prices specifically excluded from best 
price in section 1927(c)(1)(C) of the Act) will be included in the 
primary manufacturer's determination of best price since 
1927(c)(1)(C)(ii)(IV) of the Act provides that in the case of a 
manufacturer that approves, allows, or otherwise permits any other drug 
of the manufacturer to be sold under a new drug application approved 
under section 505(c) of the Federal Food Drug, and Cosmetic Act, best 
price shall be inclusive of the lowest price for such authorized drug 
available from the manufacturer during the rebate period to any 
manufacturer, wholesaler, retailer, provider, HMO, nonprofit entity, or 
governmental entity with the United States.
    We further agree with the commenter that if a primary manufacturer 
automatically presumes that the secondary manufacturer is acting as a 
wholesaler, it is likely the primary manufacturer's AMP for the drug 
will be lower which in turn may impact FULs. However, as provided 
earlier in this response, we believe it is the primary manufacturer's 
responsibility to determine whether the transfer price associated with 
the authorized generic sale to the secondary manufacturer is an AMP or 
best price eligible sale.
    Comment: A few commenters encouraged CMS to clarify the language in 
the proposed rule to stipulate that sales of products to another 
manufacturer are eligible for inclusion in regular AMP only if the 
other manufacturer will sell the drug under the primary manufacturer's 
NDC. Otherwise, the commenter believed the primary manufacturer's 
reported AMP would underestimate the product's price in the commercial 
market.
    Response: We agree with the commenters that the primary 
manufacturer should not include the price (be it a transfer price or a 
sale price) of the authorized generic drug in its AMP when the 
secondary manufacturer is relabeling the product with its own or a 
different NDC. In such cases, the secondary manufacturer would not be 
acting as a wholesaler, as defined at section 1927(k)(11) of the Act. 
In situations when the secondary manufacturer relabels the product with 
a different NDC, the secondary manufacturer would be acting as a 
manufacturer in accordance with the definition of manufacturer at 
section 1927(k)(5) of the Act. We also believe that AMP units would be 
reported by the primary manufacturer only when the secondary qualifies 
as a wholesaler, otherwise there may be double counting of AMP units 
and potential skewing of the AMP or of the FUL calculations.
    Comment: A commenter stated that as proposed, Sec.  447.506(b) does 
not require the primary manufacturer to trace sales made by the 
secondary manufacturer to downstream customers for either AMP or best 
price and that requirements to collect and include AMP or best price 
for downstream sales by a secondary manufacturer would result in 
operational difficulties and present significant antitrust risk.
    Response: As further discussed in the response to comments in the 
Determination of AMP section II.C. of the final rule, we have 
reconsidered our position regarding manufacturer's use of a buildup 
methodology for AMP calculation purposes and have determined that 
manufacturers may continue to use a presumed inclusion approach when 
calculating AMP. Therefore, we do not expect that manufacturers will 
experience the system implications noted by this commenter when 
determining AMP for authorized generic drugs. We further believe that 
since we will continue to allow manufacturers to make reasonable 
assumptions, we have addressed the commenter's concern with anti-trust 
risks associated with sharing prices.
    Comment: One commenter indicated that under current regulations and 
CMS guidance, the transfer price of an authorized generic between a 
primary and secondary manufacturer is adjusted by any fees (such as 
royalties, license fees, or profit-sharing payments) made by the 
secondary to the primary manufacturer. In the proposed rule, this is 
not explicit in the restated best price regulation or in the preamble 
discussion of best price. The commenter requested clarification that 
the primary manufacturer's determination of best price should continue 
to include offsets for fees and other adjustments paid by the secondary 
to the primary manufacturer.
    Response: As noted in the proposed rule, Sec.  447.505(d)(3) 
specifies that the manufacturer must adjust the best price for a rebate 
period if cumulative discounts, rebates, or other arrangements 
subsequently adjust the prices available from the manufacturer (77 FR 
5363). ``Other arrangements'' (such as royalty fees, licensing fees and 
profit sharing payments) or price adjustment that adjusts the sales 
price for the authorized generic, and that are not otherwise excluded 
from best price at Sec.  447.505(c), must be accounted for in the 
primary manufacturer's calculation of best price for the drug. We do 
not believe further clarification is needed because the determination 
of best price at Sec.  447.505(d)(3) requires that best price for a 
rebate period be subsequently adjusted if other arrangements (in this 
case, royalty fees) adjust the prices available from the manufacturer.
    For the reasons discussed in this section and in the proposed rule, 
we are finalizing the provisions in proposed Sec.  447.506, Authorized 
Generic Drugs, as proposed (77 FR 5337 and 5363) with the following 
revisions:
     In response to comments received, we are adding language 
at Sec.  447.506(b) to further clarify the reference to ``acting as a 
wholesaler'' to read ``acting as a wholesaler for drugs distributed to 
retail

[[Page 5262]]

community pharmacies,'' or when the primary manufacturer holding the 
NDA sells directly to a wholesaler.
     While we proposed in the preamble of the proposed rule (77 
FR 5337) that a primary manufacturer holding the NDA must include the 
best price of an authorized generic in its computation of best price 
for ``a single source or an innovator multiple source drug during a 
rebate period to any manufacturer . . . .,'' we inadvertently deleted 
the reference to ``a single source or'' in proposed Sec.  447.506(c) 
(77 FR 5363), which was not our intention. Therefore, consistent with 
the discussion in the preamble (77 FR 5337) and the statute at section 
1927(c)(1)(c)(i) of the Act, we are adding ``a single source or'' to 
Sec.  447.506(c) after ``for'' and before ``innovator.''
     As a technical edit, we are removing the reference to ``of 
this subpart'' from proposed Sec.  447.506(d) as the reference is not 
necessary given the regulatory citations.

F. Exclusion From Best Price of Certain Sales at a Nominal Price (Sec.  
447.508)

    Section 1927(c)(1)(C)(ii)(III) of the Act excludes from best prices 
those prices that are merely nominal in amount. Section 
1927(c)(1)(D)(i) of the Act identifies certain entities to whom sales 
at nominal prices of CODs are made from manufacturers for purposes of 
best price. To update our regulations text to reflect the changes set 
forth in section 221 of Division F, Title II, of the Omnibus 
Appropriations Act, 2009, (Pub. L. 111-8), enacted on March 11, 2009, 
we proposed to revise Sec.  447.508(a) by adding proposed Sec.  
447.508(a)(4) and (5) to reflect the two categories of entities added 
to the list of entities that are eligible for manufacturers to sell 
drugs at nominal prices and have those sales excluded from best price 
(77 FR 5364). Specifically, in proposed Sec.  447.508(a)(5), we 
proposed to add entities that are defined by Internal Revenue Service 
(IRS) in section 501(c)(3) of the Internal Revenue Code of 1986 (Code) 
and exempt from tax under section 501(a) of the Code, or are State-
owned or operated entities; and are providing the same services to the 
same type of populations as section 340B(a)(4) entities of the PHSA but 
not funded as such (77 FR 5337, 5364). In proposed Sec.  447.508(a)(4), 
we proposed to add a public or nonprofit entity, or a facility at an 
institution of higher learning whose primary purpose is to provide 
health care services to students of that institution and family 
planning services described in section 1001(a) of the PHSA (77 FR 5337, 
5364).
    We also proposed to add the ``Rule of Construction'' at proposed 
Sec.  447.508(c) to provide, in accordance with section 
1927(c)(1)(D)(iv) of the Act, that nothing in section 1927(c)(1)(D) of 
the Act should be construed in any way to alter any existing statutory 
or regulatory prohibition on services for entities described in Sec.  
447.508(a), including the prohibition set forth in section 1008 of the 
PHSA (77 FR 5338, 5364). Additionally, in the proposed rule, we 
declined to identify any further entities for which manufacturer 
nominally priced sales would be exempt from best price (77 FR 5338).
    We received the following comments concerning the proposed 
revisions to Sec.  447.508:
    Comment: One commenter noted that Sec.  447.508(a)(3) referenced 
Sec.  440.150 for nursing facilities. The commenter requested that we 
clarify if we intended to reference Sec.  440.155 instead of Sec.  
440.150.
    Response: We thank the commenter for noting this technical error, 
and we are correcting the citation in this final rule so that Sec.  
447.508(a)(3) is revised to reference Sec.  440.155.
    Comment: Several commenters cited that while the statutory language 
does not explicitly identify a particular type of health care provider, 
the Congressional Record (S 2817, March 5, 2009--Colloquy regarding 
Restoring Nominal drug Prices for Family Planning and University Based 
Clinics) speaks directly to the purpose of the bill, which is to make 
low cost oral contraceptives available to family planning clinics, 
college or university based clinics, and other women's health centers. 
The commenters also indicated that it was the intent of the Congress as 
having identified family planning clinics, university clinics and 
women's health centers which do not receive federal funding to be 
eligible for discounted drug pricing under section 1927(c)(1)(D)(i)(IV) 
of the Act.
    Response: We agree that the entities described in section 
1927(c)(1)(D)(i)(IV) and (V) of the Act do not need to be in receipt of 
federal funding to qualify for the best price exclusion. We are 
revising proposed Sec.  447.508(a)(5) to more closely align with the 
statutory language in section 1927(c)(1)(D)(i)(IV) of the Act. 
Specifically, by replacing ``is not in receipt of grant funds under 
that Act'' with ``does not receive funding under a provision of law 
referred to in such section'' in Sec.  447.508(a)(5)(ii), we have 
provided that entities that meet the requirements in Sec.  
447.508(a)(5) do not need to be in receipt of the grant funds described 
in section 340B(a)(4) of the PHSA in order exclude from best price 
manufacturer sales to such entities. In addition, in light of the 
commenters' concerns, we are revising proposed Sec.  447.508(a)(4), by 
inserting a comma after ``entity'' and changing the reference to 
``facility at an institution of higher learning'' to ``an entity based 
at an institution'' to comport with section 1927(c)(1)(D)(i)(V) of the 
Act and clarify that sales at nominal price to public or non-profit 
entities that are not based at an institution of higher learning and 
that provide services described in section 1001(a) of the PHSA will be 
excluded from best price.
    Comment: One commenter noted that to be consistent with statutory 
language, Sec.  447.508(a)(5)(ii) should be changed from ``under that 
Act'' to ``in such section'' for receipt of grants funds.
    Response: We agree and are revising proposed Sec.  
447.508(a)(5)(ii) so that it reads ``in such section,'' consistent with 
the statutory language in section 1927(c)(1)(D)(i)(IV)(bb) of the Act.
    Comment: Some commenters noted that section 221 of the Omnibus 
Appropriations Act, 2009, does not limit or remove the authority 
previously granted to the Secretary to extend nominal pricing to 
additional entities. One commenter noted that while the addition of the 
two new categories of entities is a positive step, CMS should use the 
authority to extend the nominal price best price exemption to other 
health care entities such as state and local government providers, 
outpatient clinics, long-term care facilities, health departments and 
correctional infirmaries serving indigent, vulnerable populations and 
that are operated and jointly owned by health systems of which 340B 
hospitals are a part.
    Response: While we agree with the commenter that the Secretary has 
the statutory authority to expand the nominal price exemption to 
additional entities, we are choosing not to extend the nominal pricing 
exemption to entities beyond those entities already identified in the 
Act at this time.
    Comment: One commenter noted that prior to the DRA of 2005, 
manufacturers had nominal price contracts with entire health systems of 
which 340B hospitals were just one component. These contracts allowed 
entire health systems to benefit from deep discounts of the nominal 
pricing which helped defray the cost of serving indigent patients. The 
commenter stated that actions of the Congress and the former Secretary 
to limit the entities eligible for best price exempt nominal pricing 
have negatively impacted manufacturer's willingness to continue nominal 
pricing.
    Response: We appreciate the commenter's concerns regarding the

[[Page 5263]]

impact of the nominal price legislation on manufacturer price 
contracting practices. As previously discussed in this section, we have 
revised the list of entities eligible for nominal price sales which may 
be excluded from a manufacturer's best price calculation; however, 
although the statutory exclusion categories are broad, at this time, we 
have decided not to include additional excluded entities.
    Comment: One commenter requested clarification regarding proposed 
Sec.  447.508(a)(4) which contained the phrase ``a public or non-profit 
entity or facility at an institution of higher learning whose primary 
purpose is to provide health care services to students of that 
institution and provide family planning services as described under 
section 1001(a) of the PHSA, 42 U.S.C., 300.'' Specifically, the 
commenter asked if this section should be read to mean a ``public or 
non-profit entity or `any' facility,'' which presumably could include a 
for-profit facility. This interpretation would allow a retail pharmacy 
to be included as a facility and could produce an unfair advantage in 
local markets.
    Response: We have revised the regulations text to align with the 
statutory language at section 1927(c)(1)(D)(i)(V) of the Act to clarify 
that an entity based at an institution of higher learning whose primary 
purpose is to provide health care services to students of that 
institution, that provides family planning services described at 
section 1001(a) of the PHSA, are eligible for the best price exemption. 
An entity based at an institution of higher learning is not required to 
be a public or non-profit entity to be exempt as long as the primary 
purpose is to provide health care services to students of that 
institution that provides a service or services described under section 
1001(a) of the PHSA.
    Comment: One commenter noted that this rule seems to exclude an 
institution whose purchases are at nominal price from the best price 
exemption if it does not also provide family planning services. The 
commenter asked why CMS would limit the exclusion to certain types of 
educational systems if the purpose is to expand the 340B exclusion and 
it appears that all drugs purchased by this type of entity would be 
excluded from best price.
    Response: As discussed previously in this section, proposed Sec.  
447.508(a)(4) was written to address section 1927(c)(1)(D)(i)(V) of the 
Act, as revised by section 221 of the Appropriations Act (Pub. L. 111-
8, 2009). Specifically, one of the criteria that entities must meet to 
qualify for the best price exemption is that it provide a service or 
services described in section 1001(a) of the PHSA, 42 U.S.C. 300(a). 
Since this section of the PHSA concerns federal grants for family 
planning services, to be consistent with the requirements of section 
1001(a) of the PHSA, the rule references entities at institutions that 
provide family planning services.
    Comment: One commenter noted that family planning services under 
section 1001(a) of PHSA includes infertility services and services to 
adolescents. The commenter asked if CMS will require states to provide 
assurances that all of these services are provided to secure the best 
price exemption.
    Response: We will not require states to provide assurances that 
these services are provided as there is no requirement for such 
assurances in statute.
    Comment: One commenter stated that it is clear the manufacturer and 
the facility benefits from the best price exclusion provision but there 
is no requirement or assurance that the savings be passed along to the 
consumer.
    Response: While we appreciate the comment, we note that the issue 
of whether the manufacturers and entities which are eligible to 
purchase nominal priced CODs pass on their savings to their customers 
is beyond the scope of this rule.
    Comment: Some commenters suggested that CMS develop a list similar 
to the Medicaid SPAP best price list of specific entities to which 
sales at a nominal price may be excluded from best price as it would 
help manufacturers avoid potential confusion identifying such entities. 
The commenter noted that these lists would require that the entity 
submit information demonstrating compliance with the standards.
    Response: We appreciate the suggestion but we did not propose that 
entities submit such information and therefore believe it would be 
difficult for CMS to create and maintain such a list without such an 
information collection requirement. We believe it is the manufacturer's 
responsibility to assure that an entity meets the criteria specified to 
exclude its drug sale from best price.
    Comment: One commenter suggested that the CMS establish a mechanism 
to communicate with states regarding the impact of the changes to Sec.  
447.508 with regard to prescription drug rebates.
    Response: We see no need at this time to establish a mechanism to 
communicate with states regarding the impact of the changes to Sec.  
447.508 with regard to rebates. As with other aspects of the rebate 
program, we will provide guidance, as needed, to address any state 
concerns that may arise as these provisions are implemented.
    For the reasons articulated in the response to comments in this 
section and in the proposed rule, and to implement changes to section 
1927 of the Act set forth in section 221 Division F, Title II of the 
Omnibus Appropriations Act, 2009 (Pub. L. 111-8), enacted March 11, 
2009, we are finalizing proposed Sec.  447.508 (Exclusions from best 
price of certain sales at a nominal price), except for the changes 
discussed in this section, to exclude the following nominal price drug 
sales from best price for:
     A covered entity as described in section 340B(a)(4) of the 
PHSA.
     An ICF/IID providing services as set forth in Sec.  
440.150.
     A State-owned or operated nursing facility providing 
services as set forth in Sec.  440.155.
     A public or non-profit entity, or an entity based at an 
institution of higher learning whose primary purpose is to provide 
health care services to students of that institution, that provides 
family planning services described under section of 1001(a) of PHSA to 
conform with section 1927(c)(1)(D)(i)(IV) of the Act.
     An entity that is described in section 501(c)(3) of the 
Internal Revenue Code of 1986 and exempt from tax under section 501(a) 
of that Act or is state-owned or operated; and, is providing the same 
services to the same type of population as a covered entity described 
in section 340B(a)(4) of the PHSA but does not receive funding under a 
provision of law referred to in such section.
    In this final rule, we are also revising proposed paragraph (c) to 
state that nothing in the section is construed to alter any existing 
statutory or regulatory prohibition on services for an entity described 
paragraph (a)(5) of the section, including the prohibition set forth in 
section 1008 of the PHSA.

G. Medicaid Drug Rebates (Sec.  447.509)

    In proposed Sec.  447.509, we proposed to incorporate provisions of 
the statute concerning the rebate calculation, including the formulas 
used to calculate rebates for CODs in the MDR program as specified 
under section 1927(c) of the Act, the requirements for drugs dispensed 
by Medicaid MCOs under section 1927(b)(1)(A) of the Act, and the 
federal offset of rebates under section 1927(b)(1)(B) of the Act (77 FR 
5338, 5364).

[[Page 5264]]

1. Determination of Rebate Amount (Sec.  447.509(a)(1) Through (3), 
(5), and (6))
    In proposed Sec.  447.509(a)(1) through (3), we proposed provisions 
regarding the determination of the basic rebate amount for single 
source and innovator multiple source drugs, as well as clotting factor 
products for which a separate furnishing payment is made under section 
1842(o)(5) of the Act, and drugs approved exclusively for pediatric 
indications; the additional rebate for single source and innovator 
multiple source drugs; and the total rebate amount for single source 
and innovator multiple source drugs. In proposed Sec.  447.509(a)(5) we 
proposed a limit on the rebate amount such that in no case will the 
total rebate amount exceed 100 percent of the AMP of the drug. In 
proposed Sec.  447.509(a)(6) we proposed provisions regarding the 
determination of rebates for noninnovator multiple source drugs (77 FR 
5338, 5364). The following is a summary of the comments received 
concerning the proposed provisions in Sec.  447.509(a)(1) through (3), 
(5), and (6).
    Comment: One commenter stated that increasing the rebate 
percentages that manufacturers are required to provide to Medicaid will 
only lead to manufacturers raising their prices to cover the higher 
rebates while pharmacies cannot raise their prices because CMS mandates 
the reimbursement methodology that state Medicaid agencies pay 
pharmacies. The commenter further stated that CMS is not mandating what 
a drug manufacturer can charge by increasing the Medicaid rebate 
percentages. Another commenter stated that the proposed rebate 
calculations for participation in Medicaid should be decreased, not 
increased. The commenter further stated that these rebates are a form 
of taxation ultimately on the consumer and general public, which will 
only lead to an increase in the cost of medicine for all consumers.
    Response: The rebate calculations we proposed were based on the 
rebate calculations as specified in section 1927(c) of the Act. Given 
the amendments to the statute by the Affordable Care Act that change 
the rebate percentages, in this final rule we are finalizing these 
rebate percentages in the regulation. In light of section 1927(c) of 
the Act, as revised by the Affordable Care Act, we are not authorized 
to decrease the rebate amounts. The suggestion that an increase in 
Medicaid rebates will result in an increase in medication costs for all 
consumers is beyond the scope of this rule.
    Comment: One commenter asked CMS to specify which of the changes 
specified in the rule that pertain to rebate calculation, if any, will 
require manufacturers or states to retroactively revise or recalculate 
rebate payments or collections back to 2010. Commenters believed this 
will impact rebate payments and collections and states could 
potentially have to pay back rebates already collected.
    Response: The amendments made by section 2501 of the Affordable 
Care Act, including the modified rebate percentages, were effective 
January 1, 2010; however, the provisions in this final rule will be 
implemented on a prospective basis, as noted in the effective date of 
this final rule. Therefore, there should be no retroactive adjustments 
to rebates based upon the provisions finalized in this final rule.
    Comment: One commenter commended CMS for implementing the minimum 
rebate percentage for clotting factors as the reduced rebate percentage 
is critical to ensuring access to these life-saving products.
    Response: We appreciate the comment.
    Comment: One commenter stated that they had been informed in an 
email from CMS that the ``clotting factor indicator'' in the MDR system 
would only be effective in the quarter after a product has been 
verified by the Agency. Additionally, the minimum rebate rate of 17.1 
percent would be applicable prospectively from that date. The commenter 
stated that this needlessly delays the change in URA for clotting 
factors; is inconsistent with the Medicaid rebate statute; and it does 
not take into account the congressional intent which was to give 
manufacturers incentive to develop and market these products. The 
commenter believed that these products should receive the 17.1 percent 
``as of the time of their launch into the marketplace, irrespective of 
when the manufacturer requested the indicator be applied to their 
product.''
    Response: We agree with the comment that these products should 
receive the 17.1 percent minimum rebate rate and previously addressed 
this issue in Manufacturer Release #85 (October 26, 2012). In this 
release, CMS indicated that when a drug is determined as a clotting 
factor, the clotting factor (CF) indicator is activated (Y/N flag) in 
MDR and the minimum 17.1 rebate percentage is applicable for those 
drugs for the most recent of:
     The quarter in which the labeler's Medicaid drug rebate 
agreement was optionally effective (that is, the earliest date states, 
at their option, can cover the drug);
     the product's Market Date quarter;
     the product's Purchased Product Date quarter (if 
applicable); or,
     the first quarter 2010 (that is, the quarter in which the 
minimum rebate percentage under ACA was effective).
    In accordance with section1927(c)(1)(B)(iii)(II)(aa) of the Act, 
which was effective on January 1, 2010, the 17.1 percent rebate is 
applicable to products identified by Medicare Part B as clotting 
factors for such products on the market anytime within or before the 
first quarter of 2010. If the product was marketed on or after April 1, 
2010, then the 17.1 rebate percentage is applied as of the market date 
quarter. Prior verification by CMS is not needed before the lower 17.1 
percent rebate is applied. Therefore, when new products are introduced 
to the market on or after April 1, 2010, regardless of when CMS 
confirms such products are clotting factors, the effective date of the 
application of the 17.1 percent rebate will the product's market date 
quarter.
    Comment: One commenter requested that CMS clarify how manufacturers 
can identify whether there has been a separate furnishing fee payment 
authorized under the Medicare Program.
    Response: For Medicare Part B, CMS regularly identifies clotting 
factors for which a separate furnishing payment is made under section 
1842(o)(5) of the Act as part of the ASP drug pricing files. We use 
this Medicare Part B data to identify those clotting factor products in 
the MDR program. A current list of clotting factor drugs is posted in 
the Medicaid DDR system for state and manufacturer use. This list is 
updated regularly; however, we recognize that in some cases, system 
delays may postpone the inclusion of a newly identified clotting factor 
products on the DDR list. Therefore, we will update the list as needed 
and we encourage manufacturers to contact CMS if they have a clotting 
factor product that does not appear on the list.
    Comment: One commenter expressed support for limiting the rebate 
amount to 100 percent of AMP.
    Response: We appreciate the commenter's support and consistent with 
section 1927(c)(2)(D) of the Act, we are finalizing Sec.  447.509(a)(5) 
as it was proposed in the proposed rule (77 FR 5338).
    After considering the comments, and for the reasons we set forth in 
this section and in the proposed rule, we are finalizing Sec.  
447.509(a)(1) through (3), (5), and (6) as proposed (77 FR 5338, 5364).

[[Page 5265]]

2. Treatment of New Formulations (Sec.  447.509(a)(4))
    Section 1927(c)(2)(C) of the Act, as added by section 2501(d) of 
the Affordable Care Act, establishes a separate formula for calculating 
the URA for a drug that is a line extension of a single source drug or 
an innovator multiple source drug that is an oral solid dosage form. 
For such line extension drugs, section 1927(c)(2)(C) of the Act 
provides that the rebate amount shall be the amount computed under 
section 1927 of the Act or, if greater, the product of the AMP for the 
line extension; the highest additional rebate (calculated as a 
percentage of the AMP) under section 1927 of the Act for any strength 
of the original single source drug or innovator multiple source drug; 
and the total number of units of each dosage form and strength of the 
line extension product paid for under the state plan in the rebate 
period. Section 1927(c)(2)(C) of the Act defines a line extension for 
purposes of the rebate calculation as a new formulation of a drug, such 
an extended release formulation.
    We proposed to include a definition for line extension drug in 
proposed Sec.  447.502 (77 FR 5323 through 5324, 5360). In proposed 
Sec.  447.502, we proposed to define a line extension drug as a single 
source or innovator multiple source drug that is in an oral solid 
dosage form that has been approved by the FDA as a change to the 
initial brand name listed drug in that it represents a new version of 
the previously approved listed drug, such as a new ester, a new salt, 
or other noncovalent derivative; a new formulation of a previously 
approved drug; a new combination of two or more drugs; or a new 
indication for an already marketed drug (77 FR 5323, 5360). We also 
proposed to include the statutory definition of ``line extension'' at 
proposed Sec.  447.509(a)(4)(ii) (77 FR 5364). Based on FDA's publicly 
available drug information and data files, we proposed to use FDA's 
Chemical Type classification, which classifies drugs when an NDA is 
approved according to the type of change made to an initial brand name 
listed drug (77 FR 5339). As we discussed in the proposed rule, the 
Chemical Type may identify a drug as new or related to the active 
ingredient of another drug that has already been approved (77 FR 5339). 
We proposed to use FDA's assigned Chemical Types 2, 3, 4, and 6 to 
identify line extension drugs and Chemical Type 1 to identify an 
initial brand name listed drug. These proposed provisions are discussed 
in more detail in the proposed rule at 77 FR 5339 through 5341. Since 
the writing of the proposed rule, FDA has changed the assigned numbers 
and meaning of some of the Chemical Types. The current list of Chemical 
Types and their meanings can be found on the FDA Web site at http://www.fda.gov/Drugs/InformationOnDrugs/ucm075234.htm.
    In regard to the proposed definition of line extension, we noted 
that we did not plan to exclude reformulations of existing products 
that incorporate abuse deterrent technologies from the definition of 
line extension, as discussed at 77 FR 5338. We also proposed not to 
exclude single source or innovator multiple source drugs that receive 
3-year exclusivity, pediatric exclusivity, or 7-year orphan drug 
exclusivity from the definition of line extension (77 FR 5340). We also 
proposed to exclude a new strength of the initial brand name listed 
drug from the definition of a line extension drug (77 FR 5338).
    Additionally, we proposed to include provisions concerning the 
rebate calculation for line extension drugs, including the method to 
calculate the URA for such drugs in proposed Sec.  447.509(a)(4)(i) (77 
FR 5340, 5364). For the purpose of calculating the URA under section 
1927(c)(2)(C) of the Act, we proposed that both the initial brand name 
listed drug and the line extension drug have to be an oral solid dosage 
form (77 FR 5338). We also proposed to provide and update a master list 
that identifies new initial brand name listed drugs and new line 
extension drugs quarterly for the initial three quarters from the 
effective date of the final rule (77 FR 5340).
    We received numerous comments regarding our proposal on line 
extensions. The comments addressed our proposed definition and 
identification of line extension drugs, including the use of FDA's 
Chemical Types, both as a general concept as well as why specific 
Chemical Types should not be included in the definition of a line 
extension. Other comments included concerns that our definition was too 
broad and not supported by legislative history, suggestions for 
alternative methods to identify line extension drugs, general 
rulemaking concerns, and concerns regarding the operational aspect of 
calculating the rebate amount for line extension drugs. Many comments 
addressed the inclusion of abuse deterrent formulations (ADFs) in the 
definition of line extension and described how the inclusion of ADFs is 
contrary to policies being promulgated to address the nation's drug 
abuse crisis.
    We also received comments that disagreed with inclusion of drugs 
that receive certain kinds of exclusivity or drugs that were required 
to undergo certain types of clinical trials. Some commenters indicated 
there was a disincentive for manufacturers to proceed with innovative 
products if our proposals were finalized.
    We appreciate the comments that were provided; however, at this 
time, we have decided not to finalize the proposed definitions of line 
extension drug at proposed Sec. Sec.  447.502 and 447.509(a)(4)(ii). We 
will continue to consider the issues commenters raised on the 
definition of a line extension drug, as well as the scope of the 
definition as it applies to ADFs or drugs that received certain types 
of exclusivity. Additionally, we are not finalizing proposed Sec.  
447.509(a)(4)(iii), which proposed the process by which line extension 
drugs would be identified by the FDA's list of certain Chemical Types. 
Because we are not utilizing FDA's Chemical Types, we will not provide 
nor update the master list that identifies new initial brand name 
listed drugs and new line extension drugs for the initial three 
quarters from the effective date of the final rule.
    Although we are taking into consideration the comments we received 
on the proposed rule for these topics, we are requesting additional 
comments on the definition of line extension drug and the 
identification of new formulations as we may consider addressing these 
in future rule making. Therefore, at this time, manufacturers are to 
rely on the statutory definition of line extension at section 
1927(c)(2)(C) of the Act, and where appropriate, are permitted to use 
reasonable assumptions in their determination of whether their drug 
qualifies as a line extension drug. Furthermore, as discussed later in 
this section, we are finalizing Sec.  447.509(a)(4)(i), which provides 
the rebate calculation for line extension drugs, including the method 
to calculate the URA and UROA for such drugs.
    We received the following comments concerning operational aspects 
of proposed Sec.  447.509(a)(4)(i) and the sharing of manufacturer 
pricing data regarding the alternative rebate calculation:
a. Line Extension Marketed by Different Manufacturer
    Comment: Several commenters stated that there is no benefit derived 
by a new manufacturer resetting the base date AMP if the initial brand 
name listed drug was marketed by a different manufacturer since the new

[[Page 5266]]

manufacturer is not subject to the initial drug owner's lower base date 
AMP. Other commenters stated that the language CMS used in the proposed 
rule regarding the exchanging of data suggests the possibility that a 
single source drug of one manufacturer could be a line extension of a 
single source drug or innovator multiple source drug by another 
manufacturer. They stated that the legislative history suggests that 
the Congress intended to eliminate a manufacturer's incentive to make 
slight alterations to its own products and that applying the provision 
between different manufacturers is inconsistent with the statute. 
Several other commenters noted that it makes no sense to apply the line 
extension provisions if the line extension drug is made by a 
manufacturer that does not own the original product. They stated that 
it is not logical that the manufacturer of the new formulation is 
trying to avoid a higher URA since another company owns the original 
product, and that this situation has no possible connection with the 
intent of the Affordable Care Act. Several commenters urged CMS to 
draft the final rule, or clarify the language, to provide that a drug 
by one manufacturer will not be treated as a line extension of a drug 
by a different manufacturer unless there is a corporate, contractual, 
licensing, or financial relationship between the manufacturers.
    Many commenters noted that manufacturers will be harmed, unfairly 
penalized, or have proprietary information compromised by the 
implementation of the line extension provisions. Several commenters 
stated that the proposed rule, if finalized, would subject products to 
higher rebate obligations without consideration of the substantial time 
and financial resource investments associated with the manufacturing of 
the line extension product.
    Several commenters noted that the provisions would make the rebate 
calculations more burdensome. Several commenters stated that the 
proposed rule, if finalized, would require the sharing of information 
between competing manufacturers. One commenter asked if, in the case of 
a Chemical Type 6 (new indication) product, the manufacturer would need 
to compare the AMP of its line extension product to the AMP of the 
original product if both products are currently being marketed by 
different manufacturers. The commenter stated that if so, the 
manufacturer would encounter great difficulty because pricing data are 
proprietary and confidential.
    Another commenter stated that data sharing is problematic from both 
an operational and legal perspective. Competitors are reluctant to 
share pricing data with a direct competitor and there were no rules 
regarding such sharing given in the proposed rule, thereby creating 
barriers for data sharing. Several other commenters stated that the 
sharing of pricing information is problematic because such information 
is confidential. One commenter stated that unless the same labeler owns 
and markets both the initial reference drug and the line extension 
drug, the alternative URA should not come into play. Another commenter 
stated that the line extension company has no control or insight into 
the pricing of the original product. The commenter stated that it makes 
little sense to apply the line extension provision if the products are 
marketed by different manufacturers because it would only penalize the 
manufacturer of the line extension drug and there would be no concern 
in this case that the original manufacturer was attempting to ``game 
the system.''
    Several commenters expressed concern regarding the use of a formula 
that relies on the additional rebate of the original drug of another 
manufacturer who could manipulate the original price to generate higher 
rebate liability for the line extension company. Another commenter 
stated that a line extension manufacturer needs pricing data from the 
original manufacturer to estimate rebate obligations as part of their 
financial forecasting when deciding whether or not to market a line 
extension drug. The commenter stated that the original manufacturer is 
unlikely to supply such data before the line extension drug goes to 
market.
    One commenter noted that if the line extension drug was 
manufactured by a different company than the initial product, then the 
manufacturer would have to obtain pricing data from a competitor to 
calculate a URA and that this would be unworkable and the proposal must 
be dropped. Another commenter noted that a line extension company could 
utilize the initial manufacturer's URA information to their competitive 
advantage. One commenter suggested that CMS narrow and revise the 
definition such that a new formulation sold by a distinct, unrelated, 
and competing manufacturer would not be subject to the alternative URA 
calculation.
    Several commenters noted that CMS did not provide any mechanism for 
manufacturers to rely on each other's data and only stated that it is 
the manufacturer's responsibility to obtain pricing information. One 
commenter noted that the data sharing requirements were not defined in 
the proposed rule and the cost burden associated with gathering such 
data was not provided. Additionally, some manufacturers may want even 
more information from the initial manufacturer to verify the additional 
rebate amount supplied by the original manufacturer. Another commenter 
stated that requiring manufacturers to share pricing data may require 
costly indemnification agreements between manufacturers to cover civil 
liability.
    One commenter stated that manufacturers might have to stop selling 
a line extension drug if they could not obtain data from the 
manufacturer of the initial reference drug. They noted that a 
manufacturer may be unable to divest a line extension drug because a 
potential buyer would know that it could not obtain the information 
necessary to comply with the line extension provisions. One commenter 
envisioned scenarios under which one company would only handle the 
distribution of an authorized generic of a line extension drug. This 
commenter was concerned by CMS's assumption that any manufacturer 
marketing a line extension drug can obtain the pricing data from the 
manufacturer of the original product.
    Response: We understand the challenges of obtaining pricing 
information from unrelated manufacturers. Therefore, in response to the 
comments received, we have decided to limit the line extension 
provision to provide that a drug by one manufacturer will not be 
treated as a line extension of a drug by a different manufacturer, 
unless there is a corporate relationship between the manufacturers. 
This will limit the obligation of manufacturers to collect pricing 
information from unrelated parties. Manufacturers of line extension 
drugs that have a corporate relationship with the manufacturer of the 
initial brand name listed drug are expected to obtain the necessary 
pricing data to calculate the alternative URA on a quarterly basis. 
This interpretation is consistent with our understanding of section 
1927(c)(2)(C) of the Act and the requirement that manufacturers 
calculate an alternative URA for new formulations.
    Section 1927(c)(2)(C) of the Act provides that the rebate 
obligation for a line extension drug shall be the amount computed under 
section 1927 of the Act for the line extension product or if greater, 
the product of the AMP of the line extension drug, the highest 
additional rebate (calculated as a

[[Page 5267]]

percentage of AMP), and the total number of units paid for under the 
State plan in the rebate period. We believe there is less of a risk for 
manufacturers to attempt to circumvent the additional rebate for a line 
extension drug if there is no relationship between the manufacturer of 
the initial brand name listed drug and the line extension drug, because 
an unrelated manufacturer is less likely to benefit from the resetting 
of the base date AMP for a drug if there is no relationship between the 
two manufacturers. Therefore, in light of the comments received, a drug 
marketed by a manufacturer will be treated as a line extension of a 
drug of another manufacturer only where there is a corporate 
relationship between the manufacturers. We will note this requirement 
in the final rule regulation at revised Sec.  447.509(a)(4)(ii). We 
will issue additional guidance or rulemaking, if needed.
    Comment: One commenter asked CMS to clarify which entity, the 
manufacturer of the initial brand name listed drug or the manufacturer 
of the line extension drug, is ultimately responsible for the data. 
Several commenters stated that the exchange of price information raises 
antitrust issues under the Sherman Antitrust Act of 1890, which CMS 
recognized in the 2007 AMP final rule when CMS rejected a proposal for 
the primary manufacturer of an authorized generic to obtain the 
quarterly AMP from a secondary manufacturer to calculate a blended AMP. 
They stated that CMS did not address these concerns nor provide 
assurance that compliance with the rule would not result in heightened 
exposure to state and federal antitrust laws.
    Response: We are persuaded by the comments regarding the concerns 
associated with sharing of pricing data between competing manufacturers 
and have changed our position concerning the inclusion of another 
manufacturer's pricing data in the calculations of the additional 
rebate for line extension drugs. We also recognize the challenges of 
obtaining pricing information from non-related manufacturers, based on 
the comments received. Therefore, we are applying the line extension 
obligations to drugs that are manufactured by the initial brand name 
listed drug company and any other companies that have a corporate 
relationship with the manufacturer of the initial brand name listed 
drug.
b. Initial Brand Name Listed Drug Not in MDR Program
    Comment: Several commenters asked for clarification that if the 
original manufacturer does not participate in the MDR program, then the 
initial brand name listed drug should be treated as terminated. A few 
commenters supported the proposal to exclude drugs that have been 
terminated from the MDR program and stated that manufacturer should 
only calculate an alternative URA when the initial brand name listed 
drug is active in the MDR program and they requested that the 
regulations text should be changed to reflect this. One of the 
commenters asked that CMS confirm that the word ``terminated'' in the 
context of the line extension provisions have the same meaning as it 
has in monthly AMP (that is a product is terminated in the first month 
after the last lot expiration). The commenter also asked for 
clarification that if a Chemical Type 1 (new molecular entity) has been 
terminated, that all resulting Chemical Type 3 (new formulation) 
products are absolved from the line extension calculations.
    Response: We agree that if no initial brand name listed drug(s) are 
active in the MDR program, then no alternative URA will be calculated 
for any line extension drug that used the pricing data of the 
terminated initial brand name listed drug(s) for the calculation of the 
alternative URA. During any quarter, if there is an active initial 
brand name listed drug in the MDR program that may be used for the 
alternative URA calculation, then such calculation is required for the 
line extension drug. Additionally, we agree with the commenter that 
``terminated'' has the same meaning in the line extension provision as 
in monthly AMP (that is, a product is terminated in the first month 
after the last lot expiration). We do not see any reason to adopt a 
different meaning of termination for line extension drugs. However, we 
do not believe that the final regulation text needs to be further 
revised to reflect this understanding.
c. New Strengths
    Comment: One commenter stated that some drugs assigned to Chemical 
Type 3 (new formulation) are multiple strengths and asked for 
clarification about how these drugs should be treated under line 
extension rules. Another commenter stated that CMS should not include 
those drugs assigned to Chemical Type 3 (new formulation) if they are 
simply a new strength. A few commenters supported exclusions for new 
strengths and recommended that this exclusion be included in the 
regulatory definition and not just the preamble. A commenter sought 
guidance regarding how the exclusion for new strengths would operate, 
and specifically whether, for example, a new strength of the initial 
brand would be excluded as a line extension. Another commenter 
supported limiting the line extension provisions to oral solid dosage 
forms, excluding new strengths of the initial brand name drug, and 
clarifying that the provision does not apply if the initial brand is no 
longer active. They asked for clarification in the regulatory text. 
Additionally, the commenters asked for clarification if a new strength 
of an extended release product would be excluded from the line 
extension definition. Another commenter asked for clarification that 
new strengths classified as Chemical Type 6 (new indication) should not 
be treated as line extensions.
    Response: We agree with the commenters and do not consider new 
strengths of the same formulation of the initial brand name listed drug 
to be a line extension because we believe that if the only change to a 
drug is the strength, without any change to the formulation of the 
drug, section 1927(c)(2)(C) of the Act does not contemplate that a new 
strength is a line extension drug. If the sole difference between a 
drug and the corresponding initial brand name listed drug is the 
strength, then the drug will not be considered a line extension drug 
and will not be subject to the alternative URA calculation for line 
extension drugs. However, because we are not finalizing a definition of 
line extension in this final rule, we are not including this exclusion 
in the final regulatory text.
    Additionally, we do not see any reason to exclude a new strength of 
a line extension drug from being a line extension drug as the drug 
itself is a new formulation, and note that section 1927(c)(2)(C) of the 
Act specifically provides that the alternative URA calculation include 
the highest additional rebate under this section for any strength of 
the original single source drug or innovator multiple source drug. For 
the purposes of the alternative URA calculation, the same initial brand 
name listed drug should be reported to CMS and used in the alternative 
URA calculation for all strengths of the line extension drug.
d. Authorized Generics
    Comment: We received several comments relating to the treatment of 
authorized generic products under the line extension provisions. A 
commenter requested modification of the definition to clearly state 
whether an authorized generic drug can be a line extension drug. 
Several commenters noted that the manufacturer of the authorized 
generic drug may not have a contractual

[[Page 5268]]

relationship with or rights to data from the original manufacturer. 
Another commenter noted that CMS should address how the URA calculation 
can be validated by an authorized generic manufacturer when the product 
is owned by another manufacturer.
    Response: We have decided not to treat authorized generic drugs 
differently than other drugs because we do not read section 
1927(c)(2)(C) of the Act as treating authorized generic products 
differently. Accordingly, manufacturers are responsible for calculating 
additional rebates for authorized generic drugs if those drugs qualify 
as line extensions. As previously discussed, a drug marketed by a 
manufacturer will be treated as a line extension of a drug of another 
manufacturer only where there is a corporate relationship between the 
manufacturers.
e. Calculation of Alternative URA and Federal Offset
    Comment: A few commenters supported CMS's proposed methodology for 
the alternate additional rebate calculation which is consistent with 
previous guidance. One commenter agreed with CMS's interpretation that 
the URA for a line extension should be based on the greater of either 
(1) the standard URA or (2) the alternative URA, where the alternative 
URA is the product of the line extension AMP and the highest additional 
rebate for any strength of the original drug.
    Response: We appreciate the comments and support and are finalizing 
the alternative rebate calculation formula in Sec.  447.509(a)(4)(i) as 
proposed.
    Comment: A commenter asked if CMS understands that while trying to 
correct the issue of resetting base date AMP through the line extension 
provisions (thus paying an artificially low URA), that it is giving 
manufacturers another tool to use once they have capped out on their 
calculations.
    Response: We understand that the 100 percent cap will limit the 
effect of the line extension provisions in some circumstances; however, 
section 1927(c)(2)(D) of the Act does not exclude line extension drugs 
from the 100 percent of AMP limit that is applied to all CODs.
    Comment: We received numerous comments regarding operational issues 
that will be encountered when CMS, manufacturers, and states attempt to 
implement the line extension provisions as detailed in the proposed 
rule. One commenter stated that CMS did not address all possible 
scenarios faced by manufacturers when trying to calculate the 
alternative URA. One commenter stated that manufacturers will require 
additional time to calculate the URA for line extension drugs because 
they need time to get the URA of the initial product. Another commenter 
asked how CMS would ensure that information flows timely so that AMPs 
and offset amounts are accurately reported to states if a line 
extension drug is manufactured by a different company.
    Several commenters stated if CMS proceeds with requiring 
manufacturers to make calculations based on data of other parties, we 
should require that data sharing for line extension calculations be a 
condition of a manufacturer's participation in the MDR program, impose 
deadlines for providing data, require that the original manufacturer 
provide NDC numbers and CPI-U penalty percentages, and that the 
original manufacturer must certify the data. Several commenters noted 
that the methodology for AMP calculations used by the original company 
may be different from the methodology of the line extension drug 
manufacturer. As many facts of the AMP calculation rely on reasonable 
assumptions, the resultant AMP comparisons would not be an equivalent 
comparison.
    One commenter noted that CMS will need to amend the certification 
language to reflect that the alternative URA is a product of another 
manufacturer's data and the calculations are beyond the control of the 
certifier. One commenter noted that these provisions would require 
significant changes in DDR, and such changes have historically taken a 
long time. The commenter discouraged CMS from adopting new regulations 
that would require process and system changes related to confirming 
products with data from FDA databases. If CMS does proceed, they ask 
that manufacturers be provided with enough time to update their own 
systems.
    Response: After reviewing the public comments and as discussed 
previously, we are modifying our position regarding the proposed 
requirement that manufacturers obtain data from other companies. A drug 
marketed by a manufacturer will be treated as a line extension of a 
drug of another manufacturer only where there is a corporate 
relationship between the manufacturers, and an alternative URA 
calculation will be required for the drug.
    We believe that our policy as revised in this final rule will 
address the concerns and operational burden for both the manufacturer 
of the initial brand name listed drug and the manufacturer of the line 
extension drug. We also believe that this process will allay concerns 
as to the accuracy and consistency of the data since information 
sharing will only be required between manufacturers that have a 
corporate relationship. We are currently drafting system requirements 
for the line extension provision and expect to issue guidance to 
manufacturers regarding the reporting of rebate information for line 
extension drugs consistent with the requirements of the statute. We 
also expect to issue guidance to states regarding the reconciliation 
and reporting of the UROA for line extension drugs.
    We appreciate the comments regarding the possibility that different 
manufacturers may make different reasonable assumptions in their AMP 
calculations; however, this final rule sets forth requirements 
regarding how manufacturers are to calculate AMP. We expect the 
statute, as well as this final rule, will prevent any significant 
differences in AMP methodologies between manufacturers.
    Comment: A commenter asked how restatements will work in regards to 
line extensions. Commenters also questioned if an initial product is 
restated, will the line extension company have to restate and reconcile 
items such as rebates and PHS pricing.
    Response: We do not have oversight over the PHS program so we 
cannot address PHS pricing in this final rule. However, restatements of 
pricing information will follow the same process as currently used for 
restatements of pricing data. Manufacturers do not need to notify CMS 
if the resubmission falls within the 12-quarter timeframe, as 
manufacturers have access to DDR to make those changes.
    Comment: Several commenters discussed the additional burden that 
would be placed on CMS to calculate the alternative URAs. Commenters 
requested that CMS describes more comprehensively in the final rule how 
the URA for line extension drugs should be calculated and how it will 
be operationalized. The commenters noted that currently, manufacturers 
do not have to submit URAs to CMS. Because the URA for line extensions 
is a comparison between two calculated URAs, the commenters asked if 
CMS will continue to calculate a URA for both forms and select the 
higher value, or, if manufacturers will be responsible for URA 
submission. The commenters also asked if all manufacturers of initial 
brand name listed drugs will submit their additional rebate-to-AMP 
ratios for all strengths, or will CMS calculate it. They also asked if 
CMS will be able to do so and if CMS will be ready to implement on the 
effective date of the

[[Page 5269]]

rule. If not, they asked when and what is the plan for reconciliation. 
Commenters asked whether DDR will contain a new URA field for 
manufacturers to report quarterly; whether manufacturers have to report 
both the standard and the alternative URAs or just the higher value; 
and if the URA has to be reported by the manufacturer, will it be for 
all products or just for line extensions.
    Response: Under section 1927(b) of the Act, it is the 
responsibility of the manufacturers to calculate rebates and make 
payment to states. Although CMS is also calculating the URA, it is only 
for the convenience of the states to facilitate rebate billing and to 
verify the manufacturer's calculated rebates. Manufacturers are 
responsible for and must continue calculating the rebates for their 
CODs, and this current process applies to the line extension provision 
as well. Manufacturers will not be responsible for submitting URAs or 
additional rebate-to-AMP ratios to CMS; however, manufacturers will be 
responsible for identifying line extension drugs and, on a quarterly 
basis, the initial brand name listed drug with the highest additional 
rebate ratio, where there is a corporate relationship between the 
manufacturer of the line extension drug and the initial brand name 
listed. We will use this information to calculate the URAs for line 
extension drugs and provide such URAs to the states. Manufacturers will 
continue to be responsible for reporting product and pricing data to 
CMS, calculating the rebates, and making rebate payments to states. 
This responsibility extends to calculation of URA for line extension 
drugs and includes the necessity of obtaining necessary information 
from the manufacturer of the initial brand name listed drug, when the 
manufacturers have a corporate relationship.
    We expect to issue future guidance to manufacturers regarding the 
additional data fields that will be necessary for CMS to calculate 
quarterly URAs for line extension drugs. We will also issue guidance to 
states regarding the reconciliation and reporting of the UROA for line 
extension drugs.
    Comment: Several commenters stated that the statutory change 
represented an attempt to mitigate the perceived windfall for 
manufacturers, at the expense of the MDR program; however, any 
financial gain has already been addressed by the states through the 
negotiation of state supplemental rebates, prior to the Affordable Care 
Act. Several commenters noted that the offset amounts created by the 
additional rebate amounts will go to CMS and not to the states. Another 
commenter noted that if the provision was retroactive to March 2010, it 
could cost states significantly. The commenters asked that 
implementation be postponed for some time after the publication of the 
final rule to allow states time to plan strategy for restructuring 
their budgets. They cited budget problems due to reduced rebates due to 
states having to report offset amounts on the additional FFS and MCO 
rebates states receive under the Affordable Care Act and also stated 
that the states may not have control over the preferred drug lists of 
the MCOs.
    Several commenters stated that the states expect a large unit 
rebate offset amount (UROA) for line extension drugs and that due to 
changes in the Affordable Care Act states have experienced and/or 
projected manufacturers reducing or eliminating supplement rebates to 
the state. A commenter indicated that this loss of supplemental rebates 
is not included in the proposed rule's Economic Analysis.
    Response: The effective date of the line extension and offset 
provisions, as set forth in section 2503 of the Affordable Care Act, 
was January 1, 2010. However, the provisions in this final rule will be 
implemented on a prospective basis. Based on the supplemental rebate 
data reported to CMS on the Medicaid and Children's Health Insurance 
Program Budget and Expenditure System (MBES), http://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Data-and-Systems/MBES/CMS-64-Quarterly-Expense-Report.html, we do not see any significant impact 
so far to states' supplemental rebate amounts.
    Comment: One commenter expressed concern regarding the effect of 
implementing the line extension provisions on the federal offset of 
rebates. The commenter stated that section 2501(a)(2) of the Affordable 
Care Act specified that amounts received by the state that are 
attributable to the increase in the minimum rebate percentage are for 
federal offset. The commenter stated that this would apply only to the 
increases of 15 percent to 23 percent and 11 percent to 13 percent; the 
alternative URA provision does not contain increases in the minimum 
rebate percentage; and the calculation does not make any changes in the 
minimum rebate percentage. The commenter believed that CMS has no 
authority to impose the offset; however, the commenter stated that if 
CMS insists on pursuing the offset, it needs to provide manufacturers 
with guidance including an example of how the offset is performed. The 
commenter asked what amount CMS plans to retain without sharing, based 
on state Federal Medical Assistance Percentage (FMAP), with the states. 
If the alternative URA is higher for a quarter, what will CMS subtract 
from that alternative URA to determine the offset, and would it be 
standard URA (either (a) 23.1 percent of AMP or (b) (AMP-BP) + 
additional rebate) as calculated for comparison to the alternative URA, 
or the URA as it would have been calculated prior to the Affordable 
Care Act (either (a) 15.1 percent of AMP or (b) (AMP-BP) + the 
additional CPI-U rebate).
    Response: We are maintaining our position as discussed in the 
proposed rule (77 FR 5342) and finalizing Sec.  447.509(c)(3) that the 
offset will be applied to a line extension drug based on section 
1927(b)(1)(C) of the Act which specifically references increases in the 
rebate percentage effected by amendments made by sections 2501(a)(1), 
2501(b), and 2501(d) of the Affordable Care Act for drugs that are line 
extension drugs. These amendments provided that if the alternative URA 
is greater than the standard URA, then the offset will be applied to 
the difference between the alternative URA and the standard URA. As 
noted in the proposed rule, CMS will be responsible for calculating the 
offset amount. However, in response to the request for an example of 
how calculation is performed, we are providing the steps for 
calculating the URA and UROA for a line extension drug in the example 
below.
    Step 1: Standard URA = Basic Rebate Amount + Additional Rebate 
Amount.
    Step 2: The alternative URA is calculated as the product of the AMP 
of the line extension that is an oral solid dosage form and the highest 
additional rebate (calculated as a percentage of AMP) for any strength 
of the initial brand name listed drug.
    Step 3: URA = The greater of (1) standard URA or (2) the 
alternative URA.
    Step 4: Determine if the URA is greater than 100 percent of AMP.
    a. If the URA is greater than 100 percent of AMP, then the URA = 
AMP consistent with section 1927(c)(2)(D) of the Act.
    b. If the URA is less than 100 percent of AMP, then use the 
calculated URA.
    Step 5: UROA Calculation = For a drug that is a line extension of a 
single source drug or innovator multiple source drug that is an oral 
solid dosage form, if the alternative URA is greater than the standard 
URA, then the offset will be the difference between the alternative URA 
and the standard URA and the basic UROA will be based on

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the increase in the minimum rebate percentage effected by the 
Affordable Care Act. If the alternative URA is less than the standard 
URA, then there is no offset amount for line extension portion, 
however, the basic UROA still applies.
    Below is an example of calculating the URA and UROA for a line 
extension drug.

Baseline AMP (line extension) = 100.00
AMP (line extension) = 300.00
Best Price (line extension) = 250.00
Baseline CPI-U = 170.00
CPI-U = 200.00

    Step 1: Calculate Standard URA = Greater of
    a. AMP x 23.1% = 300.00 x 23.1% = 69.30 or
    b. AMP--best price = 300.00-250.00 = 50.00.
    The greater of the two results (69.30 or 50.00) is 69.30.
    Basic Rebate Amount for the line extension drug = 69.30.
    Additional Rebate Amount calculated under formula in section 1927 
of the Act: If the [(Baseline AMP/Baseline CPI-U) x CPI-U] is less than 
the quarterly AMP, subtract [(Baseline AMP/Baseline CPI-U) x CPI-U] 
from the quarterly AMP to determine the additional URA. If the 
[(Baseline AMP/Baseline CPI-U) x CPI-U] is equal to or greater than the 
quarterly AMP, the additional URA is equal to zero.

[(Baseline AMP/Baseline CPI-U) x CPI-U] = 100/170 x 200 = 0.5882 x 200 
= 117.65
    117.65 is less than 300.00; then, 117.65 is subtracted from 300.00, 
300.00-117.65 = 182.35
    Additional Rebate Amount under section 1927 of the Act = 182.35

Standard URA = 69.30 + 182.35 = 251.65
    Step 2: Calculate the Alternative URA
AMP (line extension) = 300.00
AMP (initial brand name listed drug) strength A = 280.00
AMP (initial brand name listed drug) strength B = 275.00
AMP (initial brand name listed drug) strength C = 270.00
Additional Rebate Amount (initial brand name listed drug) strength A = 
200.00
Additional Rebate Amount (initial brand name listed drug) strength B = 
125.00
Additional Rebate Amount (initial brand name listed drug) strength C = 
110.00
Strength A additional rebate amount ratio = 200/280 = 0.7143
Strength B additional rebate amount ratio = 125/275 = 0.4545
Strength C additional rebate amount ratio = 110/270 = 0.4074
Highest additional rebate ratio (calculated as a percentage of AMP) for 
any strength of the initial brand name listed drug = 0.7143
Alternative URA = Product of the AMP of the line extension that is an 
oral solid dosage form and the highest additional rebate ratio 
(calculated as a percentage of AMP) for any strength of the initial 
brand name listed drug

Alternative URA = 300 x 0.7143 = 214.29

    Step 3: URA of the line extension drug = the greater of
    (1) Standard URA = 251.65 or
    (2) Alternative URA = 214.29

URA of the line extension drug = 251.65

    Step 4: Determine if the URA is greater than 100 percent of AMP.

AMP (line extension) = 300.00 = 100% x 300.00 = 300.00
URA = 251.65

URA is less than 100 percent of AMP; therefore, URA is equal to 251.65

    Step 5: UROA calculation

AMP (line extension) = 300.00
Best Price (line extension) = 250.00
Basic UROA = If AMP-BP less than AMP x 23.1% and greater than AMP x 
15.1%
AMP-BP = 50
AMP x 23.1% = 69.3
AMP-BP is less than AMP x 23.1% and greater than AMP x 15.1%
Then basic UROA = AMP x 23.1%-(AMP-BP) = 69.3-50 = 19.3
Line extension UROA = If the Alternative URA greater than the Standard 
URA

    (1) Standard URA = 251.65 or
    (2) Alternative URA = 214.29
    Alternative URA is NOT greater than Standard URA, thus no line 
extension UROA.

    UROA for this NDC drug is only the basic UROA portion = 19.3

    IF the Alternative URA and the Standard URA values were reversed:
    (1) Standard URA = 214.29 or
    (2) Alternative URA = 251.65
    The alternative URA is greater than the standard URA, and the UROA 
for this line extension drug is = 251.65-214.29 = 37.36. Consistent 
with CMS's reading of the statutory offset provision, we have 
calculated the offset amount to reflect the amount attributable to the 
increase in the percentages affected by the Affordable Care Act 
amendments. In this scenario, this NDC would have both a basic UROA 
(19.3) and a line extension UROA (37.36).
f. Miscellaneous
    Comment: We received many comments regarding timing issues 
surrounding the implementation of the line extension provisions. 
Several commenters stated that if the provision is implemented 
retroactive to 2010, then states that are receiving supplemental 
rebates currently will have large accumulated offset amounts. One 
commenter stated that if CMS applies the statute retroactively, it 
would unfairly punish manufacturers with additional rebate obligations 
for drugs introduced long before the Congress considered the line 
extension issue. The commenter stated that the statutory provision does 
not authorize retroactive application, and the legislative history 
implies that the Congress did not intend it. The commenter quoted from 
the Senate Finance Committee comments, which state ``The Chairman's 
Mark would treat new formulations of existing brand name drugs as if 
they were the original product for purposes of calculating Medicaid's 
additional drug rebate. When a new version of an existing drug is 
introduced, the additional rebate obligation for that new drug would be 
calculated on the original drug's baseline AMP, rather than a new 
baseline.'' (S. Comm. on Finance Chairman's Mark, America's Healthy 
Future Act of 2009, at 55 (Sept. 2009)). The commenter stated that the 
Congress had the opportunity to require all existing drugs be 
classified as either initial or line extension drugs, but the statute 
speaks only to new versions of existing drugs. Therefore, the commenter 
concluded that all existing drugs are initial brand name drugs, and 
only new formulations submitted to FDA after the enactment of the final 
rule can be line extensions. Rather than attempt to classify existing 
drugs as either initial or line extension drugs, the commenter stated 
that CMS should treat all drugs submitted to FDA prior to 
implementation as initial. Then manufacturers will have proper notice 
that Chemical Type 3 (new formulation) NDA drugs will be subject to 
additional rebate. Additionally, CMS will have an easier time 
identifying line extension drugs using FDA's Chemical Type codes.
    A few other commenters objected to the application of the line 
extension provisions to formulations which existed prior to the 
enactment of the Affordable Care Act. They stated that if CMS limits 
the provisions to formulations that are new after the enactment date, 
then some of the problems with acquisition of information about the 
original drug will be limited. Another commenter stated that applying 
the line extension provision to formulations existing prior

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to the enactment of the Affordable Care Act would be punitive and 
problematic. One commenter stated that because of the complexity of the 
policy and multiple unanswered questions, CMS should apply the 
provision prospectively to new line extension drugs launched after the 
enactment of the Affordable Care Act. A few other commenters noted that 
the application of the provision after the effective date of the final 
rule would allow manufacturers the opportunity to deal with data 
sharing needs through contractual agreements. Manufacturers do not have 
the ability to force another manufacturer to provide pricing data after 
a deal has been completed. Commenters stated that the implementation of 
the provision will create a tremendous burden on manufacturers to 
identify all oral solid drugs that are currently sold that received FDA 
approval based on the four proposed Chemical Types and to obtain both 
the baseline AMP and current AMP for the original drug.
    One commenter noted that the requirements for line extension drugs 
should not apply to drugs approved by FDA prior to the effective date 
of the Affordable Care Act line extension provisions because these 
requirements were not part of the law when the drugs were approved. 
They stated that this could be seen as retroactive rulemaking by 
changing AMP in a period that predates the effective date of the 
statute. Additionally, since CMS has issued guidance that manufacturers 
should use reasonable assumptions to implement the provisions prior to 
the final rule, the specific provisions should apply only after the 
rule is finalized.
    One commenter stated that their reading of the proposed rule is 
that the line extension provision is not retroactive to 2010 and they 
request confirmation. They stated that if it was to be implemented 
retroactively, that states could be subject to a significant liability.
    Response: The provisions in this final rule are effective on a 
prospective basis, as indicated in the effective date section of this 
final rule. However, in accordance with section 2501(d) of the 
Affordable Care Act, the statutory line extension provision was 
effective January 1, 2010. Specifically, section 2501(d) of the 
Affordable Care Act specifies that the line extension amendments apply 
to drugs paid for by a state after December 31, 2009, but it failed to 
specify that it would apply only to those line extension drugs that are 
approved after that effective date. Section 1927(c)(2)(C) of the Act, 
as revised by section 2501 of the Affordable Care Act, requires that 
manufacturers calculate an additional rebate for all drugs that are 
identified as line extension drugs as of the statutory effective date. 
Therefore, the date of when a drug comes to market does not have an 
effect on the determination of the applicability of the line extension 
provisions to a drug. In accordance with the statutory provisions, the 
line extension requirements apply to drugs that qualify as line 
extensions as of the statutory effective date of January 1, 2010; 
however, as noted previously in this section, the provisions of this 
final rule are not retroactive. The requirements set forth in this 
final rule shall be effective on a prospective basis only. Also as 
previously mentioned, we believe that limiting the line extension 
alternative rebate calculations to drugs produced by manufacturers that 
have a corporate relationship will alleviate the concerns about data 
sharing with competitors.
    To summarize, based on the comments received and for the reasons 
discussed in this section, Sec.  447.509(a)(4) is being finalized as 
follows:
     We are finalizing proposed Sec.  447.509(a)(4)(i) without 
modification.
     We are not finalizing the definition of the term line 
extension proposed in Sec.  447.509(a)(4)(ii).
     We have decided that the alternative rebate is required to 
be calculated if the manufacturer of the line extension drug also 
manufactured the initial brand name listed drug or if the manufacturer 
of the line extension drug has a corporate relationship with the 
manufacturer of the initial brand name listed drug and are including 
this requirement in the final regulation at revised Sec.  
447.509(a)(4)(ii).
     We are not finalizing our proposal to identify line 
extension drugs by FDA Chemical Types in Sec.  447.509(a)(4)(iii).
3. Rebates for Drugs Dispensed Through Medicaid Managed Care 
Organizations (MCOs) (Sec.  447.509(b))
    Effective March 23, 2010, section 1927(b) of the Act, as amended by 
section 2501(c) of the Affordable Care Act, requires manufacturers that 
participate in the MDR program to pay rebates for drugs dispensed to 
individuals enrolled with a Medicaid MCO if the MCO is responsible for 
coverage of such drugs. Therefore, to address these revisions, we 
proposed a new Sec.  447.509(b) (77 FR 5341, 5364). In Sec.  
447.509(b)(1), we proposed to require participating manufacturers to 
pay rebates for CODs dispensed to individuals enrolled in Medicaid MCOs 
if the MCO is contractually required to provide such drugs. In proposed 
Sec.  447.509(b)(2), we proposed that manufacturers are exempt from the 
requirement in proposed paragraph (b)(1) if such drugs are dispensed by 
HMOs, including MCOs that contract under section 1903(m) of the Act, 
and subject to discounts under section 340B of the PHSA. In Sec.  
447.509(b)(3), we proposed that a Medicaid MCO that contractually 
provides CODs dispensed to Medicaid beneficiaries must submit, within 
30 days of the end of each quarter, a report containing specific data, 
including the MCO identifier, the NDC, the period covered, the product 
FDA list name, the total units, the total number of prescriptions and 
the amount reimbursed, for the state to access the rebates authorized 
by the revisions to sections 1927(b) and 1903(m)(2)(A) of the Act (77 
FR 5341 through 5342, 5364). We received the following comments 
concerning rebates for drugs dispensed to individuals enrolled in MCOs:
a. MCO Reporting Requirements
    Comment: Several commenters had concerns with Sec.  447.509(b)(3) 
of the proposed rule which lists specific data elements MCOs would be 
required to report to states within 30 days of the end of each quarter 
to support state collection of rebates from manufacturers. One 
commenter stated that states have not commonly required MCOs to include 
the ``Product FDA list name'' in their rebate-related data submissions 
to date and that this information is not routinely maintained by MCOs 
for other purposes. The commenter stated that since an efficient means 
is available for states to generate the product FDA list name, and it 
would be burdensome and costly for MCOs to develop the capability to 
provide this information, the commenter recommended that CMS revise 
Sec.  447.509(b)(3) to strike the ``Product FDA list name.''
    Another commenter stated that the reporting of data from the MCOs 
must be timely and reflect the same required data elements in the same 
required units as is required for fee-for-service data. The commenter 
noted that encounter data from MCOs has lacked the robust quality 
component necessary to sustain rebate challenge. Other commenters 
appreciate the need to clarify Medicaid MCO reporting requirements to 
promote consistency, but encouraged CMS to allow more flexibility in 
reporting content and timing.
    One commenter indicated that many states are using their encounter 
data to develop reports that include information needed for the 
collection of rebates that meets states' needs and has

[[Page 5272]]

successfully supported many states in pursuing their respective 
outpatient drug rebates. The commenter stated that revising these 
current reporting requirements to include additional data elements may 
not significantly increase the effectiveness of these reports, and 
altering their current encounter-based reporting mechanisms would 
generate unnecessary administrative expense for both states and 
Medicaid MCOs. The commenter suggested that those states that are not 
able to use encounter data might consider a separate file submission 
for those attributes to minimize administrative expense for both states 
and Medicaid MCOs.
    Response: Given the concerns raised by the commenters about 
flexibility, we have decided not to finalize proposed Sec.  
447.509(b)(3) in the final rule. We will continue to consider the MCO 
submission requirements and issue additional guidance or rulemaking, if 
needed, concerning such requirements in the future. We have addressed 
state reporting requirements regarding MCO utilization data in Sec.  
447.511.
    Comment: One commenter stated that manufacturers may currently 
request prescription level data from the states for Medicaid FFS 
utilization that may be the subject of a rebate payment dispute. The 
commenter stated that it appears that Medicaid MCOs will not be 
required to provide prescription level data to the states, so it is 
unclear how manufacturers would obtain this data in the event that 
submitted utilization from the Medicaid MCO is the subject of a rebate 
payment dispute. The commenter requested that CMS indicate that 
Medicaid MCOs will be required to provide prescription level data to 
the states and/or to manufacturers in order that manufacturers will 
have access to this data in the event of rebate payment disputes.
    Response: As stated in this section, we have decided to not 
finalize the MCO reporting requirements at proposed Sec.  447.509(b)(3) 
in this final rule. Instead, we have chosen to address the requirements 
for states with regard to the data they report to manufacturers, 
including the data pertaining to MCO utilization, which are codified in 
Sec.  447.511 of this final rule. Furthermore, we are not adding the 
requirement for prescription level data in proposed Sec.  447.509(b)(3) 
for MCO claims because it is not currently a requirement for FFS 
claims. However, as with FFS utilization, states will need to have 
detailed, prescription level information or other mutually agreeable 
data available for dispute resolution purposes, if requested by a 
manufacturer in accordance with the state provision of information 
requirements associated with manufacturer audits at section 
1927(b)(2)(B) of the Act.
    Comment: A few commenters provided their comments regarding invoice 
processes. One commenter believed separate MCO utilization rebate 
invoices will further its ability to confirm the integrity of the data, 
which in turn will facilitate claims processing and payment. The 
commenter stated that the MCO invoice should specify the actual MCOs 
included on the invoice to assist in the validation of the data. 
Several commenters requested that CMS clarify that Medicaid MCO invoice 
data must be reported separately for each MCO.
    Other commenters requested that CMS require states, when invoicing, 
to provide MCO data separately from FFS data, or a single invoice for 
quarterly Medicaid MCO rebates, but to reflect each MCOs data 
separately on that one invoice. The commenter continued that some 
states meet this condition, but many others issue separate invoices for 
each MCO, which is detrimental to efforts to promptly, and accurately, 
validate the data on these invoices and process the related rebates.
    Response: In accordance with section 1927(b)(2)(A) of the Act and 
as specified in State Release #160 (July 19, 2012), states became 
responsible for identifying FFS and MCO utilization separately on 
manufacturer rebate invoices beginning in the second calendar quarter 
2012. With regard to the issue of whether states should be required to 
separately list utilization for each MCO on their rebate invoices, we 
believe that as long as the state separately identifies MCO data from 
FFS data, it is up to the states to determine how they will further 
break down these data.
b. MCO--Reimbursement Rates
    Comment: Several commenters stated that when manufacturers provide 
rebates directly to states, it is inappropriate to assume that previous 
rebate levels obtained by MCOs through negotiation with the same 
manufacturers would remain unchanged. The commenters continued by 
noting that the proposed rules state that plans may be affected by this 
rule if manufacturers reduce rebate payments to the plans to any extent 
that these rebates are paid to the states, but these costs would likely 
be mitigated because it is likely that the MCO rates would be adjusted. 
A few commenters believe that extension of the Medicaid prescription 
drug rebate to drugs dispensed to Medicaid MCO members has implications 
for state assumptions about MCO prescription drug costs as a component 
of Medicaid managed care rate development and some note that it is 
unlikely that states will adjust their capitation rates in the future 
to account for such decreases.
    Several commenters recommended that CMS add specific language to 
the proposed Sec.  447.509(b), or through a statement in formal 
guidance or regulation, that incorporates the importance of the 
actuarial soundness requirement from section 1903(m)(2)(A)(xiii)(II) of 
the Act. The commenters believed that it is essential that actual state 
and MCO rebate experience be taken into consideration to provide an 
accurate basis for rate development and avoid any unintended adverse 
impact such as provider access issues. Other commenters stated that 
actuarial soundness is at the core of retaining the viability of 
Medicaid managed care as a sound alternative to Medicaid FFS delivery 
system and states need to be held accountable. Other commenters noted 
that manufacturers have responded to the changes under the Affordable 
Care Act by reducing or eliminating rebates to Medicaid MCOs thus 
increasing plans' pharmacy expenditures.
    Response: Issues regarding MCO payment rates are beyond the scope 
of this final rule; although, we note that states are responsible for 
establishing capitation rates in accordance with 42 CFR part 438.We 
expect actuarially sound capitation rates to address appropriately the 
cost and utilization experience applicable to MCOs.
c. MCO Pharmacy Reimbursement
    Comment: One commenter stated that they understand that the 
requirements for pharmacy reimbursement spelled out in proposed rule 
(AAC) apply only to fee-for-service Medicaid. The commenter stated that 
now that the MDR program applies to Medicaid managed care utilization, 
states probably will choose to include the pharmacy benefit in such 
plans because of the perceived value of improved care coordination 
under ``carve in'' arrangements.
    Response: The discussion regarding AAC and the payment of 
appropriate professional dispensing fees under Medicaid FFS is further 
discussed in this section. States determine if they will contract with 
MCOs for Medicaid services and pay capitated rates for such services. 
CMS and the states allow MCOs the flexibility to reimburse for CODs' 
ingredient costs and professional dispensing fees at the levels 
necessary to achieve a network of providers to

[[Page 5273]]

ensure access to care for each MCO's Medicaid enrollees. States are 
responsible for oversight of the MCOs.
d. Manufacturer Rebates
    Comment: One commenter stated that CMS should be commended for the 
level of detail they have provided both in the proposed rule and in 
associated guidance provided to manufacturers and the states regarding 
changes to invoice and reconciliation formats for state reporting of 
MCO units.
    Response: We appreciate the commenter's support.
    Comment: One commenter opposed the amendment to section 1927(b) of 
the Act which requires manufacturers to pay rebates for drugs dispensed 
to individuals enrolled with a Medicaid MCO if the MCO is responsible 
for coverage of such drugs, and states that this process creates a 
negative for MCOs and a positive for the government.
    Response: While we appreciate the commenter's concerns, section 
1927(b)(1)(A) of the Act requires that manufacturers pay rebates for 
drugs dispensed to Medicaid MCO enrollees if the MCO is responsible for 
coverage of such drugs. We also note that section 1927(j)(1) of the 
Act, as amended by section 2501(c) of the Affordable Care Act, does 
provide for an exception to this requirement if such drugs are both 
dispensed by a HMO, including Medicaid MCOs that contract under 1903(m) 
of the Act, and are subject to discounts under section 340B of the 
PHSA. Therefore, we are finalizing our regulations, in accordance with 
these statutory provisions.
    Comment: One commenter noted that depriving MCOs of rebates 
negatively impacts small Medicaid plans.
    Response: We appreciate the concern; however, as discussed in the 
previous response, section 1927(b)(1)(A) of the Act requires that 
manufacturers provide rebates for CODs dispensed to individuals 
enrolled with Medicaid MCOs unless such drugs are both dispensed by a 
HMO, including Medicaid MCOs that contract under 1903(m) of the Act, 
and are subject to discounts under section 340B of the PHSA. The issue 
of rebates that MCOs may collect directly from drug manufacturers 
outside of the MDR program is beyond the scope of the final rule.
e. 340B Covered Entities
    Comment: Many commenters discussed the application of the MCO 
rebate provisions and its effect on 340B entities, including several 
concerns regarding states requiring 340B covered entities, including 
hospitals, to carve out these claims from Medicaid managed care. These 
commenters recommended that CMS prohibit states from requiring a 340B 
covered entity to carve out Medicaid MCO drugs. One of the commenters 
indicated that states were not given the authority under the law to 
mandate a carve-in or carve-out for Medicaid, and allowing them to do 
so thwarts the very purpose of the 340B program. Another commenter 
stated that they have become increasingly concerned that states do not 
know how to prevent the collection of rebates on 340B MCO drugs and 
indicated that some states are evaluating a strategy that would compel 
covered entities to carve their MCO drugs out of 340B. The commenter 
continued that federal law does not allow states to take these actions, 
and such an approach would conflict with congressional intent and the 
purpose of the 340B program.
    The commenters also requested that CMS create a mechanism, 
preferably a pharmacy-friendly mechanism, which states can use to avoid 
collecting rebates on 340B MCO drugs. Another commenter continued that 
if it is necessary to prevent the collection of rebates on 340B MCO 
drugs, the state should assume responsibility for management and 
oversight of this policy.
    A commenter noted that manufacturers would be exempt from paying 
rebates on MCO drugs when drugs are dispensed by MCOs and continued 
that this will have a huge impact on the little revenue that MCOs 
currently pay a local county. Commenters further claim that passing 
through the 340B cost to the MCO would be administratively burdensome 
on pharmacy operations.
    Response: While we appreciate the concerns about the imposition of 
manufacturer rebates on Medicaid MCO pharmacy claims and the exclusion 
of 340B pharmacy claims, the question of whether states have the 
authority to mandate that 340B covered entities carve out their 
Medicaid MCO drugs from their 340B purchases is beyond the scope of the 
final rule. It is, however, the states' responsibility to collect 
utilization data for purposes of the MDR program and to ensure that 
procedures are in place with their MCOs to exclude utilization for 
drugs subject to 340B discounts.
    We will continue to work with states to ensure they comply with 
this requirement regarding the prevention of duplicate discounts on MCO 
drugs purchased through the 340B program.
    Comment: One commenter indicated that it needs to be made clear 
that the 340B discounts belong to the covered entities, not to the MCOs 
and that the MCOs responsibility is simply to exclude the 340B 
transactions from the data transmitted to the states so that the states 
will not request rebates from manufacturers for those units. The 
commenter believed that failure to enforce this concept will undermine 
the entire Safety Net pharmacy program, significantly reducing revenue 
and forcing covered entities to subsidize MCO operations.
    Response: Given the expansion of the availability of MDRs for drugs 
dispensed to Medicaid MCO enrollees, states need to ensure that the 
mechanism to ensure against duplicate discounts or rebates on 340B 
drugs, consistent with section 1927(a)(5)(C) of the Act, applies to 
340B drugs dispensed to Medicaid MCO enrollees. We recognize that 
covered entities may purchase 340B drugs at a discounted rate; however, 
it is the state's responsibility to instruct their MCOs to exclude such 
discounted drugs from its utilization data. While we appreciate the 
comments regarding the 340B discounts, the issue of whether those 
discounts belong to the covered entities or MCO is beyond the scope of 
the final rule.
    Comment: One commenter noted that due to the expanding scope of the 
MDR program, manufacturers are encountering greater challenges to 
auditing and verifying state rebate claims. The commenter appreciated 
the additional details that the proposed rule provided regarding 
manufacturer responsibilities for paying rebates for CODs dispensed to 
individuals enrolled with Medicaid MCOs but indicated that there were 
several important issues related to the implementation of the expansion 
of the 340B Program to Medicaid MCOs that the proposed rule does not 
address. While the commenter supported the proposed rule's express 
prohibition of duplicate discounts on 340B units, the commenter stated 
that CMS should require the states to submit prescription-level 
information, including pharmacy identifiers and the National Council 
for Prescription Drug Plans (NCPDP) 340B flag for all FFS and MCO 
utilization. This would permit manufacturers to see through to the 
prescription level on the invoice to ensure that manufacturers are 
calculating and paying rebates appropriately in conformance with all 
340B program requirements.
    Another commenter stated that it is unclear from the list of data 
elements to be reported by the state at proposed Sec.  447.511(a) how a 
state (or a manufacturer) could know whether a drug paid for by a 
Medicaid MCO had

[[Page 5274]]

been dispensed by a 340B provider. The commenter indicated that CMS 
must require that all Medicaid utilization data that states submit to 
manufacturers (and all Medicaid claims that pharmacies submit to a 
state or a Medicaid MCO) contain the ``Pharmacy Identifier'' field, and 
the ``Submission Clarification Code'' field for identifying 340B drugs 
(along with other data elements the states must report to 
manufacturers). One commenter discussed an OIG report published in 2011 
that raised concerns with regard to rebate claims associated with drugs 
purchased under the 340B Program and states' ability to conduct 
oversight activities related to 340B-purchased drugs. The OIG found 
that nearly half of states (25 of 51) do not have 340B policies' to 
govern the prohibition on duplicate discounts. This commenter shares 
the OIG's concerns and urged CMS to require states to submit 
prescription-level information for both FFS and MCO utilization.
    Response: While we appreciate the issues raised by the commenter, 
we are not in this final rule establishing a specific requirement with 
regard to the mechanism that 340B covered entities use to bill states 
for Medicaid FFS or managed care. While section 1927(a)(5) of the Act 
provides that states not submit a claim to any manufacturer for a 
rebate payment for a drug subject to 340B discounts, states have 
flexibility to use a variety of methods to prevent duplicate discounts. 
We will continue to monitor this issue and will provide additional 
guidance to states, if needed. As to the commenter's suggestion to 
include a 340B identifier on invoices submitted to participating drug 
manufacturers, we do not believe that such pharmacy level data is 
needed at this time. We will continue to consider this issue and work 
with states to ensure that utilization data exclude any claims for 340B 
drugs.
    Comment: A few commenters believed that the burden to prevent 
rebate collection on 340B MCO drugs is on states and that states should 
create a mechanism that can exclude the drugs from their rebate 
requests. One of the commenters requested that CMS adopt requirements 
to prevent duplicate discounts, as well as work with HRSA to create a 
regulatory mechanism for states to avoid requesting rebates on the 340B 
MCO drugs consistent with congressional intent and the 340B statute. 
The commenter was concerned that in the absence of state guidance, 
states will either explicitly or implicitly rely on the 340B provider 
community to solve their problem and while it is true that covered 
entities have a responsibility to do their part in preventing duplicate 
discounts for Medicaid FFS drugs, nothing in the Affordable Care Act 
indicates that the Congress intended for those obligations to extend to 
Medicaid MCO drugs. The commenter stated that how a risk of duplicate 
discounts is avoided is a matter that must be resolved between the 
states and manufacturers. And finally, one commenter noted that CMS 
should prohibit states from implementing procedures for collecting 
rebates on drugs dispensed through Medicaid MCOs that unreasonably 
burden 340B covered entities.
    Response: We appreciate the concerns raised by the commenters 
regarding the responsibility of states to avoid the collection of 
rebates on 340B MCO drugs. It is the states' responsibility to ensure 
that procedures are in place with their MCOs to exclude utilization for 
drugs subject to 340B discounts and we will continue to work with 
states to ensure they comply with this requirement regarding the 
prevention of duplicate discounts on MCO drugs purchased through the 
340B program.
f. FFS vs. MCO
    Comment: One commenter stated that as a condition of having its 
products covered under Medicaid FFS, each manufacturer enters into an 
MDR program agreement with the Secretary. The commenter continued that 
states cannot decline to cover any COD of any manufacturer that 
participates in the MDR program, although states do have the authority 
to subject a manufacturer's drug to prior authorization. The commenter 
continued that CMS has long stated this as a governing principle of the 
MDR program as to FFS utilization, and nothing in the Affordable Care 
Act's expansion of rebate liability to MCO utilization exempts that 
utilization from this coverage mandate. The commenter further stated 
that CMS should require Medicaid MCOs to cover participating 
manufacturer drugs to the same extent as required for FFS.
    Response: Section 1927(b) of the Act, as revised by section 2501(c) 
of the Affordable Care Act, does not require that Medicaid MCOs modify 
their formularies to mirror a state's FFS drug coverage policies, 
although a state might choose to require this through the contracting 
process. As previously provided in the State Medicaid Director's Letter 
#10-019 (September 28, 2010), MCOs may continue to have some 
flexibility in maintaining formularies of drugs regardless of whether 
the manufacturers of those drugs participate in the drug rebate 
program. However, states must assure that Medicaid enrollees have 
access to state plan services; therefore, CODs not on an MCO's 
formulary either must be available by the MCO through a prior 
authorization program or be provided by the state through a state 
carve-out. State Medicaid agencies may continue to establish 
requirements regarding MCOs' formularies, consistent with the statutory 
provisions at section 1927(d)(4) through (5) of the Act.
    Comment: One commenter requested clarification regarding the 
identification of MCO utilization on invoices, as well as the effective 
date of MCO rebate eligibility.
    Response: States should differentiate between Medicaid MCO and FFS 
data on state invoices. In accordance with section 1927(b)(2) of the 
Act, we give states the option to send manufacturers separate quarterly 
invoices for FFS rebates and MCO rebates, or send one quarterly invoice 
containing both FFS units (FFSU) and MCO units (MCOU). However, as 
previously stated in Manufacturer Release #84 (July 19, 2012) and State 
Release #160 (July 19, 2012), regardless of which invoice option is 
selected, states must include a new Record ID value of either FFSU or 
MCOU on each invoice to differentiate each record as being either FFS 
or MCO.
    Comment: One commenter stated that one area where manufacturers 
have concern is regarding the rebate period for when MCO utilization is 
invoiced. The statute requires that it be calculated as ``the total 
number of units of each dosage form and strength paid for under the 
state plan in the rebate period. . .'' The commenter continued that for 
traditional FFS utilization, payment has typically been determined at 
or near the date of service; in other words, the utilization is 
invoiced in the rebate period in which the Medicaid recipient received 
the drug. The commenter stated that for MCO utilization, the paid date 
is somewhat less clear since payment is not closely linked to the date 
of service. The commenter stated that this could mean a lag by one or 
more rebate periods from the date of service. The commenter stated that 
CMS should define that for MCO utilization, the paid date is the date 
of service and should be invoiced for the period in which the date of 
service occurred. The commenter also stated that MCO utilization that 
is validated by the state after the original invoice for that rebate 
period can be included as adjustments in a subsequent invoice for that 
date of service rebate period. The commenter believed that such a 
definition more closely matches the practice for FFS claims and would 
allow manufacturers to more easily validate the invoices as

[[Page 5275]]

well as provide enhanced process controls and more accurate financial 
accruals.
    Response: As discussed previously, section 1927(b)(1)(A) of the 
Act, as revised by section 2501(c) of the Affordable Care Act, requires 
manufacturers to provide rebates for drugs dispensed to individuals 
enrolled with a Medicaid MCO if the organization is responsible for 
coverage of such drugs. Furthermore, section 1927(b)(2)(A) of the Act 
requires states to include MCO utilization in their quarterly rebate 
invoices submitted to manufacturers. We agree with the commenter that 
consistent with these provisions, utilization for MCO reporting should 
be reported based upon the date dispensed (date of service) within the 
quarter, as opposed to the claim paid date, since prospective 
capitation payment has been made to the MCO within that quarter. FFS 
utilization will continue to be reported based upon the date on which 
the state paid the claim. We also agree with the commenter that states 
may make adjustments to an original invoice in subsequent invoices as 
needed.
g. Effective Date
    Comment: Several commenters requested that CMS confirm the 
effective date and conditions for rebate eligibility, encouraging CMS 
to state explicitly that rebates are only due on MCO drugs dispensed 
after March 23, 2010.
    Response: As stated in the State Medicaid Director letter dated 
September 28, 2010, only those Medicaid MCO CODs dispensed on or after 
March 23, 2010, are subject to manufacturer rebates.
h. Dispensing Fee
    Comment: One commenter stated that to achieve the objective of 
adequate pharmacy reimbursement, CMS must also take steps to ensure 
that the commercial plans taking on Medicaid managed care business 
respect the need to guarantee adequate pharmacy reimbursement. The 
commenter continued that commercial plans move away from the historical 
model of deeply discounting dispensing fees if their drug cost payments 
are pegged to acquisition cost levels. The commenter points out that 
the actual cost of dispensing remains the same regardless of the 
insurance coverage available to the customer being served.
    Response: Medicaid MCOs are not required to adopt a pharmacy 
reimbursement methodology consistent with an AAC standard as provided 
in this final rule. Rather, as we previously stated in this section, 
Medicaid managed care organizations are permitted flexibility to 
reimburse for COD ingredients costs and professional dispensing fees at 
the levels necessary to achieve adequate access to a network of 
providers.
i. Dual Eligible Beneficiaries
    Comment: One commenter stated that it is critically important that 
invoices to manufacturers include the MCO data elements so that 
manufacturers can validate the data, especially for dual eligible 
beneficiaries. The commenter stated that it will be important for 
states to scrub Medicaid MCO data to ensure that it does not include 
Part D drugs for dual eligible beneficiaries (as Part D drugs for dual 
eligible beneficiaries must be covered by Medicare Part D, rather than 
by Medicaid). Likewise, it will also be important for manufacturers to 
have access to this data to verify that invoices do not include drugs 
that should not be Medicaid-covered.
    Response: We recognize the importance of the data elements to 
manufacturers. We believe that MCOs have billing edits in place for 
dual eligible beneficiaries to route pharmacy claims to Medicare Part 
D, since Medicare Part D is responsible for drug coverage of dual 
eligible beneficiaries. Therefore, state invoices for rebates should 
not include units associated with drug claims for dual eligible 
beneficiaries.
j. Coordinate Medical and Pharmaceutical Benefits
    Comment: One commenter stated that several states have recognized 
the value of allowing Medicaid MCOs to coordinate both the medical and 
pharmaceutical benefits for Medicaid enrollees and have included the 
management of prescription drug benefits in MCO contracts.
    Response: We appreciate this information.
    For the reasons we articulated in the response to comments in this 
section, we have decided to not finalize the MCO reporting requirements 
that we proposed in Sec.  447.509(b)(3) in this final rule. We have 
chosen to address the requirements for states with regard to the data 
they report to manufacturers, including the data pertaining to MCO 
utilization, in Sec.  447.511 of this final rule. We have revised Sec.  
447.509(b)(1) to replace the words ``pay rebates'' with the words 
``provide a rebate'' as this more accurately describes the actions of 
the manufacturers in this transaction. This edit is technical in nature 
and is not intended to change the policy being finalized.
    In addition, for the reasons discussed in response to comments in 
this section, we are finalizing the requirements in Sec.  447.509(b)(1) 
and (2) as proposed (77 FR 5341, 5364), with the exception of minor 
technical edits to proposed Sec.  447.509(b)(2) to add the words ``are 
the following'' to end of the sentence after the word ``drugs'' and 
replaced the period at the end of Sec.  447.509(b)(2)(i) with a 
semicolon and the word ``and'' to clarify that manufacturers are exempt 
from providing rebates for drugs that are dispensed by HMOs ``and'' 
discounted under section 340B. These edits are made to effectuate 
section 1927(j) of the Act and do not change the policy being 
finalized.
4. Federal Offset of Rebates (Sec.  447.509(c))
    Section 2501(a)(2) of the Affordable Care Act added section 
1927(b)(1)(C) of the Act, which provides that, effective January 1, 
2010, the amount of the savings resulting from the increases in the 
rebate percentages effected by certain provisions of the Affordable 
Care Act (which are described more fully in the proposed rule (77 FR 
5342)) will be remitted to the federal government. These offset amounts 
are in addition to the amounts applied as a reduction under section 
1927(b)(1)(B) of the Act. We proposed to calculate the offset as 
described in the proposed rule (77 FR 5342). Comments regarding line 
extension offsets are addressed under the Treatment of New Formulations 
(Sec.  447.509(a)(4)) section II.G.2. of this final rule. We received 
the following comments concerning the federal offset of MDRs:
    Comment: Several commenters stated that changes to federal offset 
of rebates in proposed Sec.  447.509(c), including increased rebates 
returned to the federal government for line extension products and the 
increase in the federal minimum rebate may negatively impact state 
supplemental rebates by reducing the size of the supplemental rebates 
received.
    Response: While a reduction in supplemental rebates is not a direct 
requirement of this rule, we recognize that the federal offset 
resulting from section 1927(b)(1)(C) of the Act may have some indirect 
impact on state supplement rebates. However, based on the supplemental 
rebate data reported to CMS on the Medicaid and Children's Health 
Insurance Program Budget and Expenditure System (MBES), http://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Data-and-Systems/MBES/CMS-64-Quarterly-Expense-Report.html, we do not see an

[[Page 5276]]

impact so far to states' supplemental rebates.
    Comment: One commenter asked that CMS clarify whether the intent 
with the statement for CODs that are dispensed to Medicaid MCO 
enrollees that, ``in addition, we planned for states to retain the non-
federal share of the amount above the revised minimum rebates for brand 
name drugs'' is to have the states retain the full value of the basic 
rebate percentage of 23.1 percent for brand name drugs dispensed to 
Medicaid MCO enrollees.
    Response: The offset formula for Medicaid MCO drugs is the same as 
for FFS drugs.
    Therefore, after considering the comments we received, and for the 
reasons discussed in this section and in the proposed rule, we are 
finalizing proposed Sec.  447.509(c) (federal offset of rebates), with 
the following technical edits:
     We are adding the word ``following'' to the introductory 
sentence of Sec.  447.509(c). This edit is technical in nature and is 
not intended to change the meaning of the provision but rather provides 
further clarity.
     We are removing the phrase ``for the following'' from the 
end of paragraph (c)(1). This edit is technical in nature and is not 
intended to change the meaning of the provision.
     We are removing the phrase ``for the following'' from the 
end of paragraph (c)(2). This edit is technical in nature and is not 
intended to change the meaning of the provision.

H. Requirements for Manufacturers (Sec.  447.510)

    To update our regulations to include references to the AMP rule, we 
proposed to revise the manufacturer reporting requirements in Sec.  
447.510(a)(1), Sec.  447.510(c)(2)(i), and Sec.  447.510(d)(2) to 
reference Sec.  447.504 (Determination of AMP) (77 FR 5342, 5365).
    We also proposed revising Sec.  447.510(g) to clarify that CMS will 
designate the electronic format in which the product and pricing data 
is submitted. These proposed provisions are discussed in more detail at 
77 FR 5342 through 5343 of the proposed rule. We received no comments 
on these revisions, and therefore, we are finalizing them as proposed, 
except we are making a technical edit and removing the reference to 
``of this subpart'' from Sec.  447.510(a)(1), (c)(2)(i), and (d)(2) 
because the reference is unnecessary given the regulatory citation.
    We also included proposed Sec.  447.510(a)(2), (a)(3), (a)(4), 
(d)(1), (d)(4), (d)(5), and (e)(1) through (4) without modification (77 
FR 5365 through 5366). We did not receive any comments and are 
finalizing Sec.  447.510(a)(2), (a)(3), (a)(4), (d)(1), (d)(4), (d)(5) 
and (e)(1) through (4), except to remove the words ``of this subpart'' 
from the proposed regulatory text of paragraphs (a)(2) and (4) because 
the reference is unnecessary given the regulatory citation.
    In proposed Sec.  447.510(f), we included the existing language 
pertaining to recordkeeping requirements, with minor changes to the 
paragraph formatting structure but no modification to the content of 
paragraph (f) (77 FR 5366). We did not receive any comments and are 
finalizing Sec.  447.510(f).
1. Failure To Report Quarterly AMP (Sec.  447.510(a)(5)) and Failure To 
Report Monthly AMP and AMP Units (Sec.  447.510(d)(7))
    We proposed, in accordance with the statutory requirements at 
section 1927(b)(3)(C)(i) of the Act, that a manufacturer that fails to 
submit and certify a quarterly AMP to CMS for a product by the 30th day 
after the end of each quarter will be reported to the OIG and be 
subject to a civil monetary penalty (CMP) for each product not reported 
on the 31st day (77 FR 5343). We also proposed, in accordance with the 
statutory requirements at section 1927(b)(3)(C)(i) of the Act, that a 
manufacturer that fails to submit and certify a monthly AMP and AMP 
units to CMS for a product by the 30th day after the end of each month 
will be reported to the OIG and be subject to a CMP for each product 
not reported on the 31st day (77 FR 5344 through 5345). We also invited 
public comments on appropriate terms and procedures for suspension and 
termination from the MDR program (77 FR 5343, 5345). We received the 
following comments concerning failure to report quarterly and monthly 
AMP and monthly AMP units:
    Comment: Many commenters expressed opposition to the automatic 
imposition of CMPs for late reporting and believed that CMS should 
retain the right to evaluate whether to refer cases to the OIG and 
whether CMPs are warranted on a case by case basis. A few commenters 
noted that factors outside the manufacturer's control may delay 
reporting of AMP data. Because manufacturers must rely on an array of 
complex systems to generate, validate, certify, and submit government 
pricing metrics and these systems can break down or produce 
unforeseeable errors that preclude timely reporting; the commenters 
stated that the imposition of automatic CMPs is unwarranted. A few 
commenters noted that such delays could include system failures or 
difficulty accessing the DDR system, which manufacturers use to provide 
data to CMS. It could also be a malfunction of a manufacturer's own 
internal pricing systems and the commenters voiced concerns with the 
proposed regulatory provision that would automatically impose CMPs upon 
manufacturers where there is any DDR or manufacturer system 
malfunctions.
    A few commenters stated that CMS should value accuracy of AMP over 
timeliness and not penalize for lateness in cases where manufacturers 
are making adjustments or corrections to ensure accuracy. One commenter 
stated that CMS should clarify that no CMPs will be imposed where CMS 
is the cause for any delay in manufacturer access to the DDR system. 
Another commenter believed the penalty should be applied only in 
situations where the manufacturer has a history of noncompliance that 
suggests repeated late filings are purposeful. One commenter requested 
that CMS clarify if the CMPs will apply to a manufacturer when pricing 
is late one time, a couple of times, or for repeat offenders.
    Response: Section 1927(b)(3)(A) of the Act requires that 
manufacturers report AMP data not later than 30 days after the last day 
of each rebate period and month of a rebate period. CMS's current 
policy is to refer to the OIG manufacturers that do not report their 
monthly or quarterly AMP data and/or that report their monthly or 
quarterly AMP data untimely. The OIG then makes the determination as to 
whether or not to impose any CMPs. Our intent in adding the language at 
proposed Sec.  447.510(a)(5) and (d)(7) was to strengthen the overall 
administration of the MDR program by explicitly stating in regulation 
that manufacturers would be subject to CMPs when manufacturers do not 
report quarterly AMP, monthly AMP, and monthly AMP unit data timely.
    However, based on the comments received, we now recognize that the 
proposed language implied the automatic imposition of such CMPs. Since 
OIG is responsible for decisions concerning the imposition of such 
CMPs, we have decided that we will not be finalizing these proposed 
changes at this time. However, given the statutory requirements set 
forth in section 1927(b)(3)(C) of the Act, we will continue to refer to 
the OIG manufacturers that do not report their monthly or quarterly AMP 
data and/or that report their monthly or quarterly

[[Page 5277]]

AMP data untimely. As discussed in the OIG's Special Advisory Bulletin 
(http://oig.hhs.gov/fraud/docs/alertsandbulletins/2010/SpAdvBulletin_AMP_ASP.pdf) issued in September 2010, OIG and CMS are 
working together to identify and penalize noncompliant manufacturers 
through the CMP process because HHS's past approach of promoting 
voluntary compliance has not been fully effective. The deadlines for 
filing quarterly and monthly pricing information are not new so we 
expect that manufacturers should have established operational 
procedures and timelines to ensure they are able to report timely. We 
will work with the manufacturers if there is a problem with the DDR 
system that prevents a manufacturer from reporting its quarterly or 
monthly pricing information timely. We agree with the commenters that 
the pricing data reported to CMS need to be accurate; however, the data 
also should be reported timely, as both accuracy and timeliness are 
essential components to ensuring that we are able to use the data 
effectively to generate the monthly FULs and the quarterly URAs.
    Comment: One commenter requested that CMS clarify whether the civil 
monetary penalties will also be imposed upon manufacturers that fail to 
submit best price as well as AMP. Furthermore, the commenter requested 
that CMS clarify whether manufacturers that fail to submit AMP and/or 
best price timely will be subject to CMPs of $10,000 per day per drug 
calculation (that is charged $10,000 for failure to report AMP and 
$10,000 for failure to report best price).
    Response: We appreciate the comments but, as noted in this section, 
we are not finalizing the CMP provision. In accordance with section 
1927(b)(3)(A) of the Act, as well as implementing regulations 
manufacturers are responsible for submitting AMP and best price 
information on a timely basis.
    Comment: A few commenters recommended that CMS replace the word 
``will'' with the word ``may'' in proposed Sec.  447.510(a)(5) and 
(d)(7) to indicate that a manufacturer that fails to submit a quarterly 
AMP and/or monthly AMP and AMP units to CMS for a product by the 30th 
day after the end of each reporting period may be subject to civil 
monetary penalties for each product not reported on the 31st day of 
$10,000 per day per drug. Another commenter stated that while they 
support CMS's proposal that CMPs may be imposed against manufacturers 
for failure to report AMP within 30 days of the end of the quarter or 
month, the commenter urged CMS to consider adopting a good cause 
exception which would allow CMS the discretion not to initiate CMPs 
against manufacturers that failed to meet the reporting deadline, 
despite good faith efforts to meet them. The commenter explained that 
there are sometimes unforeseen circumstances that cause a manufacturer 
that is acting in good faith and working to meet the AMP reporting 
deadlines to be delayed in reporting its AMP data. The commenter went 
on to say that price reporting is complex and technically challenging, 
the tight deadline for price reporting often proves challenging and CMS 
should recognize that and provide reasonable flexibility.
    Response: We appreciate the comments but as we noted in this 
section, based on comments, we are not finalizing these proposed 
provisions.
    Comment: One commenter noted that, if CMS adopts the proposed 
buildup methodology for calculating AMP, there will be significant 
operational challenges associated with the transition, and that the 
buildup requirements combined with the imposition of automatic CMPs for 
late filing without an adequate transition would be burdensome. 
Therefore, the commenter believed that CMS should exercise discretion 
in determining whether CMPs are warranted, based on specific facts and 
circumstances, as opposed to automatically levying a significant and 
burdensome penalty. If CMS was to proceed with the buildup methodology, 
the commenter stated that it must provide manufacturers with lead time 
to prepare systems for the transition.
    A few commenters noted that if CMS chooses to finalize the buildup 
methodology proposal for calculating AMP, manufacturers' AMP 
calculations will be even more dependent on third party data. Another 
commenter noted that if CMS requires manufacturers to purchase end-user 
data from third parties to use in AMP calculations, it would 
substantially reduce manufacturers' control over the AMP calculation 
process and late submission may be more of an issue. Commenters 
expressed concerns that in such cases it would not be appropriate to 
impose CMPs automatically on manufacturers. Another commenter noted 
that if CMS finalizes a plan to abandon the presumed inclusion while 
retaining its strict certification requirements, the commenter believed 
that CMS will essentially guarantee that no manufacturer would be able 
to comply with program requirements, thus exposing the industry to 
unnecessary legal liability.
    Response: As discussed in more detail in the comments and responses 
in the Determination of AMP section (section II.C.), we are not 
finalizing the buildup methodology requirement. Manufacturers will 
continue to be able to make reasonable assumptions, in the absence of 
adequate documentation to the contrary, that prices paid to 
manufacturers by wholesalers are for drugs distributed to retail 
community pharmacies, provided that those assumptions are consistent 
with the requirements and intent of section 1927 of the Act and federal 
regulations. Therefore, we believe this will address the concerns 
raised by commenters pertaining to a manufacturer's ability to report 
data timely. While we have chosen not to finalize the proposed CMP 
provision in this rule, we will continue to notify the OIG when a 
manufacturer is not meeting its timely reporting obligations. 
Therefore, as we have noted previously, we will continue to operate 
under the current policy, which is to refer to the OIG manufacturers 
that do not report or timely report their data. The OIG will be 
responsible for deciding whether to impose CMPs.
    Comment: A few commenters requested that CMS allow a grace period 
of 6 to 12 months following publication of the rule to enable 
manufacturers to incorporate changes before penalties are imposed.
    Response: As discussed in prior responses, we have decided not to 
finalize the CMP proposal; thus, the grace period commenters suggested 
is not needed.
    Comment: Several commenters disagreed with the proposal to impose a 
penalty of $10,000 per drug per day for late AMP reporting and believe 
that by imposing the late filing penalty on a per drug basis, as well 
as per day basis, the proposed rule would disproportionately penalize 
generic manufacturers because they tend to offer more extensive product 
lines than branded manufacturers and would therefore be subject to 
larger fines. Several commenters expressed the belief that the proposal 
goes beyond what is authorized by the statute and could have a 
significant and disproportionate effect on generic manufacturers. These 
commenters indicated that CMS is taking an expansive interpretation of 
the statutory penalty and by imposing the penalty on a per drug per day 
basis, CMS exceeds the statutory authority by allowing for a fine which 
could be significantly in excess of the statutory limit. These 
commenters requested that CMS revise the proposed rule to more closely 
track with the statute. One commenter believed this is inconsistent

[[Page 5278]]

with the Master Agreement which does not include the ``per drug'' 
provision contained in the proposed rule. Furthermore, the commenter 
believed that CMS's foremost concern should be the accuracy of the AMP 
calculation and that manufacturers should not be penalized in cases 
where late data corrections or system improvements cause a submission 
to be late.
    Response: As discussed in prior responses, we have decided not to 
finalize the CMP proposal, including the per drug/per day provision 
included in the proposed rule.
    Comment: One commenter requested clarification as to how CMS will 
define ``a drug'' for purposes of imposing CMPs, at the NDC-9 or NDC-11 
level.
    Response: As noted in previous responses, we are not finalizing our 
proposal; however, we report information to the OIG regarding non-
reported or late data at the NDC-9 level.
    Comment: Several commenters responded to our request for comments 
on the appropriate terms and procedures for suspension and termination 
for manufacturers that do not report quarterly AMP on a timely basis or 
are otherwise out of compliance with rebate requirements. One commenter 
stated that they believe that a policy of this type is appropriate and 
recommended that coverage of products for which the manufacturer has 
not submitted an AMP within a specified number of quarters should be 
suspended for up to a specified number of quarters. If, after the 
specified number of quarters under the suspension, the manufacturer is 
not compliant, its rebate contract could be terminated. The commenter 
further suggested that CMS consider a policy whereby manufacturers 
terminated in this manner could be prohibited from participation in the 
MDR program for a certain period of time following termination. This 
warning period would apply to any subsidiaries, parent companies, spin-
offs, consolidation, or other type of reorganized companies. The 
commenter also suggested that CMS consider including a policy whereby 
states would have authority to suspend coverage of a manufacturer's 
products when they have not received payment for a certain number of 
consecutive quarters, or an aggregate number of quarters and believed 
this policy would provide states with a strong mechanism to enforce the 
terms of the MDR program. Additionally, the commenter suggested that 
CMS consider a policy whereby manufacturers of noninnovator multiple 
source products should be penalized after a certain number of months of 
non-compliance due to the time-sensitive nature of the FUL 
calculations.
    A few commenters encouraged CMS to provide guidance on 
administrative appeals process that would allow an opportunity for 
appeal and reconsideration before sanctions such as suspension or 
termination apply, but did not provide any substantive comments on the 
appropriate terms and procedures.
    Response: We appreciate the suggestions and recommendations 
received on this issue and will continue to consider suspension and 
termination procedures for manufacturers that do not report quarterly 
pricing information on a timely basis or are otherwise out of 
compliance with rebate requirements. We are not finalizing any 
suspension or termination procedures at this time; however, we will 
consider issuing additional guidance on this issue at a later time.
    For the reasons discussed in this section, we have decided not to 
finalize proposed Sec.  447.510(a)(5) and (d)(7).
2. Reporting Revised Monthly and Quarterly AMP, Best Price, Customary 
Prompt Pay Discounts, or Nominal Prices (Sec.  447.510(b)(1) and 
(d)(3)) and Recalculations Including Good Cause (Sec.  447.510(b)(2))
    We proposed to revise the 12-quarter time limitation set forth in 
Sec.  447.510(b) (77 FR 5343). Specifically, we proposed at proposed 
Sec.  447.510(b)(1) That a manufacturer could submit a request to 
revise its pricing data (that is, AMP, best price, customary prompt pay 
discount, or nominal price) calculations outside of the 12-quarter 
filing deadline, if the revision request fell within one of the 
following categories: (1) The change is a result of a drug category 
change or a market date change; (2) the change is an initial submission 
for a product; (3) the change is due to termination of a manufacturer 
from the MDR Program for failure to submit pricing data and must submit 
pricing data to reenter the program; (4) the change is due to a 
technical correction (such as a keying error), that is, not based on 
any changes in sales transactions or pricing adjustments from such 
transactions; or (5) the change is to address specific underpayments to 
states, or potential liability regarding those underpayments, as 
required by CMS, applicable law or regulations, or an OIG or DOJ 
investigation (77 FR 5343, 5365). Please note that any reference to 
pricing data mentioned in this section is intended to refer to AMP, 
best price, customary prompt pay discounts, or nominal prices.
    We also proposed at Sec.  447.510(b)(2) an option for manufacturers 
to submit a recalculation request outside of the 12-quarter time limit 
based on good cause, which would permit a manufacturer to revise its 
methodology for calculating AMP, best price, customary prompt pay 
discounts, or nominal prices (77 FR 5365). We proposed a good cause 
option to extend the time limit for a manufacturer to submit a 
recalculation request, similar to that used in Medicare (77 FR 5343, 
5365). These proposed provisions are discussed in more detail at 77 FR 
5343 of the proposed rule.
    While these two provisions were proposed separately, many of the 
comments we received pertained to confusion commenters had in 
distinguishing the difference between what CMS was proposing in the 
restatement for underpayment exception at Sec.  447.510(b)(1)(v) and 
the good cause exception at Sec.  447.510(b)(2). Due to the nature of 
the comments received we have chosen to address both proposed 
provisions in this section.
    We received the following comments concerning reporting revised 
monthly and quarterly AMP, best price, customary prompt pay discounts, 
or nominal prices, as well as the option for manufacturers to submit a 
recalculation request outside of the 12-quarter time limit based on 
good cause:
    Comment: One commenter supported CMS's proposal to allow 
restatement of Medicaid pricing metrics beyond the 12-quarter window 
under the five listed criteria and the good cause exception.
    Response: We appreciate the comment and support.
    Comment: A few of commenters requested clarification regarding what 
is meant by ``good cause.'' One of the commenters asked if CMS would be 
approving the good causes and wanted to know what type of notice CMS or 
manufacturers would be required to provide states when the 
recalculation request exceeds the 12-quarter rule. One commenter stated 
that it is unclear how the good cause exception (Sec.  447.510(b)(2)) 
differs from the fifth exception (Sec.  447.510(b)(1)(v)) and requested 
that CMS provide clarification. The commenter otherwise commended CMS 
for recognizing the potential need for manufacturers to revise pricing 
data outside of the 12-quarter period including restatements for good 
cause and supports this aspect of the proposed rule.
    Response: We appreciate the comments and requests for 
clarification. While both proposed provisions were designed to address 
specific underpayment liability resulting from an OIG, DOJ, or internal 
investigation,

[[Page 5279]]

proposed Sec.  447.510(b)(1)(v) would allow manufacturers to revise 
their pricing information and the good cause exception under proposed 
Sec.  447.510(b)(2) would allow for a recalculation outside of the 12-
quarter based on a good cause. Generally, a recalculation of AMP or 
best price is a result of the manufacturer making changes in 
methodology for calculating the AMP and/or best price. And although 
proposed Sec.  447.510(b)(2) (the good cause provision) would primarily 
address similar circumstances as Sec.  447.510(b)(1)(v) (an 
underpayment to states and potential liability regarding those 
underpayments that may extend outside of the 12-quarter time frame), 
the good cause recalculation option was proposed to provide a broader 
option where a manufacturer could submit such a request for other good 
cause reasons that stem specifically from a change in the methodology 
for calculating AMP and/or best price. While we received comments 
requesting further clarification on our good cause proposal, we did not 
receive any comments suggesting what situations CMS should consider as 
a good cause. Based on concerns raised by the commenters, we have 
decided not to finalize proposed Sec.  447.510(b)(2) at this time; 
however, we will continue to consider this option and address it in 
future rulemaking, if appropriate.
    Comment: In regards to proposed Sec.  447.510(b)(1)(v), a few 
commenters requested that CMS allows revisions in the event of 
underpayments and overpayments. One commenter stated that CMS needs to 
clarify what it means by ``underpayment'' and suggested that 
``underpayment'' should mean a net rebate underpayment, as determined 
by calculating the overall effect of a particular error across all of 
the affected periods and NDC-9s and thus taking into account offsets. 
Several commenters stated that revisions outside of the 12-quarter 
period can result in revisions to pricing data that can both increase 
and decrease liability. The commenters stated that CMS should clarify 
that these exceptions provide CMS with discretion to accept only the 
totality of revisions proposed by a manufacturer, inclusive of 
revisions that decrease liability, assuming that CMS does not otherwise 
have a legal basis for declining the revisions as impermissible based 
on the AMP and best price calculation rule. The commenters also stated 
that CMS should not be able to ``cherry pick'' among revisions outside 
of the 12-quarter period and only accept those that increase rebate 
liability. A few commenters indicated that this could be addressed by 
revising the proposed Sec.  447.510(b)(1)(v) to include overpayments by 
manufacturers as well as underpayments to states. The commenter stated 
that CMS should be obligated to accept or reject the submission as a 
whole.
    Another commenter requested that CMS clarify if the resulting 
liability changes across all of a manufacturer's products for a period 
or several periods is a net overpayment, but some products have been 
underpaid, whether the manufacturer is liable for the entire 
underpayment but may not recoup the overpayment or whether the 
manufacturer while liable for the underpayment is also able to recoup 
the overpayment. One commenter urged CMS, when determining if a 
restatement results in an underpayment to the states, to consider the 
net impact of any overpayment that may also occur as a result of the 
restatement. Another commenter appreciated CMS's recognition of 
manufacturers needs to restate these metrics; shared states' desires to 
settle past periods for rebate liability; and thought that the 
provisions in proposed Sec.  447.510(b)(1)(v) accomplish these goals. 
However, the commenter asked that in determining whether revised 
pricing metrics would correct an ``underpayment'' to the states, CMS 
considers the totality of all changes resulting from the revised 
metrics. The commenter stated that some errors that prompt revisions of 
these metrics impact multiple drugs, such as with some drugs increasing 
in rebate liability and other drugs decreasing in rebate liability.
    Several commenters indicated that CMS should not be able to 
selectively accept a subset of data that would maximize the 
manufacturer's rebate liability, but instead the proposed revisions 
should be accepted or rejected as a whole (unless part of the proposed 
revision is incorrect). One commenter stated that when a manufacturer 
identifies an error in a historic pricing submission, CMS should allow 
or reject a statement outside of the normal 12-quarter period based on 
its interest in promoting accuracy and the integrity of data. The 
commenter stated that if granting a request would improve accuracy, it 
should be allowed. One commenter supported the development of the good 
cause exception to the 12-quarter limitation on the manufacturer's 
right to restate AMP and best price. However, the commenter was 
concerned about automatic restatement rights beyond the 12-quarter 
window as a result of CMS or OIG determinations that an underpayment of 
rebates has occurred. The commenter indicated that CMS has always 
allowed manufacturers to offset rebate underpayments with identified 
rebate overpayments and does not see why that should not continue to be 
the case regardless of the period being restated. One commenter noted 
that limiting a manufacturer's ability to restate pricing resulting 
from overpayments would prevent manufacturers from restating 340B 
prices and refunding 340B entities for overcharges on 340B purchases.
    Response: As explained in the final time limitation rule (Medicaid 
Program; Time Limitation on Price Recalculations and Recordkeeping 
Requirements Under the Drug Rebate Program, (68 FR 51912 (August 29, 
2003)), the 12-quarter time frame for submitting pricing changes was 
established to improve the administration and efficiency of the MDR 
program and assist states and manufacturers that would otherwise be 
required to retain drug utilization and pricing data indefinitely. We 
proposed to allow revisions outside of the 12-quarter time period, 
given that there are times when certain circumstances will arise that 
may require a revision of pricing data, for example, a change in drug 
category or market date, technical mistakes, or certain investigations 
for the purposes of rebate program. However, we appreciate the comments 
that we should not ``cherry pick'' among revision requests outside of 
the 12-quarter rule and that we should consider allowing pricing 
changes for both overpayment and underpayment to states.
    Since we understand that any change in pricing data could 
potentially lead to either a net underpayment or overpayment to states, 
and in light of the comments received, we are revising Sec.  
447.510(b)(1)(v) to specify that the change in pricing data outside of 
the 12-quarter rule would be considered if the change is to address 
specific rebate adjustments to states by manufacturers, as required by 
CMS or court order, or under an internal investigation, or an OIG or 
DOJ investigation. This change we are finalizing in wording is intended 
to reflect that the change request will be considered in cases where 
there is an underpayment or an overpayment to the state by the 
manufacturer that is discovered outside of the 12-quarter filing limit, 
and the adjustment to pricing data is determined to be required by CMS 
or court order, or is an internal investigation, or an OIG or DOJ 
investigation.
    We also want to clarify, in response to comments concerning the 
impact of revisions on multiple drugs, that the exception to allow for 
a revision outside of the 12-quarter rule applies to each

[[Page 5280]]

change request submission as a whole, and that at this time we were not 
proposing to allow revisions based on a per drug, or partial change 
request submission, but instead based on the net impact of the 
submission as whole. Furthermore, we believe that our net impact 
clarification would not prevent 340B restatements; however, we note 
that the 340B program is administered by HRSA's OPA, and these issues 
would need to be addressed by HRSA's OPA.
    Comment: One commenter stated that CMS should clarify that it would 
permit restatements under Sec.  447.510(b)(1)(v) or (b)(2) due to an 
internal manufacturer pricing review and that an inquiry by a 
government agency should not be required. The commenter suggested that 
CMS make revisions so Sec.  447.510(b)(1)(v) reads as follows: ``The 
change is to address specific net underpayments (that is, underpayments 
minus overpayments) to states, or any potential liability regarding 
those net underpayments, as required by CMS, applicable law or 
regulations, or an OIG or DOJ investigation, or arising from a 
manufacturer review.''
    Response: As discussed earlier in this section, we have decided not 
to finalize Sec.  447.510(b)(2) as proposed at this time. In regards to 
Sec.  447.510(b)(1)(v), which we are finalizing that a manufacturer 
will be permitted to revise its pricing information to address specific 
rebate adjustments to states or manufacturers, as required by CMS or 
court order, or per an internal investigation, or an OIG or DOJ 
investigation. The internal investigation specified in Sec.  
447.510(b)(1)(v) is intended to mean a manufacturer's internal 
investigation.
    Comment: One commenter requested that CMS add language to the final 
rule to clarify the timeline for disputes by incorporating a specific 
limitation on the number of quarters after payment that manufacturers 
are able to pay invoices, open disputes, and receive credits. The 
commenter stated that manufacturers should be expected to resolve and 
close all disputes within 60 months (5 years) from the original 
quarter, as states spend a significant amount of time working with 
manufacturers to resolve disputes going back to 1991, which is well 
over 20 years ago.
    Response: We appreciate the comment; however, we have not proposed 
any time line for closing disputes. While we may consider such time 
lines in the future, it is outside the scope of this rule.
    Comment: One commenter asked CMS to clarify what entity or agency 
will have responsibility for auditing the submitted data and how 
frequently the audits should occur.
    Response: We did not propose any provision regarding drug rebate 
audits; however, in accordance with the statute, CMS and the OIG may 
conduct verification surveys or audits, as-needed to verify pricing.
    Comment: We received several comments regarding the timeframe 
allowed for manufacturers to restate beyond the 12-quarter time limit. 
One commenter requested that CMS clarify the timetable and the series 
of events that a manufacturer should anticipate should the 
manufacturer, as a result of its internal investigation, wish to 
address a change in liability that extends beyond the 12-quarter filing 
deadline. Some commenters supported CMS's contemplated policy of 
allowing manufacturers to make certain revisions to their pricing data 
on a retroactive basis without any time limits back to the beginning of 
the program. The commenters stated that any time limit could pose a 
problem if a manufacturer discovers an error in reporting that occurred 
several years in the past, and by not setting a time limit CMS can 
avoid arbitrarily curtailing manufacturer's ability to address errors.
    Another commenter requested that CMS amend the language to specify 
minimum and maximum timeframes for manufacturer adjustments. The 
commenter believed it is contrary to the programmatic goals of 
achieving efficiency, economy, and quality of care to allow indefinite 
changes to pricing, rebates and other calculations. Conversely, another 
commenter recommended that CMS extend this period because 12 quarters 
is often too limiting. The commenter indicated that this is especially 
true when companies acquire other companies or acquire products and 
there is a chance that the acquiring company will discover errors in 
AMP and best price that occurred before the acquisition. The commenter 
stated that in many cases this can happen outside of the 12-quarter 
window. The commenter recommended that CMS afford companies flexibility 
to restate outside the window in those circumstances to address net 
underpayments.
    Response: We appreciate the comments regarding the need for 
submitting price adjustments outside of the 12-quarter window. However, 
at this time we are only finalizing the five categories identified in 
this final rule under Sec.  447.510(b)(1). We will continue to consider 
other possible scenarios for price submissions outside the 12-quarter 
window and, if warranted, issue additional guidance or rulemaking. In 
the event that a manufacturer discovers any discrepancy with their 
reported product and pricing data to the MDR program that are outside 
of the 12-quarter filing deadline, the manufacturer should determine if 
the change satisfies any of the five criteria for a revision under 
Sec.  447.510(b)(1) and, if applicable, submit a request to change the 
data to CMS. Over the years we have issued guidance via our program 
releases (for example, Manufacturer Releases #61 (September 23, 2003), 
#78 (June 26, 2007), #80 (January 5, 2010)) instructing manufacturers 
that they should contact CMS through the drug policy resource mailbox 
([email protected]) if they discover any discrepancies in 
pricing data submissions. Upon receipt of a request, we review the 
request to determine if it meets the criteria established in Sec.  
447.510(b)(1) and may contact the manufacturer to obtain additional 
information, if needed. After reviewing the request, we will notify the 
manufacturer of our decision. We did not propose a deadline and thus, 
at this time we are not establishing a deadline, although we will 
continue to consider the issue.
    Comment: A commenter requested that CMS clarify whether 
manufacturers will be allowed, in the case of a change in methodology, 
to restate a quarterly AMP only if each of the 3 months of that quarter 
are restated within the 36 month timeframe from each month. The 
commenter provided the following example: if a manufacturer must 
restate AMP for the third quarter 2009 (due October 30, 2012) but is 
unable to restate the July 2009 monthly AMP before its due date of 
August 30, 2012, may the quarterly values due October 30, 2012 still be 
restated.
    Response: In accordance with Sec.  447.510(b) and (d), 
manufacturers have 36-months or 12-quarters from the month or quarter 
that the submission was originally due to be filed to update monthly 
and/or quarterly AMP submissions in the DDR without CMS approval. In 
addition, a manufacturer should update its quarterly AMP submissions 
regardless of whether either 1 or 2 months used to calculate the 
quarterly AMP is outside of the 12-quarter timeframe. As discussed in 
the proposed rule, we would expect that any revision to pricing data to 
be consistent across the monthly and quarterly AMP submissions (77 FR 
5343). Therefore, as specified in Sec.  447.510(d)(3), a manufacturer 
should submit a revision request for the monthly AMP that exceeds the 
36-month period in accordance with Sec.  447.510(b)(1).

[[Page 5281]]

    Comment: A commenter encouraged CMS to specifically address the 
situation in which a change in methodology would affect a 
manufacturer's base date AMP period, thus requiring a restatement or 
recalculation outside of the 12-quarter window. The commenter 
encouraged CMS to also address the protocols for differences in 
resubmitted data, due to either methodology or incorrect data, under 
the 12-quarter window. The commenter stated that CMS should consider 
addressing whether or not a bar of materiality can be considered in the 
determination of the necessity of a recalculation, or whether or not 
such a consideration can be requested of CMS by a manufacturer (for 
example financial impact analysis or a change within a certain number 
of decimal places to a URA).
    Response: Any changes to AMP must follow the applicable 
requirements of this final rule, without regard to whether the changes 
affect the base date period. Manufacturers may submit revised pricing 
data for any reason within the 12-quarter window without regard to the 
criteria we added in Sec.  447.510(b)(1).
    Furthermore, as specified in this section, manufacturers do not 
need to notify CMS if they have a revision within the 12-quarter 
timeframe, as they may submit pricing data without prior review or 
approval by CMS. However, any revision within the 12-quarter timeframe 
must be consistent with the statute and regulations and manufacturers 
must retain appropriate records pertaining to the revision. In 
addition, while we appreciate the comment suggesting that CMS consider 
a bar of materiality, we did not propose such a standard, and do not 
believe it would be in the best interest of the MDR program at this 
time to establish such a materiality standard. Instead, for requests 
that fall outside the 12-quarter time frame, the manufacturer is 
responsible for demonstrating that its request satisfies one of the 
criteria we are finalizing in Sec.  447.510(b)(1).
    Comment: One commenter requested, that if CMS finalizes any of the 
proposed exceptions, it should explain how manufacturers should submit 
requests to CMS for filing under one of these exceptions. A few 
commenters requested that CMS clarify that the exception does not 
create new true-up obligations on manufacturers beyond the 12-quarter 
period, but instead only provides CMS with the discretion to grant 
voluntary requests made by manufacturers beyond the deadline.
    Response: In accordance with section 1927(b)(3) of the Act and 
Sec.  447.510(a), manufacturers are required to submit pricing data 
within the 30 days after the end of the quarter. Section 447.510(b) 
gives manufacturers 12 quarters to update those prices. Section 
447.510(b)(1)(i) through (v) also creates exceptions to this 12-quarter 
time frame, but is not designed to create additional obligations 
outside of these statutory and regulatory requirements for the purposes 
of rebate calculations. Manufacturers are responsible for calculating 
prices consistent with the statute and regulations that are in effect 
at the time those calculations are submitted. Because the provisions of 
this final rule are effective prospectively, manufacturers are not 
responsible for applying these provisions on a retrospective basis. 
Furthermore, in this final rule, the exceptions in Sec.  447.510(b) do 
not create any new true-up obligations for the manufacturers.
    Therefore, for the reasons stated in this section, we are 
finalizing Sec.  447.510(b)(1)(i) through (iv) as proposed. In 
addition, for the reasons stated in this section and in response to 
comments, we are finalizing Sec.  447.510(b)(1)(v) to include the 
change is to address specific rebate adjustments to States by 
manufacturers, as required by CMS or court order, or under an internal 
investigation, or an OIG or DOJ investigation. We have decided not to 
finalize Sec.  447.510(b)(2), and as a result, we are redesignating 
proposed Sec.  447.510(b)(3) as Sec.  447.510(b)(2) and finalizing it 
without any additional changes in this final rule.
3. Base Date AMP (Sec.  447.510(c)(1) Through (4))
    We proposed to revise Sec.  447.510(c)(1) and (2) by inserting 
``DRA'' before base date AMP where it occurs (77 FR 5343, 5365). We 
also proposed to correct the regulation by removing the notation 
``[OFR: insert publication date of the final rule]'' and replacing it 
with ``July 17, 2007'' in Sec.  447.510(c)(1). To reflect the changes 
to AMP as set forth in the Affordable Care Act, we proposed to allow 
manufacturers to recalculate base date AMP in accordance with the 
definition of AMP in proposed Sec.  447.504. We further proposed to 
allow manufacturers the option to report a recalculated base date AMP 
based on the Affordable Care Act definition of AMP or continue to use 
their existing base date AMP. We also proposed that manufacturers would 
have the option to report the Affordable Care Act base date AMP for a 
period of 4 full calendar quarters beginning with the first full 
quarter after the publication of the final rule. These proposed 
provisions, and our reasons for these proposals, are discussed in more 
detail at 77 FR 5343 through 5344 of the proposed rule. We received the 
following comments concerning the base date AMP:
    Comment: We received many comments in support of CMS's proposal to 
allow manufacturers to recalculate base date AMP on a product by 
product basis. One commenter indicated that this provision is critical 
to maintaining the integrity of the additional rebate set out in Sec.  
447.509(a)(2). Another commenter sought clarification that the ability 
to restate base date AMP is not contingent on a manufacturer having 
restated base date AMP under the DRA. The commenter noted that the pre-
DRA AMP and the Affordable Care Act AMP methodologies are not identical 
and manufacturers may have made the decision about whether to restate 
base date AMP after the DRA based on the available resources and market 
conditions at the time. Similarly, manufacturers should have the same 
ability to determine whether to restate base date AMP based on the 
definition of AMP, following the Affordable Care Act amendments 
regardless of the decisions made in the past.
    Response: We agree with the commenters and, as discussed in the 
proposed rule, believe that it is important for manufacturers to have 
the option, in light of the Affordable Care Act amendments, to revise 
their base date AMPs. Manufacturers will have the ability to report an 
Affordable Care Act base date AMP, as provided in the final rule, on a 
product by product basis regardless of whether they chose to 
recalculate and report a DRA base date AMP.
    Comment: We received several comments regarding the requirement 
that the base date AMP recalculation must be based on actual and 
verifiable pricing records. Many commenters indicated that the 
requirement to use actual and verifiable pricing records, in 
combination with the proposed buildup methodology for calculating AMP, 
would make it impossible for manufacturers to recalculate the 
Affordable Care Act base date AMP because manufacturers lack the end 
customer data that would be required to recalculate the base date AMP 
using the buildup methodology. Several commenters indicated that if CMS 
were to abandon the presumed inclusion methodology and also require 
manufacturers to recalculate the base date AMP in accordance with this 
non-statutory change, this would generally make it impossible for 
manufacturers to restate the base date AMP because the

[[Page 5282]]

data required for such a recalculation would be unavailable.
    One commenter recommended that CMS consider the base date AMP 
impact and the likelihood of manufacturers being able to perform a base 
date AMP restatement with a buildup methodology. One commenter thought 
that it is also highly unlikely that manufacturers could reasonably 
obtain information about sales to Puerto Rico and the other 
territories, which were formerly exempt from AMP and best price. 
Another commenter noted that the proposed buildup methodology for 
calculating AMP departs from historical practice and to restate under 
the buildup methodology would cause manufacturers to be dependent upon 
information from third parties that may or may not have retained the 
information. Furthermore, even if the information were obtained, the 
commenter believes it would not be verifiable by the manufacturer. 
Another commenter indicated that the data necessary to recalculate the 
base date AMP, specifically historical off-contract sales data and 
customer information that are needed to identify sales to retail 
community pharmacies, are likely to never have existed. Even if the 
data do exist, they would be prohibitively expensive to obtain or 
recreate, which would leave companies in a position of having to pay a 
penalty based on inconsistent definitions of prices that are not 
directly related to price increases. The commenter stated that if CMS 
were to adopt the buildup methodology, CMS should be very clear that 
the recalculated Affordable Care Act base date AMP must reflect AMP 
changes made by the Affordable Care Act but need not reflect changes in 
AMP calculations that are not required by the Affordable Care Act.
    Another commenter asked that CMS specify in the final rule that the 
revised Affordable Care Act base date AMP may be calculated using the 
presumed inclusion methodology rather than requiring a manufacturer to 
trace prior non-contracted sales to retail community pharmacies by 
using third party vendors, if such data were even available. The 
commenter indicated that it would be impossible for manufacturers to 
certify that such third party data reflected actual and verifiable 
pricing records and this would render the recalculation option 
meaningless.
    Response: As discussed in more detail in the comments and responses 
in the Determination of AMP section (section II.C.) of the final rule, 
in light of the comments we received, we are modifying our position on 
requiring manufacturers to calculate AMP using the buildup methodology. 
Thus, manufacturers will be able to recalculate their base date AMPs 
using the presumed inclusion methodology. We believe this change will 
satisfy the concerns raised by commenters pertaining to a 
manufacturer's ability to obtain the necessary historical data to 
calculate the Affordable Care Act base date AMP under the buildup 
methodology.
    We also believe that while manufacturers may use a presumed 
inclusion policy to calculate AMP and base date AMP, they must maintain 
actual and verifiable documentation that otherwise supports such 
calculations. Furthermore, we have adopted the same standard we used 
with the DRA base date AMP calculation and see no reason to change that 
standard. In addition, we would expect manufacturers to have historical 
data available to them in light of the recordkeeping requirement 
established in Sec.  447.510(f).
    In regards to the commenter's concern about whether manufacturers 
could obtain sales information from the territories, it is our position 
that for any time prior to the inclusion of the territories in the 
definitions of state and United States, manufacturers are not required 
to consider such sales to territories given the prospective nature of 
this rule.
    Comment: One commenter noted that when the Affordable Care Act-
defined AMP became effective in October 2010, many branded 
manufacturers saw their AMP increase dramatically, resulting in 
significant penalties inherent in using a current AMP and a base date 
AMP created under a different methodology. Moreover, the commenter 
noted that a significant impact on the calculated 340B ceiling prices 
may result because manufacturers who experienced a significant CPI-U 
penalty starting in October 2010 also experienced dramatically lower 
340B ceiling prices, even penny pricing, as the CPI-U penalty for the 
URA was so high that they hit the max URA for AMP, resulting in a 340B 
ceiling price of AMP minus a URA that equaled AMP, which is effectively 
zero.
    Response: We appreciate the concerns raised by this commenter, and 
in light of such concerns, we believe it is important to give 
manufacturers an option to recalculate their base date AMP. 
Furthermore, we recognize that for the time period between the 
effective date of the Affordable Care Act definition of AMP (October 1, 
2010) and the effective date of this final rule, some manufacturers may 
have had higher CPI-U penalties as well as lower 340B ceiling prices. 
We are offering manufacturers the opportunity to recalculate their base 
date AMP in accordance with the Affordable Care Act definition and 
report this recalculated base date AMP to CMS. With the ability to 
report the recalculated base date AMP under the Affordable Care Act 
definition, manufacturers may see a decrease in their rebate liability 
as their quarterly AMP and base date AMP will be under the same 
methodology.
    Comment: Many commenters requested, especially in light of the 
proposed buildup methodology for calculating AMP, that CMS permit 
manufacturers to use reasonable assumptions in their recalculation of 
the base date AMP. One commenter urged CMS to clarify the provision 
that manufacturers are to use ``actual and verifiable pricing records'' 
by specifying that manufacturers may rely on reasonable assumptions in 
their recalculations of the base date AMP, where necessary and 
appropriate to address gaps in historical data under a different AMP 
calculation framework. The commenter indicated that this would be 
consistent with CMS's previously expressed goal of making the base date 
AMP recalculation minimally burdensome on manufacturers. The commenter 
also stated that manufacturers should not be penalized by paying a 
higher additional rebate that reflects changes in AMP calculation 
rules, rather than actual changes in a drug's inflation-adjusted 
pricing, between the base period and the current period. A few 
commenters indicated that if manufacturers are not able to use 
reasonable assumptions then it could make recalculating the base date 
AMP impossible.
    Response: As discussed in more detail in the comments and responses 
in the Determination of AMP section of the final rule, in light of the 
comments we received, we have decided not to require manufacturers to 
calculate AMP using the buildup methodology. Thus, manufacturers will 
be able to recalculate their base date AMPs using the presumed 
inclusion methodology and we believe this will satisfy the concerns 
raised by commenters pertaining to a manufacturer's ability perform a 
base date AMP recalculation.
    Furthermore, as discussed in this section, we believe that while 
manufacturers may use a presumed inclusion policy to calculate AMP and 
base date AMP, they must maintain actual and verifiable documentation 
that otherwise supports such calculations. We have adopted the standard 
used with the DRA base date AMP calculation and see no reason to change 
that standard. In addition, we would

[[Page 5283]]

expect manufacturers to have historical data available to them in light 
of the record keeping requirement established in Sec.  447.510(f) for 
purposes of the rebate program.
    Comment: One commenter indicated that CMS should allow 
manufacturers 12-quarters after the final rule is implemented to submit 
the recalculated Affordable Care Act base date AMP, which will provide 
manufacturers with the time necessary to conduct a thorough and 
accurate review on a product by product basis and is consistent with 
the 3 years recalculation rule that CMS implemented in 2004. The 
commenter believed the 12 calendar quarters time period is appropriate 
because it is consistent with CMS's current policy of requiring 
manufacturers to report revised pricing information for up to 12-
quarters from the quarter in which the pricing data were due.
    Response: We disagree with the commenter and believe that 4 full 
quarters is a sufficient timeframe for manufacturers to recalculate 
their base date AMP under the Affordable Care Act methodology. As 
discussed earlier in this section, we decided to provide the same 
options as we did with the DRA base date AMP after the AMP final rule 
was published--that is manufacturers are being given the option to 
submit a revised base date AMP, using the same 4 quarter standard for 
making those revisions (72 FR 39211). Furthermore, we would expect 
manufacturers to have historical data available to them in light of the 
recordkeeping requirement established in Sec.  447.510(f).
    Additionally, we see no reason to adopt a 3-year time period for 
such revisions, given that manufacturers will be responsible for 
recalculating the Affordable Care Act base date AMP using their 
historical data. In contrast, manufacturers may need additional time to 
report revised pricing information because the information they are 
revising concerns current prices, which may need revision as pricing 
data are received from various sources. Therefore, we do not believe it 
is necessary to change the time frame which we established in 
regulations (72 FR 39243) for the DRA base date AMP change.
    Comment: Many commenters indicated that CMS did not discuss how 
manufacturers should address the base date AMP for 5i drugs in the 
proposed rule. One commenter noted that, as proposed in the 
Determination of AMP section of the proposed rule, the same drug could 
be considered generally dispensed or not generally dispensed through 
retail community pharmacies in any particular time period based on 
temporary changes in the distribution of the drug. The commenter 
indicated that if the base date AMP is calculated using the 5i 
methodology but the drug subsequently does not qualify for the 5i AMP 
calculation for a time period, the use of the standard base date AMP 
might trigger an additional rebate obligation even though the 
manufacturer did not increase the price of the drug. Therefore, the 
commenter stated that if CMS provides that a drug's classification can 
change periodically, it is imperative that manufacturers have the 
option of establishing the base date AMP under both the 5i and the 
standard AMP methodologies to match the methodology applicable during a 
given reporting period. Another commenter suggested that CMS should 
permit manufacturers to calculate a 5i and a standard base date AMP for 
those single source or innovator multiple source drugs that a 
manufacturer expects could flip between the two AMP methodologies, so 
that the additional rebate for the drug is calculated using a quarterly 
AMP and a base date AMP that have been calculated using the same 
methodology. Another commenter suggested that CMS should either permit 
manufacturers to submit a base date AMP calculated under the two new 
methodologies now, or submit one now and the other at some point in the 
future if the product switches. Furthermore, the commenter indicated 
that it is imperative that CMS clearly articulates in the final rule 
the processes that manufacturers will need to follow when switching 
between a 5i and non-5i base date AMP.
    One commenter indicated that for single source or innovator 
multiple source 5i drugs launched after the effective date of this 
rule, CMS should require manufacturers to calculate and report two 
distinct base date AMPs (one for each of the methodologies). 
Additionally, for innovator 5i drugs launched prior to the effective 
date of the final rule, CMS should allow manufacturers to recalculate 
and report a distinct base date AMP associated with each methodology. 
Another commenter noted that manufacturers of innovator drugs pay 
inflation penalties if their current period AMP exceeds the inflation 
rate since the establishment of the base date AMP at the time of market 
introduction. If the base date AMP is based on the 5i AMP method, and 
it crosses the 10 percent threshold in a quarter, so that the standard 
AMP applies, the resulting exclusion of discounts and rebates to non-
retail customers would create the appearance of a price increase, 
thereby triggering the additional rebate inflation penalty.
    One commenter urged CMS to add a field in DDR for identifying 
whether the 5i or standard AMP methodology was used in a given quarter 
for any 5i innovator product so that the appropriate base date AMP 
could be used to calculate the additional rebate applied. Another 
commenter indicated that CMS should establish dual base Date AMP 
records in DDR so that manufacturers can recalculate the base date AMP 
using both the 5i and the standard AMP methodologies for all 5i 
products to ensure the appropriate base date AMP is used in the 
additional rebate calculation.
    Response: We recognize the potential problem faced by manufacturers 
of 5i drugs that may be considered generally dispensed through retail 
community pharmacies in one quarter and not generally dispensed through 
retail community pharmacies in another quarter based on changes in the 
distribution of the drug. We believe that the potential for fluctuation 
will be minimized, because, as discussed in the Determination of AMP 
section (section II.C.), of this final rule we have revised our 
proposed threshold from 90 percent down to 70 percent and are allowing 
manufacturers to smooth the monthly calculation based upon 12 months of 
data.
    In addition, based on the statutory definition of the base date AMP 
found at sections 1927(c)(2)(A) through (B) of the Act, manufacturers 
are responsible for reporting one base date AMP for a COD, whether that 
base date AMP is calculated using the 5i methodology or not, as the 
statute references the same methodology. Section 1927(c)(2)(A)(ii)(II) 
of the Act specifies that for drugs originally marketed before the 
inception of the rebate program, the base date AMP means the AMP for 
the 7/1/90 to 9/30/90 quarter. For those drugs approved by FDA after 
October 1, 1990, section 1927(c)(2)(B) of the Act specifies that the 
base date AMP should be calculated based on the AMP for the first full 
calendar quarter after the day on which the drug was first marketed. 
Based on these statutory provisions, we do not believe that a drug can 
have two distinct base date AMPs. Therefore, in accordance with these 
statutory provisions, the base date AMP for a drug, whether it is a 5i 
or a non-5i drug, shall be based on the sales of the drug for the 7/1/
90 to 9/30/90 quarter for drugs approved prior to the inception of the 
rebate program or the first full calendar quarter after the day on 
which the drug was first marketed for drugs approved after the October 
1, 1990.

[[Page 5284]]

    For new products that are introduced after the effective date of 
the final rule, the base date AMP will be calculated in accordance with 
the current policy on calculating the base date AMP (the AMP for the 
first full calendar quarter after the day on which the drug was first 
marketed). That is, if a 5i drug in the first full calendar quarter 
after the day the drug is first marketed meets the ``not generally 
dispensed'' threshold, the manufacturer is responsible for calculating 
the base date AMP using the 5i AMP methodology. If a 5i drug in the 
first full calendar quarter after the day in which the drug is first 
marketed does not meet the ``not generally dispensed'' threshold, 
manufacturer is responsible for calculating the base date AMP using the 
standard AMP methodology.
    Comment: One commenter requested clarification as to whether 
detailed instructions will be forthcoming explaining what has to be 
done with products having a market date equal to 09/30/1990; a market 
date falling between 01/01/1991 and 9/30/1993; a market date falling 
after 09/30/1993; and whether the DDR system will handle these base 
date AMP updates or will manufacturers have to manually submit 
recalculated base date AMPs following OBRA 93 rules. The commenter also 
asked if the recalculated base date AMP and the generation of prior 
period adjustments (PPAs) will be allowed to be included in state 
quarterly URA files, and if so, will states be required to open all the 
affected quarters and submit supplementary invoices to manufacturers 
for those fractions of dollar adjustments. Furthermore, the commenter 
asks if manufacturers should recalculate quarterly URAs to be 
consistent with recalculated base date AMPs.
    A few commenters indicated that CMS should establish an effective 
date for the base date AMP to provide clarity to manufacturers 
regarding their additional rebate obligation. One commenter requested 
clarification that the recalculated Affordable Care Act base date AMP 
will be effective as of the effective date of the final rule even if a 
company's recalculated base date AMP is not submitted until after the 
effective date. Another commenter noted that this would be consistent 
with CMS's approach regarding base date AMPs that occurred due to the 
DRA and implemented in the 2007 final rule.
    Response: Manufacturers will be able to report the Affordable Care 
Act base date AMP as of the effective date of the final rule, and 
manufacturers will have 4 full calendar quarters from that date to 
report the Affordable Care Act base date AMP. The recalculation of the 
Affordable Care Act base date AMP set forth in this rulemaking will not 
result in PPAs for quarters prior to the effective date of this final 
rule because the Affordable Care Act base date AMP is not designed to 
be retroactively effective; it should only be used in the calculation 
of the URA for quarters beginning with the effective date of this final 
rule. We will be providing operational guidance on how manufacturers 
may report the Affordable Care Act base date AMP if a manufacturer 
decides to recalculate its base date AMP.
    Comment: One commenter asked if CMS intends for all manufacturers 
to restate their AMP and best price back to the fourth quarter of 2010, 
since that is the effective date of the Affordable Care Act.
    Response: The provisions of this final rule are effective on a 
prospective basis. Therefore, we do not expect manufacturers to restate 
their AMP and best price retroactively as a result of this final rule.
    We did not receive any comments on the remaining provisions of 
Sec.  447.510(c). Therefore, for the reasons stated in this section, we 
are finalizing the provisions at Sec.  447.510(c)(1) through (4) as 
proposed, with the exception of the following technical and clarifying 
edits:
    We are making a technical revision to Sec.  447.510(c)(1) by 
changing ``DRA'' to ``Deficit Reduction Act (DRA)'' since this is the 
first time the reference to the DRA is used within the regulatory text. 
We are also making a technical revision to Sec.  447.510(c)(2)(i) by 
removing the reference to ``of this subpart'' because we believe the 
reference is unnecessary. And we are adding ``in effect from October 1, 
2007 to December 14, 2010'' to the end of the sentence in Sec.  
447.510(c)(2)(i) to make clear that the AMP methodology applicable to 
the DRA base date AMP calculation is the AMP methodology that was 
finalized in the 2007 AMP final rule rather than the AMP methodology 
being finalized in this final rule as a result of the Affordable Care 
Act amendments.
4. Calculation of Monthly AMP (Sec.  447.510(d)(2))
    Given the requirement for a smoothing process for AMP under section 
1927(e)(5) of the Act, we proposed in Sec.  447.510(d)(2) that 
manufacturers would be required to use a 12-month rolling percentage to 
estimate the value of lagged price concessions in their calculation of 
the monthly AMP (77 FR 5365). We also proposed that a manufacturer's 
monthly AMP is to be calculated based on the weighted average of the 
prices for all the manufacturer's package sizes of each COD sold by the 
manufacturer during a month (77 FR 5365). These proposals are discussed 
in more detail in the proposed rule (77 FR 5344).
    We received the following comments concerning the calculation of 
monthly AMP:
    Comment: Many commenters expressed general support for our proposal 
that manufacturers use a smoothing methodology similar to that used to 
determine the ASP under Medicare Part B. The commenters believed that 
using a 12-month rolling percentage to estimate the value of lagged 
price concessions in the calculation of monthly AMP will minimize the 
monthly AMP fluctuations. One commenter stated that they agree with CMS 
that the smoothing process will result in more stable AMP calculations 
on a month-to-month basis and believe the process currently in place, 
under Manufacturer Release #83 (February 3, 2011), is effective and 
appropriate and encouraged CMS to finalize its proposal and maintain 
the policy. Another commenter expressed gratitude to CMS for its 
proposal to adopt a 12-month rolling percentage smoothing method that 
is consistent with the ASP smoothing method and further stated that 
consistency between and among the various metrics, where it can be 
achieved, is appreciated because it simplifies the applicable systems 
and reduces the risk of inadvertent errors.
    Response: We appreciate the support of these comments and agree 
with the comments about the importance of using a smoothing process 
consistent with ASP.
    Comment: One commenter expressed support for the use of a 12-month 
rolling percentage to estimate the value of lagged price concessions 
but stated that CMS should not subsequently adjust state FMAP to 
account for such changes, or permit states to use such revisions to 
recoup monies from pharmacies after reimbursement is made.
    Response: We note that the requirement to use the 12-month rolling 
percentage to estimate the value of lagged price concessions is 
effective on a prospective basis. Furthermore, the FMAP rate is not 
based on the State's reimbursement, but rather a different methodology 
that is beyond the scope if this final rule. Therefore, we do not 
anticipate that this policy will result in any effect on state FMAP, 
nor do we expect that this policy will cause states to recoup payments 
from pharmacies for previously paid claims.

[[Page 5285]]

    Comment: A few commenters specifically expressed their support of 
the lagged price concession smoothing methodology in the context of the 
presumed inclusion methodology for calculating AMP. One commenter 
expressed concern that the proposed smoothing methodology may be 
inappropriate if CMS mandates a buildup methodology to calculate AMP 
because in the buildup methodology the sales data would also be lagged, 
which would call into question whether an estimation methodology should 
be used at all or whether it should be modified to reflect the lagged 
nature of the sales data. The commenter believed that if CMS moves 
forward with the buildup methodology, stakeholders should be given the 
opportunity to evaluate this aspect of the methodology further to 
determines if it remains appropriate or should be revised. Another 
commenter noted that if CMS were to adopt the buildup methodology as 
proposed, it would temporarily result in two different AMP 
methodologies being used in the same year, which could distort the 
calculation 12-month rolling percentage.
    One commenter noted that the ASP calculation uses the presumed 
inclusion approach and therefore its 12-month rolling average 
estimation methodology was developed based on a presumed inclusion 
methodology as well. Since the AMP smoothing methodology is statutorily 
required to be similar to the ASP methodology, the commenter indicated 
that it is unclear what effect the 12-month rolling average estimation 
methodology under a buildup methodology would have on the accuracy of 
AMP. Therefore, the commenter urged CMS to retain the presumed 
inclusion approach and permit the smoothing process to work as 
intended.
    Response: As discussed in more detail in the comments and responses 
in the Determination of AMP section (section II.C.) of this final rule, 
we have decided not to adopt a requirement that manufacturers calculate 
AMP using a buildup methodology. Manufacturers will continue to be able 
to make reasonable presumptions, in the absence of adequate 
documentation to the contrary, that prices paid to manufacturers by 
wholesalers are for drugs distributed to retail community pharmacies. 
Therefore, we believe this will address the concerns raised by 
commenters pertaining to the application of the lagged price concession 
smoothing methodology in the context of calculating AMP using a buildup 
methodology.
    Comment: Several commenters stated that as drafted, the proposed 
AMP smoothing process that was described in Manufacturer Release #83 
(February 3, 2011) and restated in the preamble to the proposed rule 
(77 FR 5344) is not consistent with the ASP smoothing process and 
should be clarified. These commenters noted that the preamble to the 
proposed rule provides a formula which uses the terms ``lagged price 
concessions'' and ``total sales.'' The commenters believed that the 
language requires clarification as the reference to ``total'' sales and 
lagged price concessions should be changed to ``AMP-eligible'' sales 
and lagged price concessions. They believe this would make the AMP 
smoothing method similar to the ASP method (where ASP-eligible sales 
and price concessions are used to estimate the lagged price 
concessions). Furthermore, the commenters stated that CMS should revise 
the smoothing methodology for lagged price concessions in AMP to 
include the same level of specificity as is included in the ASP 
smoothing process; and for consistency, should specify that the 
numerator of the ratio is limited to AMP-eligible lagged concessions 
(not total lagged price concessions) and the monthly multiplier is AMP-
eligible sales (not total sales). The commenters also believe that the 
specifics of the lagged price concession calculation should be included 
in the regulatory language at Sec.  447.510(d)(2)(iii) to ensure 
consistency across calculations and manufacturers.
    Response: We appreciate these comments and note that we intended 
for the proposed AMP smoothing methodology to be consistent with the 
ASP smoothing process. Furthermore, we agree with commenters who 
suggested that the specific details of the lagged price concession 
calculation should be included in the regulatory text because we 
believe this will provide clarification and consistency across 
manufacturers and AMP calculations. Therefore, to provide clarification 
and ensure that the AMP smoothing methodology provided in this final 
rule is consistent with the ASP smoothing process we are modifying 
Sec.  447.510(d)(2) to include the details of the monthly AMP 
calculation process, including the smoothing of lagged price 
concessions. Specifically, we have added paragraphs (A) and (B) to 
Sec.  447.510(d)(2)(iii) which provide the detailed instructions, 
similar to that of the calculation of lagged price concessions for ASP, 
for how a manufacturer should calculate the lagged price concessions at 
the NDC 9 level. We explain that for each NDC-9 with at least 12 months 
of AMP-eligible sales, after adjusting for sales excluded from AMP, the 
manufacturer calculates a percentage equal to the sum of the price 
concessions for the most recent 12-month period (inclusive of the 
current reporting period) available associated with sales subject to 
the AMP reporting requirement divided by the total in dollars for the 
sales subject to the AMP reporting requirement for the same 12-month 
period. Furthermore, we explain that for each NDC-9 with less than 12 
months of AMP-eligible sales, the calculation is performed for the time 
period equaling the total number of months of AMP-eligible sales. This 
is consistent with the calculation of lagged price concessions for ASP 
at Sec.  414.804(a)(3)(i).
    We have also added paragraph (iv) and (v) to Sec.  447.510(d)(2) 
which further clarify the methodology used to calculate lagged price 
concessions by explaining that the manufacturer multiplies the 
applicable percentage by the total in dollars for the sales subject to 
the AMP reporting requirement (after adjusting for sales excluded from 
AMP) for the month being submitted. The result of this multiplication 
is then subtracted from the total in dollars for the sales subject to 
the AMP reporting requirement (after adjusting for sales excluded from 
AMP) for the month being submitted. The manufacturer uses the result of 
the calculation described in this section as the numerator and the 
number of units sold in the month (after adjusting for sales excluded 
from AMP) as the denominator to calculate the manufacturer's AMP for 
the NDC for the month being submitted. This is consistent with the 
calculation of lagged price concessions for ASP at Sec.  
414.804(a)(3)(ii) through (iii).
    Additionally, we agree with commenters who requested that we 
include the same level of specificity in regulatory text of the monthly 
AMP smoothing process as is included in the regulatory text of ASP 
smoothing process, and therefore, we have also added paragraph (vi) to 
Sec.  447.510(d)(2) which provides an example of the methodology 
described in the rule. The example in Sec.  447.510(d)(2)(vi) is 
modeled from that which is provided in Sec.  414.804(a)(3)(iv), except 
that it has been modified to conform with the terminology used in the 
calculation of lagged price concessions for AMP rather than the 
calculation of lagged price concessions for ASP.
    We believe this level of detail in the regulatory text will help 
ensure consistency across the industry by providing more specificity to 
the

[[Page 5286]]

methodology and reduces the need for interpretation. We also believe 
that offering an example provides even more stability and uniformity to 
the calculation of lagged price concessions across the industry. 
Furthermore, we do not believe these are substantive changes to the 
calculation or components of the calculation, but rather are simply 
more precise terminology and clarifying language which serve to make 
the methodology more detailed and accurate. As stated in this section, 
the format we adopted in this section is modeled from and similar to 
that used by Medicare Part B to describe the methodology for 
calculating lagged price concessions for ASP at Sec.  414.804(a)(3).
    Comment: Several commenters opposed the proposed methodology for 
smoothing AMPs and believe that rather than stabilizing AMP, the 
current smoothing methodology has resulted in instability and that the 
problem is created because AMPs swing dramatically as individual 
``lagged price concessions'' drop into and out of AMP calculations. 
Furthermore, the commenters believed the proposed methodology creates 
an inherent disconnect between current prices available to retail 
community pharmacies and historical prices which contribute to the 
discrepancy between AMPs and marketplace acquisition cost. The current 
methodology assumes that the current sales are subject to the same 
percentage discounts in the form of lagged price concessions as the 
average percentage discount due to lagged price concessions over the 
most recent 12-month period. The commenters believed this is not a 
valid assumption particularly when off-invoice discounts are being 
reduced or eliminated and in effect forces the manufacturers to report 
an AMP calculated with an implied discount that is not in fact being 
provided and consequently not representative of a price available to 
any retail community pharmacy or wholesaler. One commenter recommended 
that CMS revise its methodology to require manufacturers to take into 
account rebates and other lagged price concessions at the time of the 
sale on an accrual basis and stated that only lagged-price concessions 
that cannot be accounted for in this manner should be subject to the 
current methodology. The commenter stated this would help reduce the 
variability and help to bring reported AMPs close to pharmacy 
acquisition costs.
    Response: We disagree with the commenter's recommendation that CMS 
revise its methodology. Section 1927(e)(5) of the Act specifies that we 
are to implement a smoothing process for AMP that is similar to the 
smoothing process used in the determination of ASP. The methodology 
suggested by the commenter is not consistent with the ASP methodology, 
which is not limited to those lagged price concessions that cannot be 
accounted for on an accrual basis.
    Comment: One commenter requested that CMS issue guidance to 
manufacturers as to whether they will have the option to include lagged 
price concessions based on either ``earned'' date or ``paid'' date. The 
commenter noted that in the preamble to the 2007 AMP final rule, CMS 
allowed manufacturers to select lagged date based on either earned date 
or paid date.
    Response: We did not require that manufacturers select either the 
earned or the paid date. Therefore, manufacturers have the flexibility 
to include lagged price concessions based on either earned date or paid 
date, provided the manufacturer uses one methodology uniformly.
    Comment: One commenter believed that CMS's proposed implementation 
of the definition of lagged price concessions complicates certain logic 
associated with the calculation of the base date AMP. As the base date 
AMP is meant to establish the baseline comparison for subsequent 
quarterly AMPs, the commenter stated that it is important that the 
first full quarter AMP be representative of the standard price 
incentives established by manufacturers. The commenter noted that CMS 
supports this concept by establishing that the base date AMP is 
calculated on the first full quarter so that one time price incentives 
on initial sales do not reduce AMP. Lagged price concessions (such as 
rebates and chargebacks) that are paid for in the initial month prior 
to the first full quarter are subsequently taken into consideration for 
the 12-month rolling average and ultimately affect the base date AMP 
because the time frames used in each calculation do not coincide. The 
commenter suggested that CMS specifically state that base date AMP be 
established on the first full quarter of sales, and that the 
calculation of the 12-month rolling average starts with that quarter.
    Response: We disagree that lagged price concessions that are paid 
for in the initial month(s) prior to the first full calendar quarter 
(base date AMP quarter) should not be included in the calculation of 
lagged price concessions. While we agree that the statute contemplates 
a base date AMP based on the first full calendar quarter after the 
market date, we continue to believe that the calculation of the 12-
month rolling percentage should start with the month in which the 
product was first marketed. Section 1927(e)(5) of the Act specifies 
that we are to establish a smoothing process similar that used in ASP; 
and the Medicare Part B regulations at Sec.  414.804(a)(3)(i)(B) 
specifically states that for each NDC with less than 12 months of 
sales, the smoothing process calculation is to be performed for the 
time period equaling the total number of months of sales. The process 
we have established is consistent with the smoothing process used to 
determine ASP and since the ASP process has not made this type of 
allowance, we do not believe that we should do so either.
    Comment: One commenter stated that the inability to include all 
post-delivery price adjustments will undermine the effort taken. If 
these adjustments cannot be followed and appropriately considered in a 
relative ``present'' time frame the commenter believes they should be 
excluded from the calculation until such time that the life of the 
product can be monitored and adjusted for out-of-market price 
adjustments.
    Response: Based on our understanding of the market and discussions 
with manufacturers, we recognize that manufacturers may not always know 
of every post sales price adjustment that occurs within the timeframe 
they are required to report monthly AMPs. Without this information, the 
monthly AMP calculation is not an accurate reflection of the actual 
sales, discounts or other price adjustments that impact the monthly AMP 
calculation. Furthermore, the monthly AMP will have a tendency to 
fluctuate from month-to-month as the price adjustments become known. 
Therefore, we believe that manufacturers should establish a process to 
smooth lagged price concessions because this process helps to prevent 
fluctuations in AMP from month-to-month, as well as to account for any 
seasonal variations in sales, discounts and other price adjustments. In 
addition, manufacturers are permitted to adjust monthly and quarterly 
AMP in accordance with reporting requirements established in Sec.  
447.510. While there may be several reasons for a manufacturer to 
restate or recalculate the monthly AMP, one example could be because 
additional data became available that requires a revision to the 
monthly AMP submission.
    Comment: One commenter requested that CMS provide clarification 
regarding the proposal that monthly AMP is to be ``calculated based on 
the best data

[[Page 5287]]

available to the manufacturer at the time of submission.'' 
Specifically, the commenter requested that CMS address whether it is 
acceptable for manufacturers to utilize estimated data (for example, 
rebate accruals for rebates expected to be earned or paid for the 
calculation period), in their calculations or whether manufacturers are 
required to submit calculations solely based on actual paid data. 
Another commenter commended CMS on its proposal that monthly AMP should 
be calculated consistent with the proposed smoothing method, based on 
the best data available to the manufacturer at the time of submission.
    Response: Manufacturers are to calculate monthly AMP consistent 
with the statute and based on the best data available to the 
manufacturer at the time of submission. In doing so, manufacturers are 
to estimate the value of lagged price concessions using a 12-month 
rolling percentage. To the extent that the calculation includes any 
assumptions, those assumptions need to be reasonable and should be 
documented.
    As defined in proposed Sec.  447.502, a lagged price concession 
means ``any discount or rebate that is realized after the sale of the 
drug but does not include customary prompt pay discounts.'' Therefore, 
manufacturers may use the 12-month rolling percentage to estimate 
lagged price concession data (for example, using actual data on past 
rebate accruals to estimate rebates expected to be earned or paid for 
the calculation period) rather than only including estimates of future 
rebates in their monthly AMP calculation.
    Comment: Several commenters requested that CMS clarify its position 
and provide guidance on whether it is reasonable for manufacturers to 
smooth lagged AMP-ineligible sales. One commenter pointed out that this 
process is permitted by CMS in the ASP context and noted that if 
manufacturers were allowed to smooth AMP-ineligible sales it would 
increase the stability of AMPs. Another commenter noted that many 
manufacturers already extend the smoothing logic of lagged price 
concessions to the excluded indirect sales in AMP, such as chargebacks 
to hospitals. The commenter explained that this means the component of 
a ``gross to net'' calculation where sales to excluded classes of trade 
are subtracted from gross sales to arrive at the net retail community 
pharmacy sales. The commenter noted that this can be done for 
reasonable business assumptions, such as seasonable medications, and 
helps ``smooth'' the reported AMP and FUL in the same way as the lagged 
rebate price concessions. CMS has not provided much guidance regarding 
a manufacturer's ability to smooth ineligible sales. Therefore, the 
commenter recommended that CMS allow manufacturers to make reasonable 
assumptions and determine whether or not they have business reasons to 
smooth ineligible sales.
    Another commenter believed that manufacturers should be permitted 
to quantify and back out indirect ineligible sales identified through 
lagged price concession data (chargebacks and rebates) in AMP to avoid 
unnecessary volatility across reporting periods, while still ensuring 
that only eligible sales remain in the calculation. Furthermore, the 
commenter stated that determining and backing out lagged indirect 
ineligible sales is an important part of an AMP calculation that 
employs a presumed inclusion methodology. Another commenter suggested 
that CMS clarify that manufacturers may also estimate indirect 
ineligible sales using the method that manufacturers use for their ASP 
calculation and if the manufacturer does not report ASP for its 
products, then the manufacturer should be able to use any 12-month 
rolling average approach that is consistent with the lagged price 
concession ratio proposed by CMS.
    Response: Based on our understanding of the comments and 
discussions with manufacturers, a lagged ineligible AMP sale would be a 
sale which is determined to meet one of the AMP exclusions, but similar 
to price concessions, pricing data on the excluded sale is known on a 
lagged basis. As discussed in the CY 2007 PFS final rule (71 FR 69671), 
Medicare Part B allows, but does not require, manufacturers to estimate 
sales exempted from ASP by using a smoothing process. The Medicare Part 
B smoothing process for lagged exempt ASP sales permits manufacturers 
to use a 12-month rolling average ratio methodology to make certain 
estimates and exclude exempt sales from the ASP calculation where 
appropriate (71 FR 69671). While we did not propose any requirements 
regarding the calculation of ineligible sales, we agree that it is 
reasonable for manufacturers to make reasonable assumptions and use the 
same or similar methodology used for ASP calculations to smooth lagged 
ineligible-AMP sales when calculating the monthly AMP.
    Therefore, in response to comments and for the reasons discussed in 
this section, we are finalizing Sec.  447.510(d)(2) with the following 
modifications:
     We are making a technical revision to Sec.  447.510(d)(2) 
by removing the reference to ``of this subpart'' as the reference is 
not necessary given the regulatory cite.
     We have added paragraphs (A) and (B) to Sec.  
447.510(d)(2)(iii), as well as paragraphs (iv) and (v) to Sec.  
447.510(d)(2) which provide the detailed methodology that manufacturers 
must use to estimate the AMP-eligible lagged price concessions for 
drugs with at least 12 months of AMP eligible sales and those with less 
than 12 months of AMP eligible sales.
     We have also added paragraph (vi) to Sec.  447.510(d)(2) 
which provides an example of the methodology described in the preceding 
paragraphs.
5. Manufacturer Reported AMP Units (Sec.  447.510(d)(6))
    Based on the requirements set forth in section 2503(b) of the 
Affordable Care Act, we proposed that the manufacturer report on a 
monthly basis, the total number of units that are used to calculate the 
monthly AMP for each COD no later than 30 days after the last day of 
each prior month. We also proposed that the monthly units should be of 
the unit type used in the quarterly and monthly AMP calculation for 
each NDC to ensure consistency in the calculation as well as the 
reporting of monthly and quarterly AMP and the AMP units (77 FR 5344 
and 5365). These proposals are discussed in more detail at 77 FR 5344. 
We received the following comments concerning the manufacturer reported 
AMP units.
    Comment: One commenter noted that the AMP unit data is key to the 
proper calculation of weighted AMPs, and stated that the OIG has 
repeatedly found unit of measure inconsistencies in manufacturers' 
calculation of AMPs, and CMS's failure to clearly specify the correct 
unit of measure to be used by manufacturers in reporting AMP units has 
almost certainly resulted in inconsistent reporting. The commenter 
states that the Extreme Details tab of the monthly draft FUL files 
reveals instances of manufacturers of the same product and same package 
size reporting different units per package size (UPPS) meaning they 
have used different package sizes in reporting AMP units as well. The 
commenter recommended that CMS resolve this problem by adopting NCPDP 
unit of measure standards--which would also be conforming to the units 
of measure used in Medicaid claims data.
    Response: In accordance with section 1927(b) of the Act and 
implementing regulations, drug manufacturers participating in the MDR 
program are required to report and certify pricing data to CMS. It is 
ultimately the

[[Page 5288]]

responsibility of the manufacturer to determine, as part of these 
requirements, the appropriate unit type and units per package size 
(UPPS) for each of their products. To assist the drug manufacturers, 
CMS has issued guidance on the reporting of unit type and UPPS in 
Manufacturer Release #82 (November 1, 2010). As discussed in the 
release, the AMP Units should be reported as the total sum of units for 
all package sizes included in the calculation of the AMP, and should be 
reported for each product code. We do not agree with the commenter that 
CMS should adopt the NCPDP standards in calculating rebate liability, 
because the NCPDP standard units are based on package pricing, whereas 
the AMP and best price information that manufacturers report is based 
on unit pricing, without regard to package size. Therefore, we do not 
believe it is practical or reasonable to use the NCPDP units given the 
Medicaid statute reporting requirements.
    Comment: One commenter noted that CMS has previously indicated that 
the total AMP-eligible units at the NDC-9 level are to be reported for 
each NDC-11 in the DDR system and asked CMS to clarify that drug 
manufacturers should continue to report the same AMP unit values as 
currently reported to DDR for each NDC-11 within the NDC-9.
    Response: The AMP units should include the total sum of all units 
for all package sizes (11-digit NDC level) included in the calculation 
of the AMP, and should be reported per the 9-digit NDC level for the 
monthly reporting period. If a drug is distributed in multiple package 
sizes, the manufacturer should report the same number of AMP units for 
all package sizes of the product.
    Comment: One commenter was concerned that if manufacturers were not 
permitted to continuing using presumed inclusion and they must rely on 
third party data to verify those sales included in AMP, it would be 
difficult to report and certify monthly AMP units to CMS in a timely 
fashion.
    Response: We believe that our decision not to finalize the buildup 
methodology requirement and to permit manufacturers to continue using 
the presumed inclusion approach addresses the concerns raised by the 
commenter pertaining to a manufacturer's ability to obtain the data 
necessary to report and certify AMP units using a buildup methodology.
    Therefore, for the reasons discussed in this section, we are 
finalizing the requirements at Sec.  447.510(d)(6) regarding the 
reporting of AMP units as proposed.

I. Requirements for States (Sec.  447.511)

    Consistent with section 1927(b)(2)(A) of the Act, we proposed a new 
Sec.  447.511 to clarify the reporting requirements for states (77 FR 
5345, 5366). In Sec.  447.511(a), we proposed to list the data that the 
state must provide to participating drug manufacturers within 60 days 
of the end of each quarter. In Sec.  447.511(b) we proposed that states 
must submit this same data to CMS on a quarterly basis. In Sec.  
447.511(c), we proposed that states that have participating MCOs, which 
include CODs in their contracts, must report data pertaining to drugs 
dispensed through those MCOs separately from the data pertaining to 
drugs dispensed on a FFS basis. In light of the proposed change in 
definition to ``State,'' we also proposed that the requirements of 
Sec.  447.511 would not be effective for the territories until 1 year 
after the first day of the first full calendar quarter after the 
publication of the final rule. (The proposed change in definition of 
``States'' is discussed in the definition section of this final rule 
(section II.B.25.)). These proposals are discussed in more detail at 77 
FR 5345. We received the following comments concerning the proposed 
requirements for states:
1. Invoice Submission Deadline
    Comment: A few commenters supported the imposition of a deadline 
for state submission of invoices. The commenters stated that the 
statute requires states to submit information on drugs utilized not 
later than 60 days after the end of each rebate period. One of the 
commenters noted that manufacturers are reliant on these data to 
calculate and pay rebates owed to the state programs. The commenter 
believed that manufacturers should not be obligated to pay rebates on 
data that a state fails to submit in accordance with the statutory 
deadline, including revisions to prior quarter utilization data and 
suggested that CMS should impose an absolute deadline for the 
submission of MCO utilization under the Affordable Care Act.
    One commenter believed that the statutory time limit should become 
effective upon publication of the final rule and that states should be 
prohibited from submitting any further rebate claims for quarters that 
precede the specified period. The commenter referenced the preamble to 
CMS's September 19, 1995 proposed rule, in which CMS indicated that 
although the statute requires states to meet the 60-day requirement, 
CMS did not believe that the statute limited manufacturers' liability 
for rebates if states were unable to report utilization data by the 
deadline. The commenter indicated that CMS did not provide any 
explanation or statutory support for this policy, nor did it adopt the 
policy through formal notice-and-comment rulemaking. However, proposed 
Sec.  447.511 expressly sets forth the requirement that within 60 days 
of the end of each quarter, the state must bill participating drug 
manufacturers an invoice, which includes, at a minimum, certain drug 
utilization data as specified in the regulations text. The commenter 
suggested that CMS should clarify that, consistent with the statute, 
this deadline is a firm obligation for states and that manufacturers 
are not obliged to pay Medicaid rebates for claims that do not meet the 
state's reporting requirement.
    One commenter stated that a policy establishing a maximum time 
frame during which a manufacturer is obliged to pay rebates to the 
states would not only be consistent with the statute, but a firm 
deadline also would shorten the time between the date the utilization 
occurs and the date the manufacturer initiates any dispute with the 
state regarding that utilization. The commenter noted that it is 
inefficient and burdensome for both manufacturers and states to attempt 
to substantiate rebate claims to resolve disputes months or even years 
after the drug is utilized. The commenter stated that manufacturers 
also frequently use information about past utilization to project their 
future rebate obligations, and these projections are rendered less 
accurate when there are delays in reconciling sales data.
    Response: We appreciate the concerns raised by the commenters. As 
we discussed in Sec.  447.509(b) of the proposed rule, we did not 
include a proposal that absolved manufacturers of liability to pay 
rebates on invoices that are subsequently submitted with data from 
earlier periods. In accordance with section 1927(b)(1)(A) of the Act, 
manufacturers are responsible for providing rebate payments based, in 
part, on state utilization data. We did not propose a deadline for the 
submission of utilization data but in accordance with section 
1927(b)(2) of the Act, states are required to submit utilization data 
in a standard reporting format to manufacturers within a 60-day 
timeframe. The statute does not absolve manufacturers of responsibility 
to provide rebates where states provide such information outside of 
that 60-day window. Section 1927(b)(1)(A) of the Act includes a broad 
requirement that manufacturers provide rebates for CODs

[[Page 5289]]

for which payment was made under the state plan.
    Section 1927(b)(2)(B) of the Act, in turn, contemplates the 
provision of rebates regardless of when the state data is revised or 
adjusted following audit of such data. It provides that manufacturers 
shall provide adjustments to rebates to the extent that the state 
provides information per an audit (without any indication as to when 
that audit takes place) to the extent that information indicates that 
utilization is greater or less than information previously submitted. 
Accordingly, consistent with these provisions, manufacturers are 
responsible for complying with the requirements to pay rebates based on 
utilization data even when the state may be late in providing that 
data. Although we recognize that utilization data is a critical element 
for manufacturers to calculate rebates, we will not absolve 
manufacturers for liability of late state submissions.
    Comment: One commenter stated that CMS should clarify that the 60-
day time limit includes any revision to prior quarter utilization data. 
The commenter indicated that CMS had previously recognized the need to 
establish a maximum time frame during which the manufacturer is bound 
to pay its rebate obligations because, otherwise, manufacturers could 
be responsible for rebates years after drugs were dispensed and it may 
be difficult for manufacturers to substantiate those rebate claims if 
they subsequently dispute those claims. The commenter stated that the 
potential for significantly delayed reporting from the states is 
exacerbated by the expansion of the MDR program to Medicaid MCOs, with 
many states still not having reported any MCO utilization 2 years after 
the Affordable Care Act's enactment. The commenter suggested that CMS 
should impose a deadline of 120 days from the publication of a final 
rule for the submission of MCO utilization data and suggested that CMS 
should specify a 120-day deadline for states to submit timely 
information to CMS and clarify that this deadline applies to states' 
revision or correction of data previously submitted to CMS.
    Response: While we appreciate the concern regarding the importance 
of timely invoice submission by the states, we did not propose any 
deadlines for states to submit prior quarter adjustments to 
manufacturers. The MCO reporting requirements are consistent with the 
FFS reporting requirements. We recognize the need for states to submit 
information on a timely basis, and thus, we may consider issuing 
guidance regarding such deadlines in the future, if needed.
    Further, while we recognize that states and MCOs may have initially 
encountered systems issues regarding timely submission of MCO 
utilization, we are not planning to set a specific deadline beyond the 
deadlines already established in section 1927(b)(2)(A) of the Act which 
states, in part, that MCO invoice submissions are subject to the same 
60-day deadline as for Medicaid FFS.
    Comment: One commenter urged CMS to consider penalties for states 
that do not comply with the parameters for submitting reports to CMS 
that are set forth in the proposed rule.
    Response: While we appreciate the concern regarding the importance 
of timely invoice submission, the statute does not provide for 
penalties to states that do not comply with submission deadlines. 
However, the OIG has and continues to review state compliance with 
various aspects of the MDR program requirements.
2. MCOs and 340B
    Comment: One commenter stated that CMS should prohibit states from 
implementing procedures for collecting rebates on drugs dispensed 
through Medicaid MCOs that unreasonably burden 340B covered entities. 
The commenter stated that the proposed rule provides no direction 
either to MCOs or to states as to how drugs acquired under the 340B 
Program should be identified so as to prevent the manufacturer from 
being subject to a duplicate discount. The commenter requested that 
CMS, through regulation, establish mechanisms that a state can use to 
separate 340B claims from other MCO claims and suggested that a state-
based exclusion file for MCOs, similar to the exclusion file that HRSA 
maintains for FFS claims would meet the requirement. While the 
commenter understood that FQHCs, along with other covered entities, 
share responsibility for 340B compliance, it is unreasonable to expect 
covered entities to bear the entire burden. A few commenters noted that 
states must create a mechanism with which they can exclude MCO drugs 
from their requests, if the drugs are dispensed by MCOs and are 
discounted under the 340B program.
    One commenter stated that to assist in preventing violations of the 
double-discounting prohibition, CMS should emphasize to the states that 
they are responsible for ensuring that the utilization information that 
is reported on rebate invoices does not include drugs purchased under 
the 340B program. In addition, CMS should require that all Medicaid 
utilization data that the states submit to manufacturers, including 
both FFS and MCO utilization data, contain the ``pharmacy identifier'' 
field so that manufacturers have the ability to verify that the data 
has been properly screened for duplicate discounts. The utilization 
data must also include the 340B identification data element developed 
by NCPDP. The commenter noted that states will only be able to meet 
these reporting obligations by requiring that pharmacies or other 
providers that dispense or administer drugs to Medicaid FFS or MCO 
enrollees include all these same data elements on their claims to the 
state or to a Medicaid MCO.
    Response: We appreciate the concerns raised by the commenter and 
recognize the importance of preventing duplicate discounts on drugs 
purchased through the 340B program and dispensed to Medicaid MCO 
enrollees. As stated, in part, in section 1927(a)(5)(C) of the Act, the 
state shall provide a means for the covered entity to indicate that a 
drug is subject to the 340B program and not submit a claim for a rebate 
payment for such drug. States are encouraged to include such language 
in their MCO contracts so that 340B claims can be identified as to 
avoid including such claims in their rebate requests to manufacturers. 
We will continue to work with states and will consider addressing the 
issue in future guidance or rulemaking, if needed. As to the 
commenter's suggestion to include a 340B identifier on invoices 
submitted to participating drug manufacturers, we disagree and see no 
need for such an identifier given that, as discussed previously, the 
utilization data should not include drugs purchased under the 340B 
program. Therefore, we do not see a need for including a 340B 
identifier in the list of data items submitted by states to 
manufacturers.
    Comment: One commenter stated that many states have yet to submit 
any MCO utilization to manufacturers for payment. The commenter 
requested that CMS impose a fixed deadline for the submission of MCO 
claims of no more than 180 days after publication of the final rule and 
utilization submitted after that deadline should not be eligible for 
rebates. Another commenter stated that CMS should improve reporting for 
Medicaid MCOs because accurate and timely validation, processing, and 
payment of Medicaid MCO rebates are problematic for manufacturers to 
achieve due to delays by states in submissions of claims, incomplete 
data, and no common reporting formats.

[[Page 5290]]

    One commenter stated that the Medicaid statute requires states to 
report to manufacturers on CODs utilized not later than 60 days after 
the end of each rebate period and the commenter noted that the 
Affordable Care Act extended this reporting requirement to include 
information reported by each Medicaid MCO, without altering the 
statutory 60-day time limit. The commenter stated that CMS should 
clarify that even though states that have participating Medicaid MCOs 
are required to report the drug utilization data for Medicaid MCOs 
separately, the same statutory deadline of within 60 days of the end of 
each quarter applies to those reports as well.
    One commenter stated that the proposed rule implements the 
requirement that a state promptly transmit a copy of the drug 
utilization data reported to manufacturers to CMS but the proposed rule 
does not clearly specify a timeframe for that submission. The commenter 
also noted that the proposed rule does not address whether, to the 
extent that the data initially submitted to the manufacturer and CMS 
subsequently are revised, the state is obligated to revise the data 
previously submitted to CMS and in a timely matter. The commenter 
stated that CMS should require states to provide prompt updates to 
correct the utilization data previously submitted to CMS.
    Response: As discussed previously in this section, in accordance 
with section 1927(b)(2)(A) of the Act, states are responsible for 
ensuring that utilization information is submitted no later than 60 
days after the end of each rebate period to invoice manufacturers for 
rebates. The extension of manufacturer rebates to drugs covered by 
Medicaid MCOs did not change these state submission requirements. 
Further, as discussed previously in this section, the statute does not 
absolve manufacturers of their obligation to pay rebates for CODs in 
the event that the state submits an invoice to the manufacturer beyond 
the 60-day deadline; therefore, we are not providing an exemption for 
manufacturers from such obligations in this rule. While we recognize 
that states and MCOs may have encountered systems issues in complying 
with the new data requirements for the MCO rebate provisions, we are 
committed to working with states to resolve these issues in a timely 
manner. We will consider issuing additional guidance, or rulemaking, if 
necessary, to address the compliance of states to provide timely 
reports.
3. Branded Prescription Drug Fee
    Comment: One commenter stated that data submitted by states to CMS 
often are revised after the fact to reflect the resolution of disputes 
with manufacturers as well as to correct errors. The commenter stated 
that CMS relies on these data to calculate Medicaid sales figures for 
use in the Affordable Care Act's branded prescription drug fee, and 
states' failure to correct these data with CMS where they have 
corrected the data with manufacturers can lead to inaccurate 
calculations of a manufacturer's Medicaid sales.
    Response: CMS appreciates the comments and expects that states 
provide utilization corrections to manufacturers and CMS consistent 
with their obligations to submit utilization reports to the Secretary. 
The issue regarding branded prescription drug fee is beyond the scope 
of the final rule. However, more details on the branded prescription 
drug program can be found on Medicaid.gov at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Branded-Prescription-Drug.html.
4. Miscellaneous Comments
    Comment: One commenter stated that the proposed rule did not 
expressly expand upon a state Medicaid agency's obligation or authority 
to require providers to report NDCs or J-codes for the ``Top 20'' 
multiple source drugs and single source drugs in connection with 
submitting claims to the agency for these drugs. However, the proposed 
rule did expand upon the information that the state Medicaid agency 
must report to drug manufacturers. The commenter was concerned that a 
state Medicaid agency may use this expanded reporting obligation as 
authority for collecting additional information from Medicaid providers 
and recommended that CMS clarify in the final rule that state Medicaid 
agencies do not have the authority to collect duplicate data or require 
providers to report additional drug codes or other data beyond what is 
required by federal regulation.
    Response: In accordance with section 1927(a)(7) of the Act and 
Sec.  447.520, states are required to have their providers identify 
physician administered CODs using NDCs for the state to be able to bill 
manufacturers for rebates for such drugs. In accordance with these 
provisions, states may request that providers report information 
necessary to properly identify and report such utilization data.
    Therefore, after considering the comments and for the reasons 
discussed in this section and in the proposed rule, we are finalizing 
Sec.  447.511 (Requirements for States) as we proposed (77 FR 5366), 
except to make a grammatical edit to the last sentence to delete the 
word ``This'' and replace it with ``These'' as the data being 
referenced in this sentence is plural. Furthermore, given the delayed 
effective date for the inclusion of the territories in the definition 
of ``States'' to 1 year after the effective date of the final rule, we 
are finalizing our proposal to delay the applicability of the 
requirements of Sec.  447.511 to the territories by 1 year; however, we 
inadvertently indicated in our proposal that the delay would be 1 year 
after the publication of the final rule, but we intend it to be 1 year 
after the effective date of the final rule.

J. Drugs: Aggregate Upper Limits of Payment (Sec.  447.512)

    In the ``Medicaid Program; Withdrawal of Determination of Average 
Manufacturer Price, Multiple Source Drug Definition, and Upper Limits 
for Multiple Source Drugs'' final rule (75 FR 69591), we made 
conforming amendments to Sec.  447.512 (Drugs: Aggregate upper limits 
of payment) to remove references to Sec.  447.514 (Upper limits for 
multiple source drugs) as this section (Sec.  447.514) was removed from 
regulation. In the proposed rule, we proposed regulatory amendments to 
add references to Sec.  447.514 (Upper limits for multiple source 
drugs) in Sec.  447.512 (Drugs: Aggregate upper limits of payment) (77 
FR 5345). At Sec.  447.512(b)(1), we proposed to replace the term 
``EAC'' with the term ``AAC'' to conform with our proposal to replace 
``estimated acquisition cost'' with ``actual acquisition cost.'' As 
discussed in the proposed rule, we believe that using AAC to determine 
the drug ingredient cost is more reflective of actual prices paid 
rather than EAC, which is often based on published compendia pricing, 
which does not reflect actual prices that providers pay for acquiring 
drugs (77 FR 5345). Further, we proposed to add the word 
``professional'' to the description of dispensing fee in this section. 
These proposed provisions are discussed in more detail at 77 FR 5345 of 
the proposed rule. We received many comments regarding the need for 
adequate Medicaid pharmacy reimbursement, both ingredient costs and 
professional dispensing fees. Those comments and our responses are 
discussed later in this section.

[[Page 5291]]

1. Cost To Acquire and Dispense
    Comment: One commenter stated that a reasonable professional 
dispensing fee is needed to stay in operation and pay those that choose 
a career in helping the public. Several commenters stated that Medicaid 
should ensure that a pharmacy provider is reimbursed for products that 
they acquire and dispense at least at the amount that it cost them to 
acquire and dispense the products. Another commenter stated that 
reimbursement should be based on the true acquisition cost plus a fee 
that is adequate to cover dispensing costs, and believes that $6.50 for 
30 days and $10 for 100 or more days (maintenance drugs) would be fair 
to the pharmacy providers. Another commenter stated that total 
reimbursement for pharmacies must recognize the total cost of doing 
business to provide prescription drugs and pharmacy services to 
Medicaid patients. Another commenter stated that some independent 
pharmacies servicing acute care/special needs Medicaid patients will 
not be able to continue servicing these patients with reimbursement as 
outlined in the proposed rule. Several commenters noted that increasing 
demands on a pharmacy provider for professional interventions, 
technology, and safety, including employing adequate staff, as well as 
the pharmacy provider's responsibility for customer service and 
documentation must be compensated respectively by increased dispensing 
fees to meet these demands and to alleviate patient risk.
    Response: Payment to Medicaid pharmacy providers must be consistent 
with efficiency, economy, and quality of care while assuring sufficient 
beneficiary access, consistent with section 1902(a)(30)(A) of the Act, 
and we believe the total reimbursement should take into account the 
pharmacy's cost to acquire the drug and the pharmacist's professional 
services and costs to dispense the drug product to a Medicaid 
beneficiary. We do not anticipate that the aggregate upper limit, as 
finalized at Sec.  447.512(b), will limit pharmacy participation or 
compromise a Medicaid beneficiary's access to pharmacy coverage or 
services.
    In addition, as discussed in Section II.M. of this final rule, we 
are revising the proposed Sec.  447.518(d) to require states to 
consider both the ingredient cost reimbursement and the professional 
dispensing fee reimbursement when proposing changes to either or both 
of these components of the reimbursement for Medicaid covered drugs to 
ensure that total reimbursement to the pharmacy provider is in 
accordance with requirements of section 1902(a)(30)(A) of the Act.
    Comment: One commenter requested that CMS remember the importance 
of a multiplier (a percentage markup to AAC), as part of any formula 
concerning pharmacy reimbursement which uses acquisition cost as a 
benchmark for setting rates.
    Response: As we stated in the proposed rule (77 FR 5321 and 5350), 
we realize that states may have difficulty determining the actual price 
of each drug at the time it was purchased; however, given how CMS has 
defined AAC and clarified why we defined the term, we disagree that the 
use of a multiplier (that is, the addition of a percentage markup to 
AAC) should always be used by a state as part of any formula concerning 
pharmacy reimbursement which uses acquisition cost as a benchmark for 
setting rates.
2. Profit Margin
    Comment: Several commenters stated that providers need to be 
treated fairly and enjoy a modest profit. A few commenters stated that 
the state should be allowed to include a specific allowable profit 
margin above the cost of the product and the cost to dispense it--and 
that not including a profit margin requires 100 percent efficiency to 
simply break even financially. Another commenter stated that it is 
necessary to make a decent profit on his services--costs and fixed 
overhead need to be taken into account--and the services that are 
rendered by the community pharmacy vs. the big chains, especially 
acting as a liaison for Medicaid beneficiaries with their doctors, are 
important. Several commenters stated that a ``no allowance for profit'' 
would not ensure adequate participation of pharmacies as Medicaid 
providers especially in light of the planned expansion of Medicaid in 
2014, which could lead to store closings/limited access. One commenter 
stated that they understood that Alabama's AAC based reimbursement does 
not account for pharmacy profit--requiring pharmacies to participate 
for free in the Medicaid program which will, at best, shift cost to the 
private sector, and at worst, cause pharmacies to drop out of the 
Medicaid program, especially as Medicaid is set to dramatically expand 
in 2014. Several commenters stated that the proposed rule, absent 
clarifications would take the unprecedented step of prohibiting states 
from paying pharmacies a level of reimbursement sufficient for 
pharmacies to earn a profit since it appears that both ingredient cost 
and professional dispensing fee would only cover costs, and does not 
contemplate the need for reasonable margins.
    Response: As discussed previously, states are responsible for 
setting payment rates consistent with section 1902(a)(30)(A) of the 
Act. Those rates, as discussed in 77 FR 5345 should provide payment for 
ingredient costs, as well as professional dispensing fees. We believe 
that a change to AAC is more consistent with the statutory provisions 
at section 1902(a)(30)(A) of the Act as AAC requires states to 
calculate reimbursement prices based on the prices actually paid by 
pharmacy providers. Further, we afford the states the flexibility to 
adjust their professional dispensing fees, when necessary, to assure 
sufficient access in accordance with the requirements of section 
1902(a)(30)(A) of the Act. We have not identified profit in the 
definition of professional dispensing fee given that the definition in 
the proposed rule was not designed to revise our longstanding 
definition of dispensing fee. That definition, which was established in 
2007 (72 FR 39240), was designed to address those costs associated with 
transferring possession of the drug from the pharmacy to the Medicaid 
beneficiary (consistent with the definition of such fees used in other 
rules, such as Sec.  423.100). In accordance with the definition of 
professional dispensing fee, which we are finalizing in Sec.  447.502, 
states should consider pharmacy costs, including the costs associated 
with a pharmacist's time in checking the computer for information about 
an individual's coverage, performing drug utilization review and 
preferred drug lists review activities, measurement or mixing of the 
COD, filling the container, beneficiary counseling, providing the 
completed prescription to the Medicaid beneficiary, delivery, special 
packaging and overhead associated with maintaining the facility and 
equipment necessary to operate the pharmacy. After evaluating these 
factors, the states are responsible for establishing, and if necessary, 
revising, their professional dispensing fee to ensure that the Medicaid 
pharmacy providers are adequately reimbursed in accordance with the 
requirements of section 1902(a)(30)(A) of the Act. We believe that this 
flexibility should allow states to establish sufficient fees to cover 
costs and ensure adequate participation.
3. Adequacy Over Time
    Comment: Several commenters stated that CMS should add provisions 
to the final rule to ensure that the combined level of ingredient cost 
and professional dispensing fee is adequate over time.

[[Page 5292]]

The commenters stated that these provisions should recognize the need 
to build reasonable margins into pharmacy reimbursement formulas, 
require surveys that determine AAC or update professional dispensing 
fees to be conducted using methodologies that have been thoroughly 
vetted through a public comment process that includes a public comment 
process, establish rules defining requirements for timely adjustments 
to ingredient cost formulas when market prices change, and mandate the 
use of stratified professional dispensing fees that account for the 
differential costs associated with providing pharmacy services in 
varied settings. The commenters stated that Oregon already reduced the 
initial dispensing fees that were set based on surveys when the state 
changed to AAC.
    Response: We agree with the need to ensure that both the ingredient 
cost and professional dispensing fee is adequate and, in this final 
rule, we are revising proposed Sec.  447.518(d) to require states to 
consider both the ingredient cost reimbursement and the professional 
dispensing fee reimbursement when proposing changes to either or both 
of these components of the reimbursement for Medicaid covered drugs to 
ensure that total reimbursement to the pharmacy provider is in 
accordance with requirements of section 1902(a)(30)(A) of the Act.
4. Need for Appeals Process/Adjustments
    Comment: Many commenters stated that there needs to be a process in 
place for adjustments to AAC to allow for price increases or to address 
other price issues, such as efficiency or sensitivity to pricing 
changes and updates, disputes, and discrepancies, where a provider 
cannot purchase a drug product at the acquisition cost established. 
Another commenter stated that AAC pharmacy reimbursement, such as in 
Oregon and Alabama, has shown the commenter that states respond rapidly 
to price decreases but not price increases and this sluggishness 
penalizes pharmacies for price increases. Another commenter stated that 
the final rule should define the requirements for timely adjustments to 
AAC pricing. One commenter recommended that states should have 
flexibility in determining AAC, and to address inflation and other 
price changes between surveys. Several other commenters stated that the 
final rule should require that states adopt and use procedures to 
supplement survey data with rapid response plans so that AACs are 
adjusted timely when market changes cause dramatic price increases.
    Response: This final rule is not designed to mandate state payment 
rates. We set aggregate upper limit requirements, and as we stated in 
the proposed rule, states have the flexibility to establish an AAC 
reimbursement in their state plan based on several different pricing 
benchmarks, for example, the NADAC files, a state survey of retail 
pharmacy providers, or AMP-based pricing (77 FR 5350). States have the 
responsibility to ensure that Medicaid pharmacy providers are 
adequately reimbursed and to establish payment rates in their state 
plan consistent with such requirements. States have the authority to 
conduct retail pharmacy surveys without CMS approval; however, if they 
decide to use data collected from those surveys to revise the 
methodologies they have established in their state plan to make 
payments to pharmacies, the state needs to demonstrate that the 
methodology provides adequate reimbursement consistent with the 
dictates of section 1902(a)(30)(A) of the Act. Furthermore, states 
would need to submit a SPA outlining those methodologies for CMS 
approval and comply with applicable public notice requirements. States 
also have flexibility to establish a methodology that allows for states 
to supplement survey data to reflect market changes, although we did 
not propose requirements for a rapid response plan in our proposed 
rule.
    To the extent that entities have concerns with prices established 
under a state's AAC methodology, those concerns should be raised to the 
state, especially given that states are responsible for setting payment 
rates and complying with a public notice process when setting those 
rates.
5. Pharmacy Reimbursement and Access
    Comment: Several other commenters stated that numerous studies have 
shown that Medicaid dispensing fees have been below the cost of 
dispensing and commenters were concerned with current attempts by 
states to further decrease professional dispensing fees. A few 
commenters stated that cuts to pharmacy will lead to pharmacy closure, 
and one commenter stated that reimbursement below the pharmacist's cost 
should be illegal. Another commenter stated that unless changes in drug 
costs are tied in some meaningful way to changes in dispensing costs, 
access can become a problem, including pharmacies being forced out of 
the Medicaid program. Another commenter stated that CMS should 
effectuate adequate oversight in both the fee-for-service and managed 
care context to ensure adequate reimbursement to provide necessary 
services regardless of how a Medicaid beneficiary's services are 
delivered.
    Another commenter noted that extra services and expenses associated 
with services provided to Medicaid clients, including pickup and 
delivery services, make it possible for clients to remain living 
independently and not be institutionalized, which would add dramatic 
cost to the Medicaid program. Another commenter stated that increasing 
the professional dispensing fee will save money in health care by 
reducing medication related adverse events.
    Several commenters stated that CMS must require that states can 
only use AAC if they increase their dispensing fees to reflect 
pharmacy's cost to dispense. Another commenter stated that the use of 
the new AMP-based FULs or any version of AAC should be limited to those 
states than can provide evidence of adequate professional dispensing 
fees based on services rendered. Another commenter stated that unless 
dispensing fees are raised at or prior to the time that AMP-based FULs 
are finalized, pharmacies will be reimbursed at less than their total 
cost. Another commenter was concerned that a move to require states to 
use AAC for brand drugs without a requirement that dispensing fees be 
increased will negatively impact patient access.
    Response: We appreciate the comments and note that states are 
responsible for calculating reimbursement for prescribed drugs. As 
discussed previously, states have the flexibility to determine 
reimbursement for specific drugs depending on their approved state 
plan, and retain the flexibility to establish a professional dispensing 
fee that covers pharmacy costs. To ensure adequate reimbursement to 
Medicaid pharmacy providers, we are revising proposed Sec.  447.518(d) 
as explained previously.
    We have no reason to believe that pharmacies will be forced to 
leave the Medicaid program or that patient care will suffer as a result 
of the revised requirements in Sec.  447.512(b), and note that several 
states are already paying based on an AAC methodology without causing 
pharmacies to leave the Medicaid program or other adverse effects on 
patient care. However, we will continue to monitor the issue. 
Furthermore, as discussed in section II.K. of this final rule, and in 
our proposed rule (77 FR 5345 through 5347), the FUL is designed as an 
aggregate upper limit. Therefore, states have the discretion to adjust

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reimbursement on a drug-by-drug basis to the extent that such an 
adjustment is consistent with the state plan.
    Comment: One commenter stated that pharmacies are currently only 
able to serve Medicaid patients by utilizing the margins built into 
drug costs because most states have been unwilling or unable to pay 
adequate dispensing fees.
    Response: This final rule is designed to address ingredient costs 
as well as professional dispensing fees to ensure adequate 
reimbursement. As discussed in more detail in section II.M. of this 
final rule, we are revising proposed Sec.  447.518(d), based on 
comments we received, to specify that when states are proposing changes 
to either the ingredient cost reimbursement or the professional 
dispensing fee reimbursement, they are required to ensure that total 
reimbursement to the pharmacy provider complies with requirements of 
section 1902(a)(30)(A) of the Act.
6. AAC and Drug Shortage Issues
    Comment: One commenter stated that there may be instances where the 
commenter cannot purchase a drug product at the cost basis determined 
by the Medicaid program. The commenter believed this is already a 
problem for some of the generic drugs that are in short supply, and 
will only get worse with a cost-based product reimbursement that is not 
well monitored and updated. Another commenter noted that there have 
been situations in the past year, due to drug shortages and other 
factors, where his acquisition cost for the drug exceeded the 
reimbursement and he could not dispense it.
    Response: In accordance with section 1902(a)(30)(A) of the Act, 
states have the responsibility to provide pharmacy providers with 
adequate reimbursement, and likewise, to ensure that states and the 
federal government receive the cost savings benefits of market changes. 
To the extent that entities have concerns with reimbursement, those 
issues should be raised to the state, especially given that states are 
responsible for setting payment rates that are sufficient to enlist 
enough providers so that care and services, including drugs, are 
available to Medicaid beneficiaries, consistent with the requirements 
of section 1902(a)(30)(A) of the Act.
7. Claim/Aggregate Level
    Comment: One commenter requested clarification about Sec.  
447.512(b) regarding whether states are required to implement an AAC 
and professional dispensing fee at the individual claim level or are 
states required to prove that they are under the AAC and professional 
dispensing fee in the aggregate. The commenter was concerned that a 
move to AAC and professional dispensing fee at the claims level could 
increase pharmacy program costs to the state. The commenter supported 
the aggregate model for AAC reimbursement, as long as reliable AAC data 
are available to the state. Another commenter stated that the use of 
aggregate upper payment limits allows states some flexibility in 
implementation; however, the range of variance of pricing for drugs in 
a product group should be available to states to allow them the 
transparency necessary to develop an AAC model linked to the 
professional dispensing fee that can be fair and supported.
    Response: In accordance with Sec.  447.512(b) of this final rule, 
payments for covered drug products must not exceed, in the aggregate, 
payment levels that the agency has determined by applying the lower of 
the AAC and professional dispensing fee or usual and customary (U&C) 
charges to the general public. We agree that these aggregate upper 
limits allow states some flexibility in setting payment rates. As 
discussed previously, states have the flexibility to determine 
reimbursement for specific drugs and are responsible for calculating 
payments consistent with section 1902(a)(30)(A) of the Act.
8. Application of AAC to Specific Entities/Products
    Comment: One commenter asked if MCOs are required to abide by the 
AAC definition when reimbursing Medicaid pharmacies. Several commenters 
stated that if MCOs are required to abide by the AAC definition, all 
safeguards should be in place (for establishing/changing ingredient 
cost and professional dispensing fee) that will ensure adequate 
pharmacy reimbursement for Medicaid managed care patients.
    Response: In accordance the requirements of section 1932 of the 
Act, MCOs may continue to establish their own reimbursement 
methodologies, in accordance with their contractual arrangement with 
the state agency, including payment to pharmacy providers for 
ingredient cost and professional dispensing fees; therefore, the 
provisions of this final rule related to pharmacy payment at AAC do not 
apply.
    Comment: One commenter requested clarification on how the AAC and 
professional dispensing fee methodology will work in the context of 
specialty drugs. Another commenter stated that physician-administered 
drugs should be reimbursed at AAC too, and that states should collect 
rebates on these drugs.
    Response: The requirements for Medicaid pharmacy reimbursement we 
are finalizing Sec.  447.512(b) are designed to apply to payment rates 
established by states for prescription drugs. States have the 
flexibility for determining separate reimbursement rates for specialty 
and physician-administered drugs. We agree that states are required to 
collect rebates on physician-administered drugs when such drugs are 
billed separately.
9. Differential Reimbursement for Classes of Trade
    Comment: One commenter expressed that a state may want to create a 
differential reimbursement between independent and chain pharmacies or 
rural and urban pharmacies (relating to establishment of AAC) to meet 
particular access issues or concerns.
    Response: We have not required that states create a differential 
reimbursement methodology based on pharmacy type; however, the states 
retain the option to adjust the reimbursement for provider type or 
services rendered such as special packaging or delivery.
10. Method for Determining AAC
    Comment: One commenter stated that if CMS insists on the use of 
AAC, it is critical that a state be allowed to maintain flexibility in 
the method they elect to determine AAC. Another commenter stated that 
each state should be allowed to demonstrate that its process for 
determining AAC is consistent with the proposed definition, and that 
the state should be able to use processes other than pharmacy invoices 
to determine AAC. The commenter was opposed to renaming and revising 
EAC to AAC if it limits states to only one method for determining AAC, 
such as pharmacy pricing surveys, as the commenter's Medicaid state 
agency currently uses drug pricing information provided by drug 
manufacturers to determine acquisition cost. The commenter added that 
guidance should be revised to allow payment based on an average of AACs 
from a number of sources, including pharmacies, wholesalers, 
manufacturers, etc. and noted that if CMS does not allow this 
flexibility, reimbursement expenditures could increase.
    Response: We recognize that there are a variety of sources which 
states may use to establish payments consistent with the AAC 
requirements in Sec.  447.512(b). This final rule does not limit states 
to one method or only using pharmacy invoices to determine AAC;

[[Page 5294]]

however, in accordance with the requirement in Sec.  447.518(d) of this 
final rule, states must provide adequate data, such as a state or 
national survey of retail pharmacy providers or other reliable data 
other than a survey when proposing any change to its ingredient cost or 
dispensing fee reimbursement.
11. Method for Determining Professional Dispensing Fee
    Comment: One commenter recommended that the state should have the 
flexibility to determine what are in the components of the dispensing 
fee. Another commenter encouraged CMS to provide guidance to states on 
re-evaluating their dispensing fees, specifically with regard to 
operational costs, costs unique to each state, and a reasonable profit. 
A few commenters noted general categories of items/expenses that should 
be considered when determining a professional dispensing fee, including 
all fixed and variable costs and all overhead expenses, prescription 
department payroll/personnel expenses, direct prescription department 
costs, and pharmacy-wide expense items. Other commenters submitted 
specific areas to be considered when establishing the professional 
dispensing fee, which included consulting with prescribers, disease 
management, unique handling fees, unit dose packaging/dispensing, 
shipping, overhead for factor replacement products, special monitoring 
and reporting of lab values for certain drug products and adjustments 
for medical inflation. One commenter also noted that adequate 
reimbursement for additional services provided such as compliance 
packaging and review of medication regimens need to be addressed, as 
the cost effectiveness of these services is well documented. Several 
commenters stated that it is not reasonable for states to be permitted 
to set a single professional dispensing fee for all pharmacies that 
fill a Medicaid prescription, and stated that CMS should require that 
professional dispensing fees be stratified so that each type of 
pharmacy, such as long term care (LTC) pharmacies, are paid 
appropriately for the type of professional dispensing services it 
provides. The commenters stated that the higher costs of packaging, 
dispensing, and delivery borne by both home infusion and LTC 
pharmacies, as opposed to retail community pharmacies, should be 
reflected in the professional dispensing fee. Another commenter stated 
that Alaskan pharmacies, because of their remote location, face 
significant freight charges that ultimately increase their cost of 
doing business in the state.
    Response: In accordance with the definition of professional 
dispensing fee that we are finalizing at Sec.  447.502, states should 
calculate their professional dispensing fees to include those costs 
which are associated with ensuring that possession of the appropriate 
COD is transferred to a Medicaid beneficiary. The states retain the 
flexibility to establish, and if necessary, revise, their professional 
dispensing fee to ensure that the Medicaid pharmacy providers are 
adequately reimbursed in accordance with the requirements of section 
1902(a)(30)(A) of the Act.
    Comment: One commenter requested that CMS implement a unique 
Medicaid reimbursement for blood clotting factor as the dispensing of 
this product requires enhanced services and activities that vary 
greatly from those performed by a typical retail pharmacy. Another 
commenter stated that they are not suggesting that state Medicaid 
offices must necessarily adopt the current Medicare per unit furnishing 
fee of $0.18 for the coverage of professional, management and 
distribution cost of the clotting factor, but rather recognize, as 
Medicare has, that such professional dispensing fees should be unique 
from the typical professional dispensing fee for common prescriptions. 
One commenter stated that the professional dispensing fee for many 
states is $5.00-$10.00, resulting in significant loss to all pharmacies 
that provide clotting factor to Medicaid patients.
    Response: While we appreciate the comment regarding blood clotting 
factors, we do not think it is necessary for states to implement a 
specific dispensing fee for providing clotting factors. The regulatory 
provisions applicable to Medicare Part B and the MDR program are 
different and the furnishing fee payment allowed for Medicare Part B is 
not applicable to Medicaid. We recognize that there are other services 
that may be offered to a Medicaid patient when clotting factor is 
dispensed. We encourage states to accurately reflect those services in 
their Medicaid state plan under the appropriate service category and 
establish appropriate payment rates for such services.
    Comment: One commenter stated that states could be negatively 
impacted if increasing volume or efficiencies reduce dispensing costs 
and they have no methodology to reduce dispensing fee payments.
    Response: We are not mandating a specific formula or methodology 
which the state must use when calculating their professional dispensing 
fees because we believe that each state should maintain the flexibility 
to establish and, if necessary, revise its professional dispensing fee 
in accordance with the requirements in this final rule.
12. State Choice To Implement AAC
    Comment: Several commenters stated that a state should be able to 
choose not to use AAC at all in pharmacy reimbursement. One of these 
commenters stated that many states have used EAC for years and already 
have predictable and reliable EAC metrics in place. The commenter 
stated that, with this proposal, CMS is forcing states to engage in 
multiple reimbursement methodology changes simultaneously.
    Response: As we previously stated in this section, we no longer 
believe that the EAC is an appropriate measure of the pharmacy 
provider's acquisition cost because it was based traditionally on 
published compendia pricing which did not include discounts and price 
concessions which adjusted the prices actually charged in the 
marketplace. The OIG previously published reports focusing on the 
relationship between reimbursement for Medicaid CODs and compendia 
pricing (OIG Audit reports--A-06-00-00023, A-06-01-00053, A-06-02-
00041). Based on these reports, we believe it is necessary for states 
to have a more accurate reference price as the basis for Medicaid 
reimbursement for prescription drugs. We believe that AAC will provide 
states with a more accurate reference price to base ingredient cost 
reimbursement, as it reflects prices actually paid by providers to 
acquire drugs. While we agree that EAC may have been predictable, we do 
not believe it was an accurate standard for determining pharmacy 
reimbursement rates.
13. Maintain SMAC
    Comment: One commenter stated that a state should be able to 
maintain a state maximum allowable cost (SMAC) program, which monitors 
prices currently available in the marketplace, thereby complying with 
the definition of AAC.
    Response: We agree that states should have flexibility for 
establishing reimbursement rates, which could include a SMAC program; 
however, the pricing methodologies need to be consistent with Sec.  
447.512(b) of this final rule.
14. State Budget Pressures
    Comment: Several commenters expressed concern that the states 
should be encouraged or even required, to

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objectively determine fees regardless of state budget pressures and/or 
allocations. Another commenter noted that the state of California has 
already suggested that additional cuts based solely on budgetary 
constraints would be applied to the survey findings for AAC and 
professional dispensing fee, which runs counter to a cost-based 
methodology.
    Response: States retain the flexibility to establish reimbursement 
methodologies consistent with the requirements of this final rule. 
Comments about state budget pressures are outside the scope of this 
rule but we will review any SPAs to determine whether states' proposed 
payments rates are consistent with section 1902(a)(30)(A) of the Act.
15. Burden for Territories
    Comment: One commenter stated that to have full participation in 
the CMS MDR program, a specific territory will need to take certain 
measures such as: develop a data bank or reference to determine AAC for 
pharmacy claims reimbursement to community pharmacies, and a study for 
the determination and validation of professional dispensing fees.
    Response: We agree with the commenter that territories will need to 
take certain measures to determine their AAC reimbursement model. As 
noted in our response to comments on the definitions of states and 
United States, we are committed to working with all of the territories 
that participate in the MDR program to ensure their compliance with all 
applicable requirements.
    Therefore, after considering the comments and for the reasons 
discussed in this section and in the proposed rule, we are finalizing 
the provisions in proposed Sec.  447.512 Drugs: Aggregate upper limits 
of payment, with minor changes to remove the words ``of this subpart'' 
from the proposed regulatory text at Sec.  447.512(a), (b), and (c)(1) 
as the reference is not necessary given the regulatory citations. This 
minor editorial change is not intended to change the meaning or intent 
of this regulatory text.

K. Upper Limits for Multiple Source Drugs (Sec.  447.514)

    Section 2503(a) of the Affordable Care Act revised the definition 
of multiple source drug established in section 1927(k)(7)(A) of the 
Act. As discussed in the proposed rule, we proposed that the definition 
of ``multiple source drug'' be included in Sec.  447.502 
``Definitions'' (77 FR 5345). In accordance with section 1927(e)(4) of 
the Act, we proposed in Sec.  447.514(a)(1) that a FUL be calculated 
for each multiple source drug for which the FDA has rated three or more 
products therapeutically and pharmaceutically equivalent (77 FR 5346, 
5366). We also proposed that the FUL will be calculated, in accordance 
with section 1927(e)(4) of the Act, using only therapeutically and 
pharmaceutically equivalent drugs (77 FR 5346, 5366). Additionally, we 
proposed to calculate the FUL as an aggregate upper limit at 175 
percent of the weighted average of monthly AMPs, to use the most 
recently reported monthly AMPs and AMP units, and to eliminate single 
source drugs from the FUL calculation (77 FR 5346). We also considered 
various approaches, but did not propose a specific methodology for 
smoothing the FULs (77 FR 5349). These proposed provisions are 
discussed in more detail in the proposed rule (77 FR 5345 through 
5350).
    We received comments concerning our proposed upper limit for 
multiple source drugs section which include comments pertaining to the 
proposed upper limits calculation methodology, the impact of terminated 
drug products, the impact of the proposed buildup methodology for 
calculating AMP, and national availability. The comments and our 
responses are as follows:
1. Methodology
    Comment: One commenter stated that in the proposed rule, CMS does 
not present any situation in which a FUL would be calculated at more 
than 175 percent of the weighted AMP, and another commenter was 
disappointed by the absence in the proposed rule of a process to 
determine when a higher multiplier would be used. Several commenters 
stated that CMS uses the 175 percent markup as a maximum instead of a 
minimum and encouraged CMS to consider offering itself more flexibility 
in using a markup higher than 175 percent. One commenter noted that if 
this rule is finalized, it would eliminate CMS's ability to set the FUL 
above 175 percent of the average weighted AMPs. Another commenter noted 
that CMS proposed the 175 percent markup as a result of its own data 
analysis and a GAO report that indicated ``using a factor of 175 
percent of weighted monthly AMPs should yield adequate reimbursement 
for pharmacy providers, while achieving cost savings for the Medicaid 
program compared to pre-DRA FUL.'' The commenter noted that CMS's 
reasoning that 175 percent of AMP should be adequate reimbursement may 
be logical but it does not include a sound basis for CMS to limit its 
flexibility to raise the FULs when needed. The commenter further noted 
that CMS may never have to use the discretion given in the statute; 
however, a regulation that merely recognized the existence of that 
discretion, (without implementing) would not prevent CMS from setting 
FULs at a 175 percent markup.
    Another commenter stated, referring to the draft AMP-based FULs, 
that a large number of generic drugs are so low cost that even with a 
175 percent markup and a traditional dispensing fee, the reimbursement 
will fall short of a retail pharmacy's cost to dispense, and suggested 
that either a minimum FUL value or a higher percentage markup should be 
applied to these drug groups. Several commenters stated that the 
multiplier should be set at a level that will incentivize generic 
utilization given the overall cost savings to the system with increased 
use of generic drug products. One commenter stated that flexibility to 
set the FULs at levels greater than 175 percent of the weighted average 
of AMP should ensure adequate pharmacy reimbursement and limit the 
extreme volatility in monthly weighted AMPs and FULs.
    Another commenter noted that the FULs multiplier needs flexibility 
to ensure that any FUL is set at the NADAC value, given that NADAC 
values will not be used by states if they are higher than the FUL. Yet, 
another commenter noted that CMS may be able to use the monthly survey 
data it is planning to publish for the NADAC to identify FULs that are 
too low. The commenter noted that CMS's proposal to limit the FUL to 
175 percent of the weighted average of AMP may be inadequate if a 
substantial number of FULs yield a reimbursement lower than the NADAC 
or other state AAC based payment reimbursement.
    Several commenters stated that Congress provided CMS with broad 
authority to increase the multiplier in certain justifiable cases, and 
commenters cited examples when the multiplier should be increased, 
including for certain specialty drug products, drugs subject to 
shortages, drugs that experience market inflation or plummet as a 
result of discounts. One commenter stated that initially, CMS may need 
to increase the multiplier for calculating all FULs on a frequent 
basis, and then if FULs begin to more closely approximate acquisition 
cost over time, there still may be cases (listed previously) where a 
higher multiplier should still be used.
    Response: As stated in the proposed rule (77 FR 5349), we believed 
that calculating the FULs using a fixed mark-up of 175 percent would 
result in

[[Page 5296]]

Medicaid payments for multiple source drugs that are adequate to meet 
the costs incurred by retail community pharmacies to acquire drugs. 
However, in response to comments, we conducted an analysis of the NADAC 
files, which found that about 40 percent of the individual FUL values 
calculated using the 175 percent multiplier are lower than the 
corresponding NADACs each month. The NADAC and FUL data can be found by 
visiting http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Pharmacy-Pricing.html and http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Federal-Upper-Limits.html respectively. We recognize 
that the FUL may be higher or lower than the NADAC, as the FUL is 
calculated using AMPs which are based on prices paid to manufacturers 
by retail community pharmacies and wholesalers distributing drugs to 
retail community pharmacies. The NADAC file, in contrast, is based on a 
monthly nationwide survey of invoice prices for CODs purchased by 
retail community pharmacies. Further information on the methodology for 
calculating the NADAC can be found at http://medicaid.gov/medicaid-chip-program-information/by-topics/benefits/prescription-drugs/ful-nadac-downloads/nadacmethodology.pdf. Where the FUL value calculated 
using the 175 percent multiplier is below the corresponding NADAC file 
value, we agree with the commenter that the FUL using that multiplier 
is potentially too low to ensure adequate reimbursement for at least 
some of the drugs within that FUL group. We believe that in such 
instances, the FUL would not ensure that pharmacies are reimbursed for 
their acquisition costs, potentially jeopardizing access to certain 
drug products.
    In light of these concerns, we agree with the commenters about the 
need for some flexibility in establishing the FUL multiplier. 
Therefore, upon consideration of the comments and as a result of our 
ongoing analysis of the draft FULs in comparison with the monthly NADAC 
pricing files, we agree with the suggestion to establish a revised 
process using a higher multiplier to calculate the FULs for certain 
multiple source drugs. Specifically, in this final rule, we are making 
an exception to calculate the FUL at an amount equal to 175 percent of 
the weighted average of the most recently reported monthly AMPs for 
pharmaceutically and therapeutically equivalent multiple source drugs, 
except where that amount is less than the average retail community 
pharmacies' acquisition cost for such drug products as determined by 
the most current national survey of such costs. In situations where the 
FUL is less than the average retail community pharmacies' acquisition 
cost, we will establish the FUL using a higher multiplier so that the 
FUL amount would equal the most current average retail community 
pharmacies' acquisition cost as determined by the most current national 
survey of such costs. This revised process by which a higher multiplier 
is used, is codified in Sec.  447.514(b)(1) and (2) of this final rule. 
To implement this revision when we calculate the FULs each month, we 
intend to use the most current monthly NADAC pricing file values, as we 
believe that such values represent the best data available to estimate 
the average retail community pharmacies' acquisition cost. We may 
consider using other values in the future if such data become available 
and issuing additional rulemaking, if needed.
    We note that, as discussed previously and in the proposed rule (77 
FR 5347), this final rule is not designed to mandate state payment 
rates. Therefore, states have the discretion to adjust reimbursement on 
a drug-by-drug basis using pricing benchmarks, such as the NADAC 
pricing file, or other reliable data, to adjust reimbursement, as long 
as such payments are consistent with the state plan.
    Comment: Several commenters stated that the 175 percent multiplier 
should be increased for 5i drugs as commenters believed that inclusion 
of non-retail pharmacy sales will lower AMPs and a multiplier of only 
175 percent will not cover retail community pharmacies' acquisition 
cost for these drugs.
    Response: In light of the criteria set forth in section 
1927(k)(1)(B)(i)(IV) of the Act for the dispensing of 5i drugs, we have 
decided that we will not include 5i drugs that are not generally 
dispensed through retail community pharmacies in the FUL calculations, 
or apply the FUL to 5i drugs that are not generally dispensed through 
retail community pharmacies.
    Comment: One commenter stated that a multiplier higher than 175 
percent should be set where the independent pharmacies and small chains 
have higher acquisition costs than publicly traded chain pharmacies. 
One commenter added that despite aggressive efforts to negotiate and 
obtain lower prices, small business community pharmacy providers 
purchase generic drugs at a relative premium. The commenter noted than 
an OIG report found that independent pharmacies purchase multiple 
source drugs at a higher price than chain pharmacies or big box 
pharmacies.
    Response: The FUL is calculated using AMPs, which are based on 
prices paid by retail community pharmacies and wholesalers distributing 
drugs to retail community pharmacies, which are defined in section 
1927(k)(10) of the Act to include independent, chain, supermarket and 
mass merchandiser pharmacies that are licensed by the state and 
distribute medications to the general public at retail prices. Further, 
the NADAC pricing file, which we intend to use in the revised process 
for using a multiplier higher than 175 percent of the weighted average 
of the most recently reported monthly AMPs for pharmaceutically and 
therapeutically equivalent multiple source drugs to calculate the FUL, 
includes a statistically reliable representation of acquisition data 
from a random sample of pharmacies selected from all 50 states and the 
District of Columbia. Pharmacy entities surveyed include independent 
and chain retail community pharmacies in the United States. Thus, in 
light of this, we do not see a need at this time to calculate a 
separate FUL using a higher multiplier for independent or small chain 
pharmacies. For more information about the methodology for calculating 
the NADAC, please see http://medicaid.gov/medicaid-chip-program-information/by-topics/benefits/prescription-drugs/ful-nadac-downloads/nadacmethodology.pdf.
    Comment: One commenter agreed with the proposal to use the most 
recently reported monthly AMP and utilization data to calculate the 
FUL.
    Response: We appreciate the comment and believe that using the most 
recently reported AMP and utilization data is consistent with the 
statute.
    Comment: Several commenters stated that CMS did not adequately 
describe in the proposed rule or the draft FUL files the methodology 
implemented for the draft AMP-based FULs including calculation of the 
weighted AMPs and criteria for establishment of the FUL groups. One of 
the commenters requested that CMS communicate the criteria for 
calculating the FULs so that stakeholders can provide comprehensive and 
meaningful input before the final rule is issued.
    Response: We disagree with the commenters that we did not 
adequately describe in the proposed rule the methodology that would be 
used for calculating the FULs. As discussed in

[[Page 5297]]

the proposed rule, sections 1927(e)(4) and (5) of the Act outline the 
requirements for calculating the FUL (77 FR 5346-5349). Effective 
October 1, 2010, section 1927(e)(5) of the Act was revised to require 
that the Secretary calculate FULs as no less than 175 percent of the 
weighted average (determined on the basis of manufacturer utilization) 
of the most recently reported monthly AMPs for pharmaceutically and 
therapeutically equivalent multiple source drug products that are 
available for purchase by retail community pharmacies on a nationwide 
basis. In accordance with these provisions, in the proposed rule (77 FR 
5345 through 5347), we described the methodology that we intended to 
use to calculate the FULs. We proposed that, in accordance with section 
1927(k)(7) of the Act, at least two therapeutically equivalent (``A'' 
rated) formulations must be listed in the FDA's Orange book for the 
drug to be defined as a multiple source drug. We also proposed that, in 
accordance with section 1927(e)(4) of the Act, a FUL would be 
calculated for each multiple source drug for which the FDA has rated at 
least three products therapeutically and pharmaceutically equivalent 
(77 FR 5346).
    In accordance with section 1927(e)(5) of the Act, as revised by 
section 2503(a) of the Affordable Care Act, we further proposed that 
the specific FUL will be calculated using a multiplier equal to 175 
percent of the weighted average of the most recently reported monthly 
AMPs for therapeutically and pharmaceutically equivalent multiple 
source drugs (77 FR 5349, 5366). We proposed that the weighted average 
will be determined on the basis of manufacturer reported utilization of 
the most recently reported innovator and noninnovator pharmaceutically 
and therapeutically equivalent multiple source drugs available for 
purchase by retail community pharmacies on a nationwide basis (77 FR 
5346). We also proposed that the determination of the weighted average 
will not include utilization from single source drugs (77 FR 5346). We 
proposed to use the most recently reported monthly AMP and utilization 
data submitted by the manufacturer in the calculation of the weighted 
AMP (77 FR 5346). We also proposed to calculate the FUL based on the 
nine-digit NDC, which is specific to the product code, combining all 
package sizes of a drug into the same computation of AMP (77 FR 5346). 
We proposed to exclude the AMP of a terminated NDC in calculating the 
FUL beginning with the first day of the month after the termination 
date reported by the manufacturer to CMS, and to calculate the FUL 
using a multiplier of 175 percent of the weighted average of the most 
recently reported monthly AMPs using manufacturer submitted utilization 
data (77 FR 5346, 5366). The proposals put forth in the proposed rule 
(77 FR 5345 through 5347, 5366) regarding the FUL calculation were 
detailed for stakeholders to consider and comment upon accordingly. We 
have established a revised process by which a multiplier higher than 
175 percent will be used to calculate the FUL, by comparing the FUL 
established using the 175 percent multiplier to the average retail 
community pharmacies' acquisition cost and, where necessary, using a 
higher percentage markup to ensure that the FUL is not lower than such 
average retail community pharmacies' acquisition costs. As discussed 
previously in this section, we have not revised our proposed 
methodology to base the FUL calculation on the weighted average of the 
most recently reported monthly AMPs for pharmaceutically and 
therapeutically multiple source drug products.
2. Calculation Requirements--Therapeutic Equivalent Criteria and 
Authorized Generic Pricing
    Comment: One commenter recommended that CMS clarify how it will 
consider authorized generic drugs in the determination of whether three 
drug products are pharmaceutically and therapeutically equivalent, 
providing examples for consideration and clarification. Another 
commenter stated that CMS's methodology does not conform to the 
statutory requirement because authorized generic drugs are not rated by 
the FDA as therapeutically and pharmaceutically equivalent to the 
branded drug and the authorized generic drug is not listed in FDA's 
Orange Book. The commenter further asked if CMS counts the authorized 
generic drug as one of the three drug products required to calculate a 
FUL during the 180 day time frame when the first generic drug receives 
exclusivity since there are only two competitors--the brand 
manufacturer and the manufacturer that holds the ANDA. The commenter 
added that CMS should revise its methodology to ensure that authorized 
generic drugs will not be included in the three equivalent drug product 
standard required to calculate a FUL. The commenter further stated that 
congressional intent was to ensure that a FUL is calculated when there 
are a sufficient number of competitors in the marketplace.
    Response: In accordance with section 1927(e)(4) of the Act, the 
Secretary is required to calculate a FUL for each multiple source drug 
for which the FDA has rated three or more drug products therapeutically 
and pharmaceutically equivalent. Therefore, when the FDA has determined 
three or more drugs to be therapeutically and pharmaceutically 
equivalent, we will calculate a FUL for those drugs provided that they 
meet the other requirements of section 1927(e)(5) of the Act. An 
authorized generic drug, found by the FDA to be therapeutically and 
pharmaceutically equivalent to the reference listed drug, will be used 
in the calculation of the FUL. The FDA's ``Approved Drug Products with 
Therapeutic Equivalence Evaluations'' (Orange Book) will be reviewed to 
determine if drugs have been A-rated by the FDA or not. Consistent with 
section 1927(e)(4) of the Act, we will calculate the FUL using both 
innovator multiple source and noninnovator therapeutically and 
pharmaceutically equivalent multiple source drugs. As stated in the 
preamble to the proposed rule, any other formulations of the drug 
listed in the FDA Orange Book that are not therapeutically and 
pharmaceutically equivalent to the reference listed drug will not be 
used in the calculation of the FUL (77 FR 5346).
    Comment: For authorized generic drugs and the calculation of FULs, 
a few commenters stated that the transfer price between the primary and 
secondary manufacturer is not a market price and should not be included 
in AMP. The commenters further stated that these lower AMPs will impact 
FULs for any product grouping that includes an authorized generic drug, 
and has three or more equivalent products required to set a FUL. One of 
the commenters stated that this scenario is inconsistent with 
congressional intent to provide adequate reimbursement to pharmacies 
for multiple source drugs.
    Response: In accordance with section 1927(k)(1)(C) of the Act, in 
the case of a manufacturer that approves, allows, or otherwise permits 
any drug of the manufacturer to be sold under an NDA approved under 
section 505(c) of the FFDCA, the AMP shall be inclusive of the average 
price paid for such drug by wholesalers for drugs distributed to the 
retail community pharmacies. Additionally, section 1927(e)(4) of the 
Act requires that we calculate a FUL for each multiple source drug for 
which the FDA has rated three or more products therapeutically and 
pharmaceutically equivalent. Further, section 1927(e)(5) of the Act 
states, in part, that the FUL shall be calculated using the weighted 
average of the most recently reported

[[Page 5298]]

monthly AMPs for pharmaceutically and therapeutically equivalent 
multiple source drugs available for purchase by retail community 
pharmacies on a nationwide basis. Therefore, to the extent that an 
authorized generic drug meets the criteria necessary for the 
calculation of a FUL, its weighted AMP shall be included in the FUL 
calculation in accordance with the statute. However, we also note that 
our decision to use a revised process to increase the multiplier used 
in the FUL calculation, as discussed previously, should alleviate the 
concerns raised by the commenters about the adequacy of Medicaid 
reimbursement to pharmacies.
3. Non-Therapeutically Equivalent and B-Rated Drugs--Application/
Calculation of the FUL
    Comment: Several commenters expressed support for CMS's proposal 
that FULs will only derive from and be applied to A-rated drugs that 
are pharmaceutically and therapeutically equivalent to the reference 
listed drug. Several commenters stated that it is appropriate not to 
apply a FUL to a drug product that is not therapeutically equivalent, 
that is, a B-rated drug, to a reference listed drug. Another commenter 
stated that in the proposed rule, CMS does not explain the rationale 
for why FULs might be applied to drugs that are not therapeutically 
equivalent and how this would be consistent with the statute.
    Response: As noted in the proposed rule, we would not apply the FUL 
to a drug that is not therapeutically equivalent to the reference 
listed drug nor would we use a drug that is not-therapeutically or 
pharmaceutically equivalent to calculate a FUL for the product group 
(77 FR 5346). To clarify, and as discussed previously, we will only 
apply the FUL to drugs which are rated by the FDA as therapeutically 
and pharmaceutically equivalent.
    Comment: Several commenters stated that B-rated products typically 
compete in different markets characterized by different pricing than 
that applicable to the A-rated drugs, and, therefore, should not have a 
FUL applied. One commenter suggested that CMS should establish a 
mechanism which will prevent the improper calculation of FULs based on 
non-A rated products, as well as a mechanism to ensure that the FUL 
does not apply to those drugs. One commenter stated that CMS should 
codify both that B-rated generics are not counted when determining 
whether there are three sources of supply of a multiple source drug, 
and that the FULs do not apply to these B-rated drugs. Commenters 
stated that CMS is calculating draft FULs using non-A rated products 
and that each of the draft FUL releases included FULs on both B-rated 
drugs and drugs which have not been rated at all.
    Response: In accordance with section 1927(e)(4) of the Act, the FUL 
is only calculated for each multiple source drug for which the FDA has 
rated three or more products therapeutically and pharmaceutically 
equivalent. Section 1927(e)(4) of the Act also requires that only these 
therapeutically and pharmaceutically equivalent products shall be used 
when calculating the FUL. Therefore, we agree with the commenter that 
B-rated drugs should not be included in the calculation of the FUL; 
however, we disagree with the comments suggesting that we are 
calculating draft FULs using non-A rated products. We have also decided 
that B-rated drugs should not be subject to the FULs because, as 
discussed more fully in the proposed rule (77 FR 5346), B-rated drugs 
are not therapeutically equivalent to the reference drug or other 
pharmaceutically equivalent products within the group. Therefore, we 
would not apply the FUL to a B-rated drug product, nor would we use a 
B-rated drug in the calculation of the FUL.
    In the draft FUL reimbursement files, which are available on the 
Medicaid.gov Web site at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Federal-Upper-Limits.html, we include a comprehensive list of NDC-11s by FUL product 
group which have the same ingredient, strength, dose, and route of 
administration. These groups may or may not contain both A-rated and B-
rated drug products. That is, these groups may or may not contain drugs 
that have not been found by the FDA to be therapeutically and 
pharmaceutically equivalent in addition to those that have been found 
to be therapeutically and pharmaceutically equivalent. However, as 
noted previously in this section, B-rated drug products are not used in 
the calculation of the FUL and the FUL is not applied to B-rated drug 
products. We have also included this same information in the Draft FULs 
Methodology and Data Elements Guide posted on the Medicaid.gov Web site 
at http://www.medicaid.gov/medicaid-chip-program-information/by-topics/benefits/prescription-drugs/downloads/methodologyguide-amp-basedfulnew.pdf.
    Comment: One commenter was concerned that if the FUL does not apply 
to all drugs, (and it only applies to A-rated drugs), states may have 
to determine that some drugs in a FUL product group might have a FUL 
applied, while others may not, and that this change could result in 
intensive manual review and correction.
    Response: We appreciate the comment; however, for the reasons 
discussed previously, we have retained the provision in this final rule 
that the FULs will not apply to non-therapeutically equivalent drug 
products. The draft FUL files, which can be found on the Medicaid.gov 
Web site at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Federal-Upper-Limits.html, are 
designed such that they can be sorted and the user can easily identify 
drugs to which a FUL applies.
4. Unit Type/UPPS Issues
    Comment: One commenter expressed concern that CMS did not propose a 
solution to the unit of measure issues that are confounding CMS efforts 
to set FULs in the proposed rule.
    Response: It is ultimately the responsibility of the manufacturer 
to determine the appropriate Unit Type and Units per Package Size 
(UPPS) for each of their products. We issued guidance to manufacturers 
on November 1, 2010, to remind manufacturers of their reporting 
obligations concerning unit type and UPPS in Manufacturer Release #82 
(November 1, 2010), which is posted on the Medicaid.gov Web site at 
http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Downloads/Rx-Releases/MFR-Releases/mfr-rel-082.pdf. In accordance with section 1927(b) of the Act, manufacturers 
are required to submit monthly and quarterly drug product pricing data 
which includes (but is not limited to drug unit type and UPPS) via the 
DDR system. Manufacturers are also responsible for submitting 
corrections to submitted drug product pricing data, if necessary. In 
the case where various drug manufacturers have not reported the same 
unit type for their drug products in a product group, which is 
comprised of drug products with the same ingredient, strength, route of 
administration and dosage form, we do not calculate a FUL for that 
product group. We routinely review the manufacturer reported data to 
identify FUL product groups that do not have the same unit type 
reported, and we do not calculate a FUL for those product groups. 
Furthermore, we contact drug manufacturers if we have questions about 
the accuracy of their unit type submission, and, when necessary, inform 
them that we have determined that their reported unit type does not

[[Page 5299]]

appear to be consistent with the issued guidance and that their review 
of the reported unit type is necessary.
5. Calculation of the FUL and Single Source (S) Drugs
    Comment: One commenter was concerned that some manufacturers may 
not change a drug product's category from a single source to an 
innovator multiple source drug upon introduction of another competitor/
therapeutically equivalent drug product and suggested that CMS should 
revise its methodology to ensure that any branded product for which a 
therapeutically and pharmaceutically equivalent generic is listed in 
the FDA Orange Book will be included in the relevant product group and 
in the calculation of the FUL, even if the manufacturer continues to 
incorrectly report the product as a single source drug.
    Response: In accordance with section 1927(e)(4) of the Act, CMS is 
required to calculate FULs for multiple source drugs. Single source 
drugs, in accordance with section 1927(k)(7) of the Act, are not 
multiple source drugs. Accordingly, we have decided not to include 
single source drugs in the FUL calculation. In addition, drug 
manufacturers are required to report and certify drug category product 
data when submitting drug product data for their CODs to CMS. We have 
issued guidance to drug manufacturers regarding such reporting, in 
Manufacturer Release #82 (November 1, 2010), which can be found on the 
Medicaid.gov Web site at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Downloads/Rx-Releases/MFR-Releases/mfr-rel-082.pdf. In that guidance, we remind 
manufacturers of their reporting obligations and recommended that they 
review their reported drug category for accuracy. In light of these 
requirements, we see no reason to disregard the manufacturers' 
submissions and calculate the FULs using drugs which manufacturers have 
reported and certified to CMS as single source products.
6. FUL and Calculation/Application to 5i Drugs
    Comment: One commenter stated that since the statute requires that 
FULs be based on a formula of no less than 175 percent of the weighted 
AMPs for equivalent multiple source drug products that are ``available 
for purchase by retail community pharmacies on a nationwide basis,'' 
they believe that calculating FULs for 5i drugs would be inappropriate. 
The idea of a product being ``available for purchase by retail 
community pharmacies,'' not ``generally dispensed through retail 
community pharmacies'' suggests that the Congress never intended for 
FULs to be calculated for 5i drugs. Several commenters stated that FULs 
should be determined using prices paid by retail community pharmacies, 
and therefore when AMPs are calculated for 5i drugs which are not 
generally dispensed through a retail community pharmacy, these AMPs 
should not be used to determine FULs. The commenters added that since 
these drugs would clearly not be available in retail community 
pharmacies, their AMPs should not be used to set FULs under the 
requirements of the Affordable Care Act.
    A few commenters stated that CMS's proposal does not appear to 
exempt 5i drugs from the calculation of a FUL, and noted that such an 
exemption is necessary in that the alternative AMP calculation for such 
drugs consists of non-retail community pharmacy transactions. One 
commenter stated that calculating FULs based on weighted AMPs which 
include these transactions (such as physicians, PBMs, HMO, hospitals, 
clinics, outpatient facilities, mail order, LTC, and hospice 
transactions) include sales and discounts not available to retail 
community pharmacies, and will likely result in below cost 
reimbursement, and run afoul of Congressional intent. Several 
commenters requested that CMS exempt 5i drugs from the calculation of 
FULs for the above reasons.
    Several commenters noted that the FUL for infusion and injectable 
drugs should be calculated using a percent of the AMP that is higher 
than 175 percent. One commenter noted that the FUL should be increased 
due to the non-retail pharmacy drug sources that are included in the 
AMP calculation. The commenter noted that the proposed FUL calculation 
would result in insufficient reimbursement for infusion and injectable 
drugs due to the inclusion of sales, rebates, discounts and other 
financial transactions for very large and very small buyers within the 
alternate calculation of AMP for infusion drugs. The commenter noted 
that CMS should ensure that the reimbursement levels resulting from the 
proposed rule will be sufficient for home infusion therapy pharmacies 
to provide infusion and injectable drugs to Medicaid beneficiaries. 
Several commenters recommended that CMS should reach out to the 
infusion community to develop a more appropriate percentage to be used 
to calculate the FUL for injectable and infusion drugs. Another 
commenter stated that there should be a tiered structure for 
calculating FULs based on buying power; thus, CMS should ensure that 
even small buyers receive reasonable reimbursement that reflects their 
acquisition costs.
    Response: In light of the requirement in section 1927(e)(5) of the 
Act, we will calculate a FUL for multiple source drugs that are 
available for purchase by retail community pharmacies and, as noted 
earlier in this section, given the criteria set forth in section 
1927(k)(1)(B)(i)(IV) of the Act regarding the calculation of the AMP, 
we have decided that we will not include 5i drugs that are not 
generally dispensed through retail community pharmacies in the FUL 
calculations, nor apply the FUL to 5i drugs that are not generally 
dispensed through retail community pharmacies.
7. NDC-9 vs. NDC-11
    Comment: One commenter noted that the currently reported AMP is 
based on the NDC-9 level and is specific to the product code, combining 
all package sizes of the drug into the same computation of AMP. 
However, the commenter believed that basing reimbursement on the 
specific package size, that is, the NDC-11 level, will yield a more 
accurate measurement of acquisition cost.
    Response: For each drug product in the rebate program, the drug 
manufacturers calculate the AMP at the NDC-9 level which is reflective 
of the specific drug product, that is, the ingredient, route, strength, 
and dosage. The drug manufacturers report and certify the same AMP 
calculated at the NDC-9 level for all package sizes (NDC-11) of that 
same drug product. This calculation and reporting process for AMPs, 
which includes the monthly AMPs used in the calculation of the FUL, is 
consistent with the rebate calculation requirements in section 1927(c) 
of the Act, which require that manufacturers calculate rebates for each 
dosage form and strength, and with the requirements for the reporting 
of AMP since the start of the program. We note that despite a number of 
amendments to the drug rebate provisions, including the FUL provisions, 
Congress did not revise these requirements, and thus, we did not 
propose to revise the reporting requirements in regulation. We will, 
therefore, continue to base our calculations of the FUL on AMPs at the 
NDC-9 level.
8. FUL and Terminated Drugs
    Comment: Several commenters stated that if a terminated product 
reduces the number of therapeutically equivalent or A-rated products to 
two, then CMS

[[Page 5300]]

should immediately suspend the FUL and not wait for several months for 
the product's AMP to be omitted from the FUL calculation. Several 
commenters were concerned that drug manufacturers' reporting terminated 
NDCs will affect the availability determination for multiple source 
products because CMS proposes to disregard only the AMPs of terminated 
NDCs in assessing nationwide availability, assuming the AMPs of all 
non-terminated NDCs should be included. Several other commenters stated 
that Orange Book listings are tied to notifications from the 
manufacturer that a drug is no longer marketed. Several commenters also 
stated that supplies of many multiple source products will sell out 
before the product's NDC is discontinued in the Orange Book. Another 
commenter was concerned that drug manufacturers have no incentive to 
terminate NDC numbers but prefer to keep NDCs as assets for use at a 
later date. One commenter stated that drug pricing compendia continue 
to list terminated NDCs for a period of 2 years to provide for 
dispensing and claims reversal. Yet another commenter stated that drug 
manufacturers generally do not terminate the NDC of drugs in short 
supply, and CMS has not stated in the proposed rule that it will 
include only drugs for which a certain level of AMP units are reported, 
and even if there were a threshold of AMP units used, that statistic 
would not indicate availability to retail community pharmacies on a 
nationwide basis.
    Response: As we stated in the proposed rule (77 FR 5347), based on 
our reading of section 1927(e)(5) of the Act, which requires the FUL to 
be calculated using the weighted average of the most recently reported 
AMPs for A-rated multiple source drugs that are available for purchase 
by retail community pharmacies on a nationwide basis, the AMP of a 
terminated NDC will not be used to calculate the FUL, beginning with 
the first day of the month after the termination date reported by the 
manufacturer to CMS. In the case where there are fewer than three 
therapeutically and pharmaceutically equivalent drug products for a 
monthly reporting period, a FUL would not be calculated for that 
multiple source drug product.
    In addition, manufacturers are required to report and certify data 
regarding the termination date of a product to the CMS MDR program via 
the DDR system. We use the data reported and certified by the 
manufacturer to determine the termination date of the drug product. We 
also rely, in part, on the reported monthly AMP and AMP unit data from 
drug manufacturers to determine the availability of three 
therapeutically and pharmaceutically equivalent multiple source drugs 
before we calculate a FUL.
    Comment: A few commenters were concerned that since CMS requires 
that a drug manufacturer report a monthly AMP for a product until the 
first month after the expiration date of the last lot sold, it may 
appear that there is availability, even when supplies of many multiple 
source products may sell out long before the product's last-lot 
expiration date.
    Response: For purposes of drug manufacturer monthly reporting and 
the calculation of the FUL, in the case where a drug product does not 
have any utilization prior to the drug product's actual termination 
date, the drug manufacturer is responsible for reporting the drug 
product's AMP, and that drug product's AMP units would be correctly 
reported as zero. That drug product will not be considered in 
determining if three therapeutically equivalent multiple source drugs 
are available to calculate a FUL, consistent with our reading of 
section 1927(e)(5) of the Act, which provides that when a drug is not 
available for purchase on a nationwide basis, a FUL should not be 
calculated for that drug. In addition, that drug would not be included 
in the FUL calculation.
    Comment: One commenter was concerned that CMS has directed 
manufacturers to carry forward the last reported positive AMP if they 
have no product sales in a given month and stated that some 
manufacturers may understand this instruction to require they carry 
forward the last reported positive AMP units too.
    Response: When a manufacturer has had no product sales in a given 
month, the manufacturer should not carry forward the last reported 
positive AMP units. Instead, in this instance, the manufacturer should 
report to us via the DDR system an AMP based on the most recent prior 
month's positive AMP and an AMP units value of zero. We previously 
issued guidance concerning such reporting in Manufacturer Release #80 
(January 5, 2010), which can be found on Medicaid.gov at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Downloads/Rx-Releases/MFR-Releases/mfr-rel-080.pdf. 
This guidance instructs manufacturers to report the most recent prior 
month's positive AMP if a calculated monthly AMP is zero or negative. 
Further, in Manufacturer Release #86 (May 2, 2013), we issued guidance 
to drug manufacturers that AMP units should be entered in the DDR 
system as a number equal to or greater than zero and should reflect the 
AMP units for applicable time period (that is, for the month for which 
the manufacturer is reporting the monthly AMP). Manufacturer Release 
#86 (May 2, 2013) can be found on Medicaid.gov at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-topics/Benefits/Prescription-Drugs/Downloads/Rx-Releases/MFR-Releases/mfr-rel-086.pdf. 
Additionally, since the DDR system will not accept a negative value for 
the AMP units, in the event that there is a negative AMP units value, 
manufacturers should enter a zero and not enter a previous month's AMP 
unit value.
9. FUL and Presumed Inclusion Method of Calculating AMP
    Comment: Several commenters stated that changing the default rule 
will result in lower AMPs, which in turn, will result in lower FULs, 
and will increase the variability in AMPs and FULs. One commenter 
stated that under the buildup method, AMPs for multiple source products 
will be lower than the AMPs CMS has relied upon to justify its 
conclusion that FULs set at 175 percent of weighted AMPs will be 
sufficient to ensure adequate pharmacy reimbursement. One commenter 
expressed that a stable AMP (under presumed inclusion) yields a more 
predictable FUL. A commenter noted that an AMP calculated based on the 
presumed inclusion method would include a buffer that would help 
prevent periodic variability and price fluctuations. Another commenter 
stated that market driven fluctuations in the purchasing patterns of 
the relatively small number of identifiable purchasing retail customers 
will have a larger impact on the resulting AMP and FUL. Another 
commenter noted that in a buildup approach, generic manufacturers may 
have a larger number of sales (than brand manufacturers) that are 
identifiable as retail because of agreements with retail pharmacies, 
such as chain retail stores; and would have more lower priced products 
included in their AMP calculation. Then as another commenter noted, the 
generic manufacturers' generated AMPs would be lower, and as a result 
the calculated FUL could also be lower due to the volume and weighting 
of the retail AMPs; and ultimately could result in inconsistent and 
varying FULs from quarter-to-quarter.
    One commenter stated that the FULs would not be negatively impacted 
by continuing the presumed inclusion

[[Page 5301]]

policy and that the policy would not hurt pharmacies that serve 
Medicaid beneficiaries because it would not result in reduced FULs. The 
commenter referred to the preamble of the proposed rule (77 FR 5348), 
which states that CMS and the Government Accountability Office (GAO) 
compared various FUL methodologies and found the FULs under the 
Affordable Care Act are higher than other possible reimbursement 
metrics. The commenter noted that because this analysis was based on 
2009 data that was calculated and reported under the presumed inclusion 
policy, the FULs were not artificially lowered by that policy.
    Finally, several commenters stated that without the presumed 
inclusion model, a lag in data availability would occur as 
manufacturers would not be able to count any sale until they are able 
to trace data over time, which would reduce the number of identifiable 
AMP-eligible units in some periods, and would result in an AMP that 
would be calculated likely using both a lower net price numerator and a 
lower units denominator. The commenters noted that this would yield 
variable measurements that would increase what they see as already 
unacceptable levels of period-to-period volatility in AMPs, weighted 
AMPs, and FULs.
    Response: As discussed in detail in the Determination of AMP 
section (II.C.) of this final rule, we have decided not to require that 
manufacturers adopt the buildup methodology requirement. The use of 
presumed inclusion is consistent with the longstanding practice that 
permits manufacturers to presume that sales to wholesalers are for 
drugs distributed to retail community pharmacies, but to exclude sales 
to non-retail customers that specifically could be identified, such as 
by using chargeback data. We understand based on the comments, that the 
implementation of a buildup methodology could increase period-to-period 
volatility in AMPs, weighted AMPs and FULs while proving 
administratively burdensome to manufacturers. We believe that our 
decision not to require that manufacturers use the buildup methodology 
will allay the concerns raised by the commenters pertaining to the 
impact of that methodology on the FULs.
10. Fluctuation in AMP/FULs
    Comment: A few commenters appreciated CMS involving stakeholders, 
through the rulemaking process, in the implementation of AMP, but 
expressed significant concerns with the AMP calculation and/or 
reporting of AMP values and the calculation of the FUL. One commenter 
stated that until drug manufacturers are calculating and reporting AMP 
and AMP units in a manner that is consistent with both the statute and 
with one another, the weighted AMPs CMS uses to calculate FULs will 
continue to vary wildly from month-to-month and fail to reflect 
pharmacy acquisition costs. Specifically, the commenters' expressed 
concerns regarding inconsistencies in the unit of measure, particularly 
related to reporting of AMP units; inconsistencies in the methodology 
for smoothing of lagged price concessions, inconsistencies in the 
method of using a presumed inclusion policy for calculating AMP, 
treatment of authorized generics, as well as inadequate guidance on 
bona fide service fees, and the treatment of specialty and home 
infusion pharmacies.
    Response: In accordance with section 1927(b) of the Act, drug 
manufacturers participating in the MDR program are required to report 
pricing data to CMS. To assist the drug manufacturers, and to encourage 
consistency in their data reporting, CMS has issued guidance on the 
correct reporting of unit type and UPPS, in Manufacturer Release #82 
(November 1, 2010), as well as on the calculation and reporting of AMP 
units and lagged price concessions in Manufacturer Release #83 
(February 3, 2011). These releases can be found on the Medicaid.gov Web 
site at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Downloads/Rx-Releases/MFR-Releases/mfr-rel-082.pdf and http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Downloads/Rx-Releases/MFR-Releases/mfr-rel-083.pdf respectively. In accordance with 
section 1927(e)(5) of the Act, the calculation of the FUL is based on 
the most recently reported monthly AMPs for pharmaceutically and 
therapeutically equivalent multiple source drugs that are available for 
purchase by retail community pharmacies on a nationwide basis. In 
accordance with these provisions, we have used the applicable monthly 
AMPS, as reported by the manufacturer, to calculate the FULs. We have 
issued guidance consistent with the statutory standard that the FUL is 
calculated based on reported monthly AMPs for those multiple source 
drugs available for purchase on a nationwide basis. We also note that 
section 2503(d) of the Affordable Care Act provides that amendments to 
the FUL provisions shall take effect on October 1, 2010, without regard 
to whether final regulations to carry out the amendments have been 
issued by that date. Therefore, in light of the effective date, we see 
no reason to wait an additional period of time after issuance of the 
final rules for the FUL provisions to take effect.
    Comment: One commenter stated that due to a lack of agency 
guidance, many manufacturers are improperly treating certain service 
fees that the Congress intended be excluded from AMP calculation in 
their calculation of AMP as discounts (that is, deducting the amounts 
of the fees from sales revenue before calculating AMP), which results 
in artificially low AMPs and FULs.
    Response: We have no reason to believe that manufacturers are 
improperly treating certain service fees as discounts. Manufacturers 
must calculate AMP in accordance with section 1927(k)(1) of the Act, 
regardless of whether CMS has issued final rules regarding those 
provisions.
    Comment: One commenter stated that manufacturers continue to report 
AMPs calculated based on limited sales for products in short supply or 
on back order.
    Response: Manufacturers are required to report AMP based on the 
average price paid to manufacturers consistent with the requirements 
found at section 1927(k)(1) of the Act. If a sale did not occur, such 
as for a back ordered product, then it would not be included in the AMP 
calculation until the respective month in which the sale occurred.
11. National Availability
    Comment: A few commenters noted that a FUL should be calculated for 
a multiple source drug if it is generally and widely available for 
purchase by pharmacies throughout the United States. The commenters 
stated that CMS is required to calculate a FUL for each multiple source 
drug for which the FDA has rated three or more drug products 
therapeutically and pharmaceutically equivalent in accordance with 
section 1927(e)(4) of the Act, and added that the FUL must also be 
based on the AMP for drug products available for purchase by retail 
pharmacies on a nationwide basis in accordance with section 1927(e)(5) 
of the Act. The commenters noted that these requirements must be 
examined together to establish Medicaid payment policy for outpatient 
drugs that is consistent with congressional intent. The commenters 
state that the Congress did not intend for the FUL to be calculated 
based on only one nationally available multiple source drug product. 
Doing so would eliminate the

[[Page 5302]]

requirement for three or more FDA-rated equivalent drug products. The 
commenter understood CMS's interpretation of a multiple source drug to 
mean a drug for which there is at least one FDA-rated equivalent drug 
product that is sold or marketed in the United States and is available 
for purchase on a nationwide basis. The commenters believed that this 
interpretation violates the plain meaning of the statute where the 
Congress used the plural to state ``drug products that are available on 
a nationwide basis.'' One commenter stated that this language alone 
implies that a minimum of two drug products would need to be nationally 
available for purchase by retail community pharmacies before a FUL 
could be calculated. Several other commenters noted that they do not 
believe that the existence of only one other FDA therapeutically and 
pharmaceutically equivalent drug available indicates that the drug is 
sold or marketed on a nationwide basis, stating that it is not accurate 
to assume that all drugs listed in the FDA Orange Book are nationally 
available and should be included in the calculation of FULs. They noted 
that there are instances where drugs are not available due to 
shortages, manufacturing issues, and recalls, or the drug is only 
available for distribution in part of the country.
    Several commenters stated that the proposed rule did not suggest a 
process to determine national availability. Some commenters suggested 
that an adequate survey should be used to determine when a drug product 
is available for purchase by retail pharmacies on a nationwide basis. 
One commenter proposed a possible test for national availability that 
is dependent on whether the product is generally and widely available 
for purchase by all pharmacies in the United States, such as when it is 
available from the national wholesalers and stated that a drug that is 
only available in one state or region cannot be nationally available as 
the statute requires. Another commenter proposed that a product be 
considered nationally available when it is stocked by two of the three 
national wholesalers in sufficient quantities to supply most retail 
community pharmacies. Several commenters encouraged CMS to address 
national availability by using its contractor under section 
1927(f)(1)(A) of the Act to determine product availability to 
appropriately apply FULs. The commenters noted that despite CMS having 
a contractor to conduct NADAC surveys, it does not appear that the 
agency has engaged a contractor to assess product availability. The 
contractor, when conducting monthly pharmacy surveys to permit CMS 
distribution of NADAC data to the states, could alert CMS to drug 
supply issues.
    Response: In light of our experience with the implementation of 
section 1927 of the Act, as well as managing the operation of the MDR 
program, for any given month, when there are at least three FDA-
approved, therapeutically and pharmaceutically equivalent multiple 
source drug products reported to CMS by their manufacturers with a 
monthly reported AMP, and AMP units greater than zero for that given 
month, we believe that the drug is available for purchase by retail 
community pharmacies on a nationwide basis. A multiple source drug is 
not eligible to have a FUL calculated unless the FDA has rated three or 
more drugs therapeutically and pharmaceutically equivalent. To the 
extent that such a drug product is rated by the FDA to be 
therapeutically and pharmaceutically equivalent to at least two other 
drugs, the reported AMP for that drug (which includes sales directly to 
retail community pharmacies nationwide, as well as sales to wholesalers 
for distribution to retail community pharmacies nationwide) is eligible 
for inclusion in the FUL calculation.
    We are aware that in cases of shortages, various market forces, 
which may include supply and demand, or competition in the market by 
multiple generic manufacturers (or lack thereof) may result in changes 
in product supply, may cause AMPs to fluctuate, and may affect the 
prices of drug products paid by retail community pharmacies. However, 
we believe that our revised process by which a higher multiplier will 
be used to calculate the FUL will address concerns regarding the 
calculation of a FUL for such drugs. Specifically, as discussed 
previously, we will calculate the FUL at an amount equal to 175 percent 
of the weighted average of the most recently reported monthly AMPs, 
except where the FUL calculated using the 175 percent multiplier is 
less than the average retail community pharmacies' acquisition cost, as 
determined by the most current national survey of such costs incurred 
by retail community pharmacies. In these instances we will use a higher 
multiplier to calculate the FUL to equal the average retail community 
pharmacies' acquisition cost incurred by retail community pharmacies as 
determined by such survey.
    In addition, as noted previously, manufacturers are responsible for 
reporting drug termination dates timely to CMS via the DDR system and 
the AMP of such terminated NDCs will not be used to calculate the FUL, 
beginning with the first day of the month after the termination date is 
reported to CMS by the manufacturer. We also plan to regularly monitor 
the availability of drugs by reviewing the FDA drug shortage list for 
drugs that have a FUL calculated, but are not likely to have enough 
supply in the market to meet current demand. Further, we plan to 
monitor weekly pricing changes available to us in the most current 
national survey of pricing to consider changes to the multiplier used 
to calculate the FULs, based on average retail community pharmacies' 
acquisition costs. We also note that CMS currently publishes a monthly 
and weekly file of NADAC pricing values, which states can use to 
monitor those changes in average retail community pharmacies' 
acquisition costs as they apply the FUL aggregate reimbursement. We 
will not calculate a FUL for a given drug if we determine that there is 
a lack of availability of that drug to retail community pharmacies on a 
nationwide basis.
    Comment: One commenter stated that draft AMP-based FUL product 
groups include drug products in short supply or that are completely 
unavailable, and it is evident that CMS has challenges in its statutory 
obligation to adopt FULs only where there are at least three 
therapeutically and pharmaceutically equivalent products that are 
available nationally. Another commenter stated that CMS has no basis 
for the position in the proposed rule that all retail community 
pharmacies would be able to purchase at least one drug product through 
a market channel of distribution, when a drug product has at least two 
FDA-approved therapeutically and pharmaceutically equivalent drug 
products, as drug availability is highly dependent on pharmacies' 
relationships with suppliers and wholesalers, and thus, what may be 
available through one wholesaler may not be reflective of the overall 
market. Yet another commenter noted that availability of the drug 
product in chain warehouses is not a proxy for national availability as 
these are generally only available for distribution to specific chain 
pharmacies, and further noted that certain GPOs only allow their member 
pharmacies to purchase products from their warehouses. The commenter 
stated that they believe CMS should adopt a more objective definition 
of nationally available.
    One commenter noted that the shortcomings of CMS's proposal are 
exemplified in an analysis of NDCs in

[[Page 5303]]

commercial compendia and the commenter provided an example. The 
commenter noted that the existence of an NDC in a national compendium 
does not show nationwide availability to retail community pharmacies. 
Several commenters stated that manufacturers may not be able to supply 
the nation's retail community pharmacies as a manufacturer may only 
have the production capacity to meet a percentage, such as 10 percent, 
of the nationwide market demand.
    One commenter stated that since the Congress required nationwide 
availability for three equivalent products, each of the three products 
should be available for purchase by any pharmacy in the nation. Several 
commenters also noted that CMS should create a policy to suspend the 
FUL when the drug product is no longer nationally available. One 
commenter noted that if an NDC is inactive but remains in the 
marketplace, CMS could freeze the reimbursement rate at the current FUL 
until the product is no longer available in the market. A few 
commenters also recommended that a process be put in place when factors 
such as environmental or natural disasters that cause material 
constraints result in decreases in FUL values.
    The commenters added that when disruptions occur that limit 
availability of drug products, the WAC should be used for reimbursement 
until the constraints are resolved. One commenter stated that CMS 
should not just assume that all products are available nationwide and 
then place the burden of this determination on pharmacies, states, 
manufacturers or others. One commenter stated that CMS is improperly 
counting repackagers and authorized generic drug products toward the 
minimum of three FDA-rated equivalent drug products required to 
calculate a FUL under the Affordable Care Act.
    One commenter would like CMS to clarify whether the qualification 
that drugs are ``available for purchase by retail community 
pharmacies'' include specialty pharmacies, home infusion centers and 
home health care centers, and if so, will it only include these 
providers that conduct business as retail community pharmacies.
    Response: Section 1927(e)(4) of the Act requires that the Secretary 
calculate a FUL for those multiple source drugs for which the FDA has 
rated three or more products pharmaceutically and therapeutically 
equivalent. Section 1927(e)(5) of the Act provides that the FUL 
calculation be based on the weighted average (determined on the basis 
of utilization) of the most recently reported monthly AMPs for such 
drug products that are available for purchase by retail community 
pharmacies on a nationwide basis. Therefore, in accordance with section 
1927 of the Act, for any given month, when there are at least three 
FDA-approved, therapeutically and pharmaceutically equivalent multiple 
source drug products reported to CMS by their manufacturers with a 
monthly AMP, and AMP units greater than zero for that given month, we 
believe that the drug is available for purchase by retail community 
pharmacies on a nationwide basis. To the extent a multiple source drug 
product is rated by the FDA to be therapeutically and pharmaceutically 
equivalent to at least two other drugs, the reported AMP for that drug 
(which includes sales directly to retail community pharmacies 
nationwide, as well as sales to wholesalers for drugs distributed to 
retail community pharmacies in the United States) is eligible for 
inclusion in the FUL calculation. This is because for a given month 
reporting period, the fact that there were AMP and AMP units greater 
than zero reported for that multiple source drug means that the drug 
was available on the market for purchase by retail community pharmacies 
in the United States.
    We are aware that in cases of shortages, various market forces 
(supply and demand), or competition in the market by multiple generic 
manufacturers (or lack thereof) may result in changes in product 
supply, may cause AMPs to fluctuate, and may affect the prices of drug 
products paid by retail community pharmacies. These are factors and 
circumstances over which CMS has no control. However, we believe that 
the revised process of calculating the FULs using a higher multiplier 
should operate to ensure beneficiary access to medications given that 
the FUL calculated using the 175 percent multiplier will be increased 
under the exception we are finalizing at Sec.  447.514(b)(2), to equal 
the most current average acquisition cost paid by retail community 
pharmacies as determined by the most current national survey.
    The FUL is designed as an aggregate upper limit. Therefore, states 
have the flexibility to address price fluctuations due to shortages and 
other market forces. States have the discretion to adjust 
reimbursements on a drug-by-drug basis to the extent that such 
adjustments are consistent with the state plan and the state ensures 
that the total amount reimbursed to pharmacy providers for all drugs 
for which there is a FUL does not exceed the aggregate upper limit. We 
also note to the extent that pharmacy providers have concerns with 
payment amounts; they should raise those concerns with the state.
    Furthermore, as discussed in the above response, we have plans in 
place to regularly monitor the availability of drugs by reviewing the 
FDA drug shortage list, as well as to monitor weekly pricing changes 
available to us in the most current national survey of pricing to 
consider changes to the multiplier used to calculate the FULs, based on 
average retail community pharmacies' acquisition costs. We will not 
calculate a FUL for a drug if we determine that the drug does not meet 
the criteria to have a FUL calculated.
    Comment: Several commenters stated that a drug should only be 
considered a multiple source drug when there are three or more sources 
of supply and the drug is generally and widely available for purchase 
by all retail pharmacies in the United States. One commenter 
recommended that CMS address availability issues by revising the 
proposed definition to provide that the drug be accessible from at 
least three sources of supply in addition to being produced by more 
than one manufacturer. The commenter further noted that the proposed 
definition of a multiple source drug does not take into consideration 
whether or not both sources of the drug are available to all 
pharmacies. Several commenters stated that a multiple source drug 
should be considered nationally available when it is generally and 
widely available for purchase by all pharmacies in the United States, 
such as when it is available in sufficient quantities for independent 
pharmacies to buy from national wholesalers. A drug that is only 
available in one state or region cannot be nationally available as the 
statute requires. The commenters further stated that a simple listing 
of the drug in FDA's Orange Book does not mean it is nationally 
available to all pharmacies. Another commenter asked, per the third 
prong of the definition of multiple source drug, if ``sold or marketed 
in the United States'' is intended to refer to availability nationwide 
or simply in one or a few states. The commenter further noted that this 
will have important implications for recent regional and national drug 
shortages and inconsistent supplies at the regional and national level. 
Further, availability will determine whether a FUL will be calculated 
for a multiple source drug.
    Response: We disagree with the commenters that the test for whether 
a multiple source drug is sold or marketed in the United States should 
be that more than one manufacturer's version of the

[[Page 5304]]

drug is available to all pharmacies through at least three sources of 
supply. Section 1927(k)(7)(A) of the Act defines the term multiple 
source drug, in part, to mean for a rebate period, a COD for which 
there is at least one other drug product which is sold or marketed in 
the United States during the period. Therefore, we disagree with the 
commenter that the basis for the determination of a multiple source 
drug should be a whether a multiple source drug is available by three 
suppliers.
    In light of our experience with the implementation of section 1927 
of the Act and managing the MDR program, a listed drug in the FDA 
Orange Book is generally one that is sold or marketed in the United 
States. We disagree with commenters that drugs listed in the FDA's 
Orange Book are not typically available as multiple source drugs. 
Additionally, we disagree that a multiple source drug should be 
considered nationally available when it is generally and widely 
available for purchase by all pharmacies in all states nationwide and 
in sufficient quantities for independent pharmacies to buy from 
national wholesalers. While we recognize the importance of the 
availability of multiple source drugs, we note that the statutory 
definition of multiple source drug in section 1927(k)(7) of the Act 
does not require that such a drug meet any threshold of availability 
from national wholesalers in a given geographic area relative to 
another but rather, such drug is sold or marketed in the United States 
during the given rebate period.
    Furthermore, neither provision, that is, section 1927(e)(5) or 
(k)(7) of the Act references any threshold of relative regional 
availability before we calculate a FUL for a drug; however, we will 
continue to monitor the market for the availability of multiple source 
drugs, as well as pricing trends and we welcome feedback from 
providers, wholesalers, manufacturers, and states regarding the 
availability, or shortages, of drug products. We will continue to 
consider the issue of national availability and will issue additional 
guidance or rulemaking, if necessary.
12. Data Time Lag--Reporting and Publishing
    Comment: One commenter noted concern that AMP values are not 
reflective of real-time market prices available to retail pharmacies, 
and stated that given the lag time in calculating and reporting AMPs, 
the values are outdated by several weeks compared to when they would be 
used for pharmacy reimbursement. The commenter further stated that the 
lag in data may be problematic and raised the issue of the adequacy of 
the FUL multiplier percentage in cases where there is sudden inflation 
due to market forces, and the availability of products for which 
reimbursement is based on a previous AMP reported. Another commenter 
noted that there is a 3-month time lag in the actual sale of a drug 
product and the release of the FUL files. One commenter noted that CMS 
should monitor drug shortages as tracked by the FDA, as the states are 
observing a trend of increased drug prices when there is a drug with 
limited supply that returns back to the marketplace.
    Response: In accordance with section 1927(e)(5) of the Act, the FUL 
is calculated using the most recently reported monthly AMPs and AMP 
units for pharmaceutically and therapeutically equivalent multiple 
source drug products available for purchase by retail community 
pharmacies on a nationwide basis. The FULs are updated on a monthly 
basis to reflect the data from the most recent monthly reporting 
period. We note that section 1927(e)(5) of the Act states that FULs 
should be calculated using a multiplier of no less than 175 percent, 
and we do not interpret the statutory language to mean that this 
multiplier was established to address changes in pricing that may occur 
between the most recent monthly reporting period and the issuance of 
the updated FUL. We also note that our decision to use a higher 
multiplier to increase the FUL if the FUL using the 175 percent 
multiplier is lower than the average retail community pharmacies' 
acquisition cost for such drug products, as determined by the most 
current national survey of such costs should address the concern raised 
by the commenters regarding the connection between the FULs and real-
time prices available to pharmacies. Further, the states have had 
longstanding processes in place to address and respond to reimbursement 
issues, and to the extent that pharmacy providers have concerns with 
payment amounts, including situations where there is a change in 
pricing due to an increase in provider acquisition cost without a 
change in reimbursement, the pharmacy providers should raise those 
concerns with the state.
13. Aggregate Requirement
    Comment: One commenter stated that for the least disruption to 
providers, states should be required to meet the FULs in the aggregate 
and not on the claim level.
    Response: We have calculated the FULs as an aggregate upper limit, 
which gives states greater flexibility to determine payment rates for 
individual drugs in accordance with the approved state plan.
    Comment: One commenter stated that they will need more information 
to implement the FULs under the Affordable Care Act as products in the 
draft FUL files have moved on and off the list, and commenter 
questioned how these products may be accounted for in an aggregate 
calculation.
    Response: FULs are calculated using the most recently reported 
monthly pricing and utilization data, consistent with the statute. 
Where a drug product does not have a FUL calculated for a given time 
period, the state would reimburse for that drug in accordance with the 
requirements established in Sec.  447.512(b), and the approved state 
plan.
    Comment: A few commenters also noted that according to the proposed 
rule, CMS, noting the close alignment between the AMP-based FUL and the 
Indiana SMAC, has concluded it will never need to exercise its 
authority under the statute to use a weighted AMP multiplier higher 
than 175 percent, because using this multiplier will not have an impact 
on pharmacies. One commenter believed that CMS will need to exercise 
its authority to use a weighted AMP multiplier higher than 175 percent, 
citing that most states apply FULs on a drug-by-drug basis and not in 
the aggregate. Other commenters stated that CMS proposed that the AMP-
based FULs would limit generic reimbursement only in the aggregate, 
rather than on a drug-by-drug basis, but most states currently pay the 
lower of FUL or a SMAC on a drug-by-drug basis, and that CMS should not 
publish final FULs until appropriate revision to state plans are 
complete to correspond with the aggregate test CMS has proposed. If 
not, the commenters stated that generic ingredient cost reimbursement 
will be cut much more than suggested by CMS's bar chart in the proposed 
rule. Commenters added that even for states that do not apply the FUL 
on a drug-by-drug basis, states are likely to reduce their SMAC on 
drugs where the FUL is lower.
    Several commenters stated that there must be procedures in place 
for lifting FUL caps on product reimbursement after they have verified 
pharmacy complaints about access issues. One commenter also noted that 
when there are cases that applying a markup of 175 percent to the 
weighted AMP results in a FUL that is considerably low, CMS should have 
the ability to expeditiously

[[Page 5305]]

set an appropriate FUL to ensure appropriate reimbursement for 
pharmacies and patient access to medications.
    Response: We have calculated the FULs as an aggregate upper limit, 
which gives states flexibility to determine payment rates for 
individual drugs in accordance with the approved state plan. We believe 
the commenters' concerns regarding the adequacy of the Affordable Care 
Act FUL amount to ensure access is addressed by our decision to use a 
higher multiplier to increase the FUL if the FUL using the 175 percent 
multiplier is lower than the average retail community pharmacies' 
acquisition cost for such drug products, as determined by the most 
current national survey of such costs.
    We believe that this option to use a higher multiplier should 
operate to ensure access given that the FUL calculated using the 175 
percent multiplier will be increased under the exception we are 
finalizing at Sec.  447.514(b)(2), to equal the most current average 
acquisition cost paid by retail community pharmacies as determined by 
the most current national survey.
14. Appeals Process
    Comment: One commenter stated that CMS should develop and implement 
a process by which pharmacies could alert the state to situations in 
which a FUL needs to be lifted or adjusted above the 175 percent 
multiplier to address supply issues or other issues (including recalls 
or manufacturing issues) to prevent pharmacies from being paid for 
ingredient costs at less than market values. The commenter suggests 
that any such system should include a process through which pharmacies 
paid based on a discredited FUL can reverse and re-bill the affected 
claims. Another commenter believed that CMS has the authority to 
include an appeals process for the FULs in its regulatory authority, as 
the Congress did not explicitly limit this authority. Another commenter 
stated that due to the complexity of issues involved in the calculation 
of AMP and FULs, a formal appeals process should be in place, to 
provide a formal response regarding concerns raised. Another commenter 
stated that without a formal process in place, a formal agency response 
is entirely discretionary. Another commenter does not believe that CMS 
should defer appeals of AMP and FULs to the states as CMS is directly 
responsible for establishing both values and it would be difficult for 
providers to appeal to numerous states each time CMS updates FULs.
    Response: Medicaid pharmacy payments must be consistent with 
efficiency, economy, and quality of care while assuring sufficient 
beneficiary access, consistent with section 1902(a)(30)(A) of the Act. 
CMS is not responsible for calculating AMP and we did not propose a 
specific process for pharmacies to alert the states or CMS when a FUL 
needs to be lifted or adjusted. We note that to the extent pharmacy 
providers have concerns with payment amounts, they should raise those 
concerns with the state. Further, we believe the revised process by 
which to calculate a FUL using a multiplier above 175 percent if the 
FUL using the 175 percent multiplier is lower than the average retail 
community pharmacies' acquisition cost for such drug products, as 
determined by the most current national survey of such costs, incurred 
by retail community pharmacies, will address the concerns raised by the 
commenter regarding the possibility that pharmacies will be 
inadequately reimbursed. We believe that this revised process of 
calculating the FULs using a higher multiplier should operate to ensure 
beneficiary access to medications given that the FUL calculated using 
the 175 percent multiplier will be increased under the exception we are 
finalizing at Sec.  447.514(b)(2), to equal the most current average 
acquisition cost paid by retail community pharmacies as determined by 
the most current national survey.
    Comment: Several commenters stated that CMS needs to create a 
process to suspend the FUL when the agency determines--either on its 
own or based on an appeal from a state or pharmacists--that there are 
no longer three nationally available sources of supply of the multiple 
source drug or it is no longer nationally available.
    Response: In accordance with section 1927(e)(5) of the Act, we will 
not calculate a FUL unless there are at least three pharmaceutically 
and therapeutically equivalent multiple source drugs available, and all 
other established criteria are met. If a drug meets the criteria to 
have a FUL calculated, the FUL would apply to that drug for the period 
that the FUL was in effect. In the event that there are not three 
pharmaceutically and therapeutically equivalent multiple source drugs 
available, a FUL would not be calculated for the drug. We see no reason 
at this time to establish a process to suspend the FUL in an interim 
period between monthly updates when there is sufficient data to 
calculate the FUL.
15. Draft AMP-Based FUL Files
    Comment: Several commenters raised issues concerning the draft AMP-
based FUL files. The commenters stated that there is a pattern of 
inconsistency in the monthly files with a drug product having a FUL 
calculated for 1 month and then the drug is not on the next month's 
draft AMP-based FUL file. The commenters also noted that the draft AMP-
based FULs have revealed significant price swings for some drug 
products. Another commenter noted that they have observed hundreds of 
draft AMP-based FULs that experience fluctuations on a monthly basis 
that do not represent changes in pharmacy acquisition costs. One 
commenter noted that no less than half of the draft AMP-based FULs 
changed by at least 10 percent from one release to the next and over a 
quarter changed by at least 20 percent, and there were several examples 
of draft AMP-based FULs that increased by more than 100 percent or 
decreased by more than 50 percent from one month to the next.
    Another commenter encouraged CMS to give states an opportunity to 
review the draft AMP-based FUL files before the agency processes it 
through a pricing vendor, and noted that state review may prevent 
overpayment for drugs. The commenter stated that portions of the file 
could create state challenges as the states seek to utilize the files 
for reimbursement on a claim or an NDC level. The commenter asked how 
CMS would address inconsistencies and changes in published AMP-based 
FULs for drug groups. One commenter claimed that about 20 percent of 
the NDC's with a reported AMP, (published in November 2011, based on 
September 2011 monthly reported data), had supply issues, and stated 
that the existence of an NDC does not demonstrate national 
availability, including national availability to retail community 
pharmacies.
    Another commenter stated that problems with the draft AMP-based FUL 
files included the treatment of authorized generic drugs and repackaged 
drugs (as they are included in the FUL product groups), supply issues, 
fluctuating prices, and drug products that may have not been placed in 
the appropriate product groups. Further, several commenters stated that 
because the repackaged product is competitively distinct from non-
repackaged products, CMS should establish product groups for repackaged 
products separate from the product groups for the non-repackaged 
products.
    Another commenter noted that if a pharmacy was reimbursed for a 
specific

[[Page 5306]]

manufacturer's drugs using the price caps in that same monthly draft 
AMP-based FUL file, they would lose money on approximately 15 percent 
of that manufacturer's drugs. Another commenter noted that 
reimbursement using the draft AMP-based FULs resulted in a decrease of 
generic ingredient cost reimbursement for several states. Another 
commenter provided CMS with examples of how the draft AMP-based FULs 
impacted low, medium, high volume Medicaid pharmacies and stated that, 
in many cases, these pharmacies lost from one-third to 40 percent of 
their Medicaid revenues using this reimbursement.
    Response: As noted previously, a FUL will not be calculated in the 
case where a FUL product group does not have at least three 
pharmaceutically and therapeutically equivalent multiple source drugs 
with manufacturer reported data based on the reporting requirements 
established in section 1927 of the Act; therefore, we expect that a FUL 
group may not have a price calculated every month.
    We note that the draft AMP-based FULs can experience price 
variations, and we note that these changes can and do occur due to 
changes in supply and demand, including drug shortages or manufacturing 
issues. The FULs are designed as an aggregate upper limit to give 
states flexibility to establish payment rates and adjust those rates 
for individual drugs consistent with those aggregate limits. 
Furthermore, the revised process we are adopting in this final rule for 
calculating the FUL, whereby the FUL will not be calculated lower than 
the average retail community pharmacies' acquisition cost for such drug 
product, as determined by the most current national survey of such 
costs incurred by retail community pharmacies should address concerns 
raised regarding these fluctuations.
    We released draft AMP-based FUL files, beginning in September 2011, 
to give states, pharmacies, and other stakeholders an opportunity to 
review and provide comment on the FULs and the methodology we use to 
calculate the FULs, prior to the finalization of the FULs. Once the 
FULs are issued in final, we do not believe that we should continue to 
issue draft FUL prices to the states for review on a monthly basis 
prior to the FULs becoming effective. Section 1927(e)(5) of the Act 
does not require a process for issuance of draft FULs prior to 
finalization on a monthly basis.
    In accordance with section 1927(e)(5) of the Act, a FUL is 
calculated where the FDA has rated three or more products 
therapeutically and pharmaceutically equivalent. To the extent that an 
authorized generic drug or a repackaged drug is rated by the FDA as 
therapeutically and pharmaceutically equivalent, we will include those 
drugs in the calculation of the FUL.
    We have taken steps to ensure that there were not any 
inconsistencies regarding the data in the draft FUL files. For example, 
we have verified the correct placement of multiple source drugs into 
the appropriate FUL group; performed internal review of duplicate FUL 
groupings; and ensured that drugs that have the same ingredient, route 
of administration, strength, and dosage but different therapeutic 
equivalence ratings (for example, AB1 and AB2 ratings), are not placed 
in the same FUL group. We believe that these steps will alleviate some 
of the fluctuations that may have previously existed in the some of the 
draft files.
    As noted earlier in this section, we believe that our decision to 
adopt a revised process by which the FUL can be calculated using a 
multiplier higher than 175 percent of the weighted average of the most 
recently reported AMPs, so that the FUL will not be lower than the 
average retail community pharmacies' acquisition cost for such drug 
product, as determined by the most current national survey of such 
costs incurred by retail community pharmacies will also address the 
concerns regarding the adequacy of the draft AMP-based FULs we posted 
on the Medicaid.gov Web site, as we believe that this option to use a 
higher multiplier should operate to ensure access given that it is 
based on actual invoice data.
    Comment: A few commenters made suggestions for addressing the 
fluctuations with the draft AMP-based FUL prices including the use of 
an aggressive SMAC program that is compliant in the aggregate. The 
commenters noted that states could meet FULs in the aggregate, but also 
noted that CMS should provide ample time and guidance for states that 
do not have a SMAC program to develop one.
    Response: We note that the FUL is calculated as an aggregate upper 
limit, and states have the discretion to adjust reimbursement on a 
drug-by-drug basis, and may use their SMAC program as a benchmark to do 
so.
    Nearly all states currently have a SMAC program in place; however, 
we believe that the notification previously issued by CMS that the FULs 
would not be finalized until this final rule is published, should have 
provided the few states that do not currently have a SMAC program in 
place to develop and implement a program to meet the FUL aggregate 
requirement, if they choose to do so.
16. The FUL and AAC
    Comment: Several commenters noted that if the AAC methodology is 
appropriate for multiple source drugs, there will not be a need for the 
FULs. One commenter asked about the need for AAC, if the FUL were 
adequate reimbursement. The commenters stated that it is more logical 
to use the AAC model for reimbursement for branded products and a more 
flexible FUL for reimbursement for multiple source drugs. Multiple 
source drugs comprise 80 percent of all Medicaid prescriptions and 
comprise less than 20 percent of Medicaid spending. Another commenter 
noted that the proposed rule had a considerable discussion on the 
definition of AMP and the use of AMP to develop new FULs, which the 
commenter noted is a complicated and error-prone process. The commenter 
stated that if states decide not to change to an AAC-based 
reimbursement, the adoption of these new FULs as a basis for 
reimbursement would result in a reduction in pharmacy reimbursement if 
there is no increase in pharmacy dispensing fees. The commenter noted 
that there is no guidance to states to evaluate and increase dispensing 
fees if they do not change to AAC or delay the change to AAC and adopt 
the new FULs.
    A few commenters noted that implementing a defective FUL process 
with extreme period-to-period volatility will undermine the move to AAC 
and destroy any confidence that industry providers have in AAC. The 
commenters requested clarification on whether a state will override an 
AAC that was based on provider survey data with a lower FUL, and they 
noted that this ``lesser of'' logic could undermine both the AAC and 
the FUL. One commenter noted that the comparison of the draft AMP-based 
FULs to Alabama AAC values showed that a number of draft AMP-based FULs 
are below the reimbursement benchmark of 175 percent, and the analysis 
did not take into account that the dispensing fee in Alabama is $10.64, 
compared with the nation average Medicaid dispensing fee of $4.50. One 
commenter stated that to ensure the adequacy of AAC amounts when brand 
drugs have price increases, the procedures should include a mechanism 
for pharmacies to resubmit claims that were previously under 
reimbursed. One commenter stated CMS should use an appropriate measure 
of pharmacy acquisition cost to determine reimbursement and when the 
weighted

[[Page 5307]]

AMP is below that cost, CMS could calculate the FUL at 175 percent of 
such pharmacy acquisition cost measure.
    Response: Payment to Medicaid pharmacy providers must be consistent 
with efficiency, economy, and quality of care while assuring sufficient 
beneficiary access, consistent with section 1902(a)(30)(A) of the Act. 
Section 447.518(d) as finalized requires that when states are proposing 
changes to either the ingredient cost reimbursement or the professional 
dispensing fee reimbursement, they must evaluate their proposed changes 
in accordance with the revised requirements of this final rule, and 
states must consider both the ingredient cost reimbursement and the 
professional dispensing fee reimbursement when proposing such changes.
    We did not propose that states establish procedures for the 
resubmission of claims that may have been under-reimbursed, as we 
believe that a process for pharmacies to re-submit claims is a state 
function, and these issues should be raised to the state.
    Furthermore, in response to comments that CMS consider pharmacy 
acquisition costs when calculating the FUL, as discussed previously, we 
have adopted a revised process by which the FUL can be calculated using 
a multiplier higher than 175 percent of the weighted average of the 
most recently reported monthly AMPs, when the FUL calculated at 175 
percent of the weighted average of the most recently reported monthly 
AMPs is lower than the average retail community pharmacies' acquisition 
cost for such drug product, as determined by the most current national 
survey of such costs incurred by retail community pharmacies. This 
revised process considers pharmacy acquisition cost to establish a 
higher multiplier, such that, the resulting FUL is no less than the 
average retail community pharmacies' acquisition cost.
17. Policy for Misreporting and Posting of FUL
    Comment: One commenter noted that there is a need to have a 
mechanism in place to eliminate obvious gross errors in the final 
reported FUL values as reported on a monthly basis.
    Response: We did not propose a mechanism to eliminate obvious gross 
errors in the FUL; however, to the extent that a provider believes that 
a FUL reflects an obvious error, they should contact the state or CMS 
to report such errors.
18. Brand Medically Necessary (BMN)
    Comment: One commenter stated that the BMN section of the proposed 
rule appears to be in conflict with many state laws and regulations in 
which brand substitution requirements are already defined, including 
acceptable language and the use of check off boxes. CMS should more 
appropriately refer to those laws in the aggregate and allow state 
regulations to prevail in determining appropriate substitution. To do 
otherwise imposes a burden on providers. Additionally, this does not 
take into consideration state regulation or nationally accepted 
standards and systems already in use for e-prescribing that address 
this issue.
    Response: In our most recent change to this policy, we did allow 
for a BMN determination to be documented as part of an electronically 
transmitted prescription, and this policy was not designed to be in 
conflict with state laws. We did not propose deferring to state law on 
the e-prescribing issue, but we will continue to consider the issue. 
See 42 CFR 447.512(c) for further information on e-prescribing and the 
BMN certification for Medicaid CODs.
    Comment: One commenter stated that it was a good step that the 
language in Sec.  447.512 changed to allow the dispensing of a brand 
drug if the prescriber indicates that the brand is medically necessary; 
however, the commenter stated that they would like an electronic check 
box to be an acceptable way to indicate medical necessity as long as 
the wording on the check box specifically states that the prescriber 
certifies that the brand is medically necessary for the patient and 
further added that any type of electronic indication from the 
prescriber should be acceptable. Another commenter expressed 
disappointment that the proposed rule did not address an electronic 
alternative for prescribers to certify BMN on a prescription. The 
commenter points out that with e-prescribing and electronic medical 
records fully implemented in many parts of the country, requiring a 
handwritten dispense as written (DAW) certification is out of step with 
modern technology, and the commenter requested that CMS establish an 
electronic alternative to the handwritten DAW certification 
requirement.
    Response: We do not agree with this characterization of the current 
regulations, as Sec.  447.512(c) already provides an electronic 
alternative to the handwritten DAW requirement. We did not propose to 
modify the language in Sec.  447.512(c) in the proposed rule, nor are 
we making any changes to that section in this final rule.
19. Implementation/Timeline
    Comment: One commenter requested that CMS take into consideration 
in final rulemaking the establishment of effective dates for the 
implementation of the AMP-based FULs, and the commenter states that it 
will take months and additional contractor cost to implement these 
statutory provisions.
    Response: We believe that the notification previously issued by CMS 
that the FULs would not be finalized until this final rule is published 
should have provided states sufficient time to plan for the 
implementation of the Affordable Care Act FULs. Therefore, states are 
responsible for revising their state plans to be consistent with these 
final regulations, including the FULs, which we have issued to 
implement section 1927(e)(4) and (5) of the Act as of the effective 
date of this final rule.
    Comment: A few commenters stated that until the rule is finalized 
and implemented, CMS will not have the data necessary to calculate FULs 
as provided in the Affordable Care Act. Consequently, the commenters 
stated that CMS should defer calculating FULs--draft or final--until 
the regulations are finalized, and manufacturers have had an 
opportunity to properly implement calculation methodologies consistent 
with the statute.
    Response: We disagree with the commenters. In accordance with 
section 1927 of the Act, drug manufacturers participating in the MDR 
program are required to report valid drug product and pricing data to 
CMS, including the monthly AMP and AMP unit data for their CODs. 
Therefore, CMS is in receipt of the data necessary to calculate the FUL 
based on AMP data, consistent with section 1927(e)(5) of the Act.
    Comment: One commenter asked when CMS expected to post finalized 
FULs.
    Response: We expect to finalize the FUL in April 2016 after the 
final rule is effective.
20. Publication of FULs
    Comment: Several commenters stated that using the monthly AMP and 
monthly utilization (AMP unit) data submitted by the manufacturer to 
change the reimbursement levels on a monthly basis will create a 
significant administrative burden for all parties within the product 
supply channel and will create confusion in the marketplace as parties 
react monthly to the volatile and unpredictable FULs. The commenters 
stated that the frequency by

[[Page 5308]]

which CMS proposes to update the FULs to the various state Medicaid 
agencies should be extended to a quarterly basis or greater length of 
time, and that monthly changes in the FULs could ultimately harm the 
generic industry.
    Response: We disagree with commenters. The FULs may fluctuate from 
month-to-month, but we see no basis to extend the timeframe for 
updating the FULs as section 1927(e)(5) of the Act requires that the 
FUL should be calculated using the most recently reported monthly AMPs 
and AMP units.
21. Smoothing Process
    Comment: Several commenters supported the use of a 12-month rolling 
percentage to estimate the value of lagged price concessions to smooth 
out fluctuations in AMP from month-to-month that can negatively affect 
pharmacy reimbursement, as outlined in Manufacturer Release #83 
(February 3, 2011).
    Response: We appreciate the comment, and except for some minor 
clarification, we expect to implement the policy as outlined in the 
proposed rule (77 FR 5344). These clarifications are discussed in more 
detail in the Requirements for Manufacturers (section II.H.5.) of this 
final rule.
    Comment: A few commenters stated that the proposed rule did little 
to reduce the weighted AMP volatility that was evident in the draft 
AMP-based FULs and could exacerbate it. Another commenter stated that 
the proposed rule did not offer a solution to the volatility problem. 
Several commenters stated that the prevalence of extremely low and 
inordinately high FULs and the high degree of period-to-period 
variability in draft FULs posted to date clarify that the current 
methodology being used by CMS does not provide a reliable basis for 
setting FULs and could negatively impact community pharmacies. Another 
commenter stated that such volatility in a reimbursement metric would 
be highly problematic particularly for pharmacies that serve a high 
proportion of Medicaid beneficiaries.
    Response: We share the concerns of the commenters regarding the 
volatility of certain draft FULs. We contacted a number of 
manufacturers on this point and based on feedback from manufacturers we 
believe that this variation in price reflects changes in a supply and 
demand market, including drug shortages or manufacturing issues.
    Comment: Several commenters stated, after review of the draft FULs, 
that an additional smoothing methodology is necessary. Despite the 
smoothing requirements for manufacturers, the commenters stated that 
AMP-based FULs continue to demonstrate great variability. Another 
commenter thinks that the variability evident in the draft weighted 
AMPs and FULs published by CMS to date urges strongly for the 
development of a smoothing methodology for FULs and they disagreed with 
CMS's decision not to do so. One commenter stated that CMS is correct 
that any smoothing process would have drawbacks, but the unsmoothed 
FULs will have challenges as well, particularly for states without a 
SMAC. Several commenters stated that to provide predictability for 
Medicaid pharmacy providers and beneficiaries, a 12-month rolling 
average to determine FULs should be used rather than a single month's 
calculation. This additional smoothing process would substantially 
reduce the variability in FULs from month-to-month. This additional 
smoothing would not change the total reimbursement to pharmacies in a 
12-month period, but it would reduce variability. This predictability 
is important for all pharmacies but particularly those that serve a 
high percentage of Medicaid patients. One of the commenters provided an 
example of an approximation of what a FUL may look like using a 12-
month rolling average. Another commenter suggested the following 
proposed smoothing methodologies for FULs (besides the lagged price 
concession smoothing for AMPs currently in place): excluding outlier 
monthly weighted AMPs that are less than a certain percentage of the 
next highest monthly AMP for equivalent products, excluding a monthly 
AMP if the percent change is greater than a certain percentage when 
compared to the last manufacturer reported and certified monthly AMP, 
and increasing the calculated FUL by a certain percentage if the FUL is 
less than a certain percentage from the last FUL. One commenter stated 
that merely smoothing the FULs is not the appropriate solution to the 
fluctuating FULs given that so many of the erratic FULs are also well 
below 175 percent of the pharmacy acquisition cost. The commenter 
stated that CMS should exercise their authority to ensure stability and 
adequacy of the FULs by using a multiplier greater than 175 percent.
    Response: Smoothing the pricing data using one of the methodologies 
discussed in the proposed rule (77 FR 5349) may prevent some month-to-
month fluctuations in the FULs; however, as we noted in the proposed 
rule, implementing any of the smoothing methods would have limitations. 
Therefore, we do not plan to apply a specific methodology to smooth the 
FULs at this time. As noted previously in this section, we believe that 
our revised process by which the FUL will be calculated using a 
multiplier higher than 175 percent of the weighted average of the most 
recently reported monthly AMPs, when the FUL calculated at 175 percent 
of the weighted average of the most recently reported monthly AMPs is 
lower than the average retail community pharmacies' acquisition cost 
for such drug product, as determined by the most current national 
survey of such costs incurred by retail community pharmacies will 
ensure the FUL is not lower than the average retail community pharmacy 
average acquisition costs and should address concerns regarding the 
adequacy of the FULs as a reimbursement metric.
    Comment: One commenter stated that there is a proposed smoothing 
process for reported AMPs; however, since the FUL can vary due to sales 
mix (units sold) among vendors of the same product, the average 
weighted AMP can actually change with no change in individual AMP 
values, so the commenter recommended that there should be a smoothing 
process for FULs.
    Response: We agree with the commenter that the FUL can vary due to 
units sold; however, the average weighted AMP for a FUL product group 
(required by section 1927(e)(5) of the Act) is calculated based on a 
drug product's AMP units weighted against the other drug products in 
the FUL product group.
    Comment: One commenter recommended an additional process be 
implemented when factors such as drug shortages result in dramatic 
changes in FUL values. Another commenter stated that CMS has proposed a 
``smoothing process'' that may reduce the variability in the FULs, but 
stated that it may create a new problem in that generic medications are 
subject to periodic product shortages, and these product shortages 
create dramatic price increases when they occur. The commenter noted 
that a smoothing process would mask these dramatic cost increases and 
would result in substantial underpayment to pharmacies when these cost 
increases occur.
    Response: We understand that variations in pricing do occur in the 
marketplace for various reasons, including, but not limited to, drug 
shortages or manufacturing issues. If a drug product is in shortage and 
lesser amounts of that particular drug product

[[Page 5309]]

are sold, that drug product's AMP units would be weighted less against 
other products in the FUL product group.
    In the case where a drug product is not being manufactured, and the 
drug product has no utilization, it will not be included in the 
calculation of the FUL. Sections 1927(e)(4) and (5) of the Act do not 
include any exceptions for calculating a FUL when a drug is in 
shortage, provided the drug is available on a nationwide basis. 
Therefore, as discussed previously, a FUL will only be established for 
those multiple source drugs for which the FDA has rated three or more 
products therapeutically and pharmaceutically equivalent that are 
available for purchase by retail community pharmacies on a nationwide 
basis.
    Comment: One commenter states that there are limitations in all of 
the smoothing methodologies that CMS has proposed, and a more 
predictable measure should be used to address the wide swings in FULs 
from month-to-month. The commenter suggested that in lieu of smoothing, 
CMS establish a threshold for FUL variance. If the absolute value of 
the change in a grouping's FUL from period to period exceeds the 
threshold, then no FUL should be calculated for the ensuing month.
    Response: We did not propose a threshold option for determining 
whether to calculate a FUL based on a change in the FUL amount from a 
previous month in this final rule, but we will continue to consider 
this issue as we gain more experience with the FUL program.
    Comment: A few commenters believed that CMS should not use AMP 
revisions to adjust FULs for the 12-month time period, should not 
subsequently adjust a state's FMAP to account for such changes, and 
should not permit states to use such revisions to recoup monies from 
pharmacies after reimbursement is made.
    Response: At this time we are not planning to use any AMP revisions 
to adjust past FULs as section 1927(e)(5) of the Act requires that the 
FULs must be calculated based on the most recently reported AMPs. CMS 
does not read the section 1927(e)(5) of the Act to require, or 
contemplate, that FUL adjustments should be made based on subsequent 
AMP calculations or to require an adjustment to the state FMAP to 
account for such changes.
    Further, the states have had longstanding processes in place to 
address and respond to reimbursement issues, and to the extent that 
pharmacy providers have concerns with payment amounts, the pharmacy 
providers should raise those concerns with the state.
    Therefore, after considering the comments and for the reasons 
articulated in this section and in the proposed rule, we are finalizing 
proposed Sec.  447.514 (Upper limits for multiple source drugs), except 
for the following revisions:
     Proposed Sec.  447.514(a)(1) is revised to remove the 
third instance of the word ``therapeutically,'' which appeared prior to 
the word ``equivalent'' in the last sentence, given the earlier 
reference, in the same sentence, to the phrase ``pharmaceutically and 
therapeutically equivalent.'' This was a technical error in the 
proposed rule that we are correcting and is not intended to change the 
general meaning of this provision.
     We are adding a period to the end of the sentence in Sec.  
447.514(a)(1) as it was omitted from the proposed regulatory text.
     Section 447.514(b) is revised to create two paragraphs.
     Paragraph (b)(1) includes the language from the proposed 
Sec.  447.514(b), except that it is revised to replace the phrase 
``drug entity'' with the phrase ``pharmaceutically and therapeutically 
equivalent multiple source drug product,'' and is not intended to 
change the general meaning of this provision; rather, this terminology 
more closely matches the statutory language in section 1927(e)(4) of 
the Act.
     Paragraph (b)(2) addresses the exceptions process.

L. Upper Limits for Drugs Furnished as Part of Services (Sec.  447.516)

    In proposed Sec.  447.516, we included, without any modification, 
the existing upper limit provision (77 FR 5367), which we had 
previously finalized in the AMP final rule (72 FR 39244). We received 
no comments on this section and are finalizing the provision in Sec.  
447.516 (Upper limits for drugs furnished as part of services).

M. State Plan Requirements, Findings, and Assurances (Sec.  447.518)

    In the ``Medicaid Program; Withdrawal of Determination of Average 
Manufacturer Price, Multiple Source Drug Definition, and Upper Limits 
for Multiple Source Drugs'' final rule (75 FR 69591) we made conforming 
amendments to Sec.  447.518 (``State plan requirements, findings, and 
assurances) to remove reference to Sec.  447.514 (``Upper limits for 
multiple source drugs'') as this section was removed from regulation. 
In the proposed rule, we proposed regulatory amendments to add back in 
references to Sec.  447.514 ``Upper limits for multiple source drugs'' 
to Sec.  447.518 ``State plan requirements, findings, and assurances'' 
(77 FR 5350). In addition, to conform with the proposed change from 
``estimated acquisition cost'' to ``actual acquisition cost,'' we 
proposed in Sec.  447.518(d) to require states to provide data to 
support proposed changes in reimbursement using AAC and specified that 
this supporting data could include, but is not limited to, a state or 
national survey of retail community pharmacy providers, or other 
reliable data which reflects the pharmacy's price to acquire a drug (77 
FR 5350, 5367). We also proposed to add a new requirement that states 
must describe their payment methodology for drugs dispensed by a 
covered entity described in section 1927(a)(5)(B) of the Act, a 
contract pharmacy under contract with a covered entity described in 
section 1927(a)(5)(B) of the Act, and an Indian Health Service, tribal 
and urban Indian pharmacy. These provisions are discussed in more 
detail at 77 FR 5350 through 5351 of the proposed rule. Furthermore, we 
invited comments on the practicality of requiring each state to conduct 
a survey, the frequency of such a survey, and how closely we would 
expect the state to conform to the survey results in the reimbursement 
rates they propose in their SPA, including the use of acquisition cost 
averaging, AMPs as a basis for reimbursement, including the application 
of an appropriate markup factor or other methods of determining the 
ingredient cost (77 FR 5350). We received the following comments 
concerning proposed Sec.  447.518 (the state plan, requirements, 
findings, and assurances).
1. Pharmacy Reimbursement Using AAC
    The following comments pertain to pharmacy reimbursement using AAC.
a. Support for Proposal--The SPA Review Process and Change of 
Reimbursement
    Comment: One commenter was pleased that CMS has committed to 
ensuring that through the SPA process, no state will be allowed to 
reduce drug reimbursement to the required AAC without assessing the 
costs of dispensing and increasing the professional dispensing fee 
accordingly. One commenter supported CMS's proposal to require states 
to reconsider their dispensing fee methodology and to include this 
methodology in any SPAs that are submitted to CMS proposing revised 
drug cost payment. Many commenters supported CMS's proposal that states 
need to provide adequate data when proposing changes to the

[[Page 5310]]

ingredient cost or professional dispensing fee.
    Response: As discussed in section II.J. of this final rule, in 
light of the comments, we are revising Sec.  447.518(d) in this final 
rule to require states to consider both the ingredient cost 
reimbursement and the professional dispensing fee reimbursement when 
proposing changes to either or both of these components of the 
reimbursement for Medicaid covered drugs to ensure that total 
reimbursement to the pharmacy provider is in accordance with 
requirements of section 1902(a)(30)(A) of the Act. Also, states must 
provide adequate data such as a state or national survey of retail 
pharmacy providers, or other reliable data other than a survey, to 
support any proposed changes to either or both of the components of the 
reimbursement methodology. States must submit to CMS the proposed 
change in reimbursement and the supporting data through a SPA through 
the formal review process.
b. CMS Oversight--State Requirements for SPAs
    Comment: One commenter encouraged CMS to implement robust SPA 
oversight to ensure that pharmacy reimbursement is adequate. Several 
commenters stated that the SPA approval process should be overseen such 
that once a state adopts AAC, they cannot unilaterally reduce the 
professional dispensing fee without a cost of dispensing survey. 
Several commenters stated that CMS should require states to increase 
the dispensing fee as a condition of approving a SPA (for AAC) to 
ensure fair and accurate reimbursement for pharmacies, and this should 
be made clear in the final rule so future Administrations will comply/
share this view. Another commenter stated that failure to increase 
dispensing fees as a condition to approving a SPA will arbitrarily 
reduce reimbursement to pharmacies and threaten the economic viability 
and ability to continue providing the services currently offered to 
meet the distinct needs of the Medicaid population. Several commenters 
stated that prior to initiating any changes in ingredient cost or 
professional dispensing fee, including implementing an AAC model for 
reimbursement, a state must have an approved SPA with supporting data.
    Response: We agree that the total reimbursement should consider not 
only the pharmacy's cost to acquire the drug, but also the pharmacist's 
professional services in dispensing the drug; however, we do not agree 
that states must conduct surveys to revise dispensing fees. Rather, 
they have the option to submit data, other than a survey, which 
demonstrates that the total reimbursement to the pharmacy provider is 
in accordance with requirements of section 1902(a)(30)(A) of the Act. 
In light of the comments, we have revised proposed Sec.  447.518(d), to 
provide that states must consider both ingredient costs and 
professional dispensing fees to assure compliance with section 
1902(a)(30)(A) of the Act, and provide data to support any proposed 
changes to either or both of the components of the reimbursement 
methodology. In accordance with 42 CFR 430.20, states may submit a SPA 
for reimbursement changes as late as the last day of a quarter to 
maintain an effective date no earlier than the first date of that 
quarter.
    Comment: Several commenters stated that the SPA approval process 
for professional dispensing fees should require states to include a 
profit margin to receive CMS approval.
    Response: As we have explained in the Drugs: Aggregate upper limits 
of payment (Sec.  447.512) section (section II.J.), we have not 
separately identified profit in the definition of professional 
dispensing fee. Therefore, we will not require that states include a 
profit margin in their calculation of dispensing fee to receive CMS 
approval of any SPA revising such fees.
c. Timing--State Must Have an Approved SPA With Supporting Data Prior 
To Implementing Changes
    Comment: Several commenters stated that CMS should require states 
to have an approved SPA before initiating any changes in either 
component of reimbursement, including transitioning from old FULs to 
new FULs.
    Response: States are required to implement pharmacy reimbursement 
limits, in the aggregate, in accordance with Sec. Sec.  447.512 and 
447.514 as of the effective date of this final rule. However, when a 
state implements changes to its approved state plan prior to the CMS 
approval of those changes, and the SPA is subsequently disapproved, the 
state is responsible for the financial impact of those changes. As 
noted earlier in this section, we realize that states may need to 
revise their Medicaid state plans to accommodate the Affordable Care 
Act FULs provisions of this final rule, and we have decided to allow 
them 4 quarters from the effective date of this rule to submit a SPA to 
comply with the FUL provisions. In accordance with Sec.  430.20, states 
may submit a SPA for reimbursement changes as late as the last day of a 
quarter to maintain an effective date no earlier than the first date of 
that quarter.
d. SPAs and Approvals for Different Classes of Trade/Pharmacies
    Comment: Several commenters stated that the requirements for 
approval of SPAs regarding reimbursement should also extend to 
different classes of pharmacies as different pharmacies have different 
costs of purchasing, as well as different costs of dispensing. Other 
commenters stated that CMS should reject SPAs that tier dispensing fees 
based on pharmacy types, such as chain vs. non-chain, because this is 
unfair, anti-competitive, and based on false assumptions that chain 
pharmacies consistently purchase and dispense prescription medications 
at lower prices than independent pharmacies. The commenter further 
stated that national cost of dispensing studies have revealed no 
consistent differentials in dispensing costs for chain versus 
independent pharmacies.
    Response: We do not agree that we should reject SPAs that propose 
to tier dispensing fees based on pharmacy types. We believe that states 
are in a better position to assess adequate fees for their pharmacies 
and decide if tiered fees are appropriate for such providers. The state 
retains the flexibility to establish, and if necessary, revise, its 
professional dispensing fees to ensure that the Medicaid pharmacy 
providers are adequately reimbursed in accordance with the requirements 
of section 1902(a)(30)(A) of the Act. In addition, states retain the 
option to adjust the professional dispensing fee for provider type or 
services rendered such as special packaging or delivery.
e. Supporting Changes to Pharmacy Reimbursement
    Comment: One commenter claims that too often states have proposed, 
and CMS has indiscriminately approved, devastating Medicaid 
reimbursement reductions without requiring the submission of data.
    Response: We disagree with the commenter that CMS has 
indiscriminately approved Medicaid reimbursement reductions without 
submission of data. States have had the flexibility of establishing 
their pharmacy reimbursement methodology; however, states have had to 
support their proposed changes in reimbursement to ensure that the 
Medicaid pharmacy providers are adequately reimbursed consistent with 
the requirements of section 1902(a)(30)(A) of the Act.

[[Page 5311]]

f. Determining the Professional Dispensing Fee--Data/Surveys
    Comment: Many commenters stated that the process for determining 
the professional dispensing fee must be an open and transparent process 
that covers all aspects of doing business within that state. One 
commenter stated that the professional dispensing fee should be 
determined using well-designed surveys that address all costs, 
overhead, and delivery to pharmacy customers in varied settings, and 
that CMS should require states to adhere to rigorous standards when 
conducting state surveys to determine the professional dispensing fee. 
Several commenters stated that cost of dispensing surveys should 
reflect the added costs associated with entities which serve patients 
with special needs, such as frail, elderly, and disabled residents, and 
that CMS should require this in the final rule. Several commenters 
stated that there have been both statewide and nationwide attempts to 
assess cost of dispensing and the metrics utilized in those studies 
have been validated and could be included or at least referenced in the 
final rule and that there are a number of costs that should be included 
to ensure some degree of uniformity across states. One commenter 
recommended that CMS should provide a list of ``including, but not 
limited to'' items that comprise the core of the cost of dispensing 
survey--this would allow transparent additions by the state for state 
specific items such as unique regulatory requirements, levies, and 
taxes.
    Another commenter stated that the cost of dispensing survey should 
be conducted at least annually and that this should be included in the 
final rule. Another commenter noted that annual surveys are necessary 
as a pharmacy's cost to dispense will have some regional variation and 
will change periodically due to the costs of regulatory compliance and 
patient needs. Another commenter stated that cost of dispensing studies 
need to be repeated on a timely basis and utilize the results in 
pharmacy reimbursement, as pharmacy costs change over time as drug 
costs do, yet rate changes for dispensing costs have not occurred with 
similar frequency, and many times come under negative pressure, as in 
the case of Oregon, whenever budgets are tight. Many commenters stated 
that if a survey is not done annually to support the dispensing fee, 
then an annual adjustment must be made. Commenters suggested that 
adjustments should be made on a standard such as the one used to adjust 
Medicare Part D co-pays and state payments, or the medical care 
component of the CPI for urban areas.
    Response: We agree that to the extent that a state is conducting a 
cost of dispensing study, it should be a transparent, comprehensive, 
and well-designed tool that addresses a pharmacy provider's cost to 
dispense the drug product to a Medicaid beneficiary. States retain the 
flexibility to set professional dispensing fees, including creating a 
differential reimbursement per provider delivery type. We disagree that 
they should be required to use any specific methodology or study to do 
so, because we believe that states are in the best position to 
establish fees based on data reflective of the cost of dispensing drugs 
in their state.
    Comment: One commenter stated that states should be required to 
base professional dispensing fees on a recent survey conducted in the 
region or state. Another commenter requested clarification on whether 
CMS will accept a cost of dispensing survey from a neighboring state or 
a national cost of dispensing survey. One commenter stated that the 
professional dispensing fee should be set on actual provider invoice 
cost. The commenter stated that asking each state to conduct a cost of 
dispensing survey each time the pharmacy rate methodology changes is a 
large administrative burden. Another commenter expressed that the 
states may not have enough information to know what the fair 
professional dispensing fee is, as no data or survey has been 
conducted.
    Response: As noted previously in this section, states have the 
flexibility to set professional dispensing fees, including using 
national or regional data from another state and we do not require that 
a state use a specific standard or methodology such as a survey to do 
so. States are not required to conduct cost studies or use an inflation 
update where cost studies are not conducted; however, states should 
ensure that pharmacy providers are compensated in accordance with the 
requirements in section 1902(a)(30)(A) of the Act.
g. Determining AAC--Data/Surveys/Benchmarks
    Comment: Several commenters supported CMS's proposed change from 
EAC to AAC, providing that reliable and accurate data on acquisition 
cost and all associated discounts can be obtained from pharmacies. A 
few commenters stated that the proposed rule fails to lay out the 
requirements to ensure the accuracy of surveys to assess AAC and also 
the appropriateness of reimbursement rates derived from survey data. 
Another commenter stated that a pharmacy survey may only yield an 
invoice price, which could be an inaccurate pricing point, and states 
should be careful to use a term that accurately describes the 
information actually collected in the survey. One commenter stated that 
to ensure that AAC is reliable and sustainable; AAC should only be 
reported for retail pharmacy prices, and should not include discounts, 
rebates, allowances and any other price concessions not available to 
retail community pharmacies. Several commenters were concerned about 
the state's ability to secure a timely AAC benchmark that takes off-
invoice rebates and incentives into consideration. Another commenter 
stated that given these shortcomings of the AAC model, AAC should be 
stated as a derivative with a confidence interval that will assure the 
smallest of the providers will not be disadvantaged, and added that 
access to medications should not be compromised by a price setting 
process.
    Response: We appreciate the comments on AAC. We agree with the 
commenter that reliable and accurate data should be used to establish 
an AAC model of reimbursement. We have cited examples in the proposed 
rule (77 FR 5350) that the states can use to develop or support an AAC. 
States retain the flexibility to establish an AAC reimbursement based 
on several different pricing benchmarks, but they have the 
responsibility to ensure that Medicaid pharmacy providers are 
adequately reimbursed in accordance with the requirements of section 
1902(a)(30)(A) of the Act.
    Off-invoice rebates and incentives are pricing concessions that are 
generally extended to pharmacy providers on a case-by-case basis under 
specific contracting arrangements with wholesalers, and CMS does not 
require states to include these pricing concessions in a survey of 
pharmacy prices. Further, we believe that survey prices that do not 
reflect off-invoice rebates and incentives tend to benefit pharmacy 
providers. In accordance with the requirements in Sec.  447.518(d) of 
this final rule, states must provide data to support any changes to 
reimbursement, and have the proposed changes reviewed under the formal 
SPA review process. Under this process, states are responsible to 
ensure that total reimbursement to the pharmacy provider is in 
accordance with requirements of section 1902 (a)(30)(A) of the Act. 
States must also provide public notice of that change, in accordance 
with Sec.  447.205, before it can be implemented. Therefore, the 
state's proposed methodology to establish an

[[Page 5312]]

AAC model of reimbursement, including how/if the state is including any 
rebates or discounts afforded to pharmacy providers in calculating an 
AAC, should be part of this public notice and SPA review process. In 
light of this public process, providers may raise any concerns 
regarding the accuracy of the data to the state once the details of the 
proposal are made public.
    Comment: A few commenters stated that strong confidentiality and 
liability protections should be in place for pharmacies that submit 
invoices. To protect the ability of chain pharmacies to negotiate drug 
prices, it is critical that individual company invoice data are not 
revealed.
    Response: The issue of liability protections for pharmacy pricing 
invoices is beyond the scope of this rulemaking.
    Comment: One commenter understood CMS's basis for defining the term 
AAC, and the need to pay pharmacies accurately for the cost of drug 
products, but believed that the benchmarks suggested in the proposed 
rule are not reliable for meeting this goal. The commenter stated that 
the NADAC's reliability, accuracy, timeliness, and sustainability have 
not been established, and the commenter stated that AMP is not a price 
paid in the marketplace. Several commenters stated that there is no 
reliable measure of AAC currently available on a nationwide basis, and 
while CMS indicates it will publish the NADAC, it has not been 
published to date. The commenter stated that before mandating AAC, CMS 
should publish NADAC for a period of time, collect comments, and 
implement refinements.
    Another commenter recognized the need for alternative metrics for 
pharmacy acquisition costs to support state Medicaid reimbursement 
rates. The commenter is concerned that industry stakeholders do not yet 
have the necessary information or guidance to make the change to AAC-
based reimbursement in a responsible and practical manner. Therefore 
the commenter stated that any new type of pricing data requires further 
review before it can serve as the basis for reimbursement.
    Another commenter stated that CMS should forego requiring states to 
adopt ingredient cost payment based upon survey-derived measures of AAC 
as the accuracy of these unpublished and untested measures of AAC could 
have an unpredictable impact on pharmacy reimbursement. Another 
commenter expressed concern about encouraging states, without more 
specific guidance, to conduct and implement an AAC which could create 
inadequate reimbursement, with risk to access and patient care. One 
commenter stated that some states may believe that the NADAC doesn't 
represent cost to pharmacies in their state if they have a 
disproportionate share of independent pharmacies in their state. One 
commenter stated that CMS and state Medicaid programs should first 
issue draft ingredient cost for comment before implementing AAC, as 
this transparency is essential for pharmacy provider feedback.
    Response: We note that this final rule is not designed to mandate 
state payment rates. CMS sets aggregate upper limit requirements in 
accordance with the methodology established in Sec. Sec.  447.512 and 
447.514, and as we stated in the proposed rule, states have the 
authority to establish an AAC reimbursement in their state plan based 
on several different pricing benchmarks, for example, the NADAC file, a 
state survey of retail pharmacy providers, or AMP-based pricing (77 FR 
5350). States have the responsibility to ensure that Medicaid pharmacy 
providers are adequately reimbursed in accordance with the requirements 
of section 1902(a)(30)(A) of the Act, consistent with the state plan.
    We disagree with the commenters about the reliability of the data 
which states may use to calculate ingredient costs. A notification for 
the retail price survey collection was placed in the Federal Register 
on September 30, 2011 for public comment as part of the PRA process (76 
FR 60845). The public was given notice in July 2011 that, consistent 
with section 1927(f) of the Act, and as noted on the Medicaid.gov Web 
site on July 8, 2011, CMS contracted with an outside vendor for a 
monthly survey of retail community pharmacy prescription drug prices. 
We expected that state Medicaid agencies would be able to use this 
information to compare their own pricing methodologies and payments to 
those derived from this survey of retail prices.
    On a monthly basis, our contracted vendor collects acquisition cost 
data from a random sample of pharmacies selected from all 50 states and 
the District of Columbia. Pharmacy entities surveyed include 
independent and chain retail community pharmacies. A national pharmacy 
compendia file containing information on retail pharmacies throughout 
the country is used to determine the pool of pharmacies eligible for 
each survey. The Methodology for Calculating the NADAC, found at http://www.medicaid.gov/medicaid-chip-program-information/by-topics/benefits/prescription-drugs/ful-nadac-downloads/nadacmethodology.pdf discusses 
the actual data collection, survey process, and quality assurance 
measures in place for calculating a NADAC.
    The draft NADAC files and the draft Methodology for Calculating the 
NADAC were made available on the Medicaid.gov Web site as of October 
2012, and were finalized in November 2013. Further information on the 
survey of retail prices can be found at http://www.medicaid.gov/medicaid-chip-program-information/by-topics/benefits/prescription-drugs/survey-of-retail-prices.html. The NADAC pricing files can be 
found at http://www.medicaid.gov/medicaid-chip-program-information/by-
topics/benefits/prescription-drugs/pharmacy-pricing.html.
    We also disagree with the commenters concerning the reliability of 
AMP-based prices. In accordance with the requirements of section 
1927(b)(3) of the Act and Sec.  447.510, manufacturers are required to 
submit and certify the accuracy of all of the pricing data they report 
to CMS, including monthly and quarterly AMP data. As discussed 
previously in this section, we have reviewed manufacturers' submissions 
to ensure that manufacturers calculate their AMPs consistently. We also 
note that while states may use AMP data, which is based on the prices 
paid by both retail community pharmacies and wholesalers, they are 
responsible for demonstrating that using AMP-based prices as a 
reimbursement methodology will ensure that pharmacies are reimbursed at 
a price that reflects AAC.
    Therefore, we believe that we have given the states sufficient time 
and opportunity to review the NADAC pricing files and AMPs, and we 
expect that state Medicaid agencies should be able to use this data, if 
they choose to do so, to establish payment rates consistent with 
section 1902(a)(30)(A) of the Act.
    Comment: Many commenters stated that whatever process is used to 
determine AAC, it should be open, transparent, updated timely and 
specific to practice/provider type and location, readily available, and 
specific to the needs of the pharmacy, pharmacists and patients served, 
and that those provisions should be added to the final rule. Another 
commenter stated that the conformity and frequency of surveys to 
determine AAC should be matched to determine cost of dispensing and 
professional dispensing fees. The commenter recommended adding 
provisions to the final rule stipulating that states electing to carry 
out their

[[Page 5313]]

own pharmacy surveys for AAC must conduct them no less frequently than 
annually. The commenter would prefer to see a requirement for CMS's 
plan to carry out rolling monthly surveys. Another commenter requested 
that the final rule also should require states to use survey 
methodologies that have been thoroughly vetted through well-noticed, 
open public comment processes similar to those used by CMS for NADAC. 
One commenter stated that AAC could vary with the different regions in 
the United States. Several commenters thought that this supporting data 
should be provided specifically by state surveys. Another commenter 
thought that a state should be allowed to use a regional survey, which 
would be more representative of a particular state's demographics and 
unique market. Several other commenters added that the cost of a 
regional survey could be shared with a neighboring state.
    One commenter stated that CMS should take into account different 
entities such as specialty pharmacy products, and thus, the surveys 
should be well-designed to focus effectively on the specifics of the 
products and the customers involved such as vulnerable populations and 
those with rare diseases. One commenter stated that specialty products 
should be excluded from the methodology as they are unique and costly. 
Another commenter stated that independent pharmacies need special 
consideration as they do not have the advantage of ordering in large 
quantities, so it is more difficult for them to make a profit. Another 
commenter stated that AAC could vary with each pharmacy's contractual 
prices from their primary wholesaler. Several commenters stated that if 
CMS uses a survey to determine AAC, the survey should be conducted at 
the enrolled pharmacy location level, and in the case of chain 
pharmacies, individual pharmacies, and not retail chain distribution 
centers are most reflective of drug acquisition cost and should be used 
in surveying these entities.
    Response: We note that this final rule is not designed to mandate 
state payment rates, and we have not proposed specific requirements 
regarding state surveys to determine an AAC model of reimbursement for 
those states that choose to conduct a state survey; however, we agree 
that to the extent that a state is conducting a survey to establish an 
AAC model of reimbursement, it should be transparent, comprehensive, 
and one that will allow the state to provide adequate reimbursement to 
Medicaid pharmacy providers in accordance with the requirements of 
section 1902(a)(30)(A) of the Act, and consistent with the state plan.
    Comment: One commenter stated that survey-based AACs may not 
reflect manufacturers' price increases which could result in pharmacies 
taking a loss when they must dispense at a price less than what they 
can buy the drug, especially for brand drugs wherein manufacturers 
raise their prices quite frequently. Another commenter stated that the 
final rule should include protections against a substantial time lag 
between the pharmacy's incurring AAC and the calculation of AAC by the 
Medicaid agency to prevent inadequate reimbursement. Another commenter 
stated that if a survey does not take place following a price increase, 
payments to pharmacies will not be sufficient.
    Response: States have the flexibility to determine reimbursement 
for specific drugs and to provide timely updates to their AAC model of 
reimbursement as necessary to afford pharmacy providers adequate 
reimbursement, and likewise, to ensure that states and the federal 
government receive the cost savings benefits of market changes. States 
have authority to conduct retail pharmacy surveys without CMS approval; 
however, if they decide to use data collected from those surveys to 
make payments to pharmacies, they would need to submit a SPA outlining 
this methodology for approval. While we do not object to a process for 
adjustments to a state's AAC methodology, states retain the flexibility 
to set prices. We note that states have had longstanding processes in 
place to address and respond to reimbursement issues, and to the extent 
that pharmacy providers have concerns with payment amounts, including 
situations where there is a change in pricing due to a time lag in the 
pharmacy provider's acquisition and subsequent reimbursement for the 
drug, they should raise those concerns with the state.
    Comment: One commenter stated that while CMS has published in the 
Federal Register its intent to begin submitting surveys to retail 
pharmacies to support its NADAC efforts, CMS still has yet to respond 
to stakeholder comments on its proposed NADAC methodology or publish 
NADAC data for stakeholder review. The commenter questioned when such 
data may be made available. Another commenter requested that CMS not 
implement AAC until a national benchmark is available, as it makes 
little sense for each state to expend scarce administrative funds for 
state specific acquisition cost surveys. Another commenter stated that 
last year, the OIG reported that as of July 2011, a large number of 
states did not have well-developed plans for prescription drug 
reimbursement once First DataBank ceases to publish AWP data in 
September 2011. The commenter continued that the same report showed 
that a vast majority of states preferred that CMS develop a national 
benchmark for Medicaid reimbursement for prescription drugs, which CMS 
has begun to do with its NADAC survey, conducted by Myers & Stauffer, 
LC.
    Another commenter stated that CMS's proposal to use the NADAC 
survey as a basis to calculate AAC does not currently provide 
sufficient assurances that it will lead to accurate or adequate 
reimbursements for the more complex and costly specialty pharmacy 
products. The commenter expressed concerns that CMS and the states are 
unsure even how to identify specialty pharmacies, which do not 
typically receive a separate license for state pharmacy purposes. The 
commenter added that it is unclear that the NADAC survey will provide 
adequate data to accurately calculate AAC for specialty pharmacies.
    Response: As we explained previously in this section, since the 
publication of the proposed rule, we have finalized the NADAC pricing 
files and the NADAC methodology documents. Information pertaining to 
the NADAC and our response to comments can be found on the Medicaid.gov 
Web site at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/
By-Topics/Benefits/Prescription-Drugs/Survey-of-Retail-Prices.html.
    We agree with the commenter that the NADAC files may not address 
the more complex and costly specialty pharmacy products. In regard to 
specialty pharmacies that have products primarily delivered through the 
mail, these pharmacies are not included in the NADAC survey at this 
time. However, specialty drug products purchased through retail 
community pharmacies are included in the NADAC files. If states choose 
to use the NADAC pricing files in their reimbursement methodologies, 
they will be responsible for determining AAC for specialty drugs 
dispensed through specialty pharmacies.
    Comment: Several commenters stated that in the case of AMP, a 
transition to the buildup methodology has the potential to cause future 
AMPs to depart radically from their historical trends, and buildup AMPs 
should not be used as a benchmark for AAC.
    Response: As discussed in more detail in the comments and responses 
in the Determination of AMP section (section

[[Page 5314]]

II.C.) of this final rule, we are not requiring manufacturers to use a 
buildup methodology to calculate AMP. Therefore, we believe this will 
satisfy the concerns raised by the commenter pertaining to the impact 
of a buildup methodology on AMPs as a benchmark for AAC.
    Comment: We received many comments on the use of published 
compendia pricing, that is, AWP and WAC, and how these reference prices 
may help states to establish/maintain an AAC model of reimbursement. A 
few commenters opined that the states should not engage in time 
consuming costly re-survey efforts to adjust AAC when a brand 
manufacturer has a price increase nor should they be allowed to wait 
for new survey results if they are committed to a monthly survey 
process. Instead, the commenters recommended that states should 
contract with a drug pricing compendium to get real time updates. Other 
commenters requested that CMS provide for the continued use of pricing 
compendia benchmarks to determine AAC for single source products, 
referencing the October 2011 OIG report. Another commenter stated that 
their analysis of the relationship between acquisition cost and WAC is 
consistent with the OIG study, and compared WAC with AAC as collected 
by the state of Alabama for single source drugs and consistently found 
a strong correlation between the two benchmarks. Several commenters 
recommended the use of WAC, or WAC plus or minus a percentage, to 
determine AAC for single source drugs and multiple source drugs without 
a FUL because they claim WAC is currently used by many state Medicaid 
programs, readily available from commercial vendors, and updated on a 
daily basis.
    Another commenter stated that an analysis of historical ingredient 
cost survey results available to many states establish that WAC is 
reasonable, and noted that WAC and AWP will likely still play a role in 
pharmacy reimbursement as there will be occasions where a drug product 
will not have an AAC. In these cases, the commenter suggested the use 
of WAC plus an appropriate multiplier to take into account the 
wholesaler's markup before a drug product is sold to a pharmacy. 
Another commenter stated that if AAC is not available, there must be an 
acceptable surrogate for interim pricing, and suggests that using an 
escalator such as the medical care component of the CPI for urban areas 
would provide a methodology for an EAC when AAC is not immediately 
available. One commenter stated that, at a minimum, WAC should be used 
until an AMP is submitted to CMS, similar to the current Part B 
methodology, which states that during the initial period when the 
prices for a drug are not sufficiently available from a manufacturer, 
the Secretary can base reimbursement off of the WAC. One commenter 
recommended that states should have the option of using WAC as an 
alternative to determine their reimbursement for single source drugs as 
some states may not believe the NADAC is appropriate for their state 
and may not have the resources to contract for their own AAC survey.
    One commenter stated that several states currently base ingredient 
cost reimbursement on manufacturer reported (published compendia) data, 
and the commenter believed this is not the appropriate source for 
acquisition cost data. The commenter stated that pharmacies, not 
manufacturers, are in the best position to monitor and report the 
prices at which pharmacies acquire drugs, as wholesalers could be 
providing discounts or reselling to pharmacies at a premium.
    Response: We note that this final rule is not designed to mandate 
state payment rates. We set aggregate upper limit requirements, and 
states have the authority to develop and support an AAC model of 
reimbursement. Reimbursement based on publish compendia pricing, such 
as the AWP or WAC, often fail to represent accurate purchase prices, 
especially given that they do not necessarily include the discounts and 
price concessions available in the marketplace. However, the state may 
use WAC to develop and support an AAC model of reimbursement, if the 
state can provide data to support a model of reimbursement using the 
WAC prices consistent with Sec.  447.512(b) of this final rule.
    We note that, in establishing NADAC file pricing, the WAC is used 
to update brand drug prices, and on a weekly basis, the NADACs for 
brand drugs are reviewed and adjusted if necessary based on changes in 
published prices. The NADAC pricing files, including the weekly changes 
to the NADAC files can be found at http://www.medicaid.gov/medicaid-
chip-program-information/by-topics/benefits/prescription-drugs/
pharmacy-pricing.html. Changes in published prices are measured as the 
relative percentage difference between the new published price and the 
previous published price. Therefore, if the published price for a drug 
increases by 5 percent, then the NADAC for that drug is also increased 
by 5 percent. The pricing change is then validated with survey data 
obtained from the next monthly survey, and adjusted, if necessary, 
according to those survey prices. The relationship between changes in 
published brand drug prices and changes in actual brand drug prices 
obtained from surveys are tracked and monitored to ensure that a 
consistent correlation continues to exist.
2. Reimbursement Based on AMP
    The following comments pertain to pharmacy reimbursement based on 
AMP:
a. Comments Opposed to AMP as a Reimbursement Methodology
    Comment: One commenter stated that the Affordable Care Act does not 
authorize the use of AMPs for single source drug reimbursement since 
the AMP data are confidential and proprietary and may not be disclosed. 
The commenter indicated that using AMP as a reimbursement metric is 
inappropriate since AMP is based on actual sales data and it is not and 
has never been a measure of pharmacies' drug acquisition costs. The 
commenter recommended that in the final rule, CMS retract this 
suggestion.
    Response: We recognize that AMP is defined, in part, as the average 
price paid to the manufacturer for drugs in the United States by 
wholesalers for drugs distributed to retail community pharmacies and 
retail community pharmacies that purchase drugs directly from the 
manufacturer, and is therefore an indirect measure of pharmacy drug 
acquisition costs; however, we believe AMP-based pricing could be used 
by states as a method for setting reimbursement where a state can 
demonstrate that by adjusting AMP it will ensure that pharmacies are 
reimbursed at a price that reflects AAC. States would also need to 
address any confidentiality concerns in their SPA submission if the 
state chooses to use AMP-based prices for reimbursement.
    AMP, which is addressed in detail in section II.C., is based on 
actual sales data and reported and certified by drug manufacturers on a 
monthly and quarterly basis. As discussed in the proposed rule (77 FR 
5350), states that consider using AMP-based pricing as a reimbursement 
metric could determine the relationship between AMP and wholesaler 
markup, to cover the cost of distribution and other service charges by 
the wholesaler, to determine a reasonable reimbursement that would 
appropriately compensate pharmacies in accordance with the requirements 
of this final rule. As specified previously in this section, states are 
responsible for submitting SPAs with adequate data to

[[Page 5315]]

support any revisions to their current payment methodologies.
    Comment: One commenter believed most manufacturers are sending in 
information incorrectly to CMS that results in AMP pricing that is 
flawed. The commenter believed the regulations are too confusing and 
the final results are AMPs that are below acquisition cost for both 
independent and chain pharmacies.
    Response: In accordance with the requirements of section 1927(b)(3) 
of the Act and Sec.  447.510, manufacturers are required to submit and 
certify the accuracy of all of the pricing data they report to CMS, 
including monthly and quarterly AMP data. We believe that the 
provisions in the Determination of AMP section (section II.C.) of this 
final rule, which pertain to the manufacturers' calculation of AMP, 
provide the needed clarity to ensure that manufacturers calculate their 
AMPs consistently. As discussed previously in this section, states 
which use AMP-based prices as a reimbursement methodology must ensure 
that pharmacies are reimbursed at a price that reflects AAC and is 
consistent with section 1902(a)(30) of the Act.
b. Confidentiality
    Comment: One commenter stated that CMS has no statutory authority 
to make public individual AMPs for brand name or multiple source drugs. 
Thus, there should be no ability for states to use AMPs to set Medicaid 
reimbursement. Another commenter noted that AMP will likely not be an 
acceptable reimbursement metric for providers since AMP is not a 
publicly available price that is available to providers. AMP is always 
in arrears, and it is subject to retroactive restatement.
    Another commenter stated that AMP data is confidential and 
proprietary and it is unclear how states could use AMP data to set 
publicly-available payment rates without disclosing proprietary 
information. The commenter stated that by law, the AMP data for 
individual single source drugs may not be disclosed. The commenter 
stated that not only would using AMP as a pharmacy reimbursement metric 
make it more difficult to establish an accurate AAC, but it would also 
contravene the statute. The commenter continued that the Federal Trade 
Commission and the CBO have both cautioned that disclosing confidential 
price information could have adverse effects, ultimately leading to 
higher prescription costs.
    Response: In accordance with requirements of section 1927(b)(3)(D) 
of the Act, we have made AMP available through the DDR system for 
states only. Section 1927(b)(3)(D)(i) of the Act states, in part, that 
AMP may be disclosed as the Secretary determines it to be necessary to 
carry out section 1927 of the Act. Further, section 1927(b)(3)(D)(iv) 
of the Act permits disclosure of AMP data to states to carry out Title 
XIX; however, we remind states that such information is confidential 
and should not be disclosed in a form which discloses the identity of a 
specific manufacturer or wholesaler, or the prices charged for drugs by 
the manufacturer or wholesaler, except for certain exceptions. We 
believe that these provisions, when read together, permit states to use 
AMP-based pricing for purposes of pharmacy reimbursement; however, we 
further note that any disclosure concerning AMP must be addressed by 
the state during the SPA submission process. During the SPA process, 
the state must demonstrate how such disclosure of the AMP-based prices 
are consistent with the confidentiality requirements set forth by the 
statute and other applicable federal regulations and statutory 
requirements, including the requirement in section 1902(a)(30)(A) of 
the Act that payments be consistent with efficiency, economy and 
quality of care and sufficient to assure access.
c. CMS Appeals Process
    Comment: One commenter recommended that CMS provide a formal 
appeals and resolution forum as this would provide an opportunity for 
stakeholders impacted by AMP to raise questions and receive timely 
consideration and resolution regarding their concerns involving AMP as 
a price paid in the market. The commenter further believed that AMP is 
not a price paid in the market and should not serve as a basis for AAC.
    Response: Stakeholders should work directly with states in regard 
to their decision to use AMP-based pricing as a state reimbursement 
methodology since the states are responsible for determining the 
reimbursement methodology and providing public notice of any changes in 
reimbursement consistent with Sec.  447.205. Further, we will continue 
to work with manufacturers to ensure that manufacturers are in 
compliance with their obligation to accurately report and certify 
pricing information.
    Comment: Several commenters raised concerns regarding to use AMP in 
payment methodologies when CMS simultaneously proposes the use of a 
buildup methodology for calculating AMP, which commenters stated will 
almost certainly generate lower AMPs going forward and also cause 
greater fluctuation in those figures month-to-month. A few commenters 
also stated that AMP values do not reflect real time market prices and 
is not a price paid in the market to pharmacies; therefore, AMP is not 
a good reimbursement metric for AAC reimbursement to pharmacies. One 
commenter referenced OIG publication, ``Review of Drug Costs to 
Medicaid Pharmacies and Their Relation to Benchmark Prices,'' A-06-11-
00002 (October 18, 2011), which reports that AMP had the least 
consistent relationship with pharmacy invoice prices and was not as 
consistent as the relationship between invoice prices and AWPs and 
WACs.
    Response: As discussed in the OIG Report (A-06-11-00002), we 
recognize that AMP, along with AWP and WAC, were found to have pricing 
fluctuations and none of the benchmarks had consistent relationships 
with invoice prices for multiple source drugs without FULs. We disagree 
with the commenter regarding the option that states may calculate a 
reimbursement methodology using AMP-based prices. Manufacturers are 
required to report and certify monthly and quarterly AMP, calculated in 
accordance with the requirements of section 1927(k) of the Act. We 
recognize that AMPs are reported based on prior month's data, and that 
states will need to address that time lag in any SPA using AMP-based 
pricing while setting their reimbursement methodologies. We note that 
states have had longstanding processes in place to address and respond 
to reimbursement issues, and to the extent that pharmacy providers have 
concerns with payment amounts, they should address those concerns to 
the state, especially given that in accordance with Sec.  447.205, 
public notice is required prior to any changes in the methods and 
standards for setting payment rates.
    Comment: One commenter requested further clarification regarding 
how restatements of AMP would affect, if at all, AAC reimbursements; 
whether AAC would be based on monthly or quarterly AMP; how frequently 
would AAC change as a result of AMP changes; and how states would 
compare the AAC to a provider's U&C charges, and whether that 
comparison would consider that the AAC may be based on a calculation 
that contains lagged data. Another commenter requested that CMS provide 
guidance as to how states can apply AMP to drug prices and to further 
clarify whether CMS means AMP or weighted AMP.
    Response: The questions regarding how states may choose to use AMP-
based prices in their reimbursement

[[Page 5316]]

formulas should be addressed by the states in determining their 
respective reimbursement methodology. States must provide notice and 
opportunity for comment before implementing reimbursement changes, as 
required in the public notice provisions in Sec.  447.205. We further 
note that this notice and comment opportunity will allow the 
stakeholders to raise any such concerns with the state.
d. Miscellaneous
    Comment: One commenter stated that CMS should require states to 
demonstrate that both their brand name drug reimbursement, as well as 
the maximum allowable cost (MAC) lists for generics are justified based 
on state-based data and not permit states to make reductions in these 
MAC lists without justification to CMS. The commenter added that states 
should be required to demonstrate that their MAC methodology is based 
on community pharmacies costs of purchasing prescription drugs and also 
include a process by which such values are changed in a timely manner 
so that they are more transparent to the pharmacy.
    Response: Provisions addressing the use of maximum allowable cost 
(MAC) lists are not addressed in this final rule.
    Along with a SPA submission, states must also provide public notice 
of that change in accordance with Sec.  447.205 prior to proposing any 
changes; therefore, the public notice process shall address any 
transparency concerns. States are not limited in regard to conducting 
retail pharmacy surveys and CMS is not finalizing any such requirement 
in this final rule. We further emphasize that states must establish 
rates that ensure beneficiary access in accordance with the 
requirements of section 1902(a)(30) of the Act. We also note that to 
the extent that pharmacies have concerns regarding the adequacy of the 
payment rates, they should present these concerns to the state.
    Comment: One commenter believed that it is essential that AMP-based 
Medicaid reimbursement and the resulting FUL represent an accurate 
determination of retail pharmacy AAC since the reimbursement 
methodology may extend beyond Medicaid to private and commercial payers 
who may elect to adopt AMP as a pricing and reimbursement benchmark.
    Response: Concerns regarding private and commercial payers are 
beyond the scope of this rulemaking. Private payers are not bound by 
regulations to use reimbursement methodologies established for the 
Medicaid program and we are not setting payment rates for such payers 
in this final rule.
3. Reimbursement for 340B Entities, IHS, Tribal, and Urban Indian 
Organization Pharmacies
    The following comments pertain to pharmacy reimbursement for 340B 
entities, IHS, Tribal, and Urban Indian Organization Pharmacies.
a. IHS, Tribal, and Urban Indian Organizations (I/T/U)
    Comment: Some commenters expressed specific concerns regarding the 
adequacy of any proposed changes to Medicaid reimbursements to I/T/U 
pharmacies. Commenters wanted to ensure that any changes made will not 
negatively impact their ability to deliver pharmaceutical services. For 
instance, one commenter noted that I/T/U pharmacies are generally 
smaller and located in remote areas where they serve a critical need 
for tribal communities. The commenter further noted that I/T/U 
pharmacies are more reliant on Medicaid reimbursement for dispensing 
CODs to cover higher overhead costs. Another commenter noted that a 
decrease in the reimbursement rates could result in some of these 
pharmacies having to close, which would threaten access to prescription 
drugs and pharmaceutical services for American Indians and Alaska 
Natives (AI/ANs) who live in some of the poorest and most remote areas 
of the country. The commenters also expressed concern about potentially 
losing the encounter rates by which some states reimburse I/T/U 
pharmacies. Specifically, the commenters feared that if states are 
allowed to impose AAC reimbursement methodologies on the pharmacy, it 
could cause the encounter rates to be lost, preventing the I/T/U 
pharmacies from using reimbursements at the encounter rates to 
subsidize all costs, including clinical care associated with the 
dispensing of outpatient drugs to AI/ANs within the I/T/U delivery 
health system. One commenter suggested that if I/T/U pharmacies are 
included in this proposed rule, CMS should create a mechanism that 
protects the interest of federal beneficiaries, AI/ANs, from arbitrary 
and capricious state action.
    Response: We recognize there are unique aspects of dispensing CODs 
to AI/ANs by I/T/U pharmacies and understand the various concerns 
expressed through the regulatory comment process. The encounter rate is 
approved by the Office of Management and Budget (OMB) and published in 
the Federal Register every year. It is intended to be an all-inclusive 
average of all provider costs incurred by I/T/Us for the delivery of 
care for their patients. It is a uniform amount reimbursed to all I/T/
Us by the state for the delivery of any service provided to any patient 
seen by the facility, irrespective of the nature of the care provided. 
Unlike AAC, which is defined in Sec.  447.502, the encounter rate is 
more reflective of services provided and is not granular to the extent 
of identifying the ingredient cost of a drug. Therefore, if a state 
pays I/T/Us at the encounter rate, it will satisfy the requirements in 
Sec.  447.518(a)(2), which specifies that the state's payments must be 
in accordance with the definition of AAC. We have determined that the 
encounter rate is one model that states may use to reimburse I/T/U 
pharmacies, given that the rates are designed to address provider 
costs. It was not our intent in the proposed rule to change the state's 
authority to reimburse I/T/U pharmacies using the encounter rate, and 
we believe that nothing in this final rule prevents states from using 
the encounter rate as a model to reimburse I/T/U pharmacies. We believe 
that as designed, the current CMS SPA review and approval process which 
requires states to obtain the advice and input from I/T/Us before 
making changes to Medicaid reimbursements to I/T/U pharmacies, before 
CMS approval of the SPA, provides sufficient oversight and input 
regarding states establishing such pharmacy rates.
b. Tribal Consultation
    Comment: Several commenters expressed uncertainty about how CMS 
considers comments received during the Tribal consultation process. 
Commenters urged that CMS consult with tribes before changes in 
Medicaid pharmacy reimbursement for CODs with regard to I/T/U 
pharmacies are finalized. The commenters also stated the Tribal 
consultation process is a way to assure that the full effects of the 
proposed rule are well understood and is addressed in a way that is 
supportive of the Indian health programs.
    Response: We agree that the Tribal consultation process is valuable 
in helping us to finalize policies and support Indian health programs. 
We obtained the advice and input of Tribal officials during the Tribal 
Technical Advisory Group (TTAG) face-to-face meeting in Washington, DC 
on February 23, 2012; and under Executive Order 13175 and the CMS HHS 
Tribal Consultation Policy (November 2011), we consulted with Tribal 
officials during an All Tribes' Call on March 16, 2012 and through the 
regulatory review process. In determining our final

[[Page 5317]]

policies and regulations, we considered all comments received before 
the close of the comment period (including comments received through 
Tribal consultations).
c. 340B Oversight
    Comment: One commenter expressed concern about the role that drug 
manufacturers play in the oversight audits of 340B covered entities. 
The commenter further noted that 340B oversight is a governmental 
function that is the responsibility of OPA at HRSA.
    Response: Currently, oversight of the 340B program is the 
responsibility of OPA at HRSA and beyond the scope of this rulemaking.
d. Orphan Drugs
    Comment: Commenters expressed concern about the inability of 
certain 340B covered entities; that is, critical access hospitals, 
cancer centers, rural referral centers, and sole community hospitals, 
to purchase orphan drugs through the 340B program, stating that this is 
a hardship. They recommended that CMS change this policy so they can 
continue to provide valuable services to the underserved and 
underinsured populations they serve. Another commenter noted that it 
would be difficult for a manufacturer to determine if a drug that is 
sold through the 340B program is used as an orphan drug.
    Response: This exclusion relating to orphan drugs under the 340B 
program is governed by section 340B(e) of the PHSA and is beyond the 
scope of this rulemaking.
e. Inpatient Drugs
    Comment: Some commenters noted concern with the fact that the 340B 
program does not allow 340B covered entities to purchase 340B drugs for 
inpatient use. Commenters indicated that this is a hardship and asked 
CMS to reverse this policy.
    Response: Currently, oversight of the 340B program is the 
responsibility of OPA at HRSA and is beyond the scope of this 
rulemaking.
f. Professional Dispensing Fee
    Comment: Several commenters stated that CMS should provide guidance 
to states regarding dispensing fees paid to 340B covered entities. A 
few commenters expressed the view that the proposed rule, if properly 
implemented, would not only require states to present a rationale for 
their reimbursement policies, but also provide a vehicle for federal 
oversight and enforcement. One commenter noted that the state 
dispensing fees paid to 340B covered entities generally are inadequate, 
and asked CMS to use its authority under the existing regulation and 
under the proposed rule to approve the reimbursement methodology in a 
state's Medicaid state plan, to correct those deficiencies. Several 
commenters supported the requirement for states to formalize the 340B 
reimbursement methodology as part of their state plan, but recommended 
that the final rule specifically require states to document, as a 
condition of approval of their state plan, that their professional 
dispensing fee appropriately and fairly reimburses FQHCs (and other 
covered entities) for their cost in dispensing drugs to Medicaid 
beneficiaries. The commenter questioned whether current policy does, in 
fact, result in reasonable, cost-based reimbursement for 340B covered 
entities.
    Response: We agree with the commenters that states must express the 
rationale for the reimbursement methodologies in their state plans as 
discussed in Sec.  447.418(d).
    We agree that there may be unique circumstances for 340B covered 
entities that states should consider when establishing their 
professional dispensing fees for these providers and that states must 
express the rationale for the reimbursement methodologies being 
proposed in their state plans. We also believe that it is important the 
providers are reimbursed adequately for the provision of care to 
beneficiaries. Therefore, we will require states to substantiate how 
their dispensing fee reimbursement to pharmacy providers, including 
340B providers, is consistent with section 1902(a)(30)(A) of the Act. 
We note that states may decide to use different professional dispensing 
fee rates for different entities and providers. While we do not mandate 
any specific professional dispensing fee methodologies that states must 
use, states are required to provide data which indicates that the 
methodology is consistent with the regulation and ensures access.
g. Actual Acquisition Costs (AAC)
    Comment: Several commenters supported CMS's proposal to pay 340B 
providers at their cost for 340B drugs as part of the implementation of 
AAC. One commenter recommended that CMS should require, as a condition 
of approval of a state's Medicaid plan, documentation that 340B covered 
entities are reimbursed fairly for services to Medicaid beneficiaries.
    Response: In this final rule, we are revising Sec.  447.518 by 
adding paragraph (a)(2) to specify that the state's payment methodology 
must be in accordance with the definition of AAC in Sec.  447.502 of 
this final rule. We appreciate the commenter's support for our proposal 
that 340B covered entities be reimbursed for 340B drugs using 
methodologies consistent with our shift to AAC. We believe that our 
shift to AAC and the professional dispensing fee, including the new 
regulatory requirement at Sec.  447.518(d) that states must provide 
adequate data which reflect the pharmacy's AAC as a basis to support 
any proposed change in ingredient cost reimbursement, address the 
concerns raised by the commenter regarding state's assurances of 
adequate reimbursement for 340B drugs.
    The formula for calculating the 340B ceiling price is generally 
defined in section 340B(a)(1) of the PHSA as AMP minus the URA, and 
these data are available for states in DDR. AMP minus URA is then 
calculated by the Package Size to ultimately determine the 340B ceiling 
price paid. We are aware that 340B entities are often able to negotiate 
discounts below the statutory 340B ceiling price for 340B drugs. 
However, in consideration of the fact that information regarding these 
discounts (or subceiling prices) for 340B drugs may not be accessible 
to states, where states are unable to determine the prices at which 
340B providers actually acquired their drugs, we would consider a 
methodology that reimburses at the statutory 340B ceiling price for the 
ingredient cost component of reimbursement in addition to an adequate 
professional dispensing fee to be compliant with the AAC payment 
criteria. We believe that if states reimburse 340B providers for the 
ingredient cost at their actual purchase price, then those providers 
must be adequately reimbursed a professional dispensing fee that is 
representative of the cost to dispense the drug. Specifically, the 
dispensing fee should not be earmarked as an offset for ingredient cost 
reimbursements set at AAC. Instead, it should reflect the pharmacist's 
professional services and costs associated with ensuring that 
possession of the appropriate COD is transferred to a beneficiary.
    Additionally, we continue to encourage states to develop clear 
reimbursement policies for 340B covered entities in their state plans 
which detail measures that ensure that reimbursements will reflect the 
ingredient costs at their AAC and that providers will be reimbursed a 
professional dispensing fee. States will be required to submit SPAs 
consistent with the regulations, including those requirements in 
Sec. Sec.  447.502 and 447.512 finalized in this rulemaking, detailing

[[Page 5318]]

how 340B covered entities are reimbursed for their 340B drugs, to the 
extent their approved state plans do not already include this 
information. State Medicaid agencies are encouraged to work with the 
covered entities in their states when setting appropriate reimbursement 
rates for both the ingredient cost and dispensing fees.
    Comment: One commenter stated that it is unclear whether 340B 
prices would be included in the data underlying a state's pharmacy 
reimbursement system under the proposal to base Medicaid FFS 
reimbursement on a drug's AAC rather than its EAC. Another commenter 
stated that paying at the 340B price or AAC, whichever is higher, would 
be appropriate because many entities pay distributing fees to their 
wholesalers that effectively increase acquisition cost to above the 
340B price.
    Response: In this final rule, we are requiring states to establish 
their AAC-based pharmacy reimbursement methodologies such that pharmacy 
providers are reimbursed the ingredient cost reflective of the cost of 
a drug, as well as a professional dispensing fee, which is incurred at 
the point of sale or service. We encourage states to determine the 
existence of, or develop, clear reimbursement policies for 340B covered 
entities in their state plans.
    Comment: One commenter noted that it is premature to require states 
to include 340B payment methodology in their Medicaid plan until HRSA 
shares 340B prices with states. The commenter stated that it would be 
illegal and irresponsible to presume to create policy outlining a 
state's payment methodology for 340B drugs without having the requisite 
pricing information from HRSA. The commenter continued that to 
determine the AAC paid by 340B entities, states would need to manually 
review invoice prices paid by each 340B entity on a regular basis which 
would be a burdensome and costly process. Until HRSA has provided the 
necessary tools to calculate pricing, the commenter recommended that 
CMS allow states to reimburse 340B entities based on the ceiling price, 
not the AAC.
    Response: We understand that it may be burdensome and costly to 
review invoice prices paid by each 340B entity on a regular basis but 
states have a responsibility to set rates that reflect the acquisition 
costs of providers and are consistent with section 1902(a)(30)(A) of 
the Act. We would consider a methodology that reimburses at the 
statutory 340B ceiling price to be compliant with the AAC payment 
criteria in the event that the state is unable to establish or obtain 
data reflective of 340B providers' acquisition costs. The 340B ceiling 
prices are known to the states based on their access to the AMP and the 
URAs through the DDR system. The formula for calculating the 340B 
ceiling price is generally defined in section 340B(a)(1) of the PHSA as 
AMP minus the URA, and these data are available for states in DDR. AMP 
minus URA is then calculated by the Package Size to ultimately 
determine the 340B ceiling price paid. While these data will establish 
the ceiling price paid by 340B entities, as we noted earlier, in 
Manufacturer Release #85 (October 26, 2012), states should be aware and 
consider that these covered entities may have additional costs 
associated with dispensing these drugs compared to a retail pharmacy 
and also consider those dispensing costs when looking at overall 
payment to these covered entities. In accordance with section 
1902(a)(30)(A) of the Act, a state must establish payments that are 
consistent with efficiency, economy and quality of care and are 
sufficient to enlist enough providers so that care and services are 
available. Thus, it is the responsibility of individual states to 
develop methodologies that ensure that pharmacy providers, including 
340B entities, are reimbursed adequately for their provision of 
pharmacy services which include dispensing CODs.
    Comment: One commenter noted that shifting to an AAC-based 
reimbursement would cause a hospital to reassess the value of the 340B 
program, as this change in policy would likely create significant 
administrative burden and extra cost. The commenter stated that one 
particular hospital fulfills the intent of the 340B program by 
reinvesting savings from pharmaceutical drugs back into the institution 
so more underinsured and uninsured receive the pharmaceutical 
treatments they need.
    Response: We recognize the important role that 340B covered 
entities play in the provision of services to Medicaid patients and as 
key safety net providers. Further, we believe that 340B covered 
entities recognize the benefits of participating in the 340B program, 
which by definition, offers them access to CODs at federally-discounted 
prices.
    Reimbursing providers based on the ingredient cost representative 
of the cost of the drug alone and a dispensing fee representative of 
the cost to dispense the drug to the patient is in keeping with section 
1902(a)(30)(A) of the Act. We do not expect the implementation of AAC-
based reimbursement would result in unrealistic administrative burdens 
being placed on the covered entities. Instead, we believe that states 
establishing a methodology that provides reimbursement based on costs 
would not lead to a reduced commitment by 340B covered entities, in 
part, because this shift to an AAC-based reimbursement model will 
ensure that 340B covered entities are provided with payment for their 
drugs consistent with Medicaid requirements.
h. Medicaid Carve-Out
    Comment: One commenter stated that if CMS finalizes its proposal 
that states must move to an actual acquisition based reimbursement 
methodology, it is essential that CMS ensure 340B covered entities 
retain the flexibility to carve Medicaid in or out of their 340B 
programs. The commenter also noted that it is their understanding that 
some states are requiring that 340B providers carve out their Medicaid 
MCO drugs from their 340B programs so that the state may collect 
rebates on the MCO drugs used by 340B entities. The commenter stated 
that states were not given the authority under the statute to mandate a 
carve-in or carve-out for Medicaid and allowing them to do so thwarts 
the very purpose of the 340B program. The commenter further noted that 
few states have or are considering to ``double down'' on their 
restrictive reimbursement of FQHC's and other 340B covered entities by 
eliminating the ``carve-out'' option while at the same time allowing 
340B covered entities to recoup only their 340B acquisition cost and 
the state's minimal dispensing fee. This could force FQHCs to close 
down its pharmacy. Another commenter opposed a policy that would 
require hospitals to carve out Medicaid managed care drugs as the 
effect would be a devaluation of the 340B program for the hospital by 
creating a significant administrative burden. The commenter stated that 
as a result, the intended effect of the 340B program is diluted.
    Some commenters indicated that some states are not interpreting the 
340B MCO exception in a manner compatible with the intent of the law 
and one of the commenters recommended that CMS prohibit states from 
requiring a 340B entity to carve out Medicaid MCO drugs. The commenter 
further requested that CMS create a mechanism that states can use to 
avoid collecting rebates on 340B MCO drugs. Another commenter indicated 
that the impact on their health plan, if they were required to carve-
out drug costs, could negatively impact their budget and supported the 
creation of a pharmacy-friendly mechanism that states can use to 
prevent the collection of rebates on 340B MCO drugs.

[[Page 5319]]

    Another commenter urged CMS to publicly reject the path taken by a 
particular state which enacted a law that prohibits 340B covered 
entities from carving out Medicaid drugs and requires them to bill and 
be reimbursed at no more than their 340B acquisition cost plus a 
dispensing fee that is far too low to cover the costs of serving this 
population.
    Response: We recognize that states are examining the issue of the 
Medicaid carve-out in the context of the new authority to collect 
Medicaid rebates for MCO drugs and in the overall scheme of their 340B 
reimbursement methodologies. As discussed in prior responses, states 
have the responsibility to set payment rates for all CODs, including 
340B drugs. States are also responsible for not submitting claims to 
manufacturers for rebates for drugs acquired under the 340B program, in 
accordance with section 1927(a)(5) of the Act.
i. MCO Rebates
    Comment: One commenter supported CMS's proposal to explicitly 
exempt manufacturers from the requirement to pay rebates for CODs 
dispensed to individuals enrolled in Medicaid MCOs if such drugs are 
subject to discounts under the 340B program. The commenter appreciated 
CMS's proposal to require Medicaid MCOs to submit a data report to 
states within 30 days of the end of each quarter and in turn to require 
states to submit this information to manufacturers, with data for 
Medicaid MCO utilization carved out from the data pertaining to FFS 
utilization. The commenter believed that a more active exchange of 
information between 340B stakeholders will help ensure the integrity of 
both the Medicaid and 340B programs.
    Response: As stated in this section, we are not finalizing the MCO 
reporting requirements that we proposed at Sec.  447.509(b)(3). 
Instead, we will address the requirements for states with regard to the 
data they report to manufacturers, including the data pertaining to MCO 
utilization, at Sec.  447.511.
    Comment: One commenter stated that currently due to the lack of 
specific information, it is impossible for a 340B covered entity to 
manage Medicaid compliance where outpatient drug claims are processed 
through Medicaid MCOs. The commenter requested that CMS or HRSA's OPA 
publish Medicaid identifiers that are unique for each MCO that reports 
reimbursed drug units to states' Medicaid programs. The commenter 
continued that an official list of MCOs that reimburse Medicaid 
eligible claims, including each Medicaid Bank Identification Number 
(BIN) or Processor Control Number (PCN) could be published by CMS or 
HRSA's OPA. Where a unique MCO-BIN/PCN is unavailable, a unique Group 
ID would also be necessary. The commenter believed this would allow 
340B covered entities to carve out drugs from 340B replenishment based 
on identification of Medicaid MCO reimbursement. The commenter noted 
that MCOs pose a significant challenge because claims are not linked to 
Medicaid Provider numbers and eligibility is frequently determined 
retroactively.
    Response: Specific billing standards regarding BIN or PCNs are 
outside the scope of this final rule; however, we appreciate the 
concerns raised by the commenter and recognize the importance of 
ensuring that manufacturers do not pay rebates on drugs purchased the 
340B program and dispensed through Medicaid MCOs. States are 
responsible for implementing billing requirements to identify 340B 
claims, which may include such options as HRSA's Medicaid Exclusion 
File or the NCPDP 340B Telecommunication Standards. We will continue to 
monitor this issue and decide about additional guidance, if needed.
    Comment: One commenter believed that CMS's proposed policy to 
exclude 340B MCO drugs from the rebate program will have a huge impact 
on the little revenue that MCOs currently pay a particular county. The 
commenter believed that passing through the 340B cost to MCOs would be 
administratively burdensome to pharmacy operations.
    Response: Section 1927(j) of the Act states in part that CODs are 
not subject to rebates if such drugs are dispensed through Medicaid 
MCOs and subject to 340B discounts. The details of the financial 
arrangements between MCOs and their 340B providers are beyond the scope 
of the final rule.
j. OIG Report
    Comment: One commenter stated that there is limited transparency in 
the 340B and the FSS programs and as a result, states do not have 
access to the 340B prices paid by entities. The commenter cited the 
June 2011 OIG report--State Medicaid Policies and Oversight Activities 
Related to 340B-Purchased Drugs, which indicated that states do not 
have the necessary pricing information to create prepay edits for 340B 
drugs and recommended that HRSA share 340B ceiling prices with states. 
The commenter noted that while direct reporting of the ceiling prices 
through the drug pricing compendia would be helpful to states, it still 
would not provide the states with the data to determine AAC paid by any 
340B covered entity. Commenters stated to determine the AAC for each 
entity regularly would be burdensome and a manual process for states.
    Response: In accordance with the requirements of section 
1902(a)(30)(A) of the Act and this final rule, states should determine 
a reasonable reimbursement that would appropriately compensate 
pharmacies including 340B covered entities. As stated in Manufacturer 
Release #85 (October 26, 2012), states should consider that 340B 
covered entities may have additional costs associated with dispensing 
drugs compared to a retail pharmacy and also consider those dispensing 
costs when setting their payment rates in accordance with the 
principles of AAC in this final rule. In consideration for the fact 
that information regarding discounts or subceiling prices for 340B 
drugs may not be accessible or determined by states, where states are 
unable to determine the prices at which 340B providers actually 
acquired their drugs, we would consider a methodology that reimburses 
at the statutory 340B ceiling price for the ingredient cost component 
of reimbursement in addition to an adequate professional dispensing fee 
to be compliant with the AAC payment criteria.
    In requiring that states establish methodology consistent with AAC, 
we are not requiring that states determine the AAC for every drug 
dispensed by every pharmacy in their state. Rather, states can 
establish an AAC using aggregate data obtained based on surveys or 
other reliable data sources, and in the case of 340B covered entities, 
they can use the 340B ceiling price, given that these prices are 
generally representative of acquisition costs for such entities. Some 
covered entities (that is, tribal facilities), may be able to purchase 
CODs under the FSS and seek Medicaid payment. For states to determine 
AAC in these cases, they can access FSS pricing via the Department of 
Veterans Affairs Web site at http://www.va.gov/oal/business/fss/pharmaceuticals.asp and review files with drug pharmaceutical prices.
k. State Plan Requirements
    Comment: One commenter stated that implementing the state plan 
requirement and the formal review process required for SPAs is an 
appropriate mechanism for CMS to exercise oversight to ensure that 
states are capturing the savings that result from the federal discounts 
available to 340B covered entities and IHS pharmacies. The commenter 
requested

[[Page 5320]]

that CMS extend these requirements to the documentation of the state's 
mechanism for ensuring compliance with the statutory prohibition on 
duplicate discounts which protects manufacturers from paying a Medicaid 
rebate on FFS or MCO utilization that is sourced through a 340B-priced 
unit. As an additional mechanism to ensure compliance with the 
statutory prohibition on duplicative discounts, the commenter requested 
that CMS encourage state Medicaid agencies to cooperate with 
manufacturer requests for data as needed to evaluate 340B covered 
entity compliance with this prohibition.
    Another commenter noted that claims processing in 340B pharmacies 
are entirely different from claims processing in outpatient clinics, 
and each system requires a different mechanism for identifying 340B 
claims and excluding them from rebate requests. Therefore, the 
commenter encouraged CMS to require states to describe in SPAs their 
340B duplicate discount prevention processes, including how the states 
require 340B pharmacies to identify 340B claims in the retail setting.
    Response: We did not propose and are not finalizing a requirement 
that state plans include information on a state's activities associated 
with collecting rebates from manufacturers. However, we believe there 
are other appropriate mechanisms for identifying these claims, such as 
HRSA's Medicaid Exclusion File or the use of the NCPDP 
Telecommunication Standards to identify 340B claims. We will continue 
to consider the issue and decide about additional guidance, if needed.
    Comment: One commenter noted that the proposed rule does not 
provide a deadline for a state to come into compliance with the 340B 
requirements proposed in this rule and suggested that the final rule 
should establish a specific deadline for states to amend their state 
plan to incorporate the features required under the regulation.
    Response: States must submit a SPA to CMS not later than 4 quarters 
after the effective date of the final rule to revise its payment 
methodology for CODs. This includes the incorporation of the 340B 
requirements at Sec.  447.518(a)(1).
    Upon the effective date of this final rule, when proposing changes 
to either the ingredient cost reimbursement or professional dispensing 
fee reimbursement, states are required to evaluate their proposed 
changes in accordance with the requirements of this subpart, and states 
must consider both the ingredient cost reimbursement and the 
professional dispensing fee reimbursement when proposing such changes 
to ensure that total reimbursement to the pharmacy provider is in 
accordance with requirements of section 1902(a)(30)(A) of the Act. 
States must provide data to support proposed changes in reimbursement 
through the SPA process. Examples of such supporting data include, but 
are not limited to, a national or state survey of retail community 
pharmacy providers, or other reliable data other than a survey to 
support any proposed changes to either or both of the components of the 
reimbursement methodology.
l. Dispute Resolution
    Comment: One commenter stated that manufacturers employ various 
back-end checks to attempt to identify 340B claims in Medicaid 
utilization files and go through Medicaid's dispute resolution process 
when a rebate is requested on 340B claims.
    Response: We appreciate the comment and note that states and 
manufacturers are responsible for engaging in the process of dispute 
resolution in the MDR program to resolve duplicate discount issues. We 
have also provided best practices for states and manufacturers on our 
Web site at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Medicaid-Drug-Rebate-Program-Dispute-Resolution.html.
    Comment: One commenter noted that a national dispute resolution 
forum would better serve Medicaid programs, 340B entities, and drug 
manufacturers. The commenter recommended that CMS implement a nation-
wide dispute resolution program for drug manufacturers that do not 
provide 340B prices as required.
    Response: We appreciate the comment; however, we did not propose 
and therefore, are not finalizing, any requirement concerning a 
national dispute resolution forum and believe that such a forum is 
beyond the scope of this rule. Manufacturers should continue to contact 
states and HRSA, if applicable, for issues concerning 340B prices.
m. Shared Savings
    Comment: Several commenters requested that CMS consider allowing 
states to enter into shared savings arrangements with 340B covered 
entities. The commenter noted that under these arrangements, the states 
create an incentive for 340B providers to dispense 340B drugs to 
Medicaid patients, which benefits the state Medicaid programs, Medicaid 
patients, and the 340B providers. The commenters claim that shared 
savings arrangements also promote access to care.
    Response: We believe that to the extent that covered entities have 
a higher cost of dispensing these drugs, we recognize that states have 
the flexibility of establishing a higher dispensing fee for 340B 
providers. Further, to the extent that covered entities incur costs 
associated with acquisition of 340B drugs, states can appropriately 
reflect these costs in establishing their reimbursement methodology for 
the cost of 340B drugs. We believe it is appropriate to apply the AAC 
provisions consistently to all Medicaid pharmacy providers including 
those that acquire drugs through the 340B program. States should 
consider that certain pharmacy providers may have differing costs to 
dispense or different acquisition cost for 340B drugs. Further, while 
care/disease management services cannot be reimbursed through the 
pharmacy reimbursement methodology, states can chose to pay for such 
services through other Medicaid service categories.
    Comment: One commenter asked CMS to provide guidance to states in 
developing clear policies with regard to 340B drug purchases, as well 
as encourage states to develop shared saving programs with 340B 
providers, such as hemophilia treatment centers. The commenter noted 
that states should be given the flexibility to negotiate both the drug 
ingredient cost component and professional dispensing fee in a 
different manner that what is being done for other drugs; this is 
especially important for a shared savings program for hemophilia. The 
commenter continued that while the 340B drug prices can provide 
significant savings to the state, they need to be assured that it can 
adequately cover the significant cost of dispensing, distribution, and 
clinical pharmacy services. Some commenters stated that CMS should 
provide guidance as to what unique circumstances might support a 
differential professional dispensing fee and how the magnitude of those 
fees may be determined because not doing so would likely undermine the 
states' vision when pursuing shared savings models that benefit the 
government as well as patients.
    Response: As noted in this section, we are requiring states to 
submit their 340B reimbursement methodologies and professional 
dispensing fee proposals to CMS through the Medicaid SPA process. We 
will consider all proposals, including those that may establish a 
different payment to hemophilia

[[Page 5321]]

treatment centers, and review them in accordance with the provisions of 
this final rule.
n. Duplicate Discounts
    Comment: One commenter applauded CMS for recognizing the need to 
create mechanisms by which 340B entities and states (including their 
Medicaid MCOs) can satisfy their duties to prevent duplicate 
discounting.
    Response: We appreciate the support.
    Comment: One commenter noted that the discussion in the preamble to 
the proposed rule following Medicaid carve-out is misleading as it 
states that covered entities are not allowed to seek payment for 340B 
drugs from Medicaid. The commenter stated that covered entities are 
allowed to seek payment for 340B drugs if they follow state guidelines 
that result in the state not seeking rebates from the manufacturers for 
those 340B drugs dispensed to Medicaid patients. The commenter stated 
this needs to be clarified so that states and insurers do not develop 
policies based on erroneous information. Another commenter stated that 
CMS should adopt requirements to prevent duplicate discounts on 
Medicaid reimbursed drugs purchased under the 340B program. The 
commenter stated that they are concerned about the high level of risk 
that exists for duplicate discounts, which can occur when a COD is 
purchased at 340B prices and also claimed for a Medicaid rebate. The 
commenter further recommended that CMS require state Medicaid programs 
to develop effective systems to assume responsibility for ensuring that 
drugs purchased at 340B prices are not included on Medicaid rebate 
invoices, add new pharmacy and 340B identifiers to the list of required 
data elements for Medicaid rebate claims, provide claims-level Medicaid 
rebate data in a common format, and apply similarly-effective reporting 
requirements for drugs purchased by non-pharmacy providers.
    One commenter supported transparency of reimbursement rates to all 
providers, but was particularly concerned with understanding the 
processes by which states eliminate 340B utilization from their rebate 
requests so as not to request a duplicate discount.
    Several commenters were concerned that the proposed methodology and 
the information to be reported are not sufficient to prohibit duplicate 
discounts. The commenter stated that none of the proposed information 
in the MCO utilization reports would help identify products that were 
subject to 340B pricing and therefore alert the state that Medicaid 
rebates should not be sought for these products. The commenter also 
urged CMS to require that the MCO utilization report contain data that 
will clearly identify when a product was subject to a discount under 
the 340B program so that MCOs, CMS, states, and manufacturers can 
easily and clearly identify 340B priced products and ensure that 
Medicaid rebates are not requested nor paid for such products.
    Response: We want to clarify that 340B covered entities may seek 
Medicaid reimbursement for 340B drugs dispensed to Medicaid 
beneficiaries. As noted in the June 2011 OIG report, we recognize that 
states use a variety of methods to ensure against duplicate discounts, 
including HRSA's Medicaid exclusion file and the claim identifiers 
developed by NCPDP. We further note that HRSA's OPA sets forth the 
guidance that covered entities must follow with regard to compliance 
with the requirements of the 340B program.
    We did not propose any specific requirements in this final rule 
regarding the submission of claims level data in rebate invoices states 
send to manufacturers; however, we encourage states and 340B entities 
to work together to ensure they take necessary measures to prevent 
duplicate discounts. At this time, we have not finalized requirements 
concerning the need to include 340B identifiers in the list of required 
data elements for Medicaid rebate claims since each individual state is 
responsible for establishing billing instructions necessary to identify 
340B claims. In addition, we are not requiring that states include 340B 
identifiers on rebate invoices given the prohibition on states seeking 
Medicaid rebates on drugs purchased through the 340B program.
    While we encourage states and manufacturers to work cooperatively 
in verifying these rebate claims, we believe those actions are best 
handled at the state level and do not plan to add further reporting or 
auditing mechanisms at the federal level at this time.
    Comment: Some commenters asked CMS to take a stronger stance and 
establish a specific standard or set of requirements that states must 
follow to avoid requesting a Medicaid rebate on a drug that was 
purchased under the 340B program. For instance, one commenter suggested 
that CMS could require Medicaid MCOs to collect individual prescription 
numbers and pharmacy ID numbers in NCPDP format for 340B drugs 
dispensed to Medicaid enrollees, and that Medicaid MCOs should make 
such information available to manufacturers. Another commenter 
suggested that the NCPDP claim identifier could be a useful tool for 
preventing duplicate discounts.
    One commenter acknowledged that the NCPDP 340B identifier is not in 
wide use today, but believed it is within CMS's discretion to require 
participants in the Medicaid pharmacy program to include this 
identifier. The commenter stated that further data sharing is needed to 
ensure compliance with the 340B statute so that Medicaid receives the 
benefit of the 340B prices and that manufacturers are not forced to pay 
deep discounts twice on the same prescription. The commenter believed 
that to eliminate the double discounting, states would need patient de-
identified, specific, prescription level information, including claim 
level data for both MCO and Medicaid FFS prescriptions, instead of just 
the aggregate-level data shared under the proposed rule. These 
additional data fields would allow for verification that the data has 
been properly screened for duplicate discounts.
    Response: We appreciate the concerns raised by the commenter and 
recognize the importance of preventing duplicate discounts on drugs 
purchased through the 340B program. As noted previously in this 
section, states and manufacturers should continue to work together in 
verifying claims with potential duplicate discount issues. We did not 
issue specific requirements concerning such issues, but we will 
continue to consider these concerns and issue future rules or guidance, 
if needed.
    Comment: One commenter stated that most FQHCs, as well as many 
other 340B covered entities, do not have in-house pharmacies and 
instead rely on contract pharmacies, which promote access to pharmacy 
services, enhance patient care, and makes medication management easier 
and more effective. The commenter suggested that the final rule should 
require states to implement a payment methodology, incorporated in the 
Medicaid state plan, under which FQHCs (and other covered entities) can 
use a contract pharmacy to dispense 340B drugs to Medicaid patients. 
The commenter indicated that current HRSA guidance prohibits the use of 
a contract pharmacy unless the pharmacy has a method in place to 
prevent a manufacturer from paying a rebate on 340B drugs but states 
have not been eager to entertain proposals from FQHCs to implement such 
methods. The commenter requested that CMS should require states to 
establish methods for preventing duplicate discounts and contract 
pharmacy arrangements as a matter of patient care.
    Response: It is a covered entity's choice whether to use a contract

[[Page 5322]]

pharmacy. We encourage states to work with a covered entity that seeks 
to enter into a contract with a contract pharmacy so the state can be 
assured that the entity appropriately reports 340B claims.
    Therefore, after considering the comments and for the reasons 
discussed in this section and in the proposed rule, we are finalizing 
the provisions of Sec.  447.518 State plan requirements, findings and 
assurances, but making the following revisions in response to comments 
and for the reasons discussed in detail in this section:
     We are revising Sec.  447.518 by renumbering Sec.  
447.518(a) to add a new paragraph (a)(2) to specify that the state's 
payment methodology described in paragraph (a)(1) must be in accordance 
with the definition of AAC in Sec.  447.502.
     Because of the renumbering configuration, proposed Sec.  
447.518(a)(1), (2), and (3) are being renumbered and finalized as Sec.  
447.518(a)(1)(i), (ii), and (iii) respectively.
     We are revising Sec.  447.518(d) to provide that, when 
states are proposing changes to either the ingredient cost 
reimbursement or professional dispensing fee reimbursement, they are 
required to evaluate their proposed changes in accordance with the 
revised requirements of this subpart, and states must consider both the 
ingredient cost reimbursement and the professional dispensing fee 
reimbursement when proposing such changes to ensure that total 
reimbursement to the pharmacy provider is in accordance with 
requirements of section 1902 (a)(30)(A) of the Act. States must provide 
adequate data such as a state or national survey of retail pharmacy 
providers or other reliable data other than survey data to support any 
proposed changes to either or both of the components of the 
reimbursement methodology. States must submit to CMS the proposed 
change in reimbursement and the supporting data through a SPA through 
the formal review process.
     We are removing the words ``of this subpart'' from the 
proposed regulatory text of Sec.  447.518(b) as the reference is not 
necessary as given the regulatory citations.

N. FFP: Conditions Relating to Physician-Administered Drugs (Sec.  
447.520)

    In the regulatory text of the proposed rule (77 FR 5367), we 
proposed to retain the current Sec.  447.520 (FFP: Conditions relating 
to physician-administered drugs) without modification. We received the 
following comment specific to this section.
    Comment: One commenter indicated that the proposed language 
relating to physician-administered drugs provides that FFP would not be 
available when a state has not required the submission of NDC codes 
necessary for rebates. The commenter stated that the requirement does 
not make sense for drugs administered by 340B entities, since 340B 
entities are not allowed to invoice these drugs for rebate. The 
commenter requested that FFP still be available for 340B physician-
administered drugs, even without the collection of NDC codes.
    Response: The application of the physician-administered drug 
provisions to 340B entities is beyond the scope of this final 
rulemaking.
    We received no other relevant comments to this section. 
Accordingly, we are finalizing Sec.  447.520 (FFP: Conditions relating 
to physician-administered drugs) without modification.

O. Optional Coverage of Investigational Drugs and Other Drugs Not 
Subject to Rebate (Sec.  447.522)

    We proposed to add Sec.  447.522 to clarify that states may, at 
their option, provide coverage of investigational drugs and may only 
pay for and receive FFP for these drugs when they are reimbursed in 
accordance with FDA final rules 21 CFR part 312 and 316 as amended by 
the final rules published in the August 13, 2009 Federal Register, 
``Charging for Investigational Drugs Under an Investigational New Drug 
Application'' (74 FR 40872), and ``Expanded Access to Investigational 
Drugs for Treatment Use'' (74 FR 40900), and when the state specifies 
in their state plan that they are providing this coverage (77 FR 5351 
and 5367). We also proposed adding a provision to allow for the 
coverage of other non-CODs, as there are other items that may also be 
covered as prescribed drugs or products under section 1905(a)(12) of 
the Act, such as whole blood products (77 FR 5367). This proposal is 
discussed in more detail at 77 FR 5351 of the proposed rule. We 
received the following comments concerning the optional coverage of 
investigational drugs and other drugs not subject to rebate.
    Comment: One commenter stated appreciation for giving states the 
option to cover investigational drugs but wondered whether this action 
might deter manufacturers from seeking FDA approval.
    Response: We do not believe this will deter manufacturers from 
seeking FDA approval as Investigational drugs must be approved by FDA 
under an Investigational NDA for the manufacturer to begin the process 
of clinical drug trials and otherwise follow the approval process as 
designated by FDA at 21 CFR parts 312 and 320. When the manufacturer 
submits an Investigational NDA, it has initiated the process of seeking 
an NDA from FDA for its drug to be eligible to be marketed to the 
general public. FDA approval will allow the manufacturer to report the 
drug to CMS as a COD. Therefore, we do not believe that allowing 
Medicaid agencies to choose to cover investigational drugs will deter 
the manufacturer from seeking approval from FDA to market to the 
general public.
    Comment: One commenter stated that it seems contradictory that CMS 
would allow a state to cover an investigational drug not yet approved 
by FDA, while limiting the definition of ``CODs'' to medically accepted 
indications.
    Response: We do not agree. States may cover drugs, other than those 
drugs which meet the definition of CODs under section 1905(a)(12) of 
the Act. This includes drugs subject to an investigational new drug 
application (IND) that has been allowed by FDA to proceed. To clarify 
this point in the regulatory text, we are revising proposed Sec.  
447.522(a) to remove ``has been indicated by FDA for human trials'' and 
replace with ``when such drug is the subject of an investigational new 
drug application (IND) that has been allowed by FDA to proceed.'' To 
further clarify this point in the regulatory text, we are also revising 
proposed Sec.  447.522(d) to specify that Medicaid coverage of other 
drugs may be provided, at state option if they are not eligible to be 
covered as CODs in the Medicaid Drug Rebate program. The revisions to 
proposed sections Sec.  447.522(a) and (d) are technical and clarifying 
edits that are not intended to change the meaning of the provisions.
    Comment: One commenter stated that the cost of investigational 
drugs should be the responsibility of the manufacturer or the entity 
conducting the study and not by government programs.
    Response: This issue is outside the scope of this rulemaking.
    Comment: One commenter urged that this rule be finalized as it 
gives states flexibility to cover new products and new treatment 
indication, thus enabling patients with conditions that are 
unresponsive to currently approved therapy or for which there are no 
current therapies, crucial access to innovative treatment.
    Response: We appreciate this comment.

[[Page 5323]]

    After considering the comments, and for the reasons we discussed in 
this section and in the proposed rule, we are finalizing the provisions 
at Sec.  447.522, with the following revisions that do not change the 
substance of the proposed language.
     At Sec.  447.522(a) we are replacing ``has been indicated 
by FDA for human trials'' to ``is the subject of an investigational new 
drug application (IND) that has been allowed by FDA to proceed'' 
because the terminology is not technically accurate in its 
representation of how FDA allows for the use of investigational drugs 
and is not intended to change the meaning of the provision.
     At Sec.  447.522(c), we are removing reference to 21 CFR 
part 316 as it is specific to orphan drugs, which at the time that the 
proposed rule was drafted, was not yet finalized. We are also 
simplifying the structure of the paragraph. This is not intended to 
change the meaning of the provision.
     We are not finalizing the proposed language at Sec.  
447.522(d) about being listed electronically with FDA given that, as 
discussed previously in the definition of COD at section II.B. of this 
final rule, we are not finalizing such a requirement under the 
definition of COD.
     We are clarifying at Sec.  447.522(d), that Medicaid 
coverage of other drugs may be provided, at state option if they are 
not eligible to be covered as CODs in the MDR program.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), 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 PRA requires that we 
solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    In the February 2, 2012, proposed rule (77 FR 5318) we solicited 
public comment on each of these issues for the following information 
collection requirements (ICRs). Comments were received and have been 
summarized below along with our response.
    Based on internal review and the most current data, we have revised 
our estimated number of drug manufacturers that participate in the MDR 
program from 600 to 610. We have also revised our cost estimates by 
using the most current U.S. Bureau of Labor Statistics' wage estimates. 
Additional changes are discussed, where applicable, throughout this 
Collection of Information section.

A. Wage Estimates

    To derive average costs, we used data from the U.S. Bureau of Labor 
Statistics' May 2014 National Occupational Employment and Wage 
Estimates for all salary estimates (http://www.bls.gov/oes/current/oes_nat.htm). In this regard, Table 1 presents the mean hourly wage, 
the cost of fringe benefits (calculated at 100 percent of salary), and 
the adjusted hourly wage.

                                         Table 1--Hourly Wage Estimates
----------------------------------------------------------------------------------------------------------------
                                                          Mean hourly wage  Fringe benefit ($/  Adjusted hourly
          Occupation title             Occupation code         ($/hr)              hr)            wage ($/hr)
----------------------------------------------------------------------------------------------------------------
Business Operations Specialist......            13-1199              35.10              35.10              70.20
Computer System Analysts............            15-1121              41.98              41.98              83.96
General & Operations Managers.......            11-1021              56.35              56.35             112.70
Lawyers.............................            23-1011              64.17              64.17             128.34
Operations Research Analysts........            15-2031              39.88              39.88              79.76
Training & Development Managers.....            11-3131              53.38              53.38             106.76
----------------------------------------------------------------------------------------------------------------

    As indicated, we are adjusting our employee hourly wage estimates 
by a factor of 100 percent. This is necessarily a rough adjustment, 
both because fringe benefits and overhead costs vary significantly from 
employer to employer, and because methods of estimating these costs 
vary widely from study to study. Nonetheless, there is no practical 
alternative and we believe that doubling the hourly wage to estimate 
total cost is a reasonably accurate estimation method.

B. ICRs Carried Over From the February 2, 2012, Proposed Rule

1. ICRs Regarding ``Covered Outpatient Drug'' Definition (Sec.  
447.502)
    For CMS to be able to verify that reported products meet the 
definition of ``covered outpatient drug'' in Sec.  447.502, this rule 
requires that drug manufacturers must report the FDA application number 
(issued by FDA when the product is approved) and, if applicable, the 
COD status code as part of their product data information via DDR for 
each product.
    In the proposed rule, drug manufacturers would have been required 
to submit evidence demonstrating that the product meets the definition 
of a COD if the product does not have an FDA application number (77 FR 
5323). Based on public comments (see section II.B.9. of this final 
rule) we revised this provision such that this final rule clarifies 
that drug manufacturers may submit evidence supporting whether the 
product meets the definition of a COD by way of reporting the COD 
status for each of their products.
    For instance, if the product does not currently have an FDA 
application number, we will accept the COD status as evidence 
demonstrating that the product is otherwise a COD. The FDA application 
number and COD status should not be difficult for the drug manufacturer 
to determine since the drug manufacturer should already know the FDA 
application number when the product was approved by FDA, or the reason 
it qualifies as a COD, if there is no application number.
    The requirements and burden to report the FDA application number 
and, if applicable, the COD status code are approved by OMB under 
control number 0938-0578 (CMS-367). Although the requirements and 
burden were set out in the February 2, 2012, proposed rule, the ICR was 
submitted to OMB for review and approval (April 11,

[[Page 5324]]

2014; 79 FR 20209) under our authority in section 2503 of the 
Affordable Care Act, section 1927(k)(2) of the Act, and section 202 of 
the Education Jobs and Medicaid Assistance Act. This was noted in that 
package's Supporting Statement.
2. ICRs Regarding the Identification of 5i Drugs (Sec.  447.507)
    In Sec.  447.507, drug manufacturers are required to identify--for 
the purpose of calculating AMP--inhalation, infusion, instilled, 
implanted, and injectable drugs (5i), when not generally dispensed 
through retail community pharmacies. Using the methodology described at 
Sec.  447.504 and under section II.C.7. of this final rule, a drug 
manufacturer is required to identify and determine the AMP of these 
drugs. We estimate that these requirements apply to approximately 610 
drug manufacturers that participate in the MDR program. The burden 
associated with the initial reporting of the 5i drugs is the time and 
the effort it takes each drug manufacturer to identify these drugs 
using reasonable assumptions as described earlier in section II.C.7. of 
this final rule.
    Section II.C.7. of this final rule, sets forth our understanding 
that each drug manufacturer should be knowledgeable about how its drugs 
are administered; therefore, we are not finalizing the requirement that 
drug manufacturers use the Route of Administration list we proposed (77 
FR 5334). Instead, drug manufacturers will have the flexibility to 
determine whether their drug is a 5i drug based on reasonable 
assumptions and use any resource that they deem appropriate to make 
their assumptions. While such assumptions must be consistent with the 
requirements and intent of section 1927 of the Act and with federal 
regulations, a written or electronic record outlining these assumptions 
must be maintained by the drug manufacturer. Once the drug manufacturer 
has established its initial list of 5i drugs, it is required (on a 
monthly basis) to determine which of those drugs are not generally 
dispensed through a retail community pharmacy.
    The burden for the one-time reporting requirement for all drug 
manufacturers to identify 5i drugs and the ongoing monthly burden to 
report whether the 5i drugs are not generally dispensed through a 
retail community pharmacy to CMS through the DDR system are approved by 
OMB under control number 0938-0578 (CMS-367). Although the requirements 
and burden were set out in the February 2, 2012, proposed rule, the ICR 
was submitted to OMB for review and approval (April 11, 2014; 79 FR 
20209) under our authority in section 1927(k) of the Act, as revised by 
section 2503 of the Affordable Care Act and section 202 of the 
Education Jobs and Medicaid Assistance Act. This was noted in that 
package's Supporting Statement.
    As noted in section II.C.7. of this final rule, based on comments 
received, we have revised proposed Sec.  447.507(b)(2) by removing the 
reference to a quarterly basis. In accordance with Sec.  447.507(b)(1) 
of this final rule, the drug manufacturer is required to determine 
whether the percentage of sales for the 5i drugs has met the threshold 
to be considered not generally dispensed through a retail community 
pharmacy only on a monthly basis. We estimate that it will take a 
Computer System Analyst 5 hours at $83.96/hr, a General and Operations 
Manager 5 hours at $112.70/hr, a Training and Development Manager 10 
hours at $106.76/hr, and an Operations Research Analyst 10 hours at 
$79.76/hr for each drug manufacturer to identify which 5i drugs are not 
generally dispensed through a retail community pharmacy and report the 
status to CMS. This equates to an annual burden of 360 additional hours 
(30 hr/response x 12 responses/year) per drug manufacturer. In 
aggregate, we estimate 219,600 hours (610 drug manufacturers 
participating in the MDR program x 360 hr) at a cost of $20,851,020. 
The requirements and burden estimates will be submitted to OMB for 
approval under control number 0938-0578 (CMS-367).
    We received the following PRA-related comments regarding the 
identification of 5i drugs. A summary of the comments along with our 
response follow.
    Comment: Several commenters noted that our estimates associated 
with a drug manufacturer's burden to identify 5i drugs and determine 
whether such drugs are not generally dispensed through retail community 
pharmacies were low. In particular, commenters noted that it would take 
40 hours per month to perform a manual analysis regarding which drugs 
are subject to the 5i AMP methodology, which they believe is equivalent 
approximately to one-fourth of work time of a full-time employee. 
Another commenter noted that it would cost approximately $150,000 per 
year for drug manufacturers to identify 5i drugs including those not 
generally dispensed through retail community pharmacies, which is the 
cost for one additional full-time employee.
    Response: In the proposed rule, we estimated that it would take 20 
hours per response with 16 responses per year for each drug 
manufacturer to identify which 5i drugs are not generally dispensed 
through a retail community pharmacy. Because we received comments 
noting that our estimate was low, and we received a specific comment 
estimating that it would take 40 hours per drug manufacturer to perform 
the analysis for this requirement, we decided to increase our burden 
estimate from 20 to 30 hours monthly per response for drug 
manufacturers to identify which 5i drugs are not generally dispensed 
through a retail community pharmacy and an additional 1.0 hour per 
month for drug manufacturers to report this information to CMS. Given 
the comments received and the need to increase our estimate from 20 
hours, we believe this revised estimate is sufficient and appropriate 
as it is halfway between our original estimate and the specific comment 
that we received. The requirement and burden estimate for performing 
this analysis will be submitted to OMB under control number 0938-0578 
(CMS-367).
3. ICRs Regarding Medicaid Drug Rebates (Sec.  447.509)
    Under Sec.  447.509(a)(4), drug manufacturers participating in the 
rebate program that have line extension drugs are required to compute 
an alternative rebate calculation for certain drugs. To compute the 
alternative rebate calculation for a line extension drug of a brand 
name that is an oral solid dosage form, the drug manufacturer must 
first identify the line extension drug and the initial brand name 
listed drug that has the highest additional rebate ratio (calculated as 
a percentage of AMP) for any strength of the initial brand name listed 
drug. Drug manufacturers also must calculate the URA for the line 
extension drug on a quarterly basis. However, as discussed in sections 
II.B. and II.G. of this final rule, at this time we are not finalizing 
the regulatory definition of a line extension drug. Instead, 
manufacturers will rely on the statutory definition of line extension 
at section 1927(c)(2)(C) of the Act and, where appropriate, are 
permitted to use reasonable assumptions in their determination of 
whether their drug qualifies as a line extension drug. Additionally, as 
discussed in section II.G. of this final rule, we are finalizing the 
requirements of Sec.  447.509(a)(4)(i), which specifies the rebate 
calculation requirements for line extension drugs, and we are also 
finalizing revised Sec.  447.509(a)(4)(ii) to require the alternative 
rebate be calculated if there is a corporate relationship between the 
manufacturer of the line extension drug and the

[[Page 5325]]

manufacturer of the initial brand name listed drug. Therefore, we 
provide the following estimates regarding the reporting of line 
extension drugs to CMS for the purposes of calculating rebates for line 
extension drugs.
    We estimate that this requirement affects the approximately 610 
drug manufacturers participating in the MDR program. The one-time 
burden associated with the reporting of the Line Extension Drug 
Indicator is the time and effort it will take each drug manufacturer to 
identify whether each drug is a line extension product.
    We estimate that it will take a Computer System Analyst 10 hours at 
$83.96/hr, a General and Operations Manager 5 hours at $112.70/hr, a 
Training and Development Manager 1 hour at $106.76/hr, and an 
Operations Research Analyst 10 hours at $79.76/hr (for a one-time total 
cost of $2,307.46 across all four positions) to complete the reporting 
of the Line Extension Drug Indicator. The one-time burden for the 610 
drug manufacturers participating in the MDR program is estimated to be 
15,860 hours (610 drug manufacturers x 1 response) with a cost of 
$1,407,550.60. The requirements and burden estimates will be submitted 
to OMB for approval under control number 0938-0578 (CMS-367).
    In addition, for the drugs that have been determined to be a line 
extension product, the burden associated with the quarterly reporting 
of the initial brand name listed drug and the line extension drug is 
the time and effort it takes each drug manufacturer to calculate the 
URA for the line extension drug.
    We estimate that it will take a Computer System Analyst 5 hours at 
$83.96/hr, a General and Operations Manager 5 hours at $112.70/hr, a 
Training and Development Manager 5 hours at $106.76/hr, and an 
Operations Research Analyst 5 hours at $79.76/hr to complete the new 
reporting requirements to calculate the URA for the line extension drug 
on a quarterly basis. The annual burden for the 610 drug manufacturers 
participating in the MDR program is estimated to be 48,800 hours (610 
drug manufacturers x 20 hr/response x 4 responses/year) with a cost of 
$4,675,528. The requirements and burden estimates will be submitted to 
OMB for approval under control number 0938-0578 (CMS-367).
    As discussed in the preamble to the proposed rule (77 FR 5319), 
section 2501(c) of the Affordable Care Act amended section 1903(m) of 
the Act by specifying new conditions for MCO contracts, including that 
CODs dispensed to individuals eligible for medical assistance under 
Title XIX of the Act who are enrolled with a Medicaid MCO shall be 
subject to the same rebate required by the rebate agreement authorized 
under section 1927 of the Act.
    Section 447.509(b) adds requirements that drug manufacturers pay 
rebates for drugs dispensed to individuals enrolled in Medicaid MCOs. 
It also requires that states remit to the federal government the amount 
of the savings resulting from the increases in the rebate percentages. 
States are required to report the total quarterly rebate offset amount 
(on the CMS-64 form) that they are remitting to the federal government 
for the FFS rebates they currently receive from drug manufacturers and 
for the Medicaid MCO rebates they will receive from drug manufacturers. 
The information collection requirements and burden associated with CMS-
64 are approved by OMB under control number 0938-1265 (CMS-10529). 
Since this final rule does not impose any new or revised burden or 
reporting or recordkeeping requirements concerning CMS-64, a revised 
PRA package is not applicable.
    We received the following PRA-related comments regarding Medicaid 
drug rebates. A summary of the comments along with our response follow.
    Comment: A few commenters from organizations representing states 
indicated that the cost associated with the collection of Medicaid MCO 
rebates on states appears to be underestimated. One of the commenters 
stated that the cost to states for collecting Medicaid MCO rebates 
could be more than $400,000 annually, but will vary from state to 
state. Another commenter stated that CMS's estimate of costs associated 
with the collection of Medicaid MCO rebates was underestimated by 
approximately $100,000 annually.
    Response: As discussed in preamble section II.G.3., we are not 
finalizing the Medicaid MCO reporting requirements that were proposed 
under Sec.  447.509(b)(3). Instead, we address the requirements for 
states with regard to the data they report to drug manufacturers, 
including the data pertaining to Medicaid MCO utilization, under Sec.  
447.511. The ICRs and burden associated with the state invoice and 
state utilization data reporting associated with Medicaid MCO rebates 
within the MDR program for the current state Medicaid programs is 
approved by OMB under control number 0938-0582 (CMS-368 and CMS-R-144).
4. ICRs Regarding Requirements for Manufacturers (Sec.  447.510)
    Consistent with Sec.  447.510, drug manufacturers currently must 
report (electronically) product and quarterly pricing information to 
CMS not later than 30 days after the end of the rebate period. Monthly 
pricing and units are due no later than 30 days after the end of the 
month. In addition, customary prompt pay discounts and nominal prices 
must be reported quarterly.
    This final rule significantly revises the definitions of AMP and 
best price. Consequently, drug manufacturers must reconfigure their 
pricing systems to correctly calculate AMP and best price. In addition, 
drug manufacturers must submit the total number of units that are used 
to calculate the monthly AMP. The burden associated with these new 
requirements is the time and effort it takes a drug manufacturer to 
reconfigure its pricing systems to correctly calculate AMP and best 
price before it can submit the required data to CMS.
    We estimate that these requirements affect the approximately 610 
drug manufacturers in the MDR program. We estimate it will take a 
Computer System Analyst 400 hours at $83.96/hr, a General and 
Operations Manager 180 hours at $112.70/hr, a Training and Development 
Manager 180 hours at $106.76/hr, a Lawyer 40 hours at $128.34/hr, and 
an Operations Research Analyst 400 hours at $79.76/hr to complete the 
new requirements concerning the changes to AMP and best price 
definitions. In aggregate, the one-time total burden for the 610 drug 
manufacturers participating in the MDR program is estimated to be 
732,000 hours (610 drug manufacturers x 1,200 hr/drug manufacturer) at 
a cost of $67,175,884. The requirements and burden estimates will be 
submitted to OMB for approval under control number 0938-0578 (CMS-367).
    In addition to the one-time burden of reconfiguring pricing 
systems, based on comments received, we now estimate a one-time start-
up cost to include the cost of training drug manufacturer staff on the 
new, reconfigured pricing systems. To complete this task, we believe it 
will take a General and Operations Manager 600 hours at $112.70/hr, a 
Training and Development Manager 1,700 hours at $106.76/hr, and an 
Operations Research Analyst 1,700 hours at $79.76/hr. In aggregate, the 
one-time total burden is estimated to be 2,440,000 hours (610 drug 
manufacturers x 4,000 hr/drug manufacturer) at a cost of $234,669,440. 
The requirements and burden estimates will be submitted to OMB for 
approval under control number 0938-0578 (CMS-367). Once the pricing 
systems have been reconfigured, there should be no additional burden in 
time or effort other than that which already exists.

[[Page 5326]]

    Drug manufacturers are required to pay a 17.1 percent rebate on 
innovator drugs identified as approved by the FDA exclusively for a 
pediatric indication. There are currently only nine manufacturers that 
have identified such drugs to CMS within the first 5 years since this 
statutory requirement became effective. Therefore, we believe very few 
drug manufacturers will pay the 17.1 percent rebate based on the number 
of drug manufacturers that have identified such drugs to CMS. We also 
believe drug manufacturers will be able to easily identify such drugs 
based upon this final rule's definition of pediatric indication at 
Sec.  447.502. Therefore, the requirement that drug manufacturers 
identify such drugs and pay the 17.1 percent rebate on drugs approved 
exclusively for pediatric indications does not add a measurable burden 
to drug manufacturers.
    In section II.B.9. of this final rule, we discuss that 
manufacturers of certain drugs may choose to seek an exception to the 
requirement that drugs approved under an NDA, other than an ANDA, must 
be reported to the MDR program as single source or innovator multiple 
source drugs. We indicate that in such cases, for drugs that are 
reported to the MDR program prior to the effective date of the final 
rule, the manufacturer will have up to four quarters after the 
effective date of the final rule to submit, for CMS approval, materials 
to CMS demonstrating the basis of how the drug may be subject to the 
narrow exception to classify the drug as a noninnovator multiple source 
drug. While this exception process is subject to the requirements of 
the PRA, we believe it would affect relatively few manufacturers. 
Similarly, it should require very little evaluation or assessment on 
the manufacturer's part of whether the manufacturer believes the 
exception applies since the manufacturer should know the approval route 
under which the drug was approved; and the manufacturer should already 
have in its possession the necessary documentation to submit the 
exception request to CMS, if applicable. We are developing an 
information collection request for OMB review and approval. The public 
will have an opportunity to both review the information collection and 
submit comments. We plan to announce the information collection request 
under the required 60-day and 30-day Federal Register notice and 
comment periods that will be separate from those associated with the 
information collection requirements discussed in this final rule. The 
information collection requirements are not effective until approved by 
OMB.
    Under Sec.  447.510(f)(1), a drug manufacturer is required to 
retain records for 10 years from the date the drug manufacturer reports 
data to CMS for that rebate period. While this requirement is subject 
to the PRA, we believe this is a usual and customary business practice 
as defined in 5 CFR 1320.3(b)(2) and, therefore, the associated burden 
is exempt from the PRA.
    We received the following PRA-related comments regarding 
requirements for drug manufacturers. A summary of the comments along 
with our response follow.
    Comment: Several commenters expressed concern that the estimates we 
provided in the proposed rule are not an accurate reflection of the 
costs that drug manufacturers will incur to develop and test updated 
systems in order to implement several requirements in the proposed 
rule, including the determination of AMP, 5i drugs, best price, and 
general cost of data analysis. A few of those commenters noted in 
particular that the estimate does not reflect the costs a drug 
manufacturer would incur in implementing the build-up model for AMP 
versus the presumed inclusion model.
    Response: While we appreciate the comments that noted our estimates 
are low, we are unable to revise them in the absence of specific data 
or information. Further, because we are not finalizing the buildup 
methodology requirement and have retained the longstanding presumed 
inclusion methodology for drug manufacturers to calculate AMP, we do 
not need to include costs associated with the buildup model in this 
final rule.
    Comment: Several commenters shared their concern regarding 
requirements associated with Affordable Care Act changes and shared 
their thoughts on burden estimates and costs associated with the drug 
manufacturer requirements to pay rebates in accordance with the changes 
made by Affordable Care Act including the costs of determining which 
sales are in and out of AMP, drafting policy decisions and assumptions, 
systems changes, changing to a buildup approach, and training costs. 
Specifically, a commenter noted that it would need to hire a team of 10 
full-time contracted Information Technology (IT) professionals at a 
rate higher than the $60/hr that CMS estimated, and that the drug 
manufacturer would incur the following expenses to implement all of 
CMS's proposals: $2.65 million for upfront costs; spend 3 months and 
cost $400,000 for finalizing new AMP and best price calculation 
methodologies; take 12 months and cost $1 million for updating 
wholesaler data to implement the new rule, not including the IT-
contractor cost and additional cost to purchase data; take 9 months and 
cost $500,000 to modify price report systems to include U.S. 
territories, not including programming cost.
    Another commenter estimated that it would take 4 months and cost 
$250,000 to analyze how 25,000 existing customers should be categorized 
under the new AMP inclusions and exclusions; take 3 months and cost 
$500,000 for drafting new assumptions, policies, documents, and 
training employees and $4.2 million for reprogramming cost.
    Response: As discussed previously in the Determination of AMP 
section of this rule (section II.C.), we have decided not to require 
that drug manufacturers adopt the buildup approach when calculating AMP 
in which drug manufacturers were to report AMP based solely upon their 
actual sales to retail community pharmacies or wholesalers for drugs 
distributed to retail community pharmacies. Instead, we believe it is 
reasonable that drug manufacturers continue to presume, in the absence 
of guidance and adequate documentation to the contrary, that prices 
paid to drug manufacturers by wholesalers are for drugs distributed to 
retail community pharmacies, provided those assumptions are consistent 
with the requirements of section 1927 of the Act and federal 
regulations. Therefore, a drug manufacturer's time and effort as noted 
in the comments pertaining to the buildup model will not be considered 
as an impact of this final rule. We believe this will greatly alleviate 
the need for the drug manufacturer to make system changes necessary to 
process, validate, and reconcile data concerning the actual 
distribution; hence reducing the costs and burden on drug manufacturers 
to pay rebates associated with the changes in the Affordable Care Act 
and adopted as part of this final rule.
    However, we have revised our estimates pertaining to the 
implementation of the revised definitions of AMP and best price under 
the existing presumed inclusion approach. Specifically, we have revised 
our estimates to reflect that reconfiguring the manufacturers' pricing 
systems to implement the AMP and best price definitions will require 
1,200 hours per drug manufacturer, for a one-time total of 732,000 
hours with a one-time total cost of $67,175,884 for 610 participating 
drug manufacturers. In addition to the one-time burden of

[[Page 5327]]

reconfiguring pricing systems, we estimate a one-time start-up cost of 
$384,704 per drug manufacturer, with 610 participating drug 
manufacturers, totaling $234,669,440. Once the pricing systems have 
been reconfigured, there should be no additional burden in time or 
effort other than that which already exists.
    We will work with drug manufacturers regarding the collection of 
data they need from the territories to pay their rebates. We have 
accounted for the administrative and financial burden associated with 
the changes to the definitions of AMP and best price in the burden 
estimates in this section, and we considered the changes necessary to 
collect data on sales to territories to be included in these estimates. 
As previously noted in the Definition section of this final rule 
(section II.B.20.), the inclusion of the territories in the definitions 
of state and United States is effective 1 year after the effective date 
of the final rule. Therefore, the application of the MDR program to the 
territories is also effective 1 year after the effective date of this 
final rule; which we believe will enable the drug manufacturers to make 
the necessary changes in their systems.
5. ICRs Regarding Requirements for States (Sec.  447.511, Sec.  
447.512, and Sec.  447.518)
    The state requirements include the collection of rebates as well as 
changes to the reimbursement methodology based on AAC (as discussed in 
detail in sections II.J. and II.M. of this final rule) and the 
finalization of the FULs (as discussed in detail in section II.K. of 
this final rule).
    Consistent with section 1927(b)(2)(A) of the Act, we proposed a new 
Sec.  447.511 to clarify the reporting requirements for states (77 FR 
5345 and 5366) addressing the data that the state must provide to 
participating drug manufacturers within 60 days of the end of each 
quarter; the requirement that states must submit this same data to CMS 
on a quarterly basis; and the requirement that states that have 
participating Medicaid MCOs, which include CODs in their contracts, 
must report data pertaining to drugs dispensed through those Medicaid 
MCOs separately from the data pertaining to drugs dispensed on a FFS 
basis.
    As discussed in detail in section II.I. of this rule, we are 
finalizing Sec.  447.511 (Requirements for States) as proposed (77 FR 
5366). As such, states must report the total rebates (both fee-for-
service and Medicaid MCO CODs) they receive from drug manufacturers 
onto the MBES CMS-64 form and submit this data to CMS on a quarterly 
basis. The information collection requirements and burden associated 
with CMS-64 for states and territories are approved by OMB under 
control number 0938-1265 (CMS-10529). Since this final rule does not 
impose any new or revised burden or reporting or recordkeeping 
requirements concerning CMS-64, a revised PRA package is not 
applicable.
    We had also proposed (77 FR 5326) to revise the definition of the 
term ``states'' to include the territories (the Commonwealth of Puerto 
Rico, the Virgin Islands, Guam, the Northern Mariana Islands and 
American Samoa), in addition to the 50 states and the District of 
Columbia. We also proposed to add a definition of ``United States'' to 
include the territories (the Commonwealth of Puerto Rico, the Virgin 
Islands, Guam, the Northern Mariana Islands and American Samoa), in 
addition to the 50 states and the District of Columbia.
    As discussed in detail in section II.B.20. of this rule, we are 
finalizing the definitions of state and United States to specify that 
territories will be added to these definitions effective 1 year after 
the effective date of this rule. As a result, the territories will able 
to receive drug manufacturer rebates through the MDR program in the 
same manner that the 50 states and the District of Columbia are 
currently receiving rebates, beginning 1 year after the effective date 
of this rule.
    To begin collecting rebates from drug manufacturers, the 
territories must first come into compliance with the MDR program 
because the systems that the territories currently have in place are 
not set up for the MDR program. As a result, the territories will 
likely use contractors to ensure that their systems are in place to 
begin collecting rebates from drug manufacturers. In the proposed rule, 
we indicated that we were unsure of the time, effort, and cost for this 
compliance process and sought comments specific to this issue. A 
summary of comments we received pertaining to this issue are provided 
in this section along with our response.
    Under Sec.  447.502, we also proposed to replace the term, 
``estimated acquisition cost'' (EAC) with ``actual acquisition cost'' 
(AAC) and to define AAC as ``the agency's determination of the pharmacy 
providers' actual prices paid to acquire drug products marketed or sold 
by specific drug manufacturers'' (77 FR 5320 and 5359). We also 
proposed to replace the term ``dispensing fee'' with ``professional 
dispensing fee'' as the drug ingredient cost is only one component of 
the two-part formula used to reimburse pharmacies for prescribed drugs 
dispensed to Medicaid beneficiaries (77 FR 5361). We also proposed to 
require states to reconsider the dispensing fee methodology consistent 
with the revised requirements (discussed in more detail at 77 FR 5326). 
As discussed in detail in sections II.B. and II.J. of this rule, we are 
finalizing the definitions of AAC and professional dispensing fee as 
proposed.
    As discussed in detail in section II.K. of this final rule, upon 
consideration of the comments received, as well as a result of our 
ongoing analysis of the draft Affordable Care Act FULs in comparison 
with the monthly NADAC pricing files, we are making a revision to the 
methodology we will use to calculate the FUL. Specifically, the FUL 
will be calculated at an amount equal to 175 percent of the weighted 
average of the most recently reported monthly AMPs for pharmaceutically 
and therapeutically equivalent multiple source drugs, except where that 
amount is less than the average retail community pharmacies' 
acquisition cost for such drug products as determined by the most 
current national survey of such costs. In situations where the FUL is 
less than the average retail community pharmacies' acquisition cost, we 
will establish the FUL using a higher multiplier so that the FUL amount 
would equal the average retail community pharmacies' acquisition cost 
as determined by the most current national survey of such costs.
    As a result of these changes, and as discussed in sections II.J. 
and II.M. of this final rule, states are required to consider both the 
ingredient cost reimbursement and the professional dispensing fee 
reimbursement when proposing changes to either or both of these 
components of the reimbursement for Medicaid covered drugs to ensure 
that total reimbursement to the pharmacy provider is in accordance with 
the requirements under section 1902(a)(30)(A) of the Act. In addition, 
states must submit to CMS the proposed change in reimbursement and the 
supporting data through a SPA through the formal review process.
    We recognize that there will be some additional burden to the 
states to implement the new AAC and professional dispensing fee 
requirements as well as the new reimbursements for the FULs and other 
federal programs, such as 340B, IHS, and I/T/U. This burden may include 
the time and cost for administrative processes and requirements such as 
legislative and regulatory action, operational changes, and the 
submission of a SPA for formal review; therefore,

[[Page 5328]]

we are revising the state estimate for these burdens to include an 
additional 300 hours per state. We believe that it will take a Business 
Operations Specialist 300 hours at $70.20/hr for a one-time total of 
16,800 hours (56 states x 300 hours) at a cost of $1,179,360. Once the 
state has submitted and CMS has approved the SPA, there should be no 
additional burden in time or effort for the states other than that 
which already exists. The requirements and burden estimates will be 
submitted to OMB for approval under control number 0938-1148 (CMS-
10398).
    We received the following PRA-related comments regarding 
requirements for states, including comments pertaining to the costs 
associated with the territories coming into compliance with the 
requirements of the MDR program. A summary of the comments along with 
our response follow.
    Comment: One commenter stated that CMS did not consider the costs 
to the territories of implementing a rebate system for territories and 
stated that it estimated these costs at a minimum of $500,000 annually. 
Another commenter noted that a specific territory would need to take 
several actions to ensure compliance with the requirements of the final 
rule including upgrade its current computer systems and estimated the 
cost at $500,000 to $900,000 to hire a contractor to perform the 
upgrades.
    Response: We appreciate this comment. As noted in the proposed 
rule, we did not have any estimates of the costs that the territories 
would incur by participating in the MDR program. Since we only received 
one comment with an estimate of cost for the territories to implement a 
rebate system, we have based our estimate in this final rule on that 
comment, as well as the information we have obtained regarding the 
salaries for certain occupations that would be involved in this process 
(see Table 1: Hourly Wage Estimates). We believe it is reasonable to 
expect that the territories will have to hire a contractor that 
specializes in the MDR program to develop the system to collect rebates 
from drug manufacturers. Furthermore, based on the estimates that we 
have included above (see section III.B.4. of this final rule) for drug 
manufacturers to reconfigure their pricing systems to correctly 
calculate AMP and best price, we believe that the estimate provided by 
the commenter is consistent with what it would cost for the territories 
to implement the rebate system by utilizing a contract with expertise 
in the MDR program. Therefore, we are estimating that each territory 
that chooses to participate in the program will incur a minimum of a 
one-time cost of $500,000 to participate in the rebate program. We are 
also estimating that the on-going operational costs will be $500,000 
annually for the territories that participate in the program. Because 
the rebate requirements pertaining to the territories will not become 
effective until 1 year after the effective date of this final rule, we 
will submit these costs in a future PRA package and have not included 
these costs in Table 2.
    Comment: Several commenters stated that CMS did not take into 
account the costs associated with annual AAC surveys and periodic 
dispensing fee surveys. The commenters report that these costs could be 
in the range of $50,000-$100,000 per survey.
    Response: Although we are requiring in Sec.  447.518 that states 
must provide adequate data such as a state or national survey of retail 
pharmacy providers or other reliable data other than a survey to 
support any proposed changes to either or both of the components of the 
reimbursement methodology, we are not requiring states, on their own, 
to perform acquisition cost surveys. We have provided states with two 
reimbursement benchmarks that they can use in determining AAC; AMPs, 
which are reported and certified by drug manufacturers, and NADAC, 
which is based on a national survey. Therefore, we have not included 
time and cost burdens for individual state ingredient cost surveys and 
dispensing fee surveys in this final rule. During the SPA process, the 
state must demonstrate how such disclosure of the AMP-based prices are 
consistent with the confidentiality requirements set forth by the 
statute and other applicable federal regulations and statutory 
requirements, including the requirement in section 1902(a)(30)(A) of 
the Act that payments be consistent with efficiency, economy and 
quality of care and sufficient to assure access.
    We recognize that there will be some additional burden to the 
states to implement the new AAC and professional dispensing fee 
requirements, as well as the new reimbursement requirements for the 
FULs and other federal programs, such as 340B, IHS, and I/T/U. This 
burden may include the time and cost for administrative processes and 
requirements such as legislative and regulatory action, operational 
changes, and the submission of a SPA for formal review; therefore, we 
are revising the state estimate for these burdens to include an 
additional 300 hours per state.

C. Summary of Annual Burden Estimates

                                                                    Table 2--Annual Recordkeeping and Reporting Requirements
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Total    Total labor
Regulation section(s) in Title 42 of                              OMB                                               Total      Burden per    annual      cost of    Total capital/   Total cost
               the CFR                      Description       Control No.         Frequency         Respondents   responses     response     burden     reporting     maintenance        ($)
                                                                                                                                (hours)      (hours)       ($)         costs ($)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
447.507(b)(4).......................  5i Determination......    0938-0578  Monthly...............           610        7,320           30     219,600   20,851,020               0    20,851,020
447.509(a)(4).......................  Line Extension            0938-0578  Once *................           610          610           26      15,860    1,407,551               0     1,407,551
                                       Determination.
447.509(a)(4).......................  Line Extension            0938-0578  Quarterly.............           610        2,440           20      48,800    4,675,528               0     4,675,528
                                       Reporting.
447.510.............................  AMP/BP Reconfiguring      0938-0578  Once *................           610          610        1,200     732,000   67,175,884               0    67,175,884
                                       Pricing System.

[[Page 5329]]

 
447.510.............................  AMP/BP Training/Start-    0938-0578  Once *................           610          610        4,000   2,440,000            0  ** 234,669,440   234,669,440
                                       up Costs.
447.512, 447.514, and 447.518.......  States' burden to         0938-1148  Once *................            56           56          300      16,800    1,179,360               0     1,179,360
                                       implement new
                                       reimbursement
                                       requirements.
                                                                                                  ----------------------------------------------------------------------------------------------
    Total...........................  ......................  ...........  ......................           666       11,646  ...........   3,473,060   95,289,343     234,669,440   329,958,783
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* We do not anticipate any additional burden after OMB's initial 3-year approval period. Consequently, we expect to remove our one-time burden estimates before the initial 3-year approval
  period expires.
** Start-up costs.

D. Submission of PRA-Related Comments

    We have submitted a copy of this rule to OMB for its review of the 
rule's information collection and recordkeeping requirements. These 
requirements are not effective until they have been approved by the 
OMB.
    To obtain copies of the supporting statement and any related forms 
for the proposed paperwork collections referenced above, access CMS's 
Web site at http://www.cms.hhs.gov/[email protected], or call the 
Reports Clearance Office at 410-786-1326.
    We invite public comments on this rule's information collection 
requirements. If you would like to comment, please submit your comments 
to the Office of Information and Regulatory Affairs, Office of 
Management and Budget, Attention: CMS Desk Officer, (CMS-2345-F) Fax: 
(202) 395-6974; or Email: [email protected].
    Comments must be received by March 2, 2016.

IV. Regulatory Impact Analysis

A. Introduction

    We examined the impacts of this rule as required by Executive Order 
12866 on Regulatory Planning and Review (September 30, 1993), Executive 
Order 13563 on Improving Regulation and Regulatory Review (January 18, 
2011), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. 
L. 96-354), section 1102(b) of the Act, section 202 of the Unfunded 
Mandates Reform Act of 1995 (March 22, 1995, Pub. L. 104-4), Executive 
Order 13132 on Federalism (August 4, 1999), and the Congressional 
Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct 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). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This rule has been designated an ``economically'' 
significant rule, under section 3(f)(1) of Executive Order 12866. 
Accordingly, the rule has been reviewed by the Office of Management and 
Budget.

B. Statement of Need

    This final rule implements changes to section 1927 of the Act as 
set forth in sections 2501, 2503, and 3301(d)(2) of the Affordable Care 
Act, section 1927 of the Act as set forth in sections 1101(c) and 1206 
of the HCERA, and section 1927 of the Act as set forth in section 202 
of the Education Jobs and Medicaid Funding Act. This rule will also 
implement changes to section 1927 of the Act as set forth in section 
221 of Division F, Title II, of the Appropriations Act. It also 
codifies other requirements in section 1927 of the Act pertaining to 
the MDR program and revised certain regulatory provisions presently 
codified at 42 CFR part 447, subpart I, and makes other changes 
concerning Medicaid prescription drug payments.

C. Overall Impacts

    In the proposed rule, we estimated this final rule would save 
approximately $17.7 billion for federal fiscal years (FFYs) 2010 
through 2014, reflecting $13.7 billion in federal savings and $4.0 
billion in state savings (77 FR 5353). These impact estimates 
represented the increased percentages of rebates on generic and brand 
name drugs, the treatment of new formulations, the change in the 
maximum rebate amounts, the extension of rebate collection for Medicaid 
MCOs, and providing for adequate pharmacy reimbursement. Lastly, we 
estimated costs to Medicaid MCOs, drug manufacturers, and states in the 
amount of $81.4 million for FFYs 2010 through 2014 which included 
administrative and infrastructure expenses necessary to implement the 
required systems changes.
    As discussed in detail in the introduction to section I of this 
final rule, the amendments made by subsections 2501(a), (b), (d) and 
(e) of the Affordable Care Act were effective January 1, 2010, and the 
amendments made by section 2501(c) of the Affordable Care Act were 
effective March 23, 2010. Furthermore, section 2503(d) of the 
Affordable Care Act specified that the amendments made by section 2503 
of the Affordable Care Act were effective October 1, 2010, without 
regard to whether final regulations to carry out such amendments have 
been issued by October 1, 2010. However, as stated in a November 2014 
Informational Bulletin, we have delayed the release the Affordable Care 
Act FULs and announced that we expect to release them at or about the 
same time that we publish the final rule. This informational bulletin 
can be found on the Medicaid.gov Web site at http://www.medicaid.gov/Federal-Policy-Guidance/Downloads/CIB-11-20-2014.pdf.

[[Page 5330]]

    The other amendments made by section 2503 of the Affordable Care 
Act, including the definitions of multiple source drug, AMP, retail 
community pharmacy, and wholesaler; as well as the requirement that 
drug manufacturers report, not later than 30 days after the last day of 
each month of a rebate period under the agreement, on the drug 
manufacturer's total number of units that are used to calculate the 
monthly AMP for each COD; and the requirement that the Secretary post, 
on a Web site accessible to the public, the weighted average of the 
most recently reported monthly AMPs for each multiple source drug were 
effective and implemented as of October 1, 2010.
    As a result, the estimates for those sections already implemented 
are currently reflected in the Medicaid baseline projections.

D. Detailed Economic Analysis

    As discussed in the Overall Impact section above, subsections 
2501(a), (b), (c), (d), and (e) of the Affordable Care Act have been 
implemented, and are currently reflected in the Medicaid baseline 
projections. While publication of this final rule would not have an 
impact on subsections (a), (b), (c), or (e) of section 2501 of the 
Affordable Care Act, we expect the following impacts to section 2501(d) 
of the Affordable Care Act.
    We note that the final rule contains two modifications that would 
affect the administration of section 2501(d) of the Affordable Care 
Act, which requires a change in the rebate formula for line extension 
drugs. First, as discussed in sections II.B. and II.G. of this final 
rule, at this time we are not finalizing the regulatory definition of a 
line extension drug. Instead, manufacturers will rely on the statutory 
definition of line extension at section 1927(c)(2)(C) of the Act, and 
where appropriate, are permitted to use reasonable assumptions in their 
determination of whether their drug qualifies as a line extension drug. 
In addition, as discussed in section II.G. of this final rule, we are 
finalizing the requirements of Sec.  447.509(a)(4)(i), which specifies 
the rebate calculation requirements for line extension drugs. Second, 
the final rule requires drug manufacturers of line extension drugs to 
calculate the alternative rebate only if they also manufactured the 
initial brand name listed drug, or have a corporate relationship with 
the drug manufacturer of the initial brand name listed drug. We are 
finalizing this requirement at revised Sec.  447.509(a)(4)(ii). We will 
rely upon the manufacturers to determine which drugs meet the 
definition of a line extension, and when the alternative rebates apply.
    We are not able to quantify the impact that the decision to not 
finalize the regulatory definition of line extension drug will have on 
the rebates that were originally estimated to be collected due to this 
rule. We also believe that the impact of the provision about related 
drug manufacturers would have a small impact, and the total effect on 
Medicaid payments is smaller than can be credibly estimated.
    Section 2503(a), which revised section 1927(e) of the Act to 
require that the Secretary calculate a FUL for certain multiple source 
drugs, has been delayed in implementation since the original passage of 
the Affordable Care Act. In the proposed rule, we proposed to calculate 
the FUL at 175 percent of the weighted average (determined on the basis 
of utilization) of the most recently reported monthly AMPs for 
pharmaceutically and therapeutically equivalent multiple source drug 
products that are available for purchase by retail community pharmacies 
on a nationwide basis. The calculation of the FUL using this 
methodology was projected to reduce net costs through average reduction 
in prices paid to pharmacies. However, in this final rule we are 
establishing an exception option to calculating the FUL, whereby we are 
making a revision to calculate the FUL at an amount equal to 175 
percent of the weighted average of the most recently reported monthly 
AMPs for pharmaceutically and therapeutically equivalent multiple 
source drugs, except where that amount is less than the average retail 
community pharmacies' acquisition cost for such drug products as 
determined by the most current national survey of such costs. In 
situations where the FUL is less than the average retail community 
pharmacies' acquisition cost, we will establish the FUL using a higher 
multiplier so that the FUL amount would equal the most current average 
retail community pharmacies' acquisition cost as determined by the most 
current national survey of such costs.
    Our analysis was based on the drug utilization and price data for 
December 2013, which was the most recent period prior to the Medicaid 
eligibility expansion. The projected impact of implementing the FULs is 
consistent with the projections of Medicaid expenditures in the 
President's FY 2016 Budget. Based on previous modeling of the impact of 
FULs to Medicaid and a measurement of the weighted average price 
difference for such drugs, we estimate that the impact of applying the 
NADAC as a lower bound to FUL calculations would reduce the savings 
impact of the FULs. This reduction was about 1.6 percent, which is very 
similar to the results that GAO found (1.4 percent) in a recent study 
on Medicaid prescription drugs (``Medicaid Prescription Drugs: CMS 
Should Implement Revised Federal Upper Limits and Monitory Their 
Relationship to Retail Pharmacy Acquisition Costs,'' GAO, December 
2013).
    We believe that the revised process to calculate the FUL, as stated 
in this section, will provide a more reliable and credible benchmark 
for states as they apply the FUL aggregate upper limit. Table 3 
provides the estimated savings of the FULs policy being finalized in 
this final rule.

                 Table 3--Estimated Savings of Applying Federal Upper Limit to Reimbursement of Drugs Under the Medicaid Rebate Program
                                                     [Section 2503(a)(1) of the Affordable Care Act]
--------------------------------------------------------------------------------------------------------------------------------------------------------
 Cost to Medicaid of section 2503 of the Affordable Care                                                                                  Total FY 2016-
                           Act                                FY 2016         FY 2017         FY 2018         FY 2019         FY 2020          2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal.................................................            -180            -355            -355            -360            -360          -1,610
State...................................................            -125            -250            -250            -250            -250          -1,125
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................            -305            -605            -605            -610            -610          -2,735
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimates are in $ millions; negative values reflect a savings.
Added effect of interaction with section 2501(c) of the Affordable Care Act for managed care premiums does not change estimate due to rounding.

[[Page 5331]]

 
The savings to the state government are due to the reduction in transfers from the state government to retail pharmacies as well as the increased
  transfers from drug manufacturers to the state government. The savings to the federal government do not include the savings to the state government.

    These estimates rely on assumptions about prescription drug 
utilization and prices, including the assumption that there would be no 
change in the behavior of the manufacturers for their decisions to 
develop new treatments or modify prices to account for the Medicaid 
drug rebate. Changes in the utilization and prices of prescription 
drugs in the future (including new prescription drugs coming to the 
market) may lead these savings to be greater than or less than 
projected here. Furthermore, these projections rely on assumptions and 
projections of future Medicaid expenditure and enrollment growth, which 
may vary from the projections in the President's Budget.
    As discussed earlier in the final rule (sections II.B, J. and M) we 
are replacing the term ``dispensing fee'' with ``professional 
dispensing fee'' and are revising Sec.  447.518(d) to provide that, 
when states are proposing changes to either the ingredient cost 
reimbursement or professional dispensing fee reimbursement, they are 
required to consider both the ingredient cost reimbursement and the 
professional dispensing fee reimbursement when proposing changes to 
either or both of these components of the reimbursement for Medicaid 
covered drugs to ensure adequate pharmacy reimbursement. However, as 
discussed in section II.M. of this final rule, there is no requirement 
that states perform a state-specific cost of dispensing survey.
    Since states have several options when reviewing and adjusting 
their professional dispensing fee (including using a neighboring 
state's survey results, conducting their own survey, or using survey 
data from a prior survey [within a reasonable timeframe]), we have no 
way to definitively estimate the number of states that will actually 
choose to perform individual state surveys. There are many factors and 
variables that need to be taken into consideration when trying to 
determine a cost estimate for a state to perform a cost of dispensing 
survey. For example, not only will the size of the state (geographic as 
well as population) impact the cost, but other variables such as the 
elements included in the scope of work and the number of pharmacies 
involved in the survey will impact the cost. Based on the limited 
information we received from comments and a contractor who performs 
such studies, we estimate that a cost of dispensing survey and study 
could range from $30,000 to $150,000 depending on the scope of work, 
number of pharmacies involved in the survey and the size of the state. 
Taking into consideration that ten states have already implemented a 
reimbursement methodology using AAC and a professional dispensing fee 
and another two states are currently in the process of having their 
state plans reviewed by CMS to make this transition, the field drops 
from 56 (states and territories) to 44 (states and territories) that 
will have to evaluate their cost of dispensing and may choose to do so 
by conducting a state-specific cost of dispensing survey. Based on the 
limited information available, the potential range of the cost in 
conducting the dispensing survey could be from $0 (if no states choose 
to conduct a cost of dispensing survey) to $6,600,000 (if all 44 states 
conduct a cost of dispensing survey that costs $150,000). However, 
since we cannot accurately estimate how many states will choose to 
conduct a state-specific cost of dispensing survey, we have not 
included this estimate in the ICRs found in section III. of this final 
rule, nor are the estimates accounted for in tables 2 or 4 of this 
final rule.
    As discussed earlier in this rule (section II.B), we are revising 
the definitions of ``states'' and ``United States'' to include the U.S. 
territories (the Commonwealth of Puerto Rico, the Virgin Islands, Guam, 
the Northern Mariana Islands and American Samoa). We have delayed the 
inclusion of the territories in the program for one year to give 
territories and manufacturers time to make necessary system changes and 
develop the mechanisms and processes necessary to comply with the 
requirements of the Medicaid drug rebate program. We also will consider 
allowing a territory to use existing waiver authority to elect not to 
participate in the MDR program consistent with the statutory waiver 
standards.
    As such there are many complicating factors that make it difficult 
to provide an accurate estimate of the voluntary start-up and ongoing 
operational costs for the territories that will participate in the MDR 
program. First, we do not know which of the territories will 
participate in the MDR program and which will seek a waiver from 
participation. Second, each territory is unique in how it is funded and 
operates. Third, we are unaware of the existing infrastructure of each 
territory. Furthermore, we only received one comment that contained an 
estimate of $500,000 to $900,000 for the start-up costs for Puerto Rico 
and another comment which estimated a minimum annual expense of 
$500,000 in operating costs for the territories.
    Additionally, the number of beneficiaries served, the structure of 
each territory's Medicaid program, as well as the factors discussed 
above, are just some of the reasons why it is difficult to accurately 
provide a reliable quantitative analysis of the economic impact on the 
territories if they were to participate in the MDR program. Therefore, 
we believe it is appropriate to instead provide the following 
qualitative assessment of the benefits that the territories might see 
if they participate in the MDR program. One benefit that a territory 
which participates in the MDR program will realize is a savings in 
providing coverage of prescription drugs to Medicaid beneficiaries 
through the receipt of rebate payments. It is our understanding that at 
least some of the territories already have agreements with some 
manufacturers to provide rebates on certain brand name prescription 
drugs. These agreements are operated outside of the MDR program and do 
not encompass the full range of drugs covered by the MDR program. 
Therefore, a territory that participates in the MDR program will have 
access to rebates on a much larger number of drugs than they currently 
do, including physician-administered drugs and drugs dispensed through 
MCOs. While we are unable to quantify the savings benefit the 
territories would realize from this, we would expect the savings to be 
beneficial simply for the fact that a greater number of drugs would be 
eligible for rebates. Territories, as with the other states, would also 
be able to negotiate supplemental rebate agreements with drug 
manufacturers to obtain even greater savings. The availability of 
rebates on more drugs will result in savings for the territories, which 
will likely free up some currently constrained resources to provide a 
greater number of beneficiaries with access to needed drugs. While 
territories will retain their ability to develop their own preferred 
drug list, they will also have access to rebates on any covered 
outpatient drug provided to a Medicaid beneficiary.
    We understand that each territory will have to consider the size 
and makeup of

[[Page 5332]]

its beneficiary population, its Medicaid system and current operational 
costs, as well as its funding sources before determining if it will 
seek a waiver from participation in the MDR program or if the 
anticipated benefits will justify the voluntary start-up cost and the 
ongoing operational expenses of participating in the MDR program. 
Therefore, as discussed earlier in this final rule, we have delayed the 
inclusion of the territories in the program for 1 year to give 
territories time to consider their options and either make necessary 
system changes and develop the mechanisms and processes necessary to 
comply with the requirements of the Medicaid drug rebate program or 
seek a waiver from participation in the MDR program.
    Since we do not know how many of the territories will participate 
in the MDR program, nor can we accurately estimate the startup costs or 
ongoing operational expenses for the territories that participate in 
the MDR program, we have not included these estimates in the ICRs found 
in section III. of this final rule, nor are the estimates accounted for 
in tables 2 or 4 of this final rule.
    Table 4 provides a cost estimate to drug manufacturers and states 
for FFYs 2016 through 2020 based on the burden estimates discussed in 
the Collection of Information section (section III.) of this final 
rule.

                                                     Table 4--Cost to Drug Manufacturers and States
                                                                [FFYs 2016 through 2020]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           In $Millions
             Provision(s)                  Regulation    --------------------------------------------------------------------------------      Total
                                           section(s)          2016            2017            2018            2019            2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
Requirements for states to implement      Sec.   447.512            1.18               0               0               0               0            1.18
 new reimbursement provisions........     Sec.   447.514
                                          Sec.   447.518
Requirements for drug manufacturers..               Sec.          328.78            25.5            25.5            25.5            25.5          430.78
                                           447.507(b)(4)
                                                    Sec.
                                           447.509(a)(4)
                                          Sec.   447.510
                                      ------------------------------------------------------------------------------------------------------------------
    Total Costs......................  .................          329.96            25.5            25.5            25.5            25.5          431.96
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. Anticipated Effects on Drug Manufacturers
    As previously indicated in Collection of Information section 
(section III.) of this final rule, there are approximately 610 drug 
manufacturers that participate in the MDR program. The final rule 
requires all drug manufacturers to provide an increased rebate 
percentage for generic and brand name drugs.
    Section III. of this final rule provides the detailed breakdown of 
the burden associated with drug manufacturer's participation in the 
Medicaid Drug Rebate program. This burden includes the time and cost 
for drug manufacturers to gather, calculate, and report pricing (AMP 
and/or best price) and unit information associated with their drug 
sales on a monthly and quarterly basis. As previously discussed in 
section III. of this final rule, the one-time total burden hours for 
the 610 drug manufacturers participating in the MDR program to 
reconfigure pricing systems is estimated to be a total cost of 
$67,175,884. In addition, we now also estimate a one-time start-up cost 
to include the cost of training drug manufacturer staff on the new, 
reconfigured pricing systems to be a total cost of $234,669,440. These 
estimates are accounted for in Table 2, as well as Table 4.
    For each of their products, drug manufacturers also are required to 
submit the FDA application number issued by FDA when the product is 
approved. If the product does not currently have an FDA application 
number, the drug manufacturer must provide either evidence that the 
product is a COD, or the COD status. As specified in section III., the 
requirements and burden to report the FDA application number and, if 
applicable, the COD status code have been approved by OMB under control 
number 0938-0578 (CMS-367), and therefore, are not accounted for in the 
estimates provided in Tables 2 and 4.
    In addition, we believe that it will take time for drug 
manufacturers to identify the drugs that fall into 5i drug categories. 
As previously discussed in section III. of the final rule, the burden 
for the one-time reporting requirement for all drug manufacturers to 
identify 5i drugs to CMS through the DDR system have been approved by 
OMB under control number 0938-0578 (CMS-367), and therefore, are not 
accounted for in Tables 2 or 4.
    In addition to this one time reporting requirement to identify 5i 
drugs, in accordance with Sec.  447.507(b)(1) of this final rule, the 
drug manufacturer is required to determine whether the percentage of 
sales for the 5i drugs has met the threshold to be considered not 
generally dispensed through a retail community pharmacy on a monthly 
basis. This is estimated to be an annual cost of $20,851,020. The 
requirements and burden estimates will be submitted to OMB for approval 
under control number 0938-0578 (CMS-367) and are accounted for in 
Tables 2 and 4.
    Lastly, as previously discussed in section III. of the final rule, 
the new one-time burden for all 610 drug manufacturers to complete the 
new reporting requirements to report the Line Extension Drug Indicator 
is estimated to be a total cost of $1,407,550.60. In addition, for the 
drugs that have been determined to be a line extension product, the new 
annual burden for all 610 drug manufacturers to complete the quarterly 
reporting of the initial brand name listed drug and the line extension 
drug is estimated to be a total cost of $4,675,528. The requirements 
and burden estimates will be submitted to OMB for approval under 
control number 0938-0578 (CMS-367) and are accounted for in Tables 2 
and 4. Additional information on these reporting requirements for drug 
manufacturers can be found in sections II.C., II.G., and II.H., as well 
as section III. of this final rule.

[[Page 5333]]

    We received the following comments on the anticipated effects on 
drug manufacturers:
    Comment: Many commenters stated that the Financial Impact Analysis 
section of the proposed rule grossly underestimates the significant 
costs, enormous operational challenges, and the resource burdens that 
drug manufacturers will incur for them to be compliant with the 
proposed rule, and that it did not account for the fact that drug 
manufacturers will need to completely overhaul their current pricing 
systems to accommodate the buildup methodology, costs which will be 
borne solely by the drug manufacturers. A few commenters noted that the 
proposed rule is acting as a mandate for drug manufacturers to abandon 
their current systems to acquire new ones, which are not accounted for 
in the impact analysis. Several commenters requested that CMS 
reconsider how it calculates and reports the cost to drug manufacturers 
for collecting this information to more accurately reflect the true 
level of effort expended by drug manufacturers. One commenter stated 
that CMS appears not to appreciate the complexity involved in 
completing the tasks included in this broadly described regulation and 
did not account for several important complexities and ambiguities.
    Several commenters provided adjustments and specific cost estimates 
that drug manufacturers would be likely to incur should the buildup 
methodology be implemented. One commenter stated that CMS considered 
only the cost and time of drug manufacturers' computer analysts, at one 
flat rate ($60/hour), however they anticipate the need for a dedicated 
team of ten full-time contract IT professionals at a significantly 
higher rate. One commenter believed that CMS has grossly underestimated 
the amount of time that it would take for drug manufacturers to 
understand and implement these new requirements and they estimate that 
the costs associated with implementing the proposed changes to be 
approximately $2.8 million to $6.5 million, respectively. One commenter 
stated that they would require at least one year to implement the 
proposed rule at a cost of at least $6.85 million, including $2.65 
million for upfront costs and an additional $4.2 million for 
reprogramming costs. Another commenter compared their costs to 
implementing the DRA final rule, in which their cost for outside 
consulting services and IT support was approximately $8 million. The 
commenter noted that they had approximately 15 full-time employees 
dedicated to implementing the DRA Final Rule over a more than 2-year 
period. Given the far greater scope of CMS's current proposals, the 
commenter believed implementing them would impose even greater costs 
and burdens on drug manufacturers.
    One commenter stated that small or mid-sized drug manufacturers 
have estimated that it would take between 3 and 12 months to become 
fully compliant with the proposed rule, and large drug manufacturers 
have estimated that it would take between 12 and 24 months to become 
fully compliant. They also state that the time and resources already 
spent reviewing and understanding the proposed rule exceeds CMS's 
implementation cost estimates. One commenter stated that switching to a 
buildup methodology would drastically increase compliance burdens and 
would require millions of dollars of extra compliance costs.
    Another commenter supplied several estimates that the different 
sectors within their company (government price reporting team, finance 
department, product teams, legal experts, and outside consultants) 
would incur. They stated it will take their stakeholders 3 months 
analyzing and interpreting the final rule to finalize the new AMP and 
best price calculation methodologies and cost over $400,000; they 
estimated they would need 12 months to replace the default rule with a 
buildup methodology in their systems, including analysis, 
reprogramming, and testing and validation time and estimate the costs 
associated with the changes to be $3.6 million; they estimated their 
stakeholders will need to research data limitations and potential 
remediation strategies for their wholesaler data in connection with the 
proposed abandonment of the default rule, and develop a solution for 
implementing the new rule, which they estimated will take 12 months and 
cost $1 million, not including the costs of contract IT professionals 
and additional costs to purchase data that may be available (should CMS 
seek to require drug manufacturers to purchase data on wholesaler re-
sales); and they estimated that many of their stakeholders will work to 
draft new reasonable assumptions, policies, and procedural documents, 
and train employees on the same, which could take an additional 3 
months and cost approximately $500,000.
    Another commenter stated that it estimated the costs to reconfigure 
pricing systems and perform AMP and best price calculations correctly 
under the proposed rule to be approximately $0.3 million to $1.7 
million per small or mid-sized drug manufacturer and $0.5 million to 
$6.8 million per large drug manufacture. One commenter stated that they 
estimated their cost to update their systems to accommodate a presumed 
inclusion would be at least $1 million plus internal resources 
estimated at 2,000 hours.
    Another commenter noted that its company would incur one-time costs 
up to 450 times the costs identified by CMS, with a total between 
approximately $0.3 million and $1.7 million for small or mid-sized 
companies and from $1.5 million to $6.8 million for large companies. 
The commenter stated that these ``one-time efforts'' will impose 
substantial costs because the complete data necessary to perform the 
calculations do not currently exist and, if they are possible to 
acquire, they will either have to be obtained from a third party or 
will have to be created by manipulating and adding to several existing 
internal data sets. Another commenter stated they would incur ongoing 
costs associated with processing and validating third party data that 
may be needed due to the reversal of the default rule (if the data are 
even available).
    Response: As discussed previously in this rule, we are not 
requiring that drug manufacturers report AMP based solely upon their 
actual sales to retail community pharmacies or wholesalers for drugs 
distributed to retail community pharmacies. Instead, we believe it is 
reasonable that drug manufacturers continue to presume, in the absence 
of documentation to the contrary, that prices paid to drug 
manufacturers by wholesalers are for drugs distributed to retail 
community pharmacies. Therefore, we believe the commenters' burden and 
cost estimates associated with the requirements set forth in this final 
rule are overstated given that most of the expense to these estimates 
was predicated on the anticipated change to a buildup methodology for 
calculating AMP. As discussed in detail in section III. of this final 
rule as well as later in this section, we have revised our burden 
estimates to include the one-time costs to manufacturers to reconfigure 
pricing systems and train staff. However, since the use of the buildup 
methodology will not be required and manufacturers retain the ability 
to make reasonable assumptions in the calculation of AMP and best price 
as long as such assumptions are consistent with the requirements and 
intent of section 1927 of the Act and federal regulations, the 
estimates provided in the final rule are lower than those specified in 
these comments.

[[Page 5334]]

    Comment: One commenter stated that even if CMS decides to allow 
drug manufacturers to continue using the current gross-to-net 
methodology for AMP, costs would still be over $250,000 plus internal 
resources of 1,200 hours on government pricing systems work. Another 
commenter estimated that it will take 4 months and approximately 
$250,000 for their stakeholders to analyze how their approximately 
25,000 existing customers should be categorized under the new AMP 
inclusions and exclusions.
    Response: We appreciate these commenters' estimates which provide 
the impact of updating systems to meet the revised definition of AMP 
and best price under this final rule. As discussed in detail in section 
III. of this final rule, we have revised our estimates to reflect that 
the AMP and best price definitions will require 1,200 hours per drug 
manufacturer, for a one-time total of 732,000 burden hours with a one-
time total estimated burden cost of $67,175,884 for 610 participating 
drug manufacturers. In addition to the one-time burden of reconfiguring 
pricing systems, we believe that there will also be one-time start-up 
costs for the 610 drug manufacturers, totaling $234,669,440. Once the 
pricing systems have been reconfigured, there should be no additional 
burden in time or effort other than that which already exists.
    Comment: One commenter stated that ongoing costs identified by CMS 
were estimated by the interviewed drug manufacturers to be 
approximately $155,000 per year per drug manufacturer and stated that 
the commenter's member drug manufacturers estimated that the ongoing 
cost of implementing the proposed rule are more than six times the CMS 
estimate. The commenter stated that their member companies indicated 
that CMS appears to have neglected other ongoing costs necessary to 
comply with the new regulations, such as the costs of validating the 
third party data and the cost of providing additional oversight 
necessary given the increased penalties and tighter reporting 
timelines.
    The commenter also stated that the ongoing costs of processing 
(including determining whether new customers are retail community 
pharmacies), validating, and checking/reconciling third party data are 
estimated to be approximately $150,000 for small or mid-sized drug 
manufacturers and $250,000 to $350,000 for large drug manufacturers. 
Finally, the commenter stated that CMS did not anticipate nor include 
in its estimates, that drug manufacturers will incur any one-time or 
ongoing capital costs to comply with the new regulations.
    Response: Because we are not requiring that drug manufacturers 
adopt the buildup approach, which may have necessitated the purchase of 
third party data, drug manufacturers' ongoing time and effort, as well 
as associated costs of third party data purchasing, processing, 
reconciling and validation as noted in these comments will not be 
considered an impact of this final rule. However, as discussed in 
detail in section III. of this final rule, as well as in the previous 
response, we have revised our burden estimates to include the one-time 
costs to manufacturers to reconfigure pricing systems and train staff. 
However, we are not aware of any ongoing capital costs to comply with 
the new regulations, nor did we receive any comments to specify such 
costs, so we are not including any burden estimates associated with 
such costs.
    Comment: Several commenters stated that if they are required to 
purchase third party data, this would require significant, costly, and 
time consuming system changes for them to accommodate this data. 
Commenters stated that the Financial Impact Analysis in the proposed 
rule completely ignores the ongoing costs of purchasing third party 
data on an ongoing basis, as well as the system changes that would be 
required to accommodate this data. The commenters indicated that if CMS 
were to require the purchase of such data to identify 100 percent of 
sales going to retail community pharmacies, the cost of acquiring these 
data could be extraordinary, and there is meaningful uncertainty about 
whether the necessary data can be acquired at any cost.
    Response: As discussed in more detail in the comments and responses 
in the Determination of AMP section (section II.C.) of this final rule, 
we are not requiring drug manufacturers to calculate AMP using a 
buildup methodology. Drug manufacturers will continue to be able to 
presume, in the absence of adequate documentation to the contrary, that 
prices paid to drug manufacturers by wholesalers are for drugs 
distributed to retail community pharmacies. Therefore, we believe this 
will satisfy the concerns raised by commenters pertaining to the costs 
they would incur to purchase third party data in using a buildup 
methodology.
    Comment: A commenter stated that they may face costs associated 
with litigation or enforcement actions because of prices that are 
alleged to be misreported despite their best faith efforts to obtain 
the necessary data and calculate prices according to the new 
regulations. Another commenter specified there would be ongoing costs 
of providing additional oversight given the tighter reporting 
timelines, as well as costs and uncertainty associated with potential 
future liabilities arising out of alleged misreporting under the new 
calculations.
    Response: While the drug manufacturers are responsible for 
reporting accurate pricing information to CMS within the timeframes 
specified in the statute and this final rule, we believe our decision 
to allow drug manufacturers to calculate AMP using a presumed inclusion 
approach instead of a buildup approach will minimize the operational 
burden and difficulties drug manufacturers could encounter to ensure 
that AMP is calculated consistent with the requirements of this final 
rule. However, as discussed in section III. of the final rule, we have 
revised our estimates pertaining to the implementation of the revised 
definitions of AMP and best price under the existing presumed inclusion 
approach. We believe that concerns related to costs associated with 
litigation or enforcement risks related to misreported AMP as a result 
of third party data are outside the scope of this rule.
    Comment: Several drug manufacturers commented on the burden they 
would incur if CMS were to implement regulations to collect rebates for 
5i drugs that are not generally dispensed through retail community 
pharmacies, in which a few drug manufacturers commented that the 
operational costs will be particularly high if CMS expects drug 
manufacturers to use separate baselines for AMP in months or quarters 
during which drugs change their 5i status. One commenter stated that 
contrary to the underlying assumptions of CMS's burden estimate of 
$38,850 per year, the data used to complete the 5i analysis are not 
currently available in their government pricing systems and therefore 
obtaining the necessary data to determine 5i systematically would 
require significant reprogramming of the government pricing system. One 
commenter stated that determining whether the percentage of sales for 
5i drugs has met the threshold will require them to hire or allocate 
approximately one additional full-time employee (FTE) and that the 
additional FTE, based on a standard 2,000 hours per year would be 
approximately $150,000 per year, which is substantially higher than 
CMS's estimate of 80 hours per year and $19,200 per drug manufacturer.
    Another commenter agreed that the one-time costs that CMS has 
identified for reporting FDA application number

[[Page 5335]]

or the CODs status for their drugs and identifying potential 5i drugs, 
are far less resource and system intensive than other tasks, and stated 
that CMS's estimates of the hours necessary to complete these tasks 
appear to reasonably approximate the expected effort involved. However, 
maintaining separate base date AMPs and calculating a product's AMP by 
both the regular method and by the 5i method would be a significant 
burden on drug manufacturers, particularly for generic drug 
manufacturers which operate with very low margins. Another commenter 
stated that it will be extremely challenging for drug manufacturers to 
calculate a quarterly AMP when the three underlying monthly AMPs are 
calculated using different methodologies and will require drug 
manufacturers to make substantial systems upgrades and hire additional 
processing staff which will far outweigh the benefit of monthly 
determinations.
    Response: As discussed in the Base Date AMP comments and responses 
found in section II.H. of this final rule, section 1927(c)(2)(A) 
through (B) does not contemplate drug manufacturers reporting more than 
one base date AMP for a drug.
    Therefore, we will not require drug manufacturers to calculate two 
base date AMPs. Further discussion of the base date AMP and its 
application to 5i drugs is included under the Base Date AMP section of 
the final rule. In addition to the statutory requirement for a single 
base date AMP, we believe that two base date AMPs will not be 
necessary.
    Also, our decision to allow drug manufacturers to continue using a 
presumed inclusion approach when determining AMP, along with the 
addition of the smoothing process for determining when a drug is not 
generally dispensed through a retail community pharmacy will likely 
result in drug manufacturers not experiencing the erratic changes in 
calculated AMPs that they anticipated. Therefore, the system and staff 
changes associated with the monthly determinations and reporting will 
not be as onerous on drug manufacturers as the commenters predict.
    Comment: One commenter stated that most of their member companies 
suggested that CMS's estimate of the time required to identify brand 
name and line extension drugs appears reasonable.
    Response: Thank you for your comment.
    Comment: One commenter objected to the use of a fixed percentage of 
sales to determine whether the drug is not generally dispensed through 
a retail community pharmacy as it creates a serious administrative 
burden on drug manufacturers.
    Response: We have accounted for the administrative burden on drug 
manufacturers within the regulatory impact analysis section of this 
final rule.
    Comment: One commenter stated that the proposed rule proposes a 
number of significant changes to the calculations of AMP and best price 
which involve an operational burden for drug manufacturers to implement 
and maintain, including the requirement that drug manufacturers who do 
not submit and certify monthly or quarterly price reports on time, be 
reported to OIG and be subjected to civil penalties of $10,000 per day. 
The commenter requested that CMS exercise discretion in determining 
whether CMPs are warranted, based on specific facts and circumstances, 
as opposed to automatically levying a significant and burdensome 
penalty.
    A few commenters further stated that imposing the penalty on a per 
drug basis, as well as a per day basis, would disproportionately 
penalize generic drug manufacturers because they tend to offer more 
extensive product lines than do branded houses and in some instances 
would be arguing for penalties that are so large as to be unreasonable 
and unconscionable. The commenter continued by requesting that CMS 
revise the proposed rule to more closely track the statute, and 
thereby, avoid the potential for extremely large fines that would 
unduly burden the generic industry with one commenter specifying that 
for a company with many products, the cost of uploading the monthly AMP 
file one day late would be well over $10 million.
    Response: As discussed in the Requirements for Manufacturers 
section of this final rule (section II.H.), we are not finalizing these 
proposed changes at this time, and thus there is no additional burden 
to drug manufacturers as a result of these proposed provisions.
    Comment: A commenter estimated that nearly a quarter of their NDC-
9s would potentially qualify as line extensions under CMS's proposed 
definition and calculating alternative URAs for this vast number of 
NDCs would create a huge burden on CMS, because CMS is responsible for 
calculating URAs under the MDR program.
    Response: As discussed in sections II.B. and II.G. of this final 
rule, at this time we are not finalizing the regulatory definition of a 
line extension drug. Instead, manufacturers will rely on the statutory 
definition of line extension at section 1927(c)(2)(C) of the Act, and 
where appropriate, are permitted to use reasonable assumptions in their 
determination of whether their drug qualifies as a line extension drug. 
However, we are finalizing the requirements of Sec.  447.509(a)(4)(i), 
which specifies the rebate calculation requirements for line extension 
drugs, and we are also finalizing revised Sec.  447.509(a)(4)(ii) to 
require the alternative rebate be calculated if there is a corporate 
relationship between the manufacturer of the line extension drug and 
the manufacturer of the initial brand name listed drug. While we 
appreciate the concern for the impact on CMS, we note that since all 
drug manufacturers are responsible for calculating the URAs and CMS 
only calculates a URA value for the convenience of the states, there is 
minimal to no added burden on CMS.
    Comment: A few commenters stated that the proposed rule subjects 
products to higher rebate obligations without consideration of 
substantial time and financial resource investments. It was further 
noted by commenters that the provisions would make rebate calculations 
more burdensome.
    Response: As discussed previously (see section II.G.1. of this 
final rule), section 1927(c) of the Act, as revised by section 2501 of 
the Affordable Care Act, increased the rebate percentages for single 
source and multiple source drugs. This rule is designed to address 
those requirements.
    Comment: One commenter stated that drug development is an expensive 
and time consuming process and even after FDA approval, research costs 
continue to climb with additional post-approval requirements. The 
commenter further stated that where drug manufacturers make changes 
that require a significant investment of research and development, 
tying those products to the base date AMP of a product already on the 
market will hamper a drug manufacturer's ability to recoup its 
investment.
    Response: We do not believe that the line extension provision is 
meant to create a disincentive to drug manufacturers in developing and 
marketing innovative products, but that the provision is meant to 
discourage drug manufacturers from circumventing existing rebate 
liability under the MDR program. The provision requires drug 
manufacturers to identify if they have line extension drugs and to 
calculate an alternative rebate amount, if applicable, which compares 
the pricing of the line extension drug to the pricing of the original 
drug. We appreciate the insights the commenters provided on pharmacy

[[Page 5336]]

innovation and the challenges and benefits the pharmaceutical industry 
brings and have no reason to believe that such innovation will not 
continue.
    Comment: Commenters stated that the changes that involve 
operational burden for drug manufacturers to implement and maintain 
include identifying which of their products are line extension drugs, 
identifying all potential initial brand name listed drugs, determining 
which of those initial brand name listed drugs should be used for the 
calculation of the alternative URA, and requiring that, if owned by 
separate entities, drug manufacturers exchange product and pricing data 
to calculate the alternative URA for the line extension drug.
    Response: As discussed in sections II.B. and II.G. of this final 
rule, at this time we are not finalizing the regulatory definition of 
line extension. Instead, manufacturers will rely on the statutory 
definition of line extension at section 1927(c)(2)(C) of the Act, and 
where appropriate, are permitted to use reasonable assumptions in their 
determination of whether their drug qualifies as a line extension drug, 
and we are also finalizing revised Sec.  447.509(a)(4)(ii) to require 
the alternative rebate be calculated if there is a corporate 
relationship between the manufacturer of the line extension drug and 
the manufacturer of the initial brand name listed drug. Since we have 
decided to limit the line extension provisions to provide that a drug 
by one drug manufacturer will not be treated as a line extension by a 
different drug manufacturer, unless there is a corporate relationship 
between the drug manufacturers, we believe the operational burden for 
the drug manufacturers of line extension drugs will be lessened. 
Furthermore, we have accounted for the burden estimate for drug 
manufacturers to identify and report the brand name listed drug and the 
line extension drug to CMS in section III. of this final rule.
    Comment: We received several comments noting that scientific 
progress and innovation should not be economically penalized by CMS and 
that CMS must not inappropriately punish drug manufacturers of 
innovative products and deprive them of appropriate returns on their 
investments. We received several comments that the proposed handling of 
the line extension provisions threatens innovation. One commenter 
stated that the Congress passed the Orphan Drug Act to provide 
financial incentives for drug manufacturers to develop treatment for 
rare conditions. Without these incentives, it might not be economically 
feasible for drug manufacturers to develop treatments for these 
conditions because of the small target patient population. The 
commenter believes that because the alternative rebate calculation 
factors in additional rebates on the original drug, it does not account 
for the investments required to gain approval for a new indication of 
an already approved drug or the financial risk inherent in seeking 
approval for new indication that benefit small patient populations.
    Response: The line extension provision is not meant to create a 
disincentive to drug manufacturers in developing and marketing 
innovative products or products used to treat orphan diseases, but 
rather the provision is meant to discourage drug manufacturers from 
circumventing existing rebate liability under the MDR program. The 
provision requires drug manufacturers to identify if they have line 
extension drugs and to calculate an alternative rebate calculation, if 
applicable. As described earlier in section II.G.2. of this final rule, 
section 1927(c)(2)(C) of the Act provides that the rebate obligation 
for a line extension drug shall be the amount computed under section 
1927 of the Act for the line extension product or, if greater, the 
product of the AMP of the line extension drug, the highest additional 
rebate (calculated as a percentage of AMP), and the total number of 
units paid for under the state plan in the rebate period. We appreciate 
the insights the commenters provided on pharmacy innovation and the 
challenges and benefits the pharmaceutical industry brings and believe 
such innovation will continue.
    Comment: One commenter noted that the data sharing requirements 
among drug manufacturers were not defined in the proposed rule and the 
cost burden associated with gathering such data was not provided. The 
commenter stated that drug manufacturers might have to stop selling a 
line extension product if they could not comply with getting data from 
the drug manufacturer of the initial reference drug, and further noted 
that a drug manufacturer may be unable to divest a line extension 
product because a potential buyer would know that it could not obtain 
the information necessary to comply with the line extension provisions.
    Response: We agree with the commenters regarding the sharing of 
pricing data between competing and unrelated drug manufacturers. We 
also understand the challenges of obtaining pricing information from 
non-related drug manufacturers. Therefore, as discussed in more detail 
in section II.G.2., we have decided to limit the line extension 
provisions to provide that a drug by one drug manufacturer will not be 
treated as a line extension if the initial brand name listed drug is 
manufactured by a different drug manufacturer, unless there is a 
corporate relationship between the drug manufacturers. Drug 
manufacturers of line extension drugs that have a corporate 
relationship with the drug manufacturer of the initial brand name 
listed drug will have, or are expected to obtain, the necessary pricing 
data to perform the alternative rebate calculation each quarter.
    Comment: We received many comments pertaining to the significant 
financial, administrative, and regulatory burdens, as well as overall 
increased costs that drug manufacturers would incur should pre-1962 
drugs be categorized as innovator drugs. Some commented that the 
Financial Impact Analysis section did not include the fact that some 
generic drug manufacturers currently do not calculate best price for 
any product but would be required to develop a best price methodology 
based on this revised definition, which would amount to a significant 
increase in administrative burden and costs, ultimately resulting in 
higher health care costs for consumers and for government health care 
programs.
    Response: We are aware that our definition of single source and 
innovator multiple source drugs can cause some products to be subject 
to a higher rebate percentage due to the change in the drug category 
from noninnovator to innovator. It is not our intention through this 
final rule to lead to a discontinuation of production or to cause any 
companies to go out of business, and least of all to lead to higher 
healthcare costs. Because we believe that manufacturers should have 
been reporting drugs marketed under an original NDA as either single 
source or innovator multiple source drugs prior to this rulemaking, we 
do not believe that the final rule is the reason that manufacturers 
will need to develop best price methodologies. Therefore, we did not 
include this in the proposed rule under the regulatory impact section 
because we do not believe the final rule will cause this impact upon 
manufacturers.
    Comment: Another commenter stated that as proposed by CMS, drug 
manufacturers would be exempt from paying rebates on Medicaid MCO drugs 
if the drugs are dispensed by Medicaid MCOs and discounted under the 
340B program. The commenter continued that this will have a huge impact 
on the little revenue that Medicaid MCOs currently pay a local county. 
In addition to the

[[Page 5337]]

fiscal impact, passing through the 340B cost to the Medicaid MCO would 
be administratively burdensome on pharmacy operations. The commenter 
also opposed the action of states requiring hospitals to carve-out 
their Medicaid managed care drugs. The impact on this local government 
commenter if they were required to carve out drug costs could 
negatively impact their budget by $3 million annually. The commenter 
supported the creation of a pharmacy-friendly mechanism that states can 
use to prevent the collection of rebates on 340B MCO drugs.
    Response: The issue of passing on the 340B cost to Medicaid MCOs 
and whether states have the authority to mandate that 340B covered 
entities carve out their Medicaid MCO drugs from their 340B purchases 
is beyond the scope of this final rule. States are responsible for 
establishing a mechanism to prevent the collection of rebates on 340B 
MCO drugs.
    Comment: We received several comments stating the significant 
overall burden, as well as the specific burden (financial, 
administrative, compliance, operational, time, and human) drug 
manufacturers would incur if the MDR program is expanded to include the 
territories.
    Several commenters stated that the proposed Regulatory Impact 
Analysis severely underestimated the amount of resources that would be 
required to implement an expansion of the MDR program to the 
territories. Many commenters stated that this expansion would pose 
significant financial burden for drug manufacturers as it will require 
alterations to existing systems and collection of data not currently 
captured. A few commenters stated that they would incur expenses 
through the engagement of external auditors in evaluating the 
accounting practices of wholesalers in Puerto Rico and the territories.
    Several commenters stated that drug manufacturers would see an 
increase in their administrative burden, with one commenter stating 
that processing invoices for five additional jurisdictions would result 
in an approximate 10 percent increase of their current administrative 
burden in preparing the quarterly MDR program remittance advices. 
Several commenters also stated that the administrative burden of such 
an expansion would be significant since some companies would have to 
reconfigure their government pricing and/or financial management 
systems to permit them to capture territory sales in their AMP and best 
price calculations and all would face higher rebate invoice processing 
costs. One commenter estimated that it will take approximately nine 
months and cost roughly $500,000, not including programming costs, for 
their stakeholders (government price reporting team, finance 
department, product teams, legal experts, and outside consultants) to 
understand how to capture the necessary data and modify our price 
reporting systems to include sales and units to U.S. territories.
    A few commenters stated that CMS should not require drug 
manufacturers to include the territories in their AMP and best price 
calculations because of the enormous burden and compliance concerns 
that such an expansion would pose. One commenter added that increased 
operational costs for generic drug manufacturers will inevitably impact 
health care consumers and public and private payers. One commenter in 
particular remarked that the inclusion of sales in best price would 
create a financial hurdle that could result in fewer products reaching 
patients, as drug manufacturers would be forced to terminate deeply 
discounted sales that would, under the proposed rule, become eligible 
for inclusion in best price calculations. A commenter stated that CMS 
should permit drug manufacturers to exclude from best price the 
differential in prices between mainland prices and price-controlled 
prices in the territories as these price differentials can have a 
significant and detrimental effect on a drug manufacturer's best price.
    Response: As discussed in the Definition section of the final rule 
(section II.B.), in accordance with section 1101(a)(1) of the Act, we 
have the authority to adopt the revised definitions of states and 
United States in this final rule. We recognize the challenges and 
complexities that this change in definition creates for both the 
territories and the drug manufacturers and we will work with drug 
manufacturers regarding the collection of the data they need from the 
territories to pay rebates to the territories. As previously noted in 
the Definition section of this final rule (section II.B.), the 
definitions of state and United States will be revised to include the 
territories beginning 1 year after the effective date of the final 
rule. As a result, the effective date for drug manufacturers' 
requirement to include sales to territories in their calculation of AMP 
and best price, as well as their obligation to pay rebates on CODs 
dispensed to Medicaid patients in the territories is also delayed until 
1 year after the effective date of the final rule. We believe this 
delay will provide more time for the drug manufacturers to make the 
necessary changes in their systems.
2. Anticipated Effects on Retail Community Pharmacies
    Retail community pharmacies will be affected by this regulation, 
because it will result in FULs that are closer to the acquisition cost 
of the drug. In a 2009 OIG report titled ``A Comparison of Medicaid 
Federal Upper Limit Amounts to Acquisition Costs, Medicare Payment 
Amounts, and Retail Prices,'' the OIG found that for the fourth quarter 
of FY 2007 the pre-DRA FUL reimbursement was more than double the 
average pharmacy acquisition cost for 46 of the 50 highest expenditure 
FUL drugs. In the proposed rule, we stated that the Affordable Care Act 
FULs will generally reduce those limits in comparison to the highly 
inflated pre-DRA FULs and, thereby, reduce Medicaid payment for drugs 
subject to the limits. However, we noted that many states have 
implemented MACs, which were likely lower than the pre-DRA FUL amounts 
and provided an example of this as exemplified in comparing the pre-DRA 
FUL, the Affordable Care Act FUL and Indiana's SMAC, as explained the 
preamble of Sec.  447.514 of the proposed rule (77 FR 5355).
    However, other than the comparison chart provided in the discussion 
regarding proposed Sec.  447.514 (77 FR 5348), we did not analyze how 
each state's MAC program will impact the total savings under the new 
Affordable Care Act FUL methodology. Therefore, we invited public 
comments on this impact. The estimated federal savings associated with 
the proposed rule implementing section 2503 of the Affordable Care Act, 
as specified in the proposed rule, reflected this change in 
reimbursement for retail community pharmacies. Additionally, in the 
proposed rule (77 FR 5355), we specified that although there are 
savings to the Medicaid program largely realized because of lower 
payment to pharmacies, pharmacies may receive a higher reimbursement 
under the Affordable Care Act FUL than they will when compared to what 
states currently reimburse pharmacies.
    As discussed in detail in section II.K., upon consideration of the 
comments received, as well as a result of our ongoing analysis of the 
draft Affordable Care Act FULs in comparison with the monthly NADAC 
pricing files, we are making a revision to calculate the FUL at an 
amount equal to 175 percent of the weighted average of the most 
recently reported monthly AMPs for pharmaceutically and therapeutically 
equivalent multiple source drugs,

[[Page 5338]]

except where that amount is less than the average retail community 
pharmacies' acquisition cost for such drug products as determined by 
the most current national survey of such costs. In situations where the 
FUL is less than the average retail community pharmacies' acquisition 
cost, we will establish the FUL using a higher multiplier so that the 
FUL amount will equal the average retail community pharmacies' 
acquisition cost as determined by the most current national survey of 
such costs. This revised process is codified in Sec.  447.514(b)(1) and 
(2) of this final rule.
    Additionally, in the proposed rule, at Sec.  447.502, we proposed 
to replace the term, ``estimated acquisition cost'' (EAC) with ``actual 
acquisition cost'' (AAC) and to define AAC as ``the agency's 
determination of the pharmacy providers' actual prices paid to acquire 
drug products marketed or sold by specific drug manufacturers'' (77 FR 
5320 and 5359). We believe that this revision would give states the 
flexibility to establish a more accurate methodology for establishing 
prices, while assuring access, consistent with section 1902(a)(30)(A). 
Furthermore, in the proposed rule at Sec.  447.502 we proposed to 
replace the term ``dispensing fee'' with ``professional dispensing 
fee'' as the drug ingredient cost is only one component of the two-part 
formula used to reimburse pharmacies for prescribed drugs dispensed to 
Medicaid beneficiaries (77 FR 5361). We also proposed to require states 
to reconsider the dispensing fee methodology consistent with the 
revised requirements (discussed in more detail at 77 FR 5326). As 
discussed in detail in sections II.B. and II.J. of this final rule, we 
are finalizing the definitions of AAC and professional dispensing fee 
as they were proposed. We received the following comments on the 
anticipated effects of these policies on retail community pharmacies:
a. AAC and Professional Dispensing Fee
    Comment: One commenter stated that they cannot stay in business if 
a cost based system is utilized without the inclusion of a profit 
margin. The commenter requested that CMS not approve any SPA that does 
not factor this into consideration. Another commenter stated that if a 
cost-based method is utilized for drug product reimbursement, the 
states must be mandated to provide a realistic dispensing fee. The fee 
must be determined by each state through an open and transparent 
process that covers the unique cost of doing business and if a survey 
is not done annually to assure professional dispensing fees are 
adequate, then an annual adjustment fee must be made to cover increased 
operating costs. One commenter noted that there needs to be a process 
for adjustments to allow for recouping price increases or other 
instances where products cannot be purchased at the cost basis. If a 
cost-based product reimbursement is utilized, it must be tied to an 
adequate and regularly updated dispensing fee.
    Response: As noted in the discussion regarding professional 
dispensing fees in sections II.A., J., and M. of this final rule, we 
are finalizing the requirement that states review their professional 
dispensing fees when they propose to change their reimbursement 
methodology. We review each SPA to assure that the professional 
dispensing fees are established in accordance with applicable federal 
provisions regarding beneficiary access to care. We are not requiring 
that a state conduct a cost of dispensing fee survey on an annual 
basis, but states must review their current professional dispensing fee 
whenever they propose to change their reimbursement methodology.
    This final rule is not designed to mandate state payment rates. We 
set aggregate upper limit requirements, and as we stated in the 
proposed rule, states have the flexibility to establish an AAC 
reimbursement in their state plan based on several different pricing 
benchmarks, for example, the NADAC files, a state survey of retail 
pharmacy providers, or AMP-based pricing (77 FR 5350). States have the 
responsibility to ensure that Medicaid pharmacy providers are 
adequately reimbursed and to establish payment rates in their state 
plan consistent with such requirements. To the extent that entities 
have concerns with prices established under a state's AAC methodology, 
those concerns should be raised to the state, especially given that 
states are responsible for setting payment rates and complying with a 
public notice process when setting those rates.
    Comment: A few commenters stated that unique products that require 
unique handling such as specially compounded, special storage, short 
dating, special product handling, should require an above and beyond 
the ``standard'' professional dispensing fee. Another commenter further 
stated that adequate reimbursement for additional services such as 
compliance packaging and review of medication regimens need to be 
addressed since the cost effectiveness of these services have been well 
documented.
    Another commenter stated that an annual adjustment to the fee must 
be made to cover increased operating costs and that dispensing fees 
should account for the practice type of a specialty pharmacy (for 
example, a pharmacy that provides factor replacement products) because 
these pharmacies will have significantly higher operating costs per 
prescription than that of a traditional retail pharmacy.
    Response: In accordance with the definition of professional 
dispensing fee that we are finalizing at Sec.  447.502 (see section 
II.B.18.), states should calculate their professional dispensing fees 
to include those costs which are associated with ensuring that 
possession of the appropriate COD is transferred to a Medicaid 
beneficiary. The states retain the flexibility to establish, and if 
necessary, revise, their professional dispensing fee to ensure that the 
Medicaid pharmacy providers are adequately reimbursed in accordance 
with the requirements of section 1902(a)(30)(A) of the Act.
    Comment: A few commenters stated that to serve patients with the 
best care, providers need to be able to cover the cost of the product, 
the cost of provision of the product, and make a modest profit. Several 
commenters indicted that there are many components that are involved in 
purchasing, storing, and dispensing the medication beyond just the 
overhead, rent, utilities, salaries, computer updates, vials and 
bottles, labels, and other overhead costs associated with running a 
pharmacy business. One commenter indicated that the costs to dispense a 
medication run approximately $10.50 per prescription and suggested that 
CMS ensure this is factored into the equation.
    One commenter noted that the current reimbursement fee for 
insurance companies is between $1.00 and $3.00. The commenter stated 
that this is not enough for pharmacies to survive on and requested that 
CMS consider this as it finalizes its policies.
    Another commenter stated that margins are already below a level 
that community pharmacies can remain viable and going to a net cost 
model will only further shrink those margins and limit access to 
pharmacists that have the time to provide real patient care. Another 
commenter stated that there is increased demand for professional 
interventions, documentation, responsibilities, technologies, 
inventories, safety measures, and those increases can no longer be 
absorbed by the provider. Several commenters indicated that increasing 
the dispensing fees must follow the other increases and stated that 
without an increase in fees, the patient will be put in a position of 
risk. Another commenter requested that

[[Page 5339]]

CMS consider the rising cost of doing business and the valuable 
services being provided by small pharmacies which serve the 
communities. One commenter stated that the cost of dispensing formula 
should be used in all states, including states with waivers.
    Several commenters commended CMS's recognition that reimbursement 
for drug ingredient costs and professional dispensing fees must be 
adjusted in tandem. The commenter was concerned, however, that the 
discussion of professional fees and costs of dispensing studies do not 
contemplate the need for reasonable margins that for-profit companies 
need to sustain their businesses and invest in quality, safety and 
efficiency improvements. The commenter requested that CMS strengthen 
its oversight of SPAs to ensure that once states adopt AAC, they cannot 
unilaterally reduce dispensing fees without a follow-up cost-to-
dispense study.
    Another commenter stated that because so few providers are willing 
to participate in the Medicaid program due to low reimbursement, new 
Medicaid beneficiaries will rely on safety net providers as their only 
access point for primary and preventative care. The commenter stated 
that this will present a fiscal challenge for those health centers 
which already do not receive sufficient reimbursement from Medicaid to 
cover the costs of delivering healthcare. One commenter stated that if 
cuts to pharmacy reimbursement happen, then over half the pharmacies in 
the country will close because they are already seeing reimbursement 
rates below cost and believe that further cuts will also cause the 
rural pharmacists to close.
    One commenter stated that it shares CMS's view that the dispensing 
fee should reflect the actual costs of pharmacists services tied to 
dispensing the product. The commenter urged CMS to require the states 
to factor in the operational costs associated with providing pharmacy 
services as part of the professional dispensing fee calculation and 
suggested that at the very least, the following five factors should be 
included: Prescription department payroll; prescription department 
costs; facilities costs; other store/location costs; and corporate 
costs allocated to prescription department.
    Another commenter stated that currently in one particular state, 
pharmacies have been losing money on generically filled prescriptions 
simply because the federal upper limit pricing has not been updated to 
reflect market price increases. This is in spite of the state currently 
having a higher dispensing fee than most states, due to a recent 
increase from a cost to dispense survey.
    Response: As discussed in section II.J. of this final rule, payment 
to Medicaid pharmacy providers must be consistent with efficiency, 
economy, and quality of care while assuring sufficient beneficiary 
access, consistent with section 1902(a)(30)(A) of the Act, and we 
believe the total reimbursement should take into account the pharmacy's 
cost to acquire the drug and the pharmacist's professional services and 
costs to dispense the drug product to a Medicaid beneficiary. We do not 
anticipate that the aggregate upper limit, as finalized at Sec.  
447.512(b), will limit pharmacy participation or compromise a Medicaid 
beneficiary's access to pharmacy coverage or services.
    In accordance with longstanding Federal regulations, the FULs are 
designed as an aggregate upper limit to give states flexibility to 
establish payment rates and adjust those rates for individual drugs 
consistent with those aggregate limits.
    Comment: One commenter stated that the majority of the cost of 
filling a prescription lies not with the pharmacies which have excelled 
at reducing costs to keep up with decreasing reimbursements, but rather 
with PBMs who take an ever increasing share of the profits under the 
guise of saving employers on their prescription expenses. The commenter 
requested that CMS mandate that all PBMs open their books and show how 
much money they receive from drug manufacturers to keep their drugs on 
a formulary.
    Response: While we appreciate the comment, this final rule 
addresses requirements for states to reimburse pharmacies for CODs at 
AAC and professional dispensing fees. It does not address reimbursement 
methods or profit sharing that may occur through PBMs.
    Comment: One commenter noted that the potential financial and other 
possible effects of the revised definition of AAC and professional 
dispensing fee are unclear and recommended that CMS issue an interim 
final rule that addresses the financial effect of the revised 
definitions which would provide clarification and allow the opportunity 
for comment.
    Response: We do not believe that it is necessary to issue an 
interim final rule to address the financial impact of replacing the 
term EAC with AAC, which revises the reimbursement standard for 
prescription drugs. We believe that a change to AAC is more consistent 
with the statutory provisions at section 1902(a)(30)(A) of the Act as 
AAC requires states to calculate reimbursement amounts based on the 
prices actually paid by pharmacy providers.
    We have cited examples in the proposed rule (77 FR 5350) that the 
states can use to develop or support an AAC. States retain the 
flexibility to establish an AAC reimbursement based on several 
different pricing benchmarks, but they have the responsibility to 
ensure that Medicaid pharmacy providers are adequately reimbursed in 
accordance with the requirements of section 1902(a)(30)(A) of the Act.
    Further, as discussed in detail in section II.M., we are revising 
Sec.  447.518(d) to specify that when states are proposing changes to 
either the ingredient cost reimbursement or professional dispensing fee 
reimbursement, they are required to review their proposed changes in 
accordance with the revised requirements of this final rule, and states 
must consider both the ingredient cost reimbursement and the 
professional dispensing fee reimbursement when proposing such changes. 
Furthermore, states must utilize adequate data, including, but not 
limited to, data from a state or national survey of retail pharmacy 
providers or other reliable data, to support any proposed changes to 
either or both of the components of the pharmacy reimbursement 
methodology.
    Comment: A few commenters stated that dispensing blood clotting 
factors require enhanced services and activities that vary greatly from 
those performed by a typical retail pharmacy. One of these commenters 
requested that CMS consider using the rulemaking process to issue a 
unique Medicaid reimbursement for blood clotting factor that takes into 
account the effort required to provide blood clotting factor to 
Medicaid recipients. Another commenter stated that as a specialty 
pharmacy that dispenses infusion medications, it is necessary for them 
to have full-time and ``as needed'' nursing staff to assist patients 
with home infusions, to provide continuing education, and perform 
annual in-home assessments.
    Response: At this time, we are not establishing an enhanced 
pharmacy reimbursement requirement for home infusion or blood clotting 
factor products. However, states have the option of reimbursing 
providers for nursing services and supplies provided to Medicaid 
patients when billed separately from CODs, to the extent that such 
reimbursement is consistent with the Medicaid state plan.

[[Page 5340]]

    Comment: One commenter stated that the independent pharmacy 
Medicaid population is typically more costly than that of the chain 
pharmacy. The commenter stated that for the independent pharmacy, it is 
impossible to offer enhanced services to the most needy if they were to 
be reimbursed as outlined in the proposed rule. The commenter further 
noted that it is important to understand that much more goes into the 
cost of a pharmacist's care for a Medicaid patient than just the cost 
of the drug product. The commenter anticipated that there would be an 
increase in hospitalizations with a reduction of these services, which 
in turn will be much more costly at the state and federal level.
    Response: As discussed in detail in section II.J. of this final 
rule, we have no reason to believe that pharmacies will be forced to 
leave the Medicaid program or that patient care will suffer as a result 
of the revised requirements in Sec.  447.512(b). Based on information 
provided to us from the states that are already paying based on an AAC 
methodology, this change in methodology has not caused pharmacies to 
leave the Medicaid program or other adverse effects on patient care. 
However, we will continue to monitor the issue.
b. Reimbursement Based on FULs
    Comment: One commenter stated that their review of Indiana's State 
MAC list suggests that CMS's economic analysis has several short 
comings. The commenter analyzed 290 commonly-used products on the 
Indiana MAC list, finding that 140 products, or 48 percent of these 
products, had FUL values set below their respective MAC value, with an 
average per unit loss in this group of products of 16 cents. 
Furthermore, the commenter's analysis of FUL reimbursement suggested 
that 94 or 32 percent of all products analyzed had FUL values set below 
their respective AAC, with an average loss of 13 cents per product.
    The commenter continued that these findings reinforce their 
concerns that CMS's proposed rule does not properly take into 
consideration the impact that reduced reimbursement will have on the 
small independent community pharmacy, many of which continue to 
purchase generic drugs at a premium of up to 50 percent relative to 
national chains. The commenter stated that most of these small 
pharmacies are located in rural communities where many Medicaid 
patients reside, and over 1,000 of these pharmacies are the sole 
pharmacy in their community. Furthermore, the commenter stated that 92 
percent of these pharmacies' revenues are derived from prescription 
drugs, with 16 percent of this revenue coming from Medicaid. The 
commenter stated that further cuts to Medicaid revenues will force many 
of these small rural pharmacies to close their doors, negatively 
impacting the very patients that CMS purports to represent.
    The commenter continued that to illustrate the competitive 
disadvantage that small community pharmacies face, they conducted an 
analysis of the negative impact from these reimbursement changes. The 
commenter analyzed the six draft FUL lists that have been issued to 
date by CMS. In almost every monthly draft list, more than one third of 
all products with FULs are lower than independent community pharmacy 
acquisition costs. The commenter cannot assume that states will 
reimburse pharmacies above their MACs, so the commenter assumed that 
products where the FUL is higher than pharmacies' costs, that states 
would drop the FULs to the state MAC.
    The commenter applied these new FULs to a market basket of Medicaid 
drugs that are typically dispensed by a common independent community 
pharmacy for each month. They looked at the impact on low, medium, and 
high volume pharmacies. The commenter stated that the results 
illustrated that in most cases, pharmacies lost anywhere from a third 
to 40 percent of their Medicaid revenues, and such revenue losses are 
not sustainable. The commenter further notes that the closure of these 
small community pharmacies will result in increased costs for Medicaid 
because these pharmacies have a well-established records of dispensing 
lower priced generic drugs and providing face-to-face counseling which 
increases medication adherence, leading to fewer hospital visits. The 
commenter stated that CMS appears insensitive to the needs of small 
businesses in this proposed regulation.
    Response: As discussed earlier in this section and in detail in 
section II.K., upon consideration of the comments received, as well as 
a result of our ongoing analysis of the draft FULs in comparison with 
the monthly NADAC pricing files, we are making a revision to calculate 
the AMP-based FUL at an amount equal to 175 percent of the weighted 
average of the most recently reported monthly AMPs for pharmaceutically 
and therapeutically equivalent multiple source drugs, except where that 
amount is less than the average retail community pharmacies' 
acquisition cost for such drug products as determined by the most 
current national survey of such costs. In situations where the FUL is 
less than the average retail community pharmacies' acquisition cost, we 
will establish the FUL using a higher multiplier so that the FUL amount 
would equal the average retail community pharmacies' acquisition cost 
as determined by the most current national survey of such costs. This 
change in the final methodology, which would establish a process for 
using a higher multiplier, is codified in Sec.  447.514(b)(1) and (2) 
of this final rule.
    We note that, as discussed previously and in the proposed rule (77 
FR 5347), this final rule is not designed to mandate state payment 
rates. Therefore, states have the discretion to adjust reimbursement on 
a drug-by-drug basis using pricing benchmarks, such as the NADAC 
pricing file, or other reliable data, to adjust reimbursement, as long 
as such payments are consistent with the state plan.
    Comment: Several commenters noted that a comparison by an 
investment bank of the posted draft September 2011 FULs for the top 
twenty drugs to current state MACs for the 10 states representing the 
greatest number of Medicaid prescriptions found that 72 percent of the 
draft FULs were lower than the corresponding state MACs, and stated 
that calculating FULs at such a low level would contradict the 
Congress' goal to ensure adequate pharmacy reimbursement.
    Response: As noted in this section, we are revising our 
implementation of the FULs to ensure that the pharmacy reimbursement is 
consistent with the pharmacies' cost to acquire the drug. While we have 
not analyzed how each state's MAC program will impact the total 
expenditures under the new Affordable Care Act FUL methodology, the 
actual impact recognized by individual states and pharmacy providers 
will depend on the specific circumstances and programs that pertain to 
each state.
c. Miscellaneous Comments
    Comment: One commenter stated that the requirements regarding 
certification of brand name drugs at Sec.  447.512 would appear to be 
in conflict with many state laws and regulations in which brand 
substitution requirements are already defined, including acceptable 
language and the use of check boxes. The commenter stated that CMS 
should more appropriately refer to those laws in the aggregate and 
allow state regulations to prevail in determining appropriate 
substitution. To do otherwise imposes a burden on providers.

[[Page 5341]]

    Response: The requirement at Sec.  447.512 is not new. A medical 
provider retains the right to prescribe a specific brand drug for a 
Medicaid beneficiary; however, in accordance with Sec.  447.512(c), if 
a multiple source drug has a FUL calculated, the upper payment limit 
(FUL) applies, unless the prescriber certifies in his or her own 
handwriting (or by an electronic alternative means approved by the 
Secretary), that a specific brand drug is medically necessary. Section 
447.512 does allow states to decide what certification form and 
procedure are used, but also specifies that a check off box on a form 
is not an acceptable means to communicate that a brand drug is 
medically necessary and should be dispensed. States must ensure 
compliance with federal requirements to qualify for federal matching 
payment. Further, the NCPDP coordinated with CMS to determine 
functionality that would satisfy the intent of Sec.  447.512(c) for 
electronic prescribing. NCPDP Implementation Recommendations Version 
1.3 contains the guidelines established for electronic prescribing 
related to the brand medically necessary requirement in federal 
regulation. Like the federal regulation, the NCPDP standard does not 
recognize a check off box to satisfy this requirement.
    Comment: One commenter agreed with CMS that something needs to be 
done to reduce the cost of healthcare expenditures for our society, but 
stated that increasing the rebates that drug manufacturers are required 
pay to Medicaid will only lead to drug manufacturers raising their 
prices to cover these higher rebates. The commenter continued that 
pharmacies cannot raise their prices, because CMS is mandating what 
they get paid for products but is not mandating what a drug 
manufacturer can charge.
    Response: We note that the overall cost of healthcare in the 
country is beyond the scope of this final rule. Further, we are not, in 
this final rule, prohibiting pharmacies from raising their prices. In 
addition, we note that the increased rebates that drug manufacturers 
will now pay are required in statute at section 1927(c) of the Act. It 
is not known if drug manufacturers will increase prices as a result of 
the statutory requirement.
    Comment: One commenter stated that the most important thing for 
healthcare professionals is the care of the patient and that the 
proposed rule compromises optimal care to patients. The commenter 
stated that in the end, money may be saved, but quality may suffer as a 
consequence.
    Response: We appreciate the comment and agree that quality patient 
care is of the utmost importance in the Medicaid program and we believe 
the provisions of the final rule are consistent with that principle.
3. Anticipated Effects on State Medicaid Programs
    States share in the savings from this final rule. As noted in the 
Table 3, we estimate a 5-year state savings of approximately $1.125 
billion due to the implementation of the FULs as revised in this final 
rule. We also note states have already been impacted by the provisions 
of this regulation by the inclusion the requirement that, consistent 
with section 1927(b) of the Act, as amended by section 2501(c) of the 
Affordable Care Act, participating drug manufacturers must pay rebates 
for covered outpatient drugs dispensed to individuals enrolled in 
Medicaid MCOs if the MCO is responsible for coverage of such drugs. Per 
the effective date mandated by the Affordable Care Act, this provision 
was effective as of March 23, 2010. Furthermore, as noted earlier in 
this section, state administrative costs associated with this 
regulation are estimated at $800,000 to implement the reimbursement 
methodologies being finalized in this final rule.
    As stated earlier in section III., this final rule does not impose 
any new or revised reporting or record keeping requirements concerning 
CMS-64. Also, as a result of the increased rebate amounts under the 
national rebate agreement, drug manufacturers may reduce rebates they 
pay to states through supplemental rebate agreements. While this 
potential loss of supplemental rebates is not a direct consequence of 
this proposed rule, we recognize that this may occur due to the 
statutory change to the rebate amounts in 1927(c) of the Act.
    We received the following comments on the anticipated effects on 
State Medicaid programs:
a. Line Extension Drugs and Supplemental Rebates
    Comment: A few commenters stated that while the UROA for line 
extension products may effectively reduce the cost of these products, 
the benefit of the cost reduction will go entirely to CMS and not to 
the states. Commenters further noted that attributing the amount of 
rebate offset due to new indications is currently not possible and 
would result in a large, as yet unquantified, burden to states and 
providers to identify and report.
    The commenters requested that CMS reconsider the definition of line 
extension products to preserve state supplemental rebate arrangements 
and patient access to combination products. Another commenter stated 
that as proposed, this rule reduces states' supplemental rebates, which 
would be further exacerbated by the retroactive implementation of the 
regulation, and would impact prior federal rebate amounts previously 
determined and owed by the state. Commenters noted that this loss of 
supplemental rebates is not detailed in the proposed rule's Regulatory 
Impact Analysis and that the statement of need's estimated savings of 
$1.6 billion to the program for line extensions does not account for 
supplemental rebates that will be lost by states as a result of line 
extension penalties. Commenters requested that CMS revise its analysis 
to note that the line extension penalty reduces the share of rebates to 
states, thereby increasing their cost share for drugs above and beyond 
the normal arrangement.
    Response: We recognize that drug manufacturers may decide to change 
the amount of supplemental rebates they pay states due to the increase 
in the rebate amounts under the Affordable Care Act, this action is not 
a direct result of this final rule. As described in Table 6 of the 
proposed rule (77 FR 5354), the recapture/offset amount is included as 
part of the line extension provision in this table and, thus, it is 
included in $1.6 billion of savings. As there is no Federal legislative 
change to the treatment of supplemental rebates, we have no basis to 
account for any costs or savings for supplemental rebates in this final 
rule. However, based on the supplemental rebate data reported to CMS on 
the Medicaid and Children's Health Insurance Program Budget and 
Expenditure System (MBES), http://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Data-and-Systems/MBES/CMS-64-Quarterly-Expense-Report.html, we do not see any significant impact so far for states on 
their supplemental rebates and believe that as the marketplace adjusts 
to these rebate amounts, we expect supplemental rebates will continue 
at their previous levels. The effective date of the line extension and 
offset provisions, as set forth in section 2503 of the Affordable Care 
Act, was January 1, 2010; however, the provisions in this final rule 
will be implemented on a prospective basis.
    Comment: One commenter stated that it has been proposed that the 
line extension requirement be retroactive to March 2010. The commenter 
requested that consideration should be given to implementing this 
requirement after some period upon publication of the

[[Page 5342]]

final rule to allow states time to plan a strategy for accommodating 
line extension drugs and to restructure state budgets to account for 
reduced rebates due to line extension offset for FFS claims and for 
claims billed by Medicaid MCOs where states may not control MCO 
preferred drug lists.
    Response: The effective date of the line extension and offset 
provisions, as set forth in section 2503 of the Affordable Care Act, 
was January 1, 2010. The requirement that drug manufacturers pay 
rebates for drugs dispensed to Medicaid beneficiaries through Medicaid 
MCOs, in accordance with section 2501(c) of the Affordable Care Act, 
was effective March 23, 2010. However, the provisions in this final 
rule will be implemented on a prospective basis.
b. Costs Associated With Medicaid MCO Rebates
    Comment: One commenter stated that they have concerns with the 
proposed language to establish a new requirement that states invoice 
drug manufacturers on a quarterly basis for managed care utilization. 
The commenter stated that since a reduced portion of the rebates 
collected will be kept by the states, the states will be acting as 
collecting agents for rebates and an intermediary for disputes. Based 
on this commenter's analyses of these provisions, the commenter stated 
that CMS underestimated the cost for state Medicaid programs to comply 
with these provisions.
    Another commenter requested that CMS consider establishing a 
reasonable percentage of rebates that states could retain to reflect 
the costs incurred in complying with these Medicaid MCO requirements, 
especially for products for which states are not receiving any rebates. 
Commenters requested that CMS revise its analysis that the rule would 
not impose additional costs to states since the collection of Medicaid 
MCO rebates imposes system changes, programming, and staffing burden to 
bill for and collect rebates, as well as burden of mediating disputes. 
The commenter also noted that there is a cost associated with 
retraining staff or contracting with a vendor to complete these 
activities.
    One of the commenters further estimated that the cost associated 
with collection of Medicaid MCO rebates appears to be underestimated by 
approximately $100,000 annually and that this amount may vary by state.
    Response: We appreciate the comment. However, as noted in section 
III. of this final rule, the information collection requirements and 
burden associated with the collection of Medicaid MCO rebates is part 
of the CMS-64 form and is already approved by OMB under control number 
0938-1265 (CMS-10529). In addition, states are required to collect 
rebates from manufacturers on all covered outpatient drugs. Since this 
final rule does not impose any new or revised burden or reporting or 
record keeping requirements concerning CMS-64, a revised PRA package is 
not applicable at this time.
    Comment: One commenter stated they will not accrue savings in line 
with the CMS projections because the bulk of savings are attributable 
to revenue from rebates on drugs provided through Medicaid MCOs and the 
commenter realized these savings through its carve-out in 2008. The 
commenter stated that for those states that cannot realize such savings 
and already have aggressive state MAC plans, the costs of the proposed 
regulation far outweigh the potential savings and that states would in 
fact be a victim of its own progressive innovations.
    Response: States have the option of continuing to carve out their 
drug coverage from Medicaid MCOs and reimbursing pharmacies for CODs 
through FFS. Further, we recognize that the actual savings recognized 
by individual states will depend on the specific circumstances and 
programs that pertain to each state.
c. Costs Associated With AAC and Professional Dispensing Fee
    Comment: Several commenters indicated that states project that the 
new requirements of reimbursement based on AAC will significantly 
increase state Medicaid program costs in at least two ways: (1) 
Administrative costs, including additional staff on an ongoing basis to 
perform the new work to process the rebates; and (2) infrastructure 
costs to ensure Medicaid systems can comply with the proposed 
requirements. One of these commenters noted the cost of a contractor to 
perform an AAC survey is estimated to be around $100,000 annually and 
the costs of dispensing fee surveys vary, but are estimated to be 
between $30,000 and $65,000. The commenter also noted that the 
frequency of the surveys would affect costs.
    Another commenter requested that CMS provide states with 
flexibility under the revised reimbursement regulations to allow state-
specific approaches to implementation because without this flexibility, 
the commenter expected its reimbursement expenditures to increase.
    The commenter continued that it will take up to 2 years to solicit 
a Request for Proposal (RFP) for a pharmacy invoice audit, conduct the 
audit, make system changes, and update the state plan and 
administrative rules. The commenter stated that it would be less 
burdensome for them to work directly with the drug manufacturers to 
obtain the actual costs the drug manufacturer charges for each drug.
    Response: As discussed in section II.M., we are not requiring 
states to perform state-specific AAC surveys and there are other 
options that states can consider to develop reimbursement rates based 
upon AAC, such as the NADAC files or AMP. Furthermore, there is also no 
requirement that states perform a professional dispensing fee state-
specific survey; however, states are required to reconsider their 
professional dispensing fee in light of the revised requirement to 
reimburse at AAC. However, as discussed earlier in the Overall Impact 
section, based on the limited information available, we have provided 
an estimated range of $0 (if no states choose to conduct a cost of 
dispensing survey) to $6,600,000 (if all 44 states conduct a cost of 
dispensing survey that costs $150,000).
    Comment: One commenter stated that to determine the AAC for each 
340B entity on a regular basis would be extremely burdensome and manual 
for states.
    Response: As discussed in section II.M. of this final rule, we are 
requiring that states need to reimburse at AAC for all CODs, including 
drugs purchased at 340B prices for Medicaid patients. States have the 
option of reimbursing 340B drugs at the ceiling price which would meet 
the AAC requirements in this final rule. States are able to calculate 
the ceiling price for 340B purchased drugs since they have access to 
both the AMPs and the URAs. We will work with states as they implement 
the requirement to specify their 340B reimbursement method in their 
Medicaid state plan.
    Comment: One commenter stated that states project that a 
requirement to use AAC via either the NADAC or a state-specific survey 
plus a study-supported dispensing fee could increase pharmacy program 
costs to the state and federal government, depending on a state's 
existing State MAC program, current generic utilization rate, and other 
pricing and utilization strategies. As such, the commenter stated that 
a methodology other than AAC may be more cost-effective and efficient 
in some situations.
    Response: As specified in more detail in sections II.J., and II.M. 
of this final rule, payment for Medicaid covered drugs is dependent on 
the

[[Page 5343]]

methodologies set forth in the state plan. The definition of AAC in 
this final rule does not mandate that states use a specific formula or 
methodology to establish their AAC reimbursement. Further, we do not 
encourage or mandate that states have only one approved methodology for 
reimbursement. We agree that states can continue their state MAC 
programs; further, we are not requiring that states change their 
existing reimbursement methodologies at this time; however, after the 
effective date of the final rule, in line with our policy, states 
should evaluate their proposed changes in the context of the revised 
requirements prior to proposing changes to pharmacy reimbursement.
d. Costs Associated With Affordable Care Act FULs
    Comment: One commenter stated that as drafted, they do not expect a 
negative financial impact to result from implementation of the new 
FULs. However, the commenter noted that to update the state's systems 
to be in compliance with the new FULs would be an additional cost and 
take the state Medicaid agency 3 to 6 months to implement.
    Response: The provisions of the final rule are effective on April 
1, 2016 unless otherwise noted in the DATES section of this final rule. 
To implement these revised requirements, we published draft AMP-based 
FULs, beginning in September 2011, including a Draft Methodology and 
Data Elements Guide on the Medicaid.gov Web site. We believe that the 
notification previously issued by CMS that the FULs would not be 
finalized until this final rule is published provided states sufficient 
time to plan for the implementation of the Affordable Care Act FULs. In 
section III., we have accounted for the states' burden to implement the 
new reimbursement requirements, which include the implementation of the 
Affordable Care Act FULs.
e. Miscellaneous Comments
    Comment: One commenter stated that Tables 6 and 7 of the Regulatory 
Impact Analysis in the proposed rule (77 FR 5354) are not specific 
enough to determine the itemized actual costs and savings for the 
states. Indeed, it appears likely that the $84 million cost of the 
changes outlined in these tables will be borne primarily by the states, 
while savings from the rebate offset will accrue mostly to the federal 
government.
    Response: Tables 6 of the proposed rule (77 FR 5354) shows the 
state and federal savings reflected in implementing requirements from 
the Affordable Care Act which include provisions for the increased 
rebate percentages for brand name and generic drugs; the recapture of 
total savings; the extension of collection of rebates for Medicaid 
MCOs; rebates for new formulations; and the revised FULs methodology. 
The rebate offset provisions established by the Affordable Care Act are 
statutorily mandated; therefore, we have no authority to modify those 
statutory requirements in this regulation. The regulations are designed 
to implement the provision in section 1927(c) of the Act regarding the 
determination of the rebate amount. Whereas, Table 7 of the proposed 
rule (77 FR 5354) shows the 5-year estimated costs to Medicaid MCOs, 
drug manufacturers, and states to implement the requirements of the 
proposed rule and is based on the estimated information collection 
requirements described in the Collection of Information section of the 
proposed rule (77 FR 5351 through 5353). As noted in the Collection of 
Information section of this final rule (section III.), we have updated 
the estimated costs to states to account for the states' burden to 
implement new reimbursement requirements being finalized in this rule.
    Comment: One commenter stated, in reference to the definition of 
COD, that determining if the use of a particular medication is outside 
of a medically accepted indication is difficult and would result in 
undue administrative burden to states and providers. The commenter 
requested that CMS clarify the rule to state that the requirement of 
use for medically accepted indication is met by the presence of an NDC 
and that the drug is listed electronically with FDA, or one of the 
other definitions listed in the chapter, as being acceptable.
    Response: The language that a drug is not a COD if it is used for 
an indication that is not a medically accepted indication is not a 
change from what was previously provided in the statutory definition of 
COD at section 1927(k)(2) of the Act. The language regarding medically 
accepted indication in section 1927(k)(2) of the Act was not revised 
under the Affordable Care Act and we do not intend in this final rule 
to modify this requirement. As noted in the earlier discussion 
regarding the definition of COD (section II.B.7.), where there is 
concern, states will continue to have the flexibility to require prior 
authorization to limit the use of a COD to only medically accepted 
indications.
4. Anticipated Effects on U.S. Territories
    As discussed in the Definition section of this final rule (section 
II.B.20.), the definitions of the terms ``states'' and ``United 
States'' will be revised to include the territories: The Commonwealth 
of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, 
and American Samoa, in addition to the 50 states and the District of 
Columbia. The territories will be able to receive manufacturer rebates 
through the MDR program in the same manner that the 50 states and the 
District of Columbia are currently receiving rebates.
    For territories to be able to begin collecting rebates from the 
manufacturers, the territories will be required to come into compliance 
with the MDR program because the computer systems that the territories 
currently have are not setup for the MDR program. As a result, these 
territories will likely have to utilize contractors to ensure that 
their computer systems are in place to begin to collect rebates from 
manufacturers. As specified in the proposed rule (77 FR 5356), we do 
not have cost estimates for this compliance process to be completed and 
solicited comment specific to this issue. We received the following 
comments on the anticipated effects on U.S. territories:
    Comment: One commenter supported CMS's proposal to expand the MDR 
program into the territories and suggested that the increase in federal 
contributions to Medicaid in a particular territory will provide a 
great opportunity to mitigate the continuous cost increases for 
providing Medicaid beneficiaries with drugs and will achieve savings 
through drug rebates and improved pricing.
    Response: While we believe the territories will incur 
administrative costs to set up their computer systems, we agree with 
the commenter and believe there will be a net savings to the 
territories as a result of rebate collections through the MDR program.
    Comment: Several commenters stated that complying with all aspects 
of the MDR program will drive up the overall administrative costs for 
the territories including upgrades to the information technology 
systems. One of these commenters indicated that they are unable to 
estimate those costs at this time but they are concerned that this 
increase in administrative costs could adversely impact the section 
1008 cap unless CMS allows the territory to claim the computer systems 
and related contract costs necessary to set up the manufacturer and CMS 
reporting systems for the MDR as MMIS costs

[[Page 5344]]

which are outside of the section 1108 cap and which receive enhanced 90 
percent and 75 percent matching rates.
    Another one of these commenters noted that a specific territory 
would need to take several actions to ensure compliance with the 
requirements of the final rule including upgrade its current computer 
systems and estimated the cost at $500,000 to $900,000 to hire a 
contractor to perform the upgrades. Another commenter stated that CMS 
did not consider the costs to the territories of implementing a rebate 
system for territories and stated that it estimated these costs at a 
minimum of $500,000 annually.
    Response: We agree that the territories will incur administrative 
costs to set up and maintain their systems; may have varying capacity 
to comply with these requirements; and will require additional time to 
comply to implement the MDR program. However, as discussed in the 
introduction to the Detailed Economic Analysis section of the final 
rule (section IV.D.) there are many complicating factors that make it 
difficult to provide an accurate estimate of the voluntary start-up and 
ongoing operational costs for the territories that will participate in 
the MDR program. First, we do not know which of the territories will 
participate in the MDR program and which will seek a waiver from 
participation. Second, each territory is unique in how it is funded and 
operates. Third, we are unaware of the existing infrastructure of each 
territory. Furthermore, we only received one comment that contained an 
estimate of $500,000 to $900,000 for the start-up costs for Puerto Rico 
and another comment which estimated a minimum annual expense of 
$500,000 in operating costs for the territories. Since we do not know 
how many of the territories will participate in the MDR program, nor 
can we accurately estimate the startup costs or ongoing operational 
expenses for the territories that will participate in the MDR program, 
we have not included these estimate in the ICRs found in section III. 
of this final rule, nor are the estimates accounted for in tables 2 or 
4 of this final rule.
    As discussed in the Definition section of this final rule (section 
II.B.20.), while federal matching dollars are not specifically 
addressed in the proposed rule, we will work with the territories that 
participate in the MDR program, and address any questions they have 
regarding the need to claim administrative costs associated with the 
MDR program. Furthermore, as stated in the Definition section of this 
final rule (section II.B.20.), the definitions of ``states'' and 
``United States'' will be revised by including the territories 1 year 
after the effective date of the final rule.
    Comment: We received several comments opposing CMS's proposal to 
expand the MDR program into the territories until there could be a 
public discussion to ensure that the benefits would outweigh the costs. 
A few commenters stated that the costs in developing and maintaining 
the required computer systems may outweigh the benefit of the program 
to the territories. Another commenter was concerned that the proposal 
could have a series of unintended consequences which might offset any 
incremental revenue as historically the extension of rebates and 
inclusion of more drugs in the Medicaid best price has led to higher 
prices for other consumers. The commenter stated that businesses in a 
particular territory are not prepared to pay higher prices for 
prescription drugs while facing a difficult economic environment.
    Response: We appreciate the concerns raised by these commenters 
and, as discussed in detail in the Definition section of the final rule 
(section II.B.20.), have decided to allow the territories to seek a 
waiver from participation in the MDR program using their existing 
waiver authority. Therefore, we believe the territories will each have 
an adequate opportunity to evaluate the benefits of participating in 
the MDR program. Furthermore, as discussed in the determination of AMP 
section (section II.C.) of this final rule, we recognize that 
manufacturers may have to evaluate their current business practices in 
regards to sales to territories. We will continue to monitor this 
situation are will work with states, manufacturers and other 
stakeholders regarding the implementation of this policy.
    Comment: Several commenters stated that the expansion of the MDR 
program to the territories may disrupt contracts and pricing structures 
currently in place and have the unintended consequence of adversely 
affecting commercial pricing in the territories.
    Response: We recognize that some territories may engage in 
voluntary drug rebate collections. Since territories will cover more 
drugs that will be eligible for rebates under the MDR program, we 
believe that the rebates under the MDR program will result in higher 
revenues overall. Also, we note that we are allowing the territories 
the choice to opt out of the MDR program and will provide guidance 
regarding the exact mechanism for opting out.
    Comment: One commenter stated that the proposed rule would provide 
specific benefits and areas of improvement and expansion for rebate 
collections for a particular territory through the ability to collect 
rebates on drugs dispensed to Medicaid MCOs as well as rebates on 
physician administered drugs since this is an area where the 
territory's current Medicaid program is not able to benefit.
    Response: We appreciate the comment and note that when territories 
participate in the MDR program, they will be subject to all of the 
requirements of section 1927 of the Act that apply to the states, 
including that NDC information identifying physician-administered drugs 
be included on claims.

E. Alternatives Considered

    We considered a number of different policies and approaches during 
the development of the final rule.
    As mentioned in the Determination of AMP section of the proposed 
rule (77 FR 5334), a goal of the Affordable Care Act is to capture the 
AMP for those drugs that will be difficult for manufacturers to 
calculate an AMP based on only retail community pharmacy sales. 
Therefore, to eliminate any problems that may result from a 
manufacturer not able to determine an AMP for a particular drug, the 
Congress amended the Affordable Care Act to include an exception for 
inhalation, infusion, instilled, implanted, or injectable drugs that 
are not generally dispensed through retail community pharmacies. In 
this final rule, we considered whether we need to define and determine 
which drugs constitute 5i drugs. Also, we looked at Medicare Part B 
drugs and considered using their list to define these drugs. However, 
as discussed in the proposed rule (77 FR 5334), the ASP NDC-HCPCS 
crosswalk file includes drug which do not meet the 5i criteria, 
specifically, oral drugs covered by Part B following a transplant as 
well as oral anti-emetics and oral cancer drugs (http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Part-B-Drugs/McrPartBDrugAvgSalesPrice/2015ASPFiles.html). In addition to using the 
Medicare Part B list, we also considered whether CMS or manufacturers 
will be responsible for defining which drugs will fall into this 
category. Additionally, we considered using the FDA's dosage forms and 
route of administrations to assist drug manufacturers in determining 
which drugs meet this requirement.
    We proposed to use a multistep process to identify if the drug is 
not generally dispensed through a retail community pharmacy. To recap, 
drug manufacturers would identify which

[[Page 5345]]

drugs that will fall within the parameters of the 5i drugs. Then, they 
would need to determine if the drug is not generally dispensed through 
a retail community pharmacy. As discussed in detail in the 
Determination of AMP section of this final rule (section II.C.7.), in 
light of comments received, we decided not to finalize our proposal 
regarding the use of the FDA Structured Product Labeling Routes of 
Administration file when identifying 5i drugs. Instead, manufacturers 
are responsible for making a determination, based on the statute and 
these regulations, as to whether their drugs qualify as 5i drugs.
    With regard to the offset of the increased rebate percentages, as 
discussed in the proposed rule (77 FR 5342), we considered offsetting 
the non-federal share of the entire difference between the minimum 
rebate percentages in effect on December 31, 2009 and the new minimum 
rebate percentages in effect under Affordable Care Act, regardless of 
whether states received a rebate amount based on the difference between 
AMP and best price. However, after careful consideration of the 
provision in 2501 of the Affordable Care Act, we will finalize that the 
offset amount will be calculated to reflect rebates based on the 
difference between AMP and best price.
    As discussed in the proposed rule (77 FR 5342), we also considered 
a different interpretation in calculating the offset for line extension 
drugs in the September 28, 2010 State Medicaid Director (SMD) letter, 
#10-019. In the SMD letter, we stated that for a drug that is a line 
extension of a brand name drug that is an oral solid dosage form, we 
planned to offset only the difference in the additional rebate of the 
line extension drug based on the calculation methodology of the 
additional rebate for the drug preceding the requirements of the 
Affordable Care Act and the calculation of rebates for the line 
extension drug, if greater, in accordance with the Affordable Care Act. 
However, after further review of section 1927(c)(2)(C) of the Act, we 
proposed in the proposed rule to offset the difference between the URA 
for the drug calculated based on the applicable rebate percentage in 
section 1927 of the Act prior to the Affordable Care Cat and the 
calculation of the URA for the line extension drug, if greater, in 
accordance with the Affordable Care Act. We are finalizing the 
calculation of the offset provisions for line extension drug as 
proposed as we believe that this calculation is more aligned with the 
statute.
    In the proposed rule (77 FR 5345), we also considered determining 
whether there would be a cost or savings in implementing the Affordable 
Care Act FUL by comparing simulations of the DRA FUL and new Affordable 
Care Act FUL, using price, utilization, and reimbursement data from the 
MDR system combined with generic group codes from First Data Bank. The 
difference in savings from these simulations (expressed as a percent of 
total Medicaid drug spending) was applied to projected Medicaid 
prescription drug spending developed for the mid-session review of the 
FY 2010 Budget, resulting in a 5-year federal and state cost of $1.7 
billion for the Affordable Care Act FULs compared to the DRA FULs. 
However, this alternative did not take into account a state's ability 
to choose to reimburse at the state MACs, which may be lower than the 
FUL for a drug. As a result, this alternative/methodology yields a cost 
to the states and federal government, when in actuality it should 
reflect a savings as many states have implemented their own state MAC 
and reimburse below the FUL. In addition, the DRA FUL was never 
implemented and therefore this alternative was based on unpublished 
FULs and not representative of actual reimbursement.
    In the proposed rule (77 FR 5356) we solicited comments pertaining 
to the alternatives considered in drafting the proposed rule. We 
address comments pertaining to the alternatives considered for 
identification of 5i drugs that are not generally dispensed through 
retail community pharmacies in the Determination of AMP (section 
II.C.7.) of this final rule. Furthermore, we address comments 
pertaining to the alternatives implementing the Affordable Care Act FUL 
in the Upper Limits for multiple source drugs (section II.K.) of this 
final rule. Comments pertaining to calculating the offset for line 
extension drugs are addressed in the Treatment of new formulations 
section (section II.G.2.) of this final rule.

F. Accounting Statement and Table

    As required by OMB's Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in the Table 5 we have 
prepared an accounting statement showing the classification of the 
transfers and costs associated with the provisions of this proposed 
rule.

     Table 5--Accounting Statement: Classification of Estimated Transfers and Costs, From FFYs 2016 to 2020
                                                 [in $Millions]
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Category                                                             Transfers
----------------------------------------------------------------------------------------------------------------
Annualized Monetized Transfers..  Year Dollar........              Discount Rate             Period Covered
                                                      --------------------------------------
                                  2015...............                 7%                 3%  FFYs 2016-2020.
                                  Primary Estimate...            -$316.9            -$319.8  ...................
                                 -------------------------------------------------------------------------------
From/To.........................     Reduction in transfers from the Federal Government to State Governments.
----------------------------------------------------------------------------------------------------------------
Category                                                             Transfers
----------------------------------------------------------------------------------------------------------------
Annualized Monetized Transfers..  Year Dollar........              Discount Rate             Period Covered
                                                      --------------------------------------
                                  2015...............                 7%                 3%  FFYs 2016-2020.
                                  Primary Estimate...            -$221.5            -$223.5  ...................
                                 -------------------------------------------------------------------------------
From/To.........................    Reduction in transfers from the State Governments to Retail Pharmacies and
                                         increased transfers from Drug Manufacturers to State Governments.*
----------------------------------------------------------------------------------------------------------------
Category                                                               Costs
----------------------------------------------------------------------------------------------------------------
                                  Year Dollar........           Units Discount Rate          Period Covered
                                                      --------------------------------------

[[Page 5346]]

 
                                  2015...............                 7%                 3%  FFYs 2016-2020.
                                  Primary Estimate...              $94.9              $90.0  ...................
                                 -------------------------------------------------------------------------------
                                                      Costs to Drug Manufacturers and States
----------------------------------------------------------------------------------------------------------------
* If manufacturers respond to the rule by increasing prices, these estimates will overstate the transfer effects
  and some portion of transfers will be borne by non-Medicaid consumers of the affected drugs.

G. Conclusion

    In the proposed rule, we estimated savings from this regulation of 
$17.7 billion over 5 years (2010 through 2014), $13.7 billion to the 
federal government and $4.0 billion to the states (77 FR 5353). Most of 
these savings resulted from the increased rebate percentages on brand 
name drugs and the offsets of the total savings of the increased rebate 
percentage, treatment of new formulations, and from the collection of 
rebates from enrollees of Medicaid MCOs, all of which have been in 
effect since 2010 and are already accounted for in the Medicaid 
baseline. We estimate the savings from the implementation of the FULs 
as revised in this final rule of $2.735 billion over 5 years (2016 
through 2020), $1.61 billion to the federal government and $1.125 
billion to the states. Lastly, we estimate costs to drug manufacturers 
and states of $431.96 million for FFYs 2016 through 2020.
    While the effects of this regulation are substantial, they are 
primarily a result of changes in the statute.

V. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) requires agencies to analyze 
options for regulatory relief of small entities, if a rule has a 
significant impact on a substantial number of small entities. For 
purposes of the RFA, small entities include small businesses, non-
profit organizations, and small governmental jurisdictions. Individuals 
and States are not included in the definition of a small entity. For 
purposes of the RFA, three types of small businesses are potentially 
impacted by this final rule. These include small retail community 
pharmacies, small pharmaceutical manufacturers participating in the 
Medicaid Drug Rebate Program, and small Medicaid managed care 
organizations (MCOs). More detailed analysis on the impact of these 
entities is provided in the Detailed Economic Analysis section (section 
IV.D.) of this final rule. The great majority of hospitals and most 
other health care providers and suppliers are small entities, either by 
being nonprofit organizations or by meeting the Small Business 
Administration's (SBA) definition of a small business (having revenues 
of less than $7.5 million to $38.5 million in any 1 year).
    For purposes of the RFA, most of the retail pharmacies are 
considered small businesses according to the SBA's size standards with 
total revenues of $27.5 million or less in any 1 year (https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf). The 
latest data from National Community Pharmacist Association (NCPA) 
estimates that there are approximately 22,814 independent community 
pharmacies in 2013. With 73 percent of the independent pharmacies owned 
by single owner which are likely to meet the threshold of small 
entities, the possible small pharmacies would be about 16,654. These 
pharmacies would be affected by this regulation, which will result in 
lower FULs for most drugs subject to the payment limits. The lower FULs 
may result in reduced Medicaid payments to pharmacies for generic 
drugs, depending on how much pharmacies are paid currently under the 
approved Medicaid state plans. The savings for section 2503 of the 
Affordable Care Act reflect this statutory change. CMS proposes to 
replace the term ``estimated acquisition cost'' (EAC) with Actual 
Acquisition Cost (AAC) and require States to begin paying pharmacy 
providers based on the AAC of the drug. Additionally States will 
reimburse providers with a comparable dispensing fee as mentioned in 
Sec.  447.502 of this final rule. There will be a savings for states 
and the federal government for reimbursing pharmacists at AAC because 
of the highly inflated prices that the Medicaid programs are currently 
reimbursing providers.
    According to the SBA size standards, drug manufacturers are 
considered small businesses if they have fewer than 750 employees (Code 
325412, (https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf). Approximately 610 drug manufacturers 
currently participate in the Medicaid Drug Rebate Program. We believe 
most manufacturers are small businesses and anticipate this final rule 
would have an impact on small drug manufacturers.
    The rule would require all drug manufacturers participating in the 
Medicaid Drug Rebate program to increase the rebate percentages that 
they are currently paying. Manufacturers are required by the Affordable 
Care Act to pay the increased percentages. The savings for sections 
2501(a)(1), 2501(b) and 2501(d) Affordable Care Act reflect this 
statutory change.
    According to the SBA's size standards, an HMO, of which we have 
included MCOs, is considered a small business if it has revenues of 
$32.5 million or less in any 1 year (https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf). The Census of Bureau (http://www.census.gov/econ/susb/index.html) estimates that there are 
approximately 104 HMO/MCO Medical centers with an average revenue of 
$22 million annually. Because of limited data available, we are unable 
to quantify exactly how many MCOs fall within the HMO standard and meet 
the $32.5 million threshold, and contend that less than half of MCOs 
meet this standard. The small Medicaid MCOs may be affected by this 
rule if manufacturers reduce rebate payments to them to any extent that 
these rebates are paid to the states but these costs would likely be 
mitigated because it is likely that the MCOs rates would be adjusted.
    Therefore, the Secretary has determined that this proposed rule 
would have a significant economic impact on a substantial number of 
small entities. We offer an analysis of the alternatives considered in 
section IV.E. of this final rule. The preceding economic analysis, 
together with the remainder of this preamble, constitutes the 
regulatory flexibility analysis.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a 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. We do not expect this 
final rule to have a significant

[[Page 5347]]

impact on small rural hospitals although they are required to place 
NDCs on all claims, including MCO claims, for physician administered 
drugs since states are required to bill manufacturers for rebates for 
these drugs. However, the impact on these entities would be minimal 
because there would be no other requirement except for providing NDC 
numbers for physician administered drugs. Therefore, the Secretary has 
determined that this final rule would not have a significant impact on 
the operations of a substantial number of small rural hospitals. At 
this time, we are unable to specifically estimate quantitative effects 
on small retail pharmacies, particularly those in low income areas 
where there are high concentrations of Medicaid beneficiaries.

VI. Unfunded Mandates Reform Act Analysis

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that includes a federal mandate that could result in 
expenditure in any 1 year by state, local or tribal governments, in the 
aggregate, or by the private sector, of $100 million in 1995 dollars, 
updated annually for inflation. In 2015, that threshold level is 
approximately $144 million. This final rule imposes no mandate on drug 
manufacturers and other private entities. We believe the rule would not 
impose additional mandates on states and local governments. This final 
rule has tribal implications, and in accordance with E.O. 13175 and the 
HHS Tribal Consultation Policy (December 2010), CMS will consult with 
Tribal officials prior to the formal promulgation of this regulation.

VII. Federalism Analysis

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues 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. This final rule does not impose substantial direct 
requirement costs on state or local governments, preempts state law, or 
otherwise has federalism implications.

VIII. Congressional Review Act

    This final regulation is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and has been transmitted to the Congress 
and the Comptroller General for review.
    In accordance with the provisions of Executive Order 12866, this 
final rule 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 recordkeeping requirements, Rural areas.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services amends 42 CFR chapter IV 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. Subpart I is revised to read as follows:
Subpart I--Payment for Drugs
Sec.
447.500 Basis and purpose.
447.502 Definitions.
447.504 Determination of average manufacturer price.
447.505 Determination of best price.
447.506 Authorized generic drugs.
447.507 Identification of inhalation, infusion, instilled, 
implanted, or injectable drugs (5i drugs).
447.508 Exclusion from best price of certain sales at a nominal 
price.
447.509 Medicaid drug rebates (MDR).
447.510 Requirements for manufacturers.
447.511 Requirements for States.
447.512 Drugs: Aggregate upper limits of payment.
447.514 Upper limits for multiple source drugs.
447.516 Upper limits for drugs furnished as part of services.
447.518 State plan requirements, findings, and assurances.
447.520 Federal Financial Participation (FFP): Conditions relating 
to physician-administered drugs.
447.522 Optional coverage of investigational drugs and other drugs 
not subject to rebate.


Sec.  447.500  Basis and purpose.

    (a) Basis. This subpart:
    (1) Interprets those provisions of section 1927 of the Act that set 
forth requirements for drug manufacturers' calculating and reporting 
average manufacturer prices (AMPs) and best prices and that set upper 
payment limits for covered outpatient drugs.
    (2) Implements section 1903(i)(10) of the Act with regard to the 
denial of Federal financial participation (FFP) in expenditures for 
certain physician-administered drugs.
    (3) Implements section 1902(a)(54) of the Act with regard to a 
State plan that provides covered outpatient drugs.
    (4) Implements section 1903(m)(2)(A)(xiii) of the Act, in part, and 
section 1927(b) of the Act with regard to rebates for covered 
outpatient drugs dispensed to individuals eligible for medical 
assistance who are enrolled in Medicaid managed care organizations 
(MCOs).
    (5) Implements section 1902(a)(30)(A) of the Act with regard to the 
efficiency, economy, and quality of care in the context of payments for 
covered outpatient drugs.
    (b) Purpose. This subpart specifies certain requirements in the 
Social Security Act, including changes from the Affordable Care Act and 
other requirements pertaining to Medicaid payment for drugs.


Sec.  447.502  Definitions.

    For the purpose of this subpart, the following definitions apply:
    Actual acquisition cost (AAC) means the agency's determination of 
the pharmacy providers' actual prices paid to acquire drug products 
marketed or sold by specific manufacturers.
    Authorized generic drug means any drug sold, licensed, or marketed 
under a new drug application (NDA) approved by the Food and Drug 
Administration (FDA) under section 505(c) of the Federal Food, Drug and 
Cosmetic Act (FFDCA) that is marketed, sold or distributed under a 
different labeler code, product code, trade name, trademark, or 
packaging (other than repackaging the listed drug for use in 
institutions) than the brand name drug.
    Bona fide service fee means a fee paid by a manufacturer to an 
entity that represents fair market value for a bona fide, itemized 
service actually performed on behalf of the manufacturer that the 
manufacturer would otherwise perform (or contract for) in the absence 
of the service arrangement, and that is not passed on in whole or in 
part to a client or customer of an entity, whether or not the entity 
takes title to the drug. The fee includes, but is not limited to, 
distribution service fees, inventory management fees, product stocking 
allowances, and fees associated with administrative service agreements 
and patient care programs (such as medication compliance programs and 
patient education programs).
    Brand name drug means a single source or innovator multiple source 
drug.
    Bundled sale means any arrangement regardless of physical packaging 
under

[[Page 5348]]

which the rebate, discount, or other price concession is conditioned 
upon the purchase of the same drug, drugs of different types (that is, 
at the nine-digit national drug code (NDC) level) or another product or 
some other performance requirement (for example, the achievement of 
market share, inclusion or tier placement on a formulary), or where the 
resulting discounts or other price concessions are greater than those 
which would have been available had the bundled drugs been purchased 
separately or outside the bundled arrangement.
    (1) The discounts in a bundled sale, including those discounts 
resulting from a contingent arrangement, are allocated proportionally 
to the total dollar value of the units of all drugs or products sold 
under the bundled arrangement.
    (2) For bundled sales where multiple drugs are discounted, the 
aggregate value of all the discounts in the bundled arrangement must be 
proportionally allocated across all the drugs or products in the 
bundle.
    Clotting factor means a hemophilia clotting factor for which a 
separate furnishing payment is made under section 1842(o)(5) of the Act 
and which is included on a list of such factors specified and updated 
regularly by CMS and posted on the CMS Web site.
    Consumer Price Index--Urban (CPI-U) means the index of consumer 
prices developed and updated by the U.S. Department of Labor. It is the 
CPI for all urban consumers (U.S. average) for the month before the 
beginning of the calendar quarter for which the rebate is paid.
    Covered outpatient drug means, of those drugs which are treated as 
a prescribed drug for the purposes of section 1905(a)(12) of the Act, a 
drug which may be dispensed only upon a prescription (except as 
provided in paragraphs (2) and (3) of this definition).
    (1) A drug can only be considered a covered outpatient drug if it:
    (i) Is approved for safety and effectiveness as a prescription drug 
by the FDA under section 505 or 507 of the FFDCA or under section 
505(j) of the FFDCA;
    (ii) Was commercially used or sold in the United States before the 
enactment of the Drug Amendments of 1962 or which is identical, 
similar, or related (within the meaning described in FDA regulations at 
21 CFR 310.6(b)(1)) to such a drug, and which has not been the subject 
of a final determination by the Secretary that it is a ``new drug'' 
(within the meaning of section 201(p) of the FFDCA) or an action 
brought by the Secretary under sections 301, 302(a), or 304(a) of FFDCA 
to enforce section 502(f) or 505(a) of the FFDCA;
    (iii) Is 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 
(within the meaning described in FDA regulations at 21 CFR 310.6(b)(1)) 
to such a drug or for which the Secretary has not issued a notice for 
an opportunity for a hearing under section 505(e) of the FFDCA on a 
proposed order of the Secretary to withdraw approval of an application 
for such drug under section 505(e) of the FFDCA 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;
    (iv) Is a biological product other than a vaccine that may only be 
dispensed upon a prescription and is licensed under section 351 of the 
Public Health Service Act (PHSA) and is produced at an establishment 
licensed under section 351 of the PHSA to produce such product; or
    (v) Is insulin certified under section 506 of the FFDCA.
    (2) A covered outpatient drug does not include any drug, biological 
product, or insulin provided as part of or incident to and in the same 
setting as any of the following services (and for which payment may be 
made as part of that service instead of as a direct reimbursement for 
the drug):
    (i) Inpatient Services;
    (ii) Hospice Services;
    (iii) Dental Services, except that drugs for which the State plan 
authorizes direct reimbursement to the dispensing dentist are covered 
outpatient drugs;
    (iv) Physician services;
    (v) Outpatient hospital services;
    (vi) Nursing facility and services provided by an intermediate care 
facility for individuals with intellectual disabilities;
    (vii) Other laboratory and x-ray services; or
    (viii) Renal dialysis.
    (3) A covered outpatient drug does not include:
    (i) Any drug product, prescription or over-the-counter (OTC), for 
which an NDC number is not required by the FDA;
    (ii) Any drug product for which a manufacturer has not submitted to 
CMS evidence to demonstrate that the drug product satisfies the 
criteria in paragraph (1) of this definition;
    (iii) Any drug product or biological used for a medical indication 
which is not a medically accepted indication; or
    (iv) Over-the-counter products that are not drugs.
    Customary prompt pay discount means any discount off of the 
purchase price of a drug routinely offered by the manufacturer to a 
wholesaler for prompt payment of purchased drugs within a specified 
timeframe and consistent with customary business practices for payment.
    Innovator multiple source drug means a multiple source drug that 
was originally marketed under an original new drug application (NDA) 
approved by FDA, including an authorized generic drug. It also includes 
a drug product marketed by any cross-licensed producers, labelers, or 
distributors operating under the NDA and a covered outpatient drug 
approved under a biologics license application (BLA), product license 
application (PLA), establishment license application (ELA) or 
antibiotic drug application (ADA). For purposes of this definition and 
the Medicaid drug rebates (MDR) program, an original NDA means an NDA, 
other than an Abbreviated New Drug Application (ANDA), approved by the 
FDA for marketing, unless CMS determines that a narrow exception 
applies.
    Lagged price concession means any discount or rebate that is 
realized after the sale of the drug, but does not include customary 
prompt pay discounts.
    Manufacturer means any entity that holds the NDC for a covered 
outpatient drug or biological product and meets the following criteria:
    (1) Is engaged in the production, preparation, propagation, 
compounding, conversion, or processing of covered outpatient 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
    (2) Is engaged in the packaging, repackaging, labeling, relabeling, 
or distribution of covered outpatient drug products and is not a 
wholesale distributor of drugs or a retail pharmacy licensed under 
State law.
    (3) For authorized generic products, the term ``manufacturer'' will 
also include the original holder of the NDA.
    (4) For drugs subject to private labeling arrangements, the term 
``manufacturer'' will also include the entity under whose own label or 
trade name the product will be distributed.
    Multiple source drug means, for a rebate period, a covered 
outpatient drug for which there is at least one other drug product 
which meets the following criteria:
    (1) Is rated as therapeutically equivalent as reported in the FDA's

[[Page 5349]]

``Approved Drug Products with Therapeutic Equivalence Evaluations'' 
which is available at http://www.accessdata.fda.gov/scripts/cder/ob/.
    (2) Is pharmaceutically equivalent and bioequivalent, as determined 
by the FDA.
    (3) Is sold or marketed in the United States during the rebate 
period.
    National drug code (NDC) means the numerical code maintained by the 
FDA that includes the labeler code, product code, and package code. For 
purposes of this subpart, the NDC is considered to be an 11-digit code, 
unless otherwise specified in this subpart as being without regard to 
package size (that is, the 9-digit numerical code).
    National rebate agreement means the rebate agreement developed by 
CMS and entered into by CMS on behalf of the Secretary or his or her 
designee and a manufacturer to implement section 1927 of the Act.
    Nominal price means a price that is less than 10 percent of the 
average manufacturer price (AMP) in the same quarter for which the AMP 
is computed.
    Noninnovator multiple source drug means:
    (1) A multiple source drug that is not an innovator multiple source 
drug or a single source drug;
    (2) A multiple source drug that is marketed under an ANDA or an 
abbreviated antibiotic drug application;
    (3) A covered outpatient drug that entered the market before 1962 
that was not originally marketed under an NDA;
    (4) Any drug that has not gone through an FDA approval process, but 
otherwise meets the definition of covered outpatient drug; or
    (5) If any of the drug products listed in this definition of a 
noninnovator multiple source drug subsequently receives an NDA or ANDA 
approval from FDA, the product's drug category changes to correlate 
with the new product application type.
    Oral solid dosage form means capsules, tablets, or similar drugs 
products intended for oral use as defined in accordance with FDA 
regulation at 21 CFR 206.3 that defines solid oral dosage form.
    Over-the-counter (OTC) drug means a drug that is appropriate for 
use without the supervision of a health care professional such as a 
physician, and which can be purchased by a consumer without a 
prescription.
    Pediatric indication means a specifically stated indication for use 
by the pediatric age group meaning from birth through 16 years of age, 
or a subset of this group as specified in the ``Indication and Usage'' 
section of the FDA approved labeling, or in an explanation elsewhere in 
the labeling that makes it clear that the drug is for use only in a 
pediatric age group, or a subset of this group.
    Professional dispensing fee means the professional fee which:
    (1) Is incurred at the point of sale or service and pays for costs 
in excess of the ingredient cost of a covered outpatient drug each time 
a covered outpatient drug is dispensed;
    (2) Includes only pharmacy costs associated with ensuring that 
possession of the appropriate covered outpatient drug is transferred to 
a Medicaid beneficiary. Pharmacy costs include, but are not limited to, 
reasonable costs associated with a pharmacist's time in checking the 
computer for information about an individual's coverage, performing 
drug utilization review and preferred drug list review activities, 
measurement or mixing of the covered outpatient drug, filling the 
container, beneficiary counseling, physically providing the completed 
prescription to the Medicaid beneficiary, delivery, special packaging, 
and overhead associated with maintaining the facility and equipment 
necessary to operate the pharmacy; and
    (3) Does not include administrative costs incurred by the State in 
the operation of the covered outpatient drug benefit including systems 
costs for interfacing with pharmacies.
    Rebate period means a calendar quarter.
    Single source drug means a covered outpatient drug that is produced 
or distributed under an original NDA approved by FDA and has an 
approved NDA number issued by FDA, including a drug product marketed by 
any cross-licensed producers or distributors operating under the NDA. 
It also includes a covered outpatient drug approved under a biologics 
license application (BLA), product license application (PLA), 
establishment license application (ELA), or antibiotic drug application 
(ADA). For purposes of this definition and the MDR program, an original 
NDA means an NDA, other than an ANDA, approved by the FDA for 
marketing, unless CMS determines that a narrow exception applies.
    States means the 50 States and the District of Columbia and 
beginning April 1, 2017, also includes the Commonwealth of Puerto Rico, 
the Virgin Islands, Guam, the Northern Mariana Islands and American 
Samoa.
    United States means the 50 States and the District of Columbia and 
beginning April 1, 2017 also includes the Commonwealth of Puerto Rico, 
the Virgin Islands, Guam, the Northern Mariana Islands, and American 
Samoa.
    Wholesaler means a drug wholesaler that is engaged in wholesale 
distribution of prescription drugs to retail community pharmacies, 
including but not limited to manufacturers, repackers, distributors, 
own-label distributors, private-label distributors, jobbers, brokers, 
warehouses (including manufacturer's and distributor's warehouses, 
chain drug warehouses, and wholesale drug warehouses), independent 
wholesale drug traders, and retail community pharmacies that conduct 
wholesale distributions.


Sec.  447.504  Determination of average manufacturer price.

    (a) Definitions. For the purpose of this section, the following 
definitions apply:
    Average manufacturer price (AMP) means, for a covered outpatient 
drug of a manufacturer (including those sold under an NDA approved 
under section 505(c) of the Federal Food, Drug, and Cosmetic Act), the 
average price paid to the manufacturer for the drug in the United 
States by wholesalers for drugs distributed to retail community 
pharmacies and retail community pharmacies that purchase drugs directly 
from the manufacturer.
    Average unit price means a manufacturer's sales included in AMP 
less all required adjustments divided by the total units sold and 
included in AMP by the manufacturer in a quarter.
    Charitable and not-for profit pharmacies means organizations exempt 
from taxation as defined by section 501(c)(3) of the Internal Revenue 
Code of 1986.
    Insurers means entities that are responsible for payment to 
pharmacies for drugs dispensed to their members, and do not take actual 
possession of these drugs or pass on manufacturer discounts or rebates 
to pharmacies.
    Net sales means quarterly gross sales revenue less cash discounts 
allowed, except customary prompt pay discounts extended to wholesalers, 
and all other price reductions (other than rebates under section 1927 
of the Act or price reductions specifically excluded by statute or 
regulation) which reduce the amount received by the manufacturer.
    Retail community pharmacy means an independent pharmacy, a chain 
pharmacy, a supermarket pharmacy, or a mass merchandiser pharmacy that 
is licensed as a pharmacy by the State and that dispenses medications 
to the general public at retail prices. Such term does not include a 
pharmacy that dispenses prescription medications to patients primarily 
through the mail, nursing home pharmacies, long-term

[[Page 5350]]

care facility pharmacies, hospital pharmacies, clinics, charitable or 
not-for-profit pharmacies, government pharmacies, or pharmacy benefit 
managers.
    (b) Sales, nominal price sales, and associated discounts, rebates, 
payments, or other financial transactions included in AMP. Except for 
those sales, nominal price sales, and associated discounts, rebates, 
payments or other financial transactions identified in paragraph (c) of 
this section, AMP for covered outpatient drugs includes the following 
sales, nominal price sales, and associated discounts, rebates, 
payments, or other financial transactions:
    (1) Sales to wholesalers for drugs distributed to retail community 
pharmacies.
    (2) Sales to other manufacturers who act as wholesalers for drugs 
distributed to retail community pharmacies.
    (3) Sales to retail community pharmacies (including those sales, 
nominal price sales, and associated discounts, rebates (other than 
rebates under section 1927 of the Act or as specified in regulations), 
payments, or other financial transactions that are received by, paid 
by, or passed through to retail community pharmacies).
    (c) Sales, nominal price sales, and associated discounts, rebates, 
payments, or other financial transactions excluded from AMP. AMP 
excludes the following sales, nominal price sales, and associated 
discounts, rebates, payments, or other financial transactions:
    (1) Any prices on or after October 1, 1992, to the Indian Health 
Service (IHS), the Department of Veterans Affairs (DVA), a State home 
receiving funds under 38 U.S.C. 1741, the Department of Defense (DoD), 
the Public Health Service (PHS), or a covered entity described in 
section 1927(a)(5)(B) of the Act (including inpatient prices charged to 
hospitals described in section 340B(a)(4)(L) of the PHSA).
    (2) Any prices charged under the Federal Supply Schedule (FSS) of 
the General Services Administration (GSA).
    (3) Any depot prices (including TRICARE) and single award contract 
prices, as defined by the Secretary, of any agency of the Federal 
government.
    (4) Sales outside the United States.
    (5) Sales to hospitals.
    (6) Sales to health maintenance organizations (HMOs) (including 
managed care organizations (MCOs)), including HMO or MCO operated 
pharmacies.
    (7) Sales to long-term care providers, including nursing facility 
pharmacies, nursing home pharmacies, long-term care facilities, 
contract pharmacies for the nursing facility where these sales can be 
identified with adequate documentation, and other entities where the 
drugs are dispensed through a nursing facility pharmacy, such as 
assisted living facilities.
    (8) Sales to mail order pharmacies.
    (9) Sales to clinics and outpatient facilities (for example, 
surgical centers, ambulatory care centers, dialysis centers, and mental 
health centers).
    (10) Sales to government pharmacies (for example, a Federal, State, 
county, or municipal-owned pharmacy).
    (11) Sales to charitable pharmacies.
    (12) Sales to not-for-profit pharmacies.
    (13) Sales, associated rebates, discounts, or other price 
concessions paid directly to insurers.
    (14) Bona fide service fees, as defined in Sec.  447.502, paid by 
manufacturers to wholesalers or retail community pharmacies.
    (15) Customary prompt pay discounts extended to wholesalers.
    (16) Reimbursement by the manufacturer for recalled, damaged, 
expired, or otherwise unsalable returned goods, including (but not 
limited to) reimbursement for the cost of the goods and any 
reimbursement of costs associated with return goods handling and 
processing, reverse logistics, and drug destruction, but only to the 
extent that such payment covers only those costs.
    (17) Associated discounts, rebates, or other price concessions 
provided under the Medicare Coverage Gap Discount Program under section 
1860D-14A of the Act.
    (18) Payments received from and rebates and discounts provided to 
pharmacy benefit manufacturers (PBMs).
    (19) Rebates under the national rebate agreement or a CMS-
authorized State supplemental rebate agreement paid to State Medicaid 
Agencies under section 1927 of the Act.
    (20) Sales to hospices (inpatient and outpatient).
    (21) Sales to prisons.
    (22) Sales to physicians.
    (23) Direct sales to patients.
    (24) Free goods, not contingent upon any purchase requirement.
    (25) Manufacturer coupons to a consumer redeemed by the 
manufacturer, agent, pharmacy or another entity acting on behalf of the 
manufacturer, but only to the extent that the full value of the coupon 
is passed on to the consumer and the pharmacy, agent, or other AMP-
eligible entity does not receive any price concession.
    (26) Manufacturer-sponsored programs that provide free goods, 
including but not limited to vouchers and patient assistance programs, 
but only to the extent that: The voucher or benefit of such a program 
is not contingent on any other purchase requirement; the full value of 
the voucher or benefit of such a program is passed on to the consumer; 
and the pharmacy, agent, or other AMP eligible entity does not receive 
any price concession.
    (27) Manufacturer-sponsored drug discount card programs, but only 
to the extent that the full value of the discount is passed on to the 
consumer and the pharmacy, agent, or other AMP eligible entity does not 
receive any price concession.
    (28) Manufacturer-sponsored patient refund/rebate programs, to the 
extent that the manufacturer provides a full or partial refund or 
rebate to the patient for out-of-pocket costs and the pharmacy, agent, 
or other AMP eligible entity does not receive any price concessions.
    (29) Manufacturer copayment assistance programs, to the extent that 
the program benefits are provided entirely to the patient and the 
pharmacy, agent, or other AMP eligible entity does not receive any 
price concession.
    (30) Any rebates, discounts, or price concessions provided to a 
designated State Pharmacy Assistance Program (SPAP).
    (d) Sales, nominal price sales, and associated discounts, rebates, 
payments, or other financial transactions included in AMP for 5i drugs 
that are not generally dispensed through retail community pharmacies. 
Except for those sales, nominal price sales, and associated discounts, 
rebates, payments, and other financial transactions identified in 
paragraph (e) of this section, AMP for inhalation, infusion, instilled, 
implanted, or injectable drugs (5i) covered outpatient drugs identified 
in accordance with Sec.  447.507 shall include sales, nominal price 
sales, and associated discounts, rebates, payments, or other financial 
transactions to all entities specified in paragraph (b) of this 
section, as well as the following sales, nominal price sales, and 
associated discounts, rebates, payments, or other financial 
transactions:
    (1) Sales to physicians.
    (2) Sales to pharmacy benefit managers.
    (3) Sales to health maintenance organizations (HMOs), including 
managed care organizations (MCOs).
    (4) Sales to insurers (except for rebates under section 1927 of the 
Act and this subpart).
    (5) Sales to hospitals.
    (6) Sales to clinics and outpatient facilities (for example, 
surgical centers,

[[Page 5351]]

ambulatory care centers, dialysis centers, mental health centers).
    (7) Sales to mail order pharmacies.
    (8) Sales to long-term care providers, including nursing facility 
pharmacies, nursing home pharmacies, long-term care facilities, 
contract pharmacies for the nursing facility where these sales can be 
identified with adequate documentation, and other entities where the 
drugs are dispensed through a nursing facility pharmacy, such as 
assisted living facilities.
    (9) Sales to hospices (inpatient and outpatient).
    (10) Sales to manufacturers, or any other entity that does not 
conduct business as a wholesaler or retail community pharmacy.
    (e) Sales, nominal price sales, and associated discounts, rebates, 
payments, or other transactions excluded from AMP for 5i drugs that are 
not generally dispensed through retail community pharmacies. AMP for 5i 
covered outpatient drugs identified in accordance with Sec.  447.507 
excludes the following sales, nominal price sales, and associated 
discounts, rebates, or other financial transactions:
    (1) Any prices on or after October 1, 1992, to the Indian Health 
Service (IHS), the Department of Veterans Affairs (DVA), a State home 
receiving funds under 38 U.S.C. 1741, the Department of Defense (DoD), 
the Public Health Service (PHS), or a covered entity described in 
section 1927(a)(5)(B) of the Act (including inpatient prices charged to 
hospitals described in section 340B(a)(4)(L) of the PHSA).
    (2) Any prices charged under the Federal Supply Schedule (FSS) of 
the General Services Administration (GSA).
    (3) Any depot prices (including TRICARE) and single award contract 
prices, as defined by the Secretary, of any agency of the Federal 
government.
    (4) Sales outside the United States.
    (5) Bona fide service fees as defined in Sec.  447.502 paid by 
manufacturers to wholesalers or retail community pharmacies.
    (6) Customary prompt pay discounts extended to wholesalers.
    (7) Reimbursement by the manufacturer for recalled, damaged, 
expired, or otherwise unsalable returned goods, including (but not 
limited to) reimbursement for the cost of the goods and any 
reimbursement of costs associated with return goods handling and 
processing, reverse logistics, and drug destruction, but only to the 
extent that such payment covers only these costs.
    (8) Any prices charged which are negotiated by a prescription drug 
plan under Part D of title XVIII, by any MA-PD plan under Part C of 
such title for covered Part D drugs, or by a Qualified Retiree 
Prescription Drug Plan (as defined in section 1860D-22(a)(2) of the 
Act) for such drugs on behalf of individuals entitled to benefits under 
Part A or enrolled under Part B of Medicare, or any discounts provided 
by manufacturers under the Medicare coverage gap discount program under 
section 1860D-14A of the Act.
    (9) Rebates under the national rebate agreement or a CMS-authorized 
State supplemental rebate agreement paid to State Medicaid Agencies 
under section 1927 of the Act.
    (10) Any rebates, discounts, or price concessions provided to a 
designated State Pharmacy Assistance Program (SPAP).
    (11) Sales to patients.
    (12) Free goods, not contingent upon any purchase requirement.
    (13) Manufacturer coupons to a consumer redeemed by the 
manufacturer, agent, pharmacy or another entity acting on behalf of the 
manufacturer, but only to the extent that the full value of the coupon 
is passed on to the consumer and the pharmacy, agent, or other AMP 
eligible entity does not receive any price concession.
    (14) Manufacturer-sponsored programs that provide free goods, 
including, but not limited to vouchers and patient assistance programs, 
but only to the extent that the voucher or benefit of such a program is 
not contingent on any other purchase requirement; the full value of the 
voucher or benefit of such a program is passed on to the consumer; and 
the pharmacy, agent, or other AMP eligible entity does not receive any 
price concession.
    (15) Manufacturer-sponsored drug discount card programs, but only 
to the extent that the full value of the discount is passed on to the 
consumer and the pharmacy, agent, or other AMP eligible entity does not 
receive any price concession.
    (16) Manufacturer-sponsored patient refund/rebate programs, to the 
extent that the manufacturer provides a full or partial refund or 
rebate to the patient for out-of-pocket costs and the pharmacy, agent, 
or other AMP eligible entity does not receive any price concessions.
    (17) Manufacturer copayment assistance programs, to the extent that 
the program benefits are provided entirely to the patient and the 
pharmacy, agent, or other AMP eligible entity does not receive any 
price concession.
    (18) Sales to government pharmacies (for example, a Federal, State, 
county, or municipal-owned pharmacy).
    (19) Sales to charitable pharmacies.
    (20) Sales to not-for-profit pharmacies.
    (f) Further clarification of AMP calculation. (1) AMP includes cash 
discounts except customary prompt pay discounts extended to 
wholesalers, free goods that are contingent on any purchase 
requirement, volume discounts, chargebacks that can be identified with 
adequate documentation, incentives, administrative fees, service fees, 
distribution fees (other than bona fide service fees), and any other 
rebates, discounts or other financial transactions, other than rebates 
under section 1927 of the Act, which reduce the price received by the 
manufacturer for drugs distributed to retail community pharmacies.
    (2) Quarterly AMP is calculated as a weighted average of monthly 
AMPs in that quarter.
    (3) The manufacturer must adjust the AMP for a rebate period if 
cumulative discounts, rebates, or other arrangements subsequently 
adjust the prices actually realized, to the extent that such cumulative 
discounts, rebates, or other arrangements are not excluded from the 
determination of AMP by statute or regulation.


Sec.  447.505  Determination of best price.

    (a) Definitions. For the purpose of this section, the following 
definitions apply:
    Best price means, for a single source drug or innovator multiple 
source drug of a manufacturer (including the lowest price available to 
any entity for an authorized generic drug), the lowest price available 
from the manufacturer during the rebate period to any wholesaler, 
retailer, provider, health maintenance organization, nonprofit entity, 
or governmental entity in the United States in any pricing structure 
(including capitated payments), in the same quarter for which the AMP 
is computed.
    Provider means a hospital, HMO, including an MCO, or entity that 
treats or provides coverage or services to individuals for illnesses or 
injuries or provides services or items in the provision of health care.
    (b) Prices included in best price. Except for those prices 
identified in paragraph (c) of this section, best price for covered 
outpatient drugs includes all prices, including applicable discounts, 
rebates, or other transactions that adjust prices either directly or 
indirectly to the best price-eligible entities listed in paragraph (a) 
of this section.
    (c) Prices excluded from best price. Best price excludes the 
following:

[[Page 5352]]

    (1) Any prices on or after October 1, 1992, charged to the IHS, the 
DVA, a State home receiving funds under 38 U.S.C. 1741, the DoD, or the 
PHS.
    (2) Any prices charged to a covered entity described in section 
1927(a)(5)(B) of the Act (including inpatient prices charged to 
hospitals described in section 340B(a)(4)(L) of the PHSA).
    (3) Any prices charged under the FSS of the GSA.
    (4) Any prices, rebates, or discounts provided to a designated 
State Pharmacy Assistance Program (SPAP).
    (5) Any depot prices (including TRICARE) and single award contract 
prices, as defined by the Secretary, of any agency of the Federal 
government.
    (6) Any prices charged which are negotiated by a prescription drug 
plan under Part D of title XVIII, by any MA-PD plan under Part C of 
such title for covered Part D drugs, or by a Qualified Retiree 
Prescription Drug Plan (as defined in section 1860D-22(a)(2) of the 
Act) for such drugs on behalf of individuals entitled to benefits under 
Part A or enrolled under Part B of Medicare, or any discounts provided 
by manufacturers under the Medicare coverage gap discount program under 
section 1860D-14A of the Act.
    (7) Rebates under the national rebate agreement or a CMS-authorized 
supplemental rebate agreement paid to State Medicaid Agencies under 
section 1927 of the Act.
    (8) Manufacturer-sponsored drug discount card programs, but only to 
the extent that the full value of the discount is passed on to the 
consumer and the pharmacy, agent, or other entity does not receive any 
price concession.
    (9) Manufacturer coupons to a consumer redeemed by a consumer, 
agent, pharmacy, or another entity acting on behalf of the 
manufacturer; but only to the extent that the full value of the coupon 
is passed on to the consumer, and the pharmacy, agent, or other entity 
does not receive any price concession.
    (10) Manufacturer copayment assistance programs, to the extent that 
the program benefits are provided entirely to the patient and the 
pharmacy, agent, or other entity does not receive any price concession.
    (11) Manufacturer-sponsored patient refund or rebate programs, to 
the extent that the manufacturer provides a full or partial refund or 
rebate to the patient for out-of-pocket costs and the pharmacy, agent, 
or other entity does not receive any price concession.
    (12) Manufacturer-sponsored programs that provide free goods, 
including but not limited to vouchers and patient assistance programs, 
but only to the extent that the voucher or benefit of such a program is 
not contingent on any other purchase requirement; the full value of the 
voucher or benefit of such a program is passed on to the consumer; and 
the pharmacy, agent, or other entity does not receive any price 
concession.
    (13) Free goods, not contingent upon any purchase requirement.
    (14) Reimbursement by the manufacturer for recalled, damaged, 
expired, or otherwise unsalable returned goods, including, but not 
limited to, reimbursement for the cost of the goods and any 
reimbursement of costs associated with return goods handling and 
processing, reverse logistics, and drug destruction but only to the 
extent that such payment covers only these costs.
    (15) Nominal prices to certain entities as set forth in Sec.  
447.508.
    (16) Bona fide service fees as defined in Sec.  447.502.
    (17) PBM rebates, discounts, or other financial transactions except 
their mail order pharmacy's purchases or where such rebates, discounts, 
or other financial transactions are designed to adjust prices at the 
retail or provider level.
    (18) Sales outside the United States.
    (19) Direct sales to patients.
    (d) Further clarification of best price. (1) Best price is net of 
cash discounts, free goods that are contingent on any purchase 
requirement, volume discounts, customary prompt pay discounts, 
chargebacks, incentives, promotional fees, administrative fees, service 
fees (except bona fide service fees), distribution fees, and any other 
discounts or price reductions and rebates, other than rebates under 
section 1927 of the Act, which reduce the price available from the 
manufacturer.
    (2) Best price must be determined on a unit basis without regard to 
package size, special packaging, labeling, or identifiers on the dosage 
form or product or package.
    (3) The manufacturer must adjust the best price for a rebate period 
if cumulative discounts, rebates, or other arrangements subsequently 
adjust the prices available from the manufacturer.


Sec.  447.506  Authorized generic drugs.

    (a) Definitions. For the purpose of this section, the following 
definitions apply:
    Primary manufacturer means a manufacturer that holds the NDA of the 
authorized generic drug.
    Secondary manufacturer of an authorized generic drug means a 
manufacturer that is authorized by the primary manufacturer to sell the 
drug but does not hold the NDA.
    (b) Inclusion of authorized generic drugs in AMP by a primary 
manufacturer. The primary manufacturer must include in its calculation 
of AMP its sales of authorized generic drugs that have been sold or 
licensed to a secondary manufacturer, acting as a wholesaler for drugs 
distributed to retail community pharmacies, or when the primary 
manufacturer holding the NDA sells directly to a wholesaler.
    (c) Inclusion of authorized generic drugs in best price by a 
primary manufacturer. A primary manufacturer holding the NDA must 
include the best price of an authorized generic drug in its computation 
of best price for a single source or an innovator multiple source drug 
during a rebate period to any manufacturer, wholesaler, retailer, 
provider, HMO, non-profit entity, or governmental entity in the United 
States, only when such drugs are being sold by the manufacturer holding 
the NDA.
    (d) Inclusion of authorized generic in AMP and best price by a 
secondary manufacturer. The secondary manufacturer of an authorized 
generic drug must provide a rebate based on its sales of authorized 
generics, and must calculate AMP and best price, consistent with the 
requirements specified in Sec. Sec.  447.504 and 447.505.


Sec.  447.507  Identification of inhalation, infusion, instilled, 
implanted, or injectable drugs (5i drugs).

    (a) Identification of a 5i drug. A manufacturer must identify to 
CMS each covered outpatient drug that qualifies as a 5i drug.
    (b) Not generally dispensed through a retail community pharmacy. A 
manufacturer must determine if the 5i drug is not generally dispensed 
through a retail community pharmacy based on the percentage of sales to 
entities other than retail community pharmacies.
    (1) A 5i drug is not generally dispensed through a retail community 
pharmacy if 70 percent or more of the sales (based on units at the NDC-
9 level) of the 5i drug, were to entities other than retail community 
pharmacies or wholesalers for drugs distributed to retail community 
pharmacies.
    (2) A manufacturer is responsible for determining and reporting to 
CMS whether a 5i drug is not generally dispensed through a retail 
community pharmacy on a monthly basis.


Sec.  447.508  Exclusion from best price of certain sales at a nominal 
price.

    (a) Exclusion from best price. Sales of covered outpatient drugs by 
a manufacturer at nominal prices are

[[Page 5353]]

excluded from best price when purchased by the following entities:
    (1) A covered entity as described in section 340B(a)(4) of the 
PHSA.
    (2) An ICF/IID providing services as set forth in Sec.  440.150 of 
this chapter.
    (3) A State-owned or operated nursing facility providing services 
as set forth in Sec.  440.155 of this chapter.
    (4) A public or non-profit entity, or an entity based at an 
institution of higher learning whose primary purpose is to provide 
health care services to students of that institution, that provides 
family planning services described under section of 1001(a) of PHSA, 42 
U.S.C. 300.
    (5) An entity that:
    (i) Is described in section 501(c)(3) of the Internal Revenue Code 
of 1986 and exempt from tax under section 501(a) of that Act or is 
State-owned or operated; and
    (ii) Is providing the same services to the same type of population 
as a covered entity described in section 340B(a)(4) of the PHSA but 
does not receive funding under a provision of law referred to in such 
section.
    (b) Nonapplication. This restriction does not apply to sales by a 
manufacturer of covered outpatient drugs that are sold under a master 
agreement under 38 U.S.C. 8126.
    (c) Rule of construction. Nothing in this section is construed to 
alter any existing statutory or regulatory prohibition on services for 
an entity described paragraph (a)(5) of this section, including the 
prohibition set forth in section 1008 of the PHSA.


Sec.  447.509  Medicaid drug rebates (MDR).

    (a) Determination of rebate amount--(1) Basic rebate for single 
source drugs and innovator multiple source drugs. The amount of basic 
rebate for each dosage form and strength of a single source drug or an 
innovator multiple source drug is equal to the product of:
    (i) The total number of units of each dosage form and strength paid 
for under the State plan in the rebate period (as reported by the 
State); and
    (ii) The greater of:
    (A) The difference between the AMP and the best price for the 
dosage form and strength of the drug; or
    (B) The AMP for the dosage form and strength of the drug multiplied 
by one of the following percentages:
    (1) For a clotting factor, 17.1 percent;
    (2) For a drug approved by FDA exclusively for pediatric 
indications, 17.1 percent; or
    (3) For all other single source drugs and innovator multiple source 
drugs, 23.1 percent.
    (2) Additional rebate for single source and innovator multiple 
source drugs. In addition to the basic rebate described in paragraph 
(a)(1) of this section, for each dosage form and strength of a single 
source drug or an innovator multiple source drug, the rebate amount 
will be increased by an amount equal to the product of the following:
    (i) The total number of units of such dosage form and strength paid 
for under the State plan in the rebate period.
    (ii) The amount, if any, by which:
    (A) The AMP for the dosage form and strength of the drug for the 
period exceeds:
    (B) The base date AMP for such dosage form and strength, increased 
by the percentage by which the consumer price index for all urban 
consumers (United States city average) for the month before the month 
in which the rebate period begins exceeds such index associated with 
the base date AMP of the drug.
    (3) Total rebate. The total rebate amount for single source drugs 
and innovator multiple source drugs is equal to the basic rebate amount 
plus the additional rebate amount, if any.
    (4) Treatment of new formulations. (i) In the case of a drug that 
is a line extension of a single source drug or an innovator multiple 
source drug that is an oral solid dosage form, the rebate obligation is 
the amount computed under paragraphs (a)(1) through (3) of this section 
for such new drug or, if greater, the product of all of the following:
    (A) The AMP of the line extension of a single source drug or an 
innovator multiple source drug that is an oral solid dosage form.
    (B) The highest additional rebate (calculated as a percentage of 
AMP) under this section for any strength of the original single source 
drug or innovator multiple source drug.
    (C) The total number of units of each dosage form and strength of 
the line extension product paid for under the State plan in the rebate 
period (as reported by the State).
    (ii) The alternative rebate is required to be calculated if the 
manufacturer of the line extension drug also manufactures the initial 
brand name listed drug or has a corporate relationship with the 
manufacturer of the initial brand name listed drug.
    (5) Limit on rebate. In no case will the total rebate amount exceed 
100 percent of the AMP of the drug.
    (6) Rebate for noninnovator multiple source drugs. The amount of 
the rebate for each dosage form and strength of a noninnovator multiple 
source drug will be equal to the product of:
    (i) The total number of units of such dosage form and strength for 
which payment was made under the State plan for the rebate period; and
    (ii) The AMP for the dosage form and strength for the rebate period 
multiplied by 13 percent.
    (b) Rebates for drugs dispensed through Medicaid managed care 
organizations (MCOs). (1) Manufacturers participating in the Medicaid 
drug rebate program will provide a rebate for covered outpatient drugs 
dispensed to individuals enrolled in Medicaid MCOs if the MCO is 
contractually required to provide such drugs.
    (2) Manufacturers are exempt from the requirement in paragraph 
(b)(1) of this section if such drugs are the following:
    (i) Dispensed by health maintenance organizations including MCOs 
that contract under section 1903(m) of the Act; and
    (ii) Discounted under section 340B of the PHSA.
    (c) Federal offset of rebates. States must remit to the Federal 
government the amount of the savings resulting from the following 
increases in the rebate percentages.
    (1) For single source or innovator multiple source drugs other than 
blood clotting factors and drugs approved by FDA exclusively for 
pediatric indications:
    (i) If AMP minus best price is less than or equal to AMP times 15.1 
percent, then the offset amount is the full 8.0 percent of AMP (the 
difference between 23.1 percent of AMP and 15.1 percent of AMP).
    (ii) If AMP minus best price is greater than AMP times 15.1 percent 
but less than AMP times 23.1 percent, then the offset amount is the 
difference between AMP times 23.1 percent and AMP minus best price.
    (iii) If AMP minus best price is equal to or greater than AMP times 
23.1 percent, then there is no offset amount.
    (2) For single source or innovator multiple source drugs that are 
clotting factors and drugs approved by FDA exclusively for pediatric 
indications that are subject to a rebate percentage of 17.1 percent of 
AMP:
    (i) If AMP minus best price is less than or equal to AMP times 15.1 
percent, then the offset amount is the full 2.0 percent of AMP (the 
difference between 17.1 percent of AMP and 15.1 percent of AMP).
    (ii) If AMP minus best price is greater than AMP times 15.1 percent 
but less than AMP times 17.1 percent, then the offset amount is the 
difference between AMP times 17.1 percent and AMP minus best price.
    (iii) If AMP minus best price is equal to or greater than AMP times 
17.1 percent, then there is no offset amount.

[[Page 5354]]

    (3) For a drug that is a line extension of a single source or 
innovator multiple source drug that is an oral solid dosage form, the 
offset amount is the difference between the unit rebate amount (URA) 
calculation for the drug calculated based on the applicable rebate 
percentage in section 1927 of the Act prior to the Affordable Care Act 
and the calculation of the URA for the line extension drug, if greater, 
in accordance with the Affordable Care Act.
    (4) For noninnovator multiple source drugs, the offset amount is 
equal to 2.0 percent of the AMP (the difference between 13.0 percent of 
AMP and 11.0 percent of AMP).


Sec.  447.510  Requirements for manufacturers.

    (a) Quarterly reports. A manufacturer must report product and 
pricing information for covered outpatient drugs to CMS not later than 
30 days after the end of the rebate period. The quarterly pricing 
report must include the following:
    (1) AMP, calculated in accordance with Sec.  447.504.
    (2) Best price, calculated in accordance with Sec.  447.505.
    (3) Customary prompt pay discounts, which are reported as an 
aggregate dollar amount for each covered outpatient drug at the nine-
digit NDC level, provided to all wholesalers in the rebate period.
    (4) Prices that fall within the nominal price exclusion, which are 
reported as an aggregate dollar amount and include all sales of single 
source and innovator multiple source drugs to the entities listed in 
Sec.  447.508(a) for the rebate period.
    (b) Reporting revised quarterly AMP, best price, customary prompt 
pay discounts, or nominal prices. (1) A manufacturer must report to CMS 
any revision to AMP, best price, customary prompt pay discounts, or 
nominal prices for a period not to exceed 12 quarters from the quarter 
in which the data were due. Any revision request that exceeds 12 
quarters will not be considered, except for the following reasons:
    (i) The change is a result of the drug category change or a market 
date change.
    (ii) The change is an initial submission for a product.
    (iii) The change is due to termination of a manufacturer from the 
MDR program for failure to submit pricing data and must submit pricing 
data to reenter the program.
    (iv) The change is due to a technical correction; that is, not 
based on any changes in sales transactions or pricing adjustments from 
such transactions.
    (v) The change is to address specific rebate adjustments to States 
by manufacturers, as required by CMS or court order, or under an 
internal investigation, or an OIG or Department of Justice (DOJ) 
investigation.
    (2) A manufacturer must report revised AMP within the 12-quarter 
time period, except when the revision would be solely as a result of 
data pertaining to lagged price concessions.
    (c) Base date AMP report--(1) Reporting period. A manufacturer may 
report a revised Deficit Reduction Act (DRA) base date AMP to CMS 
within the first 4 full calendar quarters following July 17, 2007.
    (2) Recalculation of the DRA base date AMP. (i) A manufacturer's 
recalculation of the DRA base date AMP must only reflect the revisions 
to AMP as provided for in Sec.  447.504 in effect from October 1, 2007 
to December 14, 2010.
    (ii) A manufacturer may choose to recalculate the DRA base date AMP 
on a product-by-product basis.
    (iii) A manufacturer must use actual and verifiable pricing records 
in recalculating the DRA base date AMP.
    (3) Reporting a revised Affordable Care Act base date AMP. A 
manufacturer may report a revised Affordable Care Act base date AMP to 
CMS within the first 4 full calendar quarters following April 1, 2016.
    (4) Recalculation of the Affordable Care Act base date AMP. (i) A 
manufacturer's recalculation of the Affordable Care Act base date AMP 
must only reflect the revisions to AMP as provided for in Sec.  
447.504.
    (ii) A manufacturer may choose to recalculate the Affordable Care 
Act base date AMP on a product-by-product basis.
    (iii) A manufacturer must use actual and verifiable pricing records 
in recalculating the Affordable Care Act base date AMP.
    (d) Monthly AMP--(1) Definition. Monthly AMP means the AMP that is 
calculated on a monthly basis. A manufacturer must submit a monthly AMP 
to CMS not later than 30 days after the last day of each prior month.
    (2) Calculation of monthly AMP. Monthly AMP is calculated based on 
Sec.  447.504, except the period covered is based on monthly, as 
opposed to quarterly, sales.
    (i) The monthly AMP is calculated based on the weighted average of 
prices for all the manufacturer's package sizes of each covered 
outpatient drug sold by the manufacturer during a month.
    (ii) It is calculated as net sales divided by number of units sold, 
excluding goods or any other items specifically excluded in the statute 
or regulations. Monthly AMP is calculated based on the best data 
available to the manufacturer at the time of submission.
    (iii) In calculating monthly AMP, a manufacturer must estimate the 
impact of its lagged AMP-eligible price concessions using a 12-month 
rolling percentage in accordance with the methodology described in this 
paragraph (d)(2).
    (A) For each NDC-9 with at least 12 months of AMP-eligible sales, 
after adjusting for sales excluded from AMP, the manufacturer 
calculates a percentage equal to the sum of the price concessions for 
the most recent 12-month period (inclusive of the current reporting 
period) available associated with sales subject to the AMP reporting 
requirement divided by the total in dollars for the sales subject to 
the AMP reporting requirement for the same 12-month period.
    (B) For each NDC-9 with less than 12 months of AMP-eligible sales, 
the calculation described in paragraph (d)(2)(iii)(A) of this section 
is performed for the time period equaling the total number of months of 
AMP-eligible sales.
    (iv) The manufacturer multiplies the applicable percentage 
described in paragraph (d)(2)(iii)(A) or (B) of this section by the 
total in dollars for the sales subject to the AMP reporting requirement 
(after adjusting for sales excluded from AMP) for the month being 
submitted. The result of this multiplication is then subtracted from 
the total in dollars for the sales subject to the AMP reporting 
requirement (after adjusting for sales excluded from AMP) for the month 
being submitted.
    (v) The manufacturer uses the result of the calculation described 
in paragraph (d)(2)(iv) of this section as the numerator and the number 
of units sold in the month (after adjusting for sales excluded from 
AMP) as the denominator to calculate the manufacturer's AMP for the NDC 
for the month being submitted.
    (vi) Example. After adjusting for sales excluded from AMP, the 
total lagged price concessions over the most recent 12-month period 
available associated with sales for NDC 12345-6789 subject to the AMP 
reporting requirement equal $200,000, and the total in dollars for the 
sales subject to the AMP reporting requirement for the same period 
equals $600,000. The lagged price concessions percentage for this 
period equals 200,000/600,000 = 0.33333. The total in dollars for the 
sales subject to the AMP

[[Page 5355]]

reporting requirement for the month being reported equals $50,000 for 
10,000 units sold. The manufacturer's AMP calculation for this NDC for 
this month is: $50,000-(0.33333 x $50,000) = $33,334 (net total sales 
amount); $33,334/10,000 = $3.33340 (AMP).
    (3) Timeframe for reporting revised monthly AMP. A manufacturer 
must report to CMS revisions to monthly AMP for a period not to exceed 
36 months from the month in which the data were due, except as allowed 
in paragraph (b)(1) of this section.
    (4) Exception. A manufacturer must report revisions to monthly AMP 
within the 36-month time period, except when the revision would be 
solely as a result of data pertaining to lagged price concessions.
    (5) Terminated products. A manufacturer must not report a monthly 
AMP for a terminated product beginning with the first month after the 
expiration date of the last lot sold.
    (6) Monthly AMP units. A manufacturer must report the total number 
of units that are used to calculate the monthly AMP in the same unit 
type as used to compute the AMP to CMS not later than 30 days after the 
last day of each month.
    (e) Certification of pricing reports. Each report submitted under 
paragraphs (a) through (d) of this section must be certified by one of 
the following:
    (1) The manufacturer's chief executive officer (CEO).
    (2) The manufacturer's chief financial officer (CFO).
    (3) An individual other than a CEO or CFO, who has authority 
equivalent to a CEO or a CFO; or
    (4) An individual with the directly delegated authority to perform 
the certification on behalf of an individual described in paragraphs 
(e)(1) through (3) of this section.
    (f) Recordkeeping requirements. (1) A manufacturer must retain 
records (written or electronic) for 10 years from the date the 
manufacturer reports data to CMS for that rebate period.
    (i) The records must include these data and any other materials 
from which the calculations of the AMP, the best price, customary 
prompt pay discounts, and nominal prices are derived, including a 
record of any assumptions made in the calculations.
    (ii) The 10-year timeframe applies to a manufacturer's quarterly 
and monthly submissions of pricing data, as well as any revised pricing 
data subsequently submitted to CMS.
    (2) A manufacturer must retain records beyond the 10-year period if 
all of the following circumstances exist:
    (i) The records are the subject of an audit, or of a government 
investigation related to pricing data that are used in AMP, best price, 
customary prompt pay discounts, or nominal prices of which the 
manufacturer is aware.
    (ii) The audit findings or investigation related to the AMP, best 
price, customary prompt pay discounts, or nominal price have not been 
resolved.
    (g) Data reporting format. All product and pricing data, whether 
submitted on a quarterly or monthly basis, must be submitted to CMS in 
an electronic format designated by CMS.


Sec.  447.511  Requirements for States.

    (a) Invoices submitted to participating drug manufacturers. Within 
60 days of the end of each quarter, the State must bill participating 
drug manufacturers an invoice which includes, at a minimum, all of the 
following data:
    (1) The State code.
    (2) National Drug Code.
    (3) Period covered.
    (4) Product FDA list name.
    (5) Unit rebate amount.
    (6) Units reimbursed.
    (7) Rebate amount claimed.
    (8) Number of prescriptions.
    (9) Medicaid amount reimbursed.
    (10) Non-Medicaid amount reimbursed.
    (11) Total amount reimbursed.
    (b) Data submitted to CMS. On a quarterly basis, the State must 
submit drug utilization data to CMS, which will be the same information 
as submitted to the manufacturers.
    (c) State that has participating Medicaid Managed care 
organizations (MCO). A State that has participating Medicaid managed 
care organizations (MCO) which includes covered outpatient drugs in its 
contracts with the MCOs, must report data described in paragraph (a) of 
this section for covered outpatient drugs dispensed to individuals 
eligible for medical assistance who are enrolled with the MCO and for 
which the MCO is required under contract for coverage of such drugs 
under section 1903 of the Act. These data must be identified separately 
from the data pertaining to drugs that the State reimburses on a fee-
for-service basis.


Sec.  447.512  Drugs: Aggregate upper limits of payment.

    (a) Multiple source drugs. Except for brand name drugs that are 
certified in accordance with paragraph (c) of this section, the agency 
payment for multiple source drugs must not exceed, in the aggregate, 
the amount that would result from the application of the specific 
limits established in accordance with Sec.  447.514. If a specific 
limit has not been established under Sec.  447.514, then the rule for 
``other drugs'' set forth in paragraph (b) of this section applies.
    (b) Other drugs. The agency payments for brand name drugs certified 
in accordance with paragraph (c) of this section and drugs other than 
multiple source drugs for which a specific limit has been established 
under Sec.  447.514 must not exceed, in the aggregate, payment levels 
that the agency has determined by applying the lower of the following:
    (1) AAC plus a professional dispensing fee established by the 
agency; or
    (2) Providers' usual and customary charges to the general public.
    (c) Certification of brand name drugs. (1) The upper limit for 
payment for multiple source drugs for which a specific limit has been 
established under Sec.  447.514 does not apply if a physician certifies 
in his or her own handwriting (or by an electronic alternative means 
approved by the Secretary) that a specific brand is medically necessary 
for a particular beneficiary.
    (2) The agency must decide what certification form and procedure 
are used.
    (3) A check off box on a form is not acceptable but a notation like 
``brand necessary'' is allowable.
    (4) The agency may allow providers to keep the certification forms 
if the forms will be available for inspection by the agency or HHS.


Sec.  447.514  Upper limits for multiple source drugs.

    (a) Establishment and issuance of a listing. (1) CMS will establish 
and issue listings that identify and set upper limits for multiple 
source drugs available for purchase by retail community pharmacies on a 
nationwide basis that FDA has rated at least three drug products as 
pharmaceutically and therapeutically equivalent in the ``Approved Drug 
Products with Therapeutic Equivalence Evaluations'' which is available 
at http://www.accessdata.fda.gov/scripts/cder/ob/. Only 
pharmaceutically and therapeutically equivalent formulations will be 
used to determine such limit, and such limit will only be applied to 
those equivalent drug products.
    (2) CMS publishes the list of multiple source drugs for which upper 
limits have been established and any revisions to the list in Medicaid 
Program issuances.
    (b) Specific upper limits. (1) The agency's payments for multiple 
source drugs identified and listed periodically

[[Page 5356]]

by CMS in Medicaid Program issuances must not exceed, in the aggregate, 
prior to the application of any federal or state drug rebate 
considerations, payment levels determined by applying for each 
pharmaceutically and therapeutically equivalent multiple source drug 
product, a professional dispensing fee established by the state agency 
plus an amount established by CMS that is equal to 175 percent of the 
weighted average of the most recently reported monthly AMPs for such 
multiple source drugs, using manufacturer submitted utilization data 
for each multiple source drug for which a Federal upper limit (FUL) is 
established.
    (2) Exception. If the amount established by CMS in paragraph (b)(1) 
of this section for a pharmaceutically and therapeutically equivalent 
multiple source drug product is lower than the average retail community 
pharmacies' acquisition cost for such drug product, as determined by 
the most current national survey of such costs, CMS will use a percent 
of the weighted average of the most recently reported monthly AMPs that 
equals the most current average acquisition costs paid by retail 
community pharmacies as determined by such survey.
    (c) Ensuring a drug is for sale nationally. To assure that a 
multiple source drug is for sale nationally, CMS will consider the 
following additional criteria:
    (1) The AMP of a terminated NDC will not be used to set the Federal 
upper limit (FUL) beginning with the first day of the month after the 
termination date reported by the manufacturer to CMS.
    (2) The monthly AMP units data will be used to calculate the 
weighted average of monthly AMPs for all multiple source drugs to 
establish the FUL.
    (d) The FUL will be applied as an aggregate upper limit.


Sec.  447.516  Upper limits for drugs furnished as part of services.

    The upper limits for payment for prescribed drugs in this subpart 
also apply to payment for drugs provided as part of skilled nursing 
facility services and intermediate care facility services and under 
prepaid capitation arrangements.


Sec.  447.518  State plan requirements, findings, and assurances.

    (a) State plan. (1) The State plan must describe comprehensively 
the agency's payment methodology for prescription drugs, including the 
agency's payment methodology for drugs dispensed by all of the 
following:
    (i) A covered entity described in section 1927(a)(5)(B) of the Act.
    (ii) A contract pharmacy under contract with a covered entity 
described in section 1927(a)(5)(B) of the Act.
    (iii) An Indian Health Service, tribal and urban Indian pharmacy.
    (2) The agency's payment methodology in paragraph (a)(1) of this 
section must be in accordance with the definition of AAC in Sec.  
447.502.
    (b) Findings and assurances. Upon proposing significant State plan 
changes in payments for prescription drugs, and at least annually for 
multiple source drugs and triennially for all other drugs, the agency 
must make the following findings and assurances:
    (1) Findings. The agency must make the following separate and 
distinct findings:
    (i) In the aggregate, its Medicaid expenditures for multiple source 
drugs, identified and listed in accordance with Sec.  447.514(a), are 
in accordance with the upper limits specified in Sec.  447.514(b).
    (ii) In the aggregate, its Medicaid expenditures for all other 
drugs are in accordance with Sec.  447.512.
    (2) Assurances. The agency must make assurances satisfactory to CMS 
that the requirements set forth in Sec. Sec.  447.512 and 447.514 
concerning upper limits and in paragraph (b)(1) of this section 
concerning agency findings are met.
    (c) Recordkeeping. The agency must maintain and make available to 
CMS, upon request, data, mathematical or statistical computations, 
comparisons, and any other pertinent records to support its findings 
and assurances.
    (d) Data requirements. When proposing changes to either the 
ingredient cost reimbursement or professional dispensing fee 
reimbursement, States are required to evaluate their proposed changes 
in accordance with the requirements of this subpart, and States must 
consider both the ingredient cost reimbursement and the professional 
dispensing fee reimbursement when proposing such changes to ensure that 
total reimbursement to the pharmacy provider is in accordance with 
requirements of section 1902(a)(30)(A) of the Act. States must provide 
adequate data such as a State or national survey of retail pharmacy 
providers or other reliable data other than a survey to support any 
proposed changes to either or both of the components of the 
reimbursement methodology. States must submit to CMS the proposed 
change in reimbursement and the supporting data through a State plan 
amendment through the formal review process.


Sec.  447.520  Federal Financial Participation (FFP): Conditions 
relating to physician-administered drugs.

    (a) No FFP is available for physician-administered drugs for which 
a State has not required the submission of claims using codes that 
identify the drugs sufficiently for the State to bill a manufacturer 
for rebates.
    (1) As of January 1, 2006, a State must require providers to submit 
claims for single source, physician-administered drugs using Healthcare 
Common Procedure Coding System codes or NDC numbers to secure rebates.
    (2) As of January 1, 2007, a State must require providers to submit 
claims for physician-administered single source drugs and the 20 
multiple source drugs identified by the Secretary using NDC numbers.
    (b) As of January 1, 2008, a State must require providers to submit 
claims for the 20 multiple source physician-administered drugs 
identified by the Secretary as having the highest dollar value under 
the Medicaid Program using NDC numbers to secure rebates.
    (c) A State that requires additional time to comply with the 
requirements of this section may apply to the Secretary for an 
extension.


Sec.  447.522  Optional coverage of investigational drugs and other 
drugs not subject to rebate.

    (a) Medicaid coverage of investigational drugs may be provided at 
State option under section 1905(a)(12) of the Act when such drug is the 
subject of an investigational new drug application (IND) that has been 
allowed by FDA to proceed.
    (b) A State agency electing to provide coverage of an 
investigational drug must include in its State plan a description of 
the coverage and payment for such drug.
    (c) The State plan must indicate that any reimbursement for 
investigational drugs by the State are consistent with FDA regulations 
at 21 CFR part 312 if they are to be eligible to receive FFP for these 
drugs.
    (d) Medicaid coverage of other drugs may be provided at State 
option under section 1905(a)(12) of the Act provided that they are not 
eligible to be covered as covered outpatient drugs in the Medicaid Drug 
Rebate program.
    (e) Investigational drugs and other drugs are not subject to the 
rebate requirements of section 1927 of the Act provided they do not 
meet the definition of a covered outpatient drug as set forth in 
section 1927(k) of the Act.


[[Page 5357]]


    Dated: October 1, 2015.
Andrew M. Slavitt,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Dated: November 24, 2015.
Sylvia M. Burwell,
Secretary, Department of Health and Human Services.
[FR Doc. 2016-01274 Filed 1-21-16; 4:15 pm]
 BILLING CODE 4120-01-P