Federal Register, Volume 81 Issue 20 (Monday, February 1, 2016)

[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

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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\
---------------------------------------------------------------------------

\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.''

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[[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,

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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

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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

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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

[[Page 5270]]

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

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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

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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

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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).

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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.

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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

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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

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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)

[[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

[[Page 5293]]

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

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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.

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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

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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

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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

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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,

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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

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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.

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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.

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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

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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.

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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