[Federal Register Volume 88, Number 102 (Friday, May 26, 2023)]
[Proposed Rules]
[Pages 34238-34296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-10934]



[[Page 34237]]

Vol. 88

Friday,

No. 102

May 26, 2023

Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Parts 433, 438, and 447





 Medicaid Program; Misclassification of Drugs, Program Administration 
and Program Integrity Updates Under the Medicaid Drug Rebate Program; 
Proposed Rules

  Federal Register / Vol. 88 , No. 102 / Friday, May 26, 2023 / 
Proposed Rules  

[[Page 34238]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 433, 438, and 447

[CMS-2434-P]
RIN 0938-AU28


Medicaid Program; Misclassification of Drugs, Program 
Administration and Program Integrity Updates Under the Medicaid Drug 
Rebate Program

AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of 
Health and Human Services (HHS).

ACTION: Proposed rule.

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SUMMARY: This proposed rule would seek to implement policies in the 
Medicaid Drug Rebate Program (MDRP) related to the new legislative 
requirements in the Medicaid Services Investment and Accountability Act 
of 2019 (MSIAA), which are needed to address drug misclassification, as 
well as drug pricing and product data misreporting by manufacturers. 
Additionally, we are proposing several other program integrity and 
program administration provisions or modifications in this proposed 
rule including revising and proposing key definitions used in the MDRP. 
This proposed rule also designates a time limitation on manufacturers 
initiating audits with States; clarifies and establishes requirements 
for State fee-for-service (FFS) pharmacy reimbursement; codifies 
conditions relating to States claiming FFP for physician-administered 
drugs (PADs); clarifies the requirement of accumulating price 
concessions when determining best price; designates drug price 
verification and transparency through data collection; and proposes two 
new contracting requirements between States and their Medicaid managed 
care plans. In addition, this rule includes a proposal unrelated to 
MDRP that would make revisions to the third-party liability regulation 
due to Bipartisan Budget Act (BBA) of 2018. Finally, we are proposing 
to rescind revisions made by the December 31, 2020 final rule 
``Medicaid Program; Establishing Minimum Standards in Medicaid State 
Drug Utilization Review (DUR) and Supporting Value-Based Purchasing 
(VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug Rebate and 
Third Party Liability (TPL) Requirements'' to the Determination of Best 
Price and Determination of Average Manufacturer Price (AMP) sections.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, by July 25, 2023.

ADDRESSES: In commenting, please refer to file code CMS-2434-P.
    Comments, including mass comment submissions, must be submitted in 
one of the following three ways (please choose only one of the ways 
listed):
    1. Electronically. You may submit electronic comments on this 
regulation to https://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    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-2434-P, P.O. Box: 8016, 
Baltimore, MD 21244-8016.
    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-2434-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: 
    Ruth Blatt, (410) 786-1767, for issues related to the definitions 
of vaccine, noninnovator multiple-source drug, market date, and covered 
outpatient drug (COD).
    Ginger Boscas, (410) 786-3098, for issues related to third party 
liability.
    Michael Forman, (410) 786-2666, for issues related to physician-
administered drugs.
    Whitney Swears (410) 786-6543, for issues related to time 
limitation on audits, definition of vaccine, diagnosis on 
prescriptions, professional dispensing fees, definition of a 
manufacturer.
    Christine Hinds, (410) 786-4578, for issues related to internal 
investigation, removal of manufacturer rebate cap, drug cost 
transparency in Medicaid managed care contracts, ``stacking'' when 
determining best price, and drug price verification through data 
collection.
    Lisa Shochet, (410) 786-5445, for issues related to Beneficiary 
Identification Number and Processor Control Number (BIN/PCN) and drug 
misclassifications.
    Terry Simananda, (410) 786-8144, for issues related to the 
Collection of Information and Regulatory Impact Analysis sections.

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 
website as soon as possible after they have been received: https://www.regulations.gov. Follow the search instructions on that website to 
view public comments. CMS will not post on Regulations.gov public 
comments that make threats to individuals or institutions or suggest 
that the individual will take actions to harm the individual. CMS 
continues to encourage individuals not to submit duplicative comments. 
We will post acceptable comments from multiple unique commenters even 
if the content is identical or nearly identical to other comments.

I. Background

A. Introduction

    Under the Medicaid program, States may provide coverage of 
prescribed drugs as an optional benefit 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. In the case of a State that provides for medical 
assistance for covered outpatient drugs (CODs), as provided under 
section 1902(a)(54) of the Act, the State must comply with the 
requirements of section 1927 of the Act. Section 1927 of the Act 
governs the Medicaid Drug Rebate Program (MDRP) and payment for CODs, 
which are defined in section 1927(k)(2) of the Act. In general, for 
payment to be made available for CODs under section 1903(a) of the Act, 
manufacturers must enter into a National Drug Rebate Agreement (NDRA) 
as set forth in section 1927(a) of the Act. See also section 
1903(i)(10) of the Act. The rebates paid by manufacturers to States 
help to partially offset the Federal and State costs of most outpatient 
prescription drugs dispensed to Medicaid beneficiaries. The MDRP 
provides specific requirements for manufacturer rebate agreements, drug 
pricing submission and confidentiality requirements, the formulas for 
calculating rebate payments, drug utilization reviews (DUR), and 
requirements for States for CODs.
    With limited exceptions, if a manufacturer wants payment to be

[[Page 34239]]

available under Medicaid for their CODs, the manufacturer must 
participate (have entered into and have in effect a rebate agreement) 
in the MDRP, and agree to pay rebates for CODs dispensed and paid for 
under the State Plan. The amount of the rebate is determined by a 
formula set forth in section 1927(c) of the Act. Generally, the formula 
to calculate the rebate that applies to a particular drug depends on 
whether the drug is classified as (1) a single source drug (S drug) or 
innovator multiple source drug (I drug) (commonly referred to as a 
brand-name drug), or (2) other drugs, which include noninnovator 
multiple source drugs (N drug), commonly referred to as generic drugs, 
among others.
    Consistent with section 1927(b)(3)(A) of the Act, a manufacturer 
must report and certify certain drug product and drug pricing 
information for CODs to CMS not later than 30 days after the last day 
of each month and certain drug pricing information and drug product 
data 30 days after the last day of each quarter of a rebate period. For 
example, drug pricing information that manufacturers must submit and 
certify includes average manufacturer price (AMP) and best price data 
in addition to other information consistent with section 1927(b)(3)(A) 
of the Act each quarter. We use the reported data to calculate an 
accurate unit rebate amount (URA) for each covered outpatient drug to 
assist States with billing manufacturers for rebates. Drug product 
information that is reported includes the name of the drug, its 
National Drug Code (NDC), drug category, and drug type, among other 
items. However, manufacturers ultimately remain responsible for 
accurately calculating the URA for their drug products. Manufacturers 
pay rebates to States for each unit of the drug dispensed and paid for 
under the State Plan on the basis of the URA.
    Thus, the failure of a manufacturer to submit and certify timely 
monthly and quarterly pricing and drug product data for a drug may 
impede the States' ability to invoice and collect appropriate rebate 
amounts. If a manufacturer fails to submit timely information, or 
misreports information, we may be unable to establish accurate URAs due 
to the misreporting or late reporting. While we provide URAs to the 
States each quarter to help facilitate billing manufacturers for 
rebates, it is ultimately the manufacturer's responsibility to assure 
that accurate rebates are paid to States for their CODs.
    One specific element of drug product information that is required 
to be submitted by manufacturers includes drug category or drug 
classification information. Generally, drugs classified as single 
source or innovator multiple source pay higher rebates than those that 
are classified as an ``other drug,'' such as noninnovator multiple 
source drugs. In accordance with section 1927(c) of the Act and 42 CFR 
447.509, the rebate calculation for a particular COD may also include 
an additional inflationary component to account for increases in the 
drug's Average Manufacturer's Price from the base date AMP quarter to 
the current calendar quarter's AMP. That is, this additional rebate is 
generally calculated based on the difference between the drug's current 
quarter AMP and its base date AMP adjusted to the current period by the 
Consumer Price Index for All Urban Consumers (CPI-U).
    Prior to the enactment of the Medicaid Services Investment and 
Accountability Act of April 2019 (MSIAA) (Pub. L. 116-16; enacted April 
18, 2019), section 1927(k)(7)(A)(iv) of the Act defined a single source 
drug as a covered outpatient drug which is produced or distributed 
under an original new drug application. Section 1927(k)(7)(A)(ii) of 
the Act similarly defined an innovator multiple source drug as a 
multiple source drug that was originally marketed under an original new 
drug application. A noninnovator multiple source drug was defined at 
section 1927(k)(7)(A)(iii) of the Act as a multiple source drug that is 
not an innovator multiple source drug.
    Prior to the 2016 Medicaid Covered Outpatient Drug final rule with 
comment period (COD final rule) (81 FR 5170), the regulatory 
definitions of a single source and an innovator multiple source drug 
largely mirrored the statute and defined a drug as a single source or 
innovator multiple source drug based on whether it was produced, 
distributed, or marketed under an ``original new drug application.'' 
The statute did not expressly define ``original NDA''. However, CMS' 
longstanding interpretation of the term was that an original new drug 
application (NDA) is an NDA approved under section 505(b)(1) or (2) of 
the Federal Food, Drug, and Cosmetic Act (FFDCA), as distinguished from 
one approved under an abbreviated NDA (ANDA) under section 505(j) of 
the FFDCA (Manufacturer's Release 113).
    We codified new regulatory definitions of single source and 
innovator multiple source drugs in the COD final rule and added a 
narrow exception for ``certain drugs [that] might be more appropriately 
treated as if they were approved under an ANDA and classified as a 
noninnovator multiple source drug'' (81 FR 5191). The COD final rule 
also added a drug approved under a Biologics License Application (BLA) 
to the definition of single source drug (81 FR 5203).
    In the COD final rule, we also introduced a process by which drug 
manufacturers could submit a request for a narrow exception to have us 
recognize individual drugs approved under an NDA as noninnovator 
multiple source drugs prospectively from the effective date of the COD 
final rule. Instructions to manufacturers regarding this process were 
included in Manufacturer Release #98, May 2, 2016 (https://www.medicaid.gov/medicaid-chip-program-information/by-topics/prescription-drugs/downloads/rx-releases/mfr-releases/mfr-rel-098.pdf). 
The COD final rule did not, however, excuse manufacturers from their 
obligation to correctly report drugs approved under an NDA as either 
single source or innovator multiple source drugs prior to the effective 
date of the COD final rule, which was April 1, 2016.
    Yet, notwithstanding our interpretation of the statute, many 
manufacturers have disregarded our reasonable interpretation of the 
statute and have continued to misreport drugs marketed under an NDA as 
noninnovator multiple source drugs for periods prior to April 1, 2016 
(Manufacturer Release #113-https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf).

B. Amendments Made by the Medicaid Services Investment and 
Accountability Act of 2019 (MSIAA) to Section 1927 of the Act Regarding 
MDRP Drug Classification Enforcement and Penalties

    Section 6 of the MSIAA, titled ``Preventing the Misclassification 
of Drugs Under the Medicaid Drug Rebate Program,'' amended sections 
1903 and 1927 of the Act to specify the definitions for multiple source 
drug, single source drug and innovator multiple source drug, and to 
provide the Secretary with additional compliance, oversight and 
enforcement authorities to ensure compliance with program requirements 
with respect to manufacturers' reporting of drug product and pricing 
information, which includes the appropriate classification of a drug. 
Drug classification refers to how a drug should be classified--as a 
single source, innovator multiple source, or noninnovator multiple 
source drug for the purposes of determining the correct rebates that a 
manufacturer owes

[[Page 34240]]

the States.\1\ In general, a misclassification in the MDRP occurs when 
a manufacturer reports and certifies its covered outpatient drug under 
a drug category that is not supported by the statutory and regulatory 
definitions of S, I, or N. A drug that is misclassified is likely 
paying different rebates to States than those supported by statute and 
regulation.
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    \1\ Section 1927(c)(3) of the Act describes rebates for ``other 
drugs'' and section 1927(c)(3)(A) of the Act, more specifically 
describes rebates for covered outpatient drugs ``other than single 
source drugs and innovator multiple source drugs.'' The MDRP 
reporting system provides for all ``other drugs'' that are covered 
outpatient drugs to be classified in the system as N drugs, 
regardless of whether they expressly meet the definition of 
noninnovator multiple source drug. This reporting methodology has 
been in effect for the history of the program and interested parties 
have understood that a covered outpatient drug that was not an S or 
an I drug is reported in the system as an N drug. In a later section 
of this proposed rule, we are proposing changes to the regulatory 
definition of a N drug to more clearly align with the statutory 
definition of N drug. This is a technical change and is not intended 
to modify any reporting requirements.
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    We published guidance to manufacturers regarding compliance with 
drug pricing and drug product information reporting under this new law 
in Manufacturer Release #113 on June 5, 2020. See https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf. Here, 
although much of this law is self-implementing, we are proposing a 
series of regulatory amendments at Sec. Sec.  447.509 and 447.510 to 
implement and codify the statutory changes in regulation. We propose 
that a misclassification of a drug under the MDRP has occurred or is 
occurring when a manufacturer reports and certifies to the agency a 
drug category or drug product information relating to that COD that is 
not supported by the statutory and regulatory definitions of S, I, or 
N. We also define a misclassification as a situation in which a 
manufacturer is correctly reporting its drug category or drug product 
information for a COD, but is paying a different rebate amount to the 
States than is supported by the classification.
    The MSIAA also amended the Act to expressly require a manufacturer 
to report not later than 30 days after the last day of each month of a 
rebate period under the agreement, such drug product information as the 
Secretary shall require for each of the manufacturer's covered 
outpatient drugs. We are proposing a definition of ``drug product 
information'' for the purposes of the MDRP.
    Similarly, the MSIAA amended the Act to specify that the reporting 
of false drug product information and data related to false drug 
product information would also be subject to possible civil monetary 
penalties (CMPs) by the HHS Office of the Inspector General (OIG), and 
to provide specific new authority to the Secretary to issue civil 
monetary penalties related to knowing misclassifications of drug 
product or misreported information. These new OIG authorities will not 
be the subject of this rulemaking.
    Under the MSIAA, if a manufacturer fails to correct the 
misclassification of a drug in a timely manner after receiving 
notification from the agency that the drug is misclassified, in 
addition to the manufacturer having to pay past unpaid rebates to the 
States for the misclassified drug if applicable, the Secretary can take 
any or all of the following actions: (1) correct the misclassification, 
using drug product information provided by the manufacturer on behalf 
of the manufacturer; (2) suspend the misclassified drug, and the drug's 
status as a covered outpatient drug under the manufacturer's national 
rebate agreement, and exclude the misclassified drug from FFP 
(correlating amendments to section 1903 of the Act); and, (3) impose 
CMPs for each rebate period during which the drug is misclassified 
subject to certain limitations. The Act expressly provides that the 
imposition of such penalties may be in addition to other remedies, such 
as termination from the MDRP, or CMPs under Title XI.
    The manufacturer has an affirmative legal obligation to correctly 
report all necessary drug product and pricing information to the agency 
on a timely basis as described in the statute and regulations. When 
issues or questions regarding a drug's classification arise, we 
generally rely upon various sources of information to be able to 
determine if a drug is misclassified in MDRP. In its oversight role, 
the agency will use information reported by manufacturers to us, in 
combination with publicly available information, to be able to make 
determinations of whether a drug is misclassified in the MDRP. The 
agency also uses manufacturer reported information, such as the COD 
status code, in combination with information available on the Food and 
Drug Administration's (FDA's) Comprehensive NDC Structured Product 
Labeling (SPL) Data Elements file (NSDE) https://download.open.fda.gov/Comprehensive_NDC_SPL_Data_Elements_File.zip, and information from 
FDA's drugs@fda web page https://www.accessdata.fda.gov/scripts/cder/daf/ to be able to verify that the national drug codes (NDCs) reported 
to the MDRP by manufacturers are appropriately classified and reported.
    Codifying these statutory amendments in our regulations provides an 
opportunity for the agency to give additional clarity to and guidance 
on the new legal authorities for ensuring oversight of, compliance 
with, and enforcement of the provisions of the MDRP, and ultimately, to 
ensure that Federal and State programs are receiving appropriate 
rebates and that CMS continues to be a stringent steward of the 
Medicaid program.

 Table 1--History of the Changes in the Definition of Single Source Drug
                   and Innovator Multiple Source Drug
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                                     Statute             Regulation
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Prior to April 18, 2019       Single Source drug
 MSIIA enactment.             Section
                               1927(k)(7)(A)(iv)
                               of the Act.
                              A covered outpatient
                               drug which is
                               produced or
                               distributed under
                               an original new
                               drug application
                               approved by the
                               Food and Drug
                               Administration
                               (FDA), including a
                               drug product
                               marketed by any
                               cross-licensed
                               producers or
                               distributors
                               operating under the
                               new drug
                               application.

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                              Innovator Multiple
                               Source Drug
                              Section
                               1927(k)(7)(A)(ii)
                               of the Act.
                              A multiple source
                               drug that was
                               originally marketed
                               under an original
                               new drug
                               application
                               approved by the
                               Food and Drug
                               Administration.
2007 Final Rule.............  ....................  Sec.   447.502
                                                    Single source drug
                                                    A covered outpatient
                                                     drug that is
                                                     produced or
                                                     distributed under
                                                     an original new
                                                     drug application
                                                     (NDA) approved by
                                                     the FDA, including
                                                     a drug product
                                                     marketed by any
                                                     cross-licensed
                                                     producers or
                                                     distributors
                                                     operating under the
                                                     NDA. It also
                                                     includes a covered
                                                     outpatient drug
                                                     approved under a
                                                     biological license
                                                     application (BLA),
                                                     product license
                                                     approval (PLA),
                                                     establishment
                                                     license approval
                                                     (ELA) or antibiotic
                                                     drug approval (ADA)
                                                     PLA, ELA, or ADA.
                                                    Innovator Multiple
                                                     Source Drug
                                                    A multiple source
                                                     drug that was
                                                     originally marketed
                                                     under an original
                                                     NDA approved by the
                                                     FDA, including an
                                                     authorized generic
                                                     drug. It 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
                                                     PLA, ELA, or ADA.
2016 Final Rule.............  ....................  The term ``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
                                                     BLA, PLA, ELA, or
                                                     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.
                                                    The term ``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,
                                                     labelers, or
                                                     distributors
                                                     operating under the
                                                     NDA and a covered
                                                     outpatient drug
                                                     approved under a
                                                     BLA, ELA, or 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.
MSIAA enactment on April 18,  Single Source drug
 2019.                        Section
                               1927(k)(7)(A)(iv)
                               of the Act.
                              The term ``single
                               source drug'' means
                               a covered
                               outpatient drug,
                               including a drug
                               product approved
                               for marketing as a
                               non-prescription
                               drug that is
                               regarded as a
                               covered outpatient
                               drug under
                               paragraph (4),
                               which is produced
                               or distributed
                               under a new drug
                               application
                               approved by the
                               Food and Drug
                               Administration,
                               including a drug
                               product marketed by
                               any cross-licensed
                               producers or
                               distributors
                               operating under the
                               new drug
                               application unless
                               the Secretary
                               determines that a
                               narrow exception
                               applies (as
                               described in 42 CFR
                               447.502 (or any
                               successor
                               regulation)). Such
                               term also includes
                               a covered
                               outpatient drug
                               that is a
                               biological product
                               licensed, produced,
                               or distributed
                               under a biologics
                               license application
                               approved by the
                               Food and Drug
                               Administration.

[[Page 34242]]

 
                              Innovator Multiple
                               Source Drug
                              Section
                               1927(k)(7)(A)(ii)
                               of the Act.
                              The term ``innovator
                               multiple source
                               drug'' means a
                               multiple source
                               drug that is
                               marketed under a
                               new drug
                               application
                               approved by the
                               FDA, unless the
                               Secretary
                               determines that a
                               narrow exception
                               applies (as
                               described in 42 CFR
                               447.502 (or any
                               successor
                               regulation)).
2020 Final Rule.............  ....................  The term ``single
                                                     source drug'' means
                                                     a covered
                                                     outpatient drug,
                                                     including a drug
                                                     product approved
                                                     for marketing as a
                                                     non-prescription
                                                     drug that is
                                                     regarded as a
                                                     covered outpatient
                                                     drug under section
                                                     1927(k)(4) of the
                                                     Act, which is
                                                     produced or
                                                     distributed under a
                                                     new drug
                                                     application
                                                     [removing
                                                     `original']
                                                     approved by the
                                                     FDA, including a
                                                     drug product
                                                     marketed by any
                                                     cross-licensed
                                                     producers or
                                                     distributors
                                                     operating under the
                                                     new drug
                                                     application unless
                                                     the Secretary
                                                     determines that a
                                                     narrow exception
                                                     applies (as
                                                     described in this
                                                     section), and
                                                     includes a covered
                                                     outpatient drug
                                                     that is a
                                                     biological product
                                                     licensed, produced,
                                                     or distributed
                                                     under a biologics
                                                     license application
                                                     approved by the
                                                     FDA.
                                                    The term ``innovator
                                                     multiple source
                                                     drug'' means a
                                                     multiple source
                                                     drug that is
                                                     marketed [removing
                                                     `was originally
                                                     marketed'] under a
                                                     new drug
                                                     application
                                                     [removing
                                                     `original']
                                                     approved by the
                                                     Food and Drug
                                                     Administration,
                                                     unless the
                                                     Secretary
                                                     determines that a
                                                     narrow exception
                                                     applies (as
                                                     described in 42 CFR
                                                     447.502 (or any
                                                     successor
                                                     regulation)).
------------------------------------------------------------------------

C. MDRP Program Administration Proposed Changes

    We are focused on increasing efficiency and economy of directing 
overall operations, resources, and activities of MDRP to better 
facilitate the needs of Medicaid beneficiaries. In that regard, we are 
proposing a number of new regulatory policies and clarification of 
existing policies.
    Specifically, consistent with our statutory authorities, we are 
proposing to define, specify or amend the definitions for COD, internal 
investigation (for restatement purposes outside the 3-year time 
window), manufacturer (for NDRA purposes), market date, noninnovator 
multiple source drug, drug product information, and vaccine for the 
purpose of MDRP. We are also proposing to specify that the rebate 
provisions for a drug other than a single source drug or an innovator 
multiple source drug apply to an array of drugs, including those that 
may not satisfy the definition of multiple source drug. As noted above, 
based on longstanding operational processes, such drugs are properly 
classified as N drugs in the MDP reporting system.
    Next, we are also proposing new policies, including to add a time 
limitation on manufacturer ability to initiate audits with States, to 
further clarify and establish the requirements for FFS pharmacy 
reimbursement, and to clarify the required collection of all National 
Drug Codes (NDC) for single and multiple source physician-administered 
drugs to receive FFP and secure manufacturer rebates.
    We also propose to revise Medicaid managed care standard contract 
requirements to adopt a requirement for inclusion of Beneficiary 
Identification Number and Processor Control Number (BIN/PCN) numbers on 
Medicaid prescription identification cards, as well as enhance drug 
cost transparency by adopting specific requirements relating to the 
third-party administration of the pharmacy benefit.
    These proposed revisions are designed to improve CMS oversight, and 
State administration of Medicaid pharmacy benefits by promoting greater 
consistency and accuracy of reporting, strengthened data, and robust 
stewardship of State and Federal funds. These proposals would help to 
strengthen and preserve the foundation of the MDRP by ensuring proper 
payments so Federal expenditures are spent appropriately on delivering 
quality, necessary care, while also ensuring sufficient access to care 
for Medicaid beneficiaries.
1. Proposal To Modify the Definition of Covered Outpatient Drug
    Sections 1927(k)(2) and (3) of the Act provide a definition of the 
term ``covered outpatient drug'' (COD) and a limiting definition, which 
excludes certain drugs, biological products, and insulin provided as 
part of, or as incident to and in the same setting as, enumerated 
services and settings. This exclusion is subject to a parenthetical, 
however, which limits the exclusion to when payment may be made as part 
of payment for the enumerated service or setting, and not as direct 
reimbursement for the drug. In the COD final rule, we finalized a 
regulatory definition of covered outpatient drug in Sec.  447.502 that 
substantially mirrors the statutory definition, and consistent with 
section 1927(k)(3) of the Act, the regulatory language includes a 
limiting clause at Sec.  447.502 (covered outpatient drug) that 
excludes from the definition of COD any drug, biological product, or 
insulin provided as part of or incident to and in the same setting in a 
list of services, and for which payment may be made as part of that 
service instead of as a direct reimbursement for the drug.
    Over the years we have received questions about when a payment is 
considered to be a direct reimbursement for a drug and whether 
identifying a

[[Page 34243]]

drug separately on a claim for payment may qualify as direct 
reimbursement for a drug, rendering the drug eligible for rebates under 
section 1927 of the Act, or in other words, making the limiting 
definition inapplicable. To provide greater clarity, we propose to 
amend the regulatory definition of the term covered outpatient drug at 
Sec.  447.502 to clarify when a payment is considered direct 
reimbursement for the drug.
    Additionally, we propose to more closely align the regulatory 
language to the statute by changing ``. . . instead of as a direct 
reimbursement . . .'' to ``. . . and not as direct reimbursement . . 
.''
2. Proposed Definition of an Internal Investigation for Purposes of 
Pricing Metric Revisions
    In accordance with section 1927(b)(3) of the Act, Sec.  447.510 of 
the applicable regulations, and the terms of the NDRA, manufacturers 
are required to report certain pricing and drug product information to 
CMS on a timely basis or could incur penalties or other compliance and 
enforcement measures. As explained in the ``Medicaid Program; Time 
Limitation on Price Recalculations and Recordkeeping Requirements Under 
the Drug Rebate Program'' final rule (final time limitation rule) (68 
FR 51912, August 29, 2003), in an effort to improve the administration 
and efficiency of the MDRP and assist States and manufacturers that 
would otherwise be required to retain drug utilization pricing data 
records indefinitely, we established the 12-quarter time frame for 
reporting revisions to AMP or best price information.
    Despite the 12-quarter time frame, we continued to receive requests 
from manufacturers to make revisions to their pricing data that fall 
outside of the 12-quarter period. Consequently, in the COD final rule 
(81 FR 5278) we established Sec.  447.510(b)(1), which provides that a 
manufacturer must report to CMS any revision to AMP, best price, 
customary prompt pay discounts or nominal prices (pricing data) for a 
period not to exceed 12 quarters from the quarter in which the data 
were due unless one of a number of enumerated exceptions applies. See 
Sec.  447.510(b)(1)(i) through (vi).
    Section 447.510(b)(1)(v) provides an exception to the 12-quarter 
price reporting rule 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 Department of 
Justice (DOJ) investigation. However, as part of that rule, we did not 
define the term internal investigation which has led to different 
interpretations of the nature of an internal investigation. Therefore, 
we propose to add a definition of internal investigation at Sec.  
447.502 and additional clarity around the 12-quarter rule at Sec.  
447.510.
3. Proposal To Modify the Definition of Manufacturer for National Drug 
Rebate Agreement (NDRA) Compliance Purposes
    At times, we receive requests from manufacturers to allow them to 
exclude a particular labeler that they may own or have a business 
affiliation with from participation in the MDRP, even though the 
labeler markets products that meet the definition of covered outpatient 
drug. It is our view that the statute requires that all labelers of a 
manufacturer that market CODs be required to participate in the MDRP to 
meet the statutory requirement that FFP is only available for a 
manufacturer's drugs if they participate in the program. That is, all 
the labelers of the manufacturer have to be in the program, or none of 
the labelers can be in the program.
    We are proposing to further refine the definition manufacturer at 
Sec.  447.502 to codify the requirements under section 1927(a)(1) of 
the Act which specifies that a manufacturer has to have entered into 
and have in effect a rebate agreement with the Secretary in order for 
payment to be available for their CODs under Medicaid. We are also 
proposing to codify in regulation that all labelers (with their 
applicable codes) that are associated or affiliated with a manufacturer 
must have a rebate agreement in effect in order for the manufacturer to 
satisfy the statutory requirement that the manufacturer have a rebate 
agreement in effect with the Secretary.
    Additionally, we are also proposing a new paragraph (h) in Sec.  
447.510 to further specify the responsibilities of a manufacturer with 
respect to rebate agreements when that manufacturer acquires or 
purchases another labeler, acquires or purchases covered outpatient 
drugs from another labeler, or forms a new subsidiary or associated 
entity to ensure that any of a manufacturer's labeler codes that market 
CODs are included in the MDRP. We also specify that termination of one 
of the manufacturer's labelers from the program results in all labelers 
of that manufacturer being terminated from the program whether 
initiated by the manufacturer or the government. If the manufacturer is 
terminated for noncompliance, they can come back into the program under 
certain conditions, including resolving all compliance issues. However, 
the one-quarter delay in program re-entry provided for in section 
1927(b)(4)(C) of the Act still applies unless good cause is found.
4. Proposal To Establish a Definition of Market Date for a COD for the 
Purposes of Determining a Base Date AMP for a COD
    Section 1927 of the Act governs the MDRP and payment for CODs which 
are defined in section 1927(k)(2) of the Act. Manufacturers that 
participate in the MDRP are required to pay rebates for CODs that are 
dispensed and paid for under the State Medicaid plan. See section 
1927(b)(1)(A) of the Act.
    The rebates due by manufacturers are calculated based on statutory 
formulas described in section 1927(c) of the Act and consist of a basic 
rebate and, in some cases, an additional rebate that is applicable when 
an increase in the AMP, with respect to each dosage form and strength 
of a drug, exceeds the rate of inflation. One of the factors in the 
calculation of the additional rebate is the base date AMP of the drug, 
a value that is determined based on the market date of the drug. 
Manufacturers are required to report the market date of each dosage 
form and strength of a COD for all of its CODs.
    We have received numerous inquiries regarding the determination of 
market date for reporting to MDRP, and some manufacturers have reported 
incorrect market dates for their CODs. Because the term market date has 
not been previously defined in regulation and it is a critical factor 
in the determination of base date AMP, and ultimately, the calculation 
of applicable rebates, we are proposing to define the term market date 
at Sec.  447.502 for the purpose of the MDRP.
5. Proposal To Modify the Definition of Noninnovator Multiple Source 
Drug
    As discussed previously in this proposed rule, section 6(c) of the 
MSIAA included a number of amendments to statutory definitions in 
section 1927 of the Act. Generally, those statutory amendments were 
discussed in the ``Medicaid Program; Establishing Minimum Standards in 
Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based 
Purchasing (VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug 
Rebate and Third Party Liability (TPL) Requirements'' final rule 
published in the December 31, 2020 Federal Register (the December 31, 
2020 final rule) (see 85 FR 87000, 87032), where the regulatory 
definitions of multiple source drug, innovator multiple source (I) 
drug, and single source drug were amended

[[Page 34244]]

consistent with the MSIAA. One of the amendments to the regulatory 
definitions was to remove the phrase ``was originally marketed'' from 
the definition of an I drug and replace it with ``is marketed.''
    The change in the statutory and regulatory definitions of an I drug 
should have prompted us to also change the regulatory definition of 
noninnovator multiple source (N) drug, however we neglected to do so in 
the December 31, 2020 final rule. We are now proposing to amend the 
definition of an N drug at Sec.  447.502 to maintain the clear 
distinction between an I drug and an N drug.
6. Proposal To Define Vaccine for the Purposes of the MDRP Only
    Section 1927(k)(2)(B) of the Act specifically excludes vaccines 
from the definition of COD for purposes of the MDRP. This exclusion is 
codified in paragraph (1)(iv) of the regulatory definition of COD at 
Sec.  447.502. Section 1927 of the Act, specifically, does not define 
vaccine. Nor is there a definition of vaccine in Title XI, XVIII, XIX, 
or XXI of the Act (applicable to Medicare, Medicaid, and Children's 
Health Insurance Program (CHIP)), that speaks to the specific kinds of 
biological products that qualify as vaccines, in terms of their actions 
in the human body and how and when they are used.\2\ Moreover, we are 
not aware that any authorizing statutes for any other Department of 
Health and Human Services agencies include such a statutory definition 
of the term ``vaccine.''
---------------------------------------------------------------------------

    \2\ While section 1928(h) of the Act defines ``pediatric 
vaccine'' and ``qualified pediatric vaccine,'' those definitions do 
not speak to the actions of a vaccine in the human body and how and 
when it is used, and therefore do not help CMS determine when a 
product should count as a vaccine (as opposed to a drug) for 
purposes of the Medicaid Drug Rebate Program.
---------------------------------------------------------------------------

    To date, we have not established a regulatory definition of the 
term vaccine as used in section 1927(k)(2)(B) of the Act for the 
specific purposes of the MDRP. However, given therapeutic advances that 
have occurred since 1990, when the original rebate statute was enacted, 
we believe that a regulatory definition is necessary to identify which 
products are considered vaccines for the purposes of the MDRP and thus, 
appropriately excluded from the definition of COD. We are therefore 
proposing a definition of vaccine at Sec.  447.502 for the purpose of 
identifying products that do not satisfy the definition of COD and are 
therefore not subject to possible required coverage under the 
prescribed drugs benefit consistent with section 1927 of the Act, and 
applicable rebate liability under the MDRP. The regulatory definition 
of vaccine that is proposed to be added to Sec.  447.502 would be 
established solely for the purposes of the MDRP, and be applicable only 
to that program. It would not apply under any title XIX statutory 
provisions other than section 1927(k)(2), or to separate CHIPs 
operating pursuant to 42 CFR 457.70(a)(1) and (d), or for purposes of 
the Vaccines for Children Program. Nor would it apply to any other 
programs within CMS or any other agencies within the Department of 
Health and Human Services, (for example, FDA, Centers for Disease 
Control and Prevention (CDC), or Health Resources and Services 
Administration (HRSA)). We note that these proposed changes would only 
specify which products are vaccines and are therefore excluded from the 
definition of a covered outpatient drug and are not subject to Medicaid 
drug rebates. This proposed policy would not apply with regard to any 
applicable Federal or State requirements to cover vaccines for Medicaid 
beneficiaries, as applicable.
7. Proposal To Accumulate Price Concessions and Discounts 
(``Stacking'') When Determining Best Price
    Section 1927(c)(1)(C) of the Act defines the term ``best price'' to 
mean with respect to a single source drug or innovator multiple source 
drug of a manufacturer (including the lowest price available to any 
entity for any such drug of a manufacturer that is sold under a new 
drug application approved under section 505(c) of the Federal Food, 
Drug, and Cosmetic Act), the lowest price available from the 
manufacturer during the rebate period to any wholesaler, retailer, 
provider, health maintenance organization, nonprofit entity, or 
governmental entity within the United States, subject to certain 
exceptions and special rules.
    The implementing regulations for the determination of best price 
are found at Sec.  447.505, and we propose to revise Sec.  
447.505(d)(3) to add language to make clearer that the manufacturer 
must adjust the best price for a drug for a rebate period if cumulative 
discounts, rebates, or other arrangements to best price eligible 
entities subsequently adjust the prices available from the 
manufacturer, and that those discounts, rebates, or other arrangements 
must be stacked for a single transaction to determine a final price 
realized by the manufacturer for a drug. In other words, we are 
proposing to make clearer that manufacturers have to stack all 
applicable discounts that they offer on a single sale of a covered 
outpatient drug, including discounts or rebates provided to more than 
one best price eligible entity.
8. Proposal To Establish a Time Limitation for Audits Over Utilization 
Data With States: 12-Quarter Rebate Dispute Time Limitation
    Currently, there is no time limit for a manufacturer to initiate an 
audit or resolve previously disputed State utilization data with 
respect to rebates owed, and section 1927 of the Act does not impose a 
specific timeframe on a manufacturer's audit authority. As a result, 
any dispute of State invoices arising from audits, reviews, or hearings 
of State information on State utilization data is not limited to 
current quarter rebate invoices, but may also be initiated for prior 
quarterly rebate invoices that have been previously paid in full. We 
are proposing to limit the time period for manufacturers to initiate 
disputes, hearing requests and audits of State-invoiced utilization 
data to 12 quarters from the last day of the quarter from the date of 
State invoice to the manufacturer. We propose to include a new 
paragraph (j), titled ``Manufacturer audits of State-provided 
information,'' at Sec.  447.510, to limit the time a manufacturer has 
to initiate a dispute, hearing request or audit of State-invoiced 
utilization data with a State, to ensure more efficient administration 
of the Medicaid Drug Rebate Programs.
9. Proposal Regarding Drug Price Verification and Transparency Through 
Data Collection
    Since the beginning of the MDRP in 1991, the Secretary has had the 
authority, under section 1927(b)(3)(B) of the Act, to survey 
wholesalers and manufacturers that directly distribute their covered 
outpatient drugs, when necessary, to verify manufacturer prices that 
are reported under section 1927(b)(3)(A) of the Act, if required to 
make a payment. The prices that are subject to this survey include a 
manufacturer's AMP, best price, Average Sales Price (ASP), and in 
certain cases, Wholesale Acquisition Cost (WAC) for a drug. (Note that 
in 2003, Congress amended section 1927(b)(3)(B) of the Act in the 
Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 
2003 (Pub. L. 108-173, enacted December 8, 2003), to expand the 
original survey authority to include manufacturer's average sales 
prices (including wholesale acquisition cost or WAC).) These prices 
that are reported to the agency under section 1927(b)(3)(A) of the Act 
are used by various CMS programs, such as

[[Page 34245]]

Medicare Part B and State Medicaid agencies, to pay for drugs for 
beneficiaries, as well as calculate rebates paid by manufacturers to 
States under MDRP. Thus, there is a direct connection between the 
prices reported to us and the payments made by Medicaid.
    The types of drugs paid for by Medicaid, manufacturers' pricing 
structures for these drugs, as well as the methods used by 
manufacturers to distribute these drugs, have evolved since the 
enactment of the MDRP, as well as the enactment of the MMA. New highly 
individualized gene and cell therapy drug treatments have resulted in 
manufacturer launch prices that have increased dramatically, impacting 
the manufacturers' prices reported to CMS. In addition, manufacturers 
and health plans now own pharmacy benefit managers (PBMs), and 
manufacturers are more frequently limiting the distribution of drugs 
through specialty pharmacies, some of which are owned by the PBMs 
themselves.
    All of these factors impact how manufacturers set drug pricing, 
and, given that these prices are used to set payment rates, it affects 
the payments that State Medicaid programs make for these drugs. For 
example, State Medicaid programs use the ASP values reported by 
manufacturers to make payment for many physician-administered drugs. A 
product's WAC has generally tracked its acquisition cost to providers 
for brand name drugs, and this WAC value is used by payers to reimburse 
them for the drug cost component of providing the drug. AMP is used to 
calculate Federal Upper Limits (FULs) for multiple source drugs.
    While the model of distribution from manufacturer to wholesaler to 
provider still exists, and the predominant provider of pharmacy 
services remains the community-based pharmacy, there are other 
arrangements emerging for the production and distribution of specialty 
and high-cost gene therapy drugs, and pricing structures for these 
drugs that were not necessarily existing in the market when the MDRP 
was enacted.
    Section 1902(a)(30)(A) of the Act requires that Medicaid payments 
be consistent with economy, efficiency, and quality of care to enlist 
enough providers so that care and services are available under the plan 
to Medicaid beneficiaries at least to the extent that such care and 
services are available to the general population in the geographic 
area. It is important that the Medicaid program understand the 
production and distribution method for these drugs, as well as the 
impact on prices and charges, to assure beneficiary access to these 
medications. Therefore, using the authority at section 1927(b)(3)(B) of 
the Act, which grants the Secretary the ability to survey wholesalers 
and manufacturers to obtain information about manufacturer's prices for 
a drug reported to us under section 1927(b)(3)(A) of the Act, we are 
proposing rules to describe those situations when it is necessary for 
surveys to be sent to manufacturers and wholesalers to verify prices 
and charges, and the information that would be requested, to verify 
prices or charges such that payments can be made.
10. Proposal To Clarify and Establish Requirements for FFS Pharmacy 
Reimbursement
    In the COD final rule, we finalized regulations to move FFS 
pharmacy reimbursement to an actual acquisition cost-based 
reimbursement, under which pharmacists would be paid for the ingredient 
costs of the drug that was dispensed, and a professional dispensing fee 
(PDF) that reflected their costs of dispensing. Since that time, almost 
every State has made the appropriate transition, and the updated 
pharmacy reimbursement methodology is accurately reflected in approved 
amendments to their State Plans. Nonetheless, we are proposing to 
revise Sec.  447.518, ``State plan requirements, findings, and 
assurances,'' in paragraph (d)(1) to ensure that pharmacy providers are 
reimbursed adequately for both their pharmacy ingredient costs and 
professional dispensing services costs consistent with the applicable 
statutory and regulatory requirements.
    This regulation currently indicates that States are required to 
provide adequate data to support any proposed changes to either 
component of the reimbursement methodology (ingredient cost or PDF), 
such as a State or national survey of retail pharmacy providers or 
other reliable data other than a survey. We are proposing to provide 
clarity regarding adequate data so that payments are consistent with 
efficiency, economy, and quality of care and are sufficient to enlist 
enough providers so that care and services are available at least to 
the extent that such care and services are available to the general 
population in the geographic area, by expressly providing in regulation 
that the research and data must be based on costs and be sufficient to 
establish the adequacy of the pharmacy reimbursement methodology under 
the State Plan. In addition, we are proposing to state in regulatory 
text that other data, such as reimbursements that pharmacies accept 
from third parties, are not cost-based data, and therefore, cannot be 
used by States to justify PDFs.
11. Proposals Implementing Section 1927(a)(7) of the Act and Federal 
Financial Participation (FFP): Conditions Relating to Physician-
Administered Drugs
    Generally, physician-administered drugs may satisfy the definition 
of a covered outpatient drugs (COD) under section 1927(k)(2) of the 
Act, subject to the limiting definition at section 1927(k)(3) of the 
Act. Prior to the Deficit Reduction Act (DRA) of 2005 (Pub. L. 109-171, 
enacted February 8, 2006), States did not collect rebates on all 
physician-administered drugs when they were not identified by NDC 
number, because the NDC number is necessary for States to invoice 
manufacturers for rebates.
    Section 6002 of the DRA added sections 1903(i)(10)(C) and 
1927(a)(7) to the Act to require the States to collect and submit 
certain utilization data on certain physician-administered drugs in 
order for FFP to be available for these drugs, and for States to secure 
rebates. More specifically, in accordance with section 1927(a)(7) of 
the Act, titled ``Requirement For Submission Of Utilization Data For 
Certain Physician-Administered Drugs'', States are required to provide 
for the collection and submission of utilization data and coding (such 
as J-codes \3\ and NDC numbers) for a covered outpatient drug that is a 
single source or a multiple source drug that is a top 20 high dollar 
volume physician-administered drug on a published list (based on 
highest dollar volume dispensed under Medicaid identified by the 
Secretary) that the Secretary may specify in order for payment to be 
available under section 1903 of the Act and for States to secure 
applicable Medicaid rebates.\4\ This list may be modified year to year 
to reflect changes in such volume.
---------------------------------------------------------------------------

    \3\ J codes are a subset of the Healthcare Common Procedure 
Coding System (HCPCS) Level II code set used to primarily identify 
injectable drugs.
    \4\ https://www.govinfo.gov/content/pkg/CFR-2007-title42-vol4/pdf/CFR-2007-title42-vol4-sec447-520.pdf.
---------------------------------------------------------------------------

    Regulations at Sec.  447.520 were established to implement these 
statutory provisions in the final rule entitled ``Medicaid Program; 
Prescription Drugs'' (72 FR 39142, 39162) (hereinafter referred to as 
the July 17, 2007 final rule), specifying the conditions for FFP for 
physician-administered drugs.\5\
---------------------------------------------------------------------------

    \5\ Ibid.
---------------------------------------------------------------------------

    We are proposing to amend Sec.  447.520 to require States to 
collect NDC information on all covered outpatient single and multiple 
source physician-

[[Page 34246]]

administered drugs and to specify that States should be invoicing for 
rebates for all covered outpatient physician-administered drugs to 
receive FFP and secure manufacturer rebates.
12. Proposal Related to Suspension of a Manufacturer's Drug Rebate 
Agreement
    We are proposing regulatory changes to further implement section 
1927(b)(3)(C)(i) of the Act, which provides authority to suspend a 
rebate agreement for a manufacturer's failure to timely report drug 
pricing or drug product information to the agency, required under 
section 1927(b)(3)(A) of the Act, and when there is a continued failure 
to report after a 90-calendar day deadline for reporting of information 
is imposed by the agency. Specifically, the new Sec.  447.510(i) 
proposes that a manufacturer who has failed to report timely 
information to the agency under Sec.  447.510(a) and (d), would be 
imposed a 90-calendar day deadline determined by the agency, and 
communicated to electronically and in writing by the agency to report 
such information, or the manufacturer would have its rebate agreement 
suspended.
    This section further proposes that failure to report such 
information to the agency after the end of the imposed 90-calendar day 
period would result in suspension of the rebate agreement, and that 
such agreement shall not be reinstated until such information is 
reported in full and certified, but not for a period of suspension of 
less than 30 calendar days. This suspension would apply to all of the 
manufacturer's labelers that have a rebate agreement with the 
Secretary, consistent with the proposed regulatory definition of 
``manufacturer.''
    This rule also proposes that continued suspension of the rebate 
agreement could result in termination for cause. During the period of 
time of the suspension, FFP would not be available to the States for a 
manufacturer's CODs. The States would be given 30 calendar days' notice 
before such a suspension is implemented. This would allow States to 
notify prescribers and beneficiaries that a specific COD or specific 
CODs may be unavailable for a period of time, and to allow the 
beneficiary to switch to a different medication, if necessary. We are 
proposing that the suspension would only be applicable to the 
manufacturer's Medicaid program participation, and would not affect 
manufacturer participation in Medicare Part B or the 340B Drug Pricing 
Program during the time the rebate agreement is suspended. However, if 
continued suspension results in termination, such termination could 
affect Medicare Part B and 340B Drug Pricing Program participation.
13. Proposals Related to Managed Care Plan Standard Contract 
Requirements
a. Requirement of BIN/PCN Inclusion on Medicaid Managed Care Pharmacy 
Identification Cards
    Patients enrolled in health care plans, including in Medicaid 
managed care plans such as Medicaid managed care organizations (MCOs), 
prepaid inpatient health plans (PIHPs), or prepaid ambulatory health 
plans (PAHPs), generally use identification cards at the pharmacy so 
they can obtain prescription drug benefits, as well as allow pharmacies 
to process and bill claims in real time. Health plans use two codes on 
the card to identify a patient's prescription health insurance and 
benefits--the National Council for Prescription Drug Programs (NCPDP) 
Processing Bank Identification Number (BIN) and Processor Control 
Number (PCN). This information, along with a group number, can specify 
that a beneficiary is part of a specific patient insurance group, such 
as being a Medicaid managed care beneficiary.
    However, it is often difficult to determine from a Medicaid managed 
care beneficiary's health insurance card if he or she is covered under 
a Medicaid managed care plan or under non-Medicaid coverage, such as an 
employer-sponsored group health plan or individual market insurance, 
offered by the same organization or entity that offers the Medicaid 
managed care plan. This is due to the fact that Medicaid-specific BIN, 
PCN, and group numbers are not always placed on Medicaid managed care 
plan identification cards. However, if Medicaid-specific BIN/PCN and 
group information were included on the card, the pharmacy could enter 
this information into its claims processing system which would identify 
that the beneficiary is enrolled in a Medicaid managed care plan. We 
believe it is important that unique BIN/PCN/group numbers are 
established for Medicaid managed care plans for several program needs, 
including facilitating the appropriate identification of cost sharing 
and ensuring claims are billed and paid for appropriately.
    Use of Medicaid-specific BIN/PCN/group numbers can help States and 
their managed care plans identify claims for drugs paid for under the 
340B Drug Pricing Program (340B Program) and avoid invoicing for 
rebates on 340B drugs. Section 340B(a)(5)(A) of the Public Health 
Service Act (the PHS Act) prohibits duplicate discounts for drugs 
purchased under the Medicaid drug rebate program. Section 1927(a)(5)(C) 
of the Act requires the establishment of a mechanism to ensure against 
duplicate discounts or rebates and section 1927(j)(1) of the Act 
provides that covered outpatient drugs are not subject the requirements 
of section 1927 of the Act if they are dispensed by health maintenance 
organizations (HMOs), including MCOs that contract under section 
1903(m) of the Act, and are subject to discounts under section 
340B(a)(5)(A) of the PHS Act. Certain eligible entities and hospitals 
are permitted to purchase drugs under the 340B Drug Pricing Program and 
dispense these drugs to Medicaid beneficiaries. Identifying claims 
where the dispensed drug has been discounted under the 340B program is 
necessary to avoid duplicating that discount in the MDRP.
    Duplicate discounts occur when a State erroneously bills a 
manufacturer for a Medicaid drug program rebate involving a drug that 
was purchased under the 340B Drug Pricing Program. That occurs because 
the claim was not identified as a 340B claim before it was sent to the 
State. If the identification card included a unique Medicaid BIN/PCN/
group number, and the State permits the use of 340B drugs at contract 
pharmacies for individuals enrolled in Medicaid managed care, then it 
would allow for the inclusion of a modifier at the point of dispensing 
that would identify the claim as ineligible for a Medicaid rebate. This 
would assist States with identifying 340B drug claims that should not 
be invoiced for Medicaid drug rebates.
    Section 1902(a)(4) of the Act allows the Secretary to specify 
``methods of administration'' that are ``found by the Secretary to be 
necessary for . . . proper and efficient operation.'' We believe that 
having States require their MCOs, PIHPs, or PAHPs that provide CODs to 
Medicaid beneficiaries to add unique identifiers onto the 
identification cards would make the Medicaid drug program run more 
efficiently, help avoid duplicate discounts, and improve the level of 
pharmacy services provided to Medicaid beneficiaries.
    Therefore, under the authority of section 1902(a)(4) of the Act, as 
well as to ensure effective implementation of and compliance with 
sections 1927(a)(5)(C) and 1927(j)(1) of the Act, we are proposing to 
amend 42 CFR 438.3(s) to require MCOs, PIHPs, and PAHPs that provide 
coverage of CODs to assign and exclusively use unique Medicaid BIN, 
PCN, and group number identifiers for all Medicaid managed

[[Page 34247]]

care beneficiary identification cards for pharmacy benefits.
b. Drug Cost Transparency in Medicaid Managed Care Contracts
    Medicaid managed care plans often contract with a subcontractor PBM 
to operate the pharmacy benefit provided to Medicaid beneficiaries. In 
order for a Medicaid managed care plan to appropriately calculate and 
report its Medical Loss Ratio (MLR) under Sec.  438.8, the plan must 
know from the subcontractor certain information relating to how much of 
the payments made to the Medicaid managed care plan by the State was 
used to pay for health care services and other specific categories 
outlined in Sec.  438.8. To correctly report the MLR, a Medicaid 
managed care plan must distinguish between expenses that are for 
covered benefits (such as healthcare services and drug costs) and 
administrative expenses, such as fees paid to its PBM for PBM services 
(for example, claims adjudication, processing prior authorization 
requests, etc.).
    Therefore, we are proposing that MCOs, PIHPs, and PAHPs that 
provide coverage of CODs structure any contract with any subcontractor 
to require the subcontractor report the amounts related to the incurred 
claims described in Sec.  438.8(e)(2), such as reimbursement for the 
covered outpatient drug, payments for other patient services, and the 
fees paid to providers or pharmacies for dispensing or administer a 
covered outpatient drug, separately from any administrative costs, 
fees, and expenses of the subcontractor.
14. Proposal To Rescind Revisions Made by the December 31, 2020 Final 
Rule to Determination of Best Price (Sec.  447.505) and Determination 
of Average Manufacturer Price (AMP) (Sec.  447.504) Consistent With 
Court Order
    On May 17, 2022, the United States District Court for the District 
of Columbia vacated and set aside the ``accumulator adjustment rule of 
2020'' in response to a complaint filed against the Secretary regarding 
the best-price accumulator provisions within the December 31, 2020 
final rule ``Medicaid Program; Establishing Minimum Standards in 
Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based 
Purchasing (VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug 
Rebate and Third Party Liability (TPL) Requirements.'' See Pharm. Rsch. 
& Mfrs. of Am. v. Becerra, 1:21-cv-01395-CJN (D.D.C. May 17, 2022). 
This final rule had revised the conditions for excluding patient 
assistance from AMP at Sec.  447.504(c)(25) through (29) and (e)(13) 
through (17), and best price at Sec.  447.505(c)(8) through (12), to 
add language (effective January 1, 2023) that would require 
manufacturers to ``ensure'' the full value of the assistance provided 
by patient assistance programs is passed on to the consumer and that 
the pharmacy, agent, or other AMP or best price eligible entity does 
not receive any price concession. While the district court's order 
focused on the changes to the patient-assistance program exclusions 
from best-price determinations, to which it referred as the 
``accumulator adjustment rule of 2020,'' for consistency, we propose to 
withdraw the changes to both the AMP and best-price sections made by 
the December 31, 2020 final rule.
    As a result, the regulations would maintain the language that has 
been in place since 2016.
15. Proposals Related to Amendments Made by the American Rescue Act of 
2021--Removal of Manufacturer Rebate Cap (100 Percent AMP)
    Section 9816 of the American Rescue Plan Act of 2021 (Pub. L. 117-
2, enacted March 11, 2021) sunsets the limit on maximum rebate amounts 
for single source and innovator multiple source drugs by amending 
section 1927(c)(2)(D) of Act by adding ``and before January 1, 2024,'' 
after ``December 31, 2009''. In accordance with section 
1927(c)(3)(C)(i) of the Act and the special rules for application of 
provision in section 1927(c)(3)(C)(ii)(IV) and (V) of the Act, this 
sunset provision also applies to the limit on maximum rebate amounts 
for CODs other than single source or innovator multiple source drugs. 
Therefore, to conform Sec.  447.509 with section 1927(c)(2)(D) of Act, 
as amended by the American Rescue Plan Act of 2021, and sections 
1927(c)(3)(C)(i), (ii)(IV), and (ii)(V) of the Act, we are proposing to 
make conforming changes to Sec.  447.509 to reflect the removal of the 
maximum rebate amounts for rebate periods beginning on or after January 
1, 2024.
16. Request for Information--Comments on Issues Relating to Requiring a 
Diagnosis on Medicaid Prescriptions as a Condition for Claims Payment
    Under the MDRP, a COD is generally defined as a prescribed drug 
that is FDA approved and used for a medically accepted indication. 
While the statute limits the definition of a COD to those products used 
for ``medically accepted indications,'' without a diagnosis on a 
prescription drug claims, it is difficult to determine whether a drug 
is being used for a medically accepted indication, and if it therefore 
satisfies the definition of a COD, and is rebate eligible. We are 
soliciting comments on the possibility and potential impact of 
proposing a requirement that a patient's diagnosis be included on a 
prescription as a condition of receiving Medicaid FFP for that 
prescription. We are soliciting comment on the patient care, clinical, 
and operational impact of requiring that a patient's diagnosis be 
included on a prescription as a condition of a State receiving FFP for 
that prescription. We are particularly interested in understanding any 
operational implications, privacy related concerns, the burden 
associated, and how to negate any foreseeable impact on beneficiaries 
and providers, including what steps would be needed by States to 
successfully implement a Medicaid requirement for diagnosis on 
prescriptions. This is a request for information only.
17. Background on Coordination of Benefits/Third Party Liability 
Regulation Due to Bipartisan Budget Act of 2018 (BBA 2018)
    Medicaid is generally the payer of last resort, which means that 
other available resources--known as third party liability, or TPL--must 
be used before Medicaid pays for services received by a Medicaid-
eligible individual. Title XIX of the Act requires State Medicaid 
programs to identify and seek payment from liable third parties, before 
billing Medicaid. Section 53102 of the Bipartisan Budget Act of 2018 
(BBA 2018) (Pub. L. 115-123, enacted February 9, 2018) amended the TPL 
provision at section 1902(a)(25) of the Act.
    Specifically, section 1902(a)(25)(A) of the Act requires that 
States take all reasonable measures to ascertain the legal liability of 
third parties to pay for care and services available under the plan. 
That provision further specifies that a third party is any individual, 
entity, or program that is or may be liable to pay all or part of the 
expenditures for medical assistance furnished under a State Plan. 
Section 1902(a)(25)(A)(i) of the Act specifies that the State Plan must 
provide for the collection of sufficient information to enable the 
State to pursue claims against third parties. Examples of liable third 
parties include: Private insurance companies through employment-related 
or privately purchased health insurance; casualty coverage resulting 
from an accidental injury; payment received directly from an individual 
who has voluntarily accepted or been assigned legal responsibility for 
the health care of one or more Medicaid recipients;

[[Page 34248]]

fraternal groups, unions, or State workers' compensation commissions; 
and medical support provided by a parent under a court or 
administrative order.
    To update the regulation for the recent statutory changes, a final 
rule was published on December 31, 2020, which went into effect on 
March 1, 2021, to include changes as authorized under the BBA 2018. We 
are submitting a correction due to an omission in the regulation text 
to require a State to make payments without regard to TPL for pediatric 
preventive services unless the State has made a determination related 
to cost-effectiveness and access to care that warrants cost avoidance 
for up to 90 days.

II. Provisions of the Proposed Regulations

A. Payment of Claims (42 CFR 433.139)

    In 1980, under the authority in section 1902(a)(25)(A) of the Act, 
we issued regulations at part 433, subpart D, establishing requirements 
for State Medicaid agencies to support the coordination of benefits 
(COB) effort by identifying third party liability.
    Section 433.139(b)(3)(i) and (b)(3)(ii)(B) detail the exception to 
standard COB cost avoidance by allowing pay and chase for certain types 
of care, as well as the timeframe allowed prior to Medicaid paying 
claims for certain types of care. Specifically, we proposed to revise 
Sec.  433.139(b)(3)(i) by adding--``that requires a State to make 
payments without regard to third party liability for pediatric 
preventive services unless the State has made a determination related 
to cost-effectiveness and access to care that warrants cost avoidance 
for up to 90 days.'' We propose to revise Sec.  433.139(b)(3)(i) and 
(b)(3)(ii)(B) by adding ``within'' prior to the waiting periods 
Medicaid has to pay claims for preventive pediatric and medical child 
support claims. We also propose to revise Sec.  433.139(b)(3)(ii)(B) by 
removing ``from'' and replacing it with ``after;'' and by removing 
``has not received payment from the liable third party'' and adding the 
following language at the end of the sentence ``provider of such 
services has initially submitted a claim to such third party for 
payment for such services, except that the State may make such payment 
within 30 days after such date if the State determines doing so is 
cost-effective and necessary to ensure access to care.'' These 
revisions in language would permit States to pay claims sooner than the 
specified waiting periods, when appropriate.

B. Standard Medicaid Managed Care Contract Requirements (Sec.  
438.3(s))

1. BIN/PCN on Medicaid Managed Care Cards
    We propose to amend Sec.  438.3(s) to add a new paragraph (s)(7) to 
require States that contract with MCOs, PIHPs, or PAHPs that provide 
coverage of CODs, to require those managed care plans to assign and 
exclusively use unique Medicaid-specific BIN, PCN, and group number 
identifiers for all Medicaid managed care beneficiary identification 
cards for pharmacy benefits. We propose that the managed care 
contracts, and thus MCOs, PIHPs and PAHPs, must comply with this new 
requirement no later than the next rating period for Medicaid managed 
care contracts, following the effective date of the final rule adopting 
this new regulatory provision. We believe that the delay between the 
effective date of the final rule and the start of the next rating 
period would provide both States and the affected Medicaid managed care 
plans with adequate time to prepare both the necessary contract terms, 
and finish the necessary administrative processes for creating and 
issuing beneficiary identification cards with these newly required 
Medicaid-specific BIN, PCN, and group number identifiers.
    This proposal is under our authority in section 1902(a)(4) of the 
Act to specify ``methods of administration'' that are ``found by the 
Secretary to be necessary for . . . proper and efficient operation.'' 
Having States require their MCOs, PIHPs, or PAHPs that provide CODs to 
Medicaid beneficiaries to add these types of unique identifiers to the 
identification cards would make the Medicaid drug program run more 
efficiently, and improve the level of pharmacy services provided to 
Medicaid beneficiaries. With the inclusion of Medicaid-specific BIN/PCN 
and group numbers on the pharmacy identification cards issued to the 
enrollees of MCOs, PHIPs and PAHPs, pharmacies would be able to 
identify patients as Medicaid beneficiaries, and better provide 
pharmacy services. This would be helpful to all parties to ensure that 
Medicaid benefits are provided correctly, including the confirmation of 
accurate cost sharing amounts, along with assisting that claims are 
billed and paid for appropriately.
    This proposed change would also help to reduce the incidence of 
340B duplicate discounts. Section 340B(a)(5)(A) of the PHS Act 
prohibits duplicate discounts; that is, manufacturers are not required 
to both provide a 340B discounted price and pay the State a rebate 
under the Medicaid drug rebate program for the same drug. Section 
1927(a)(5)(C) of the Act requires the establishment of a mechanism to 
ensure against duplicate discounts or rebates, and section 1927(j)(1) 
of the Act also provides that CODs are not subject to, among other 
requirements of section 1927 of the Act, MDRP rebates if: (1) they are 
dispensed by health maintenance organizations, including MCOs that 
contract under section 1903(m) of the Act, and are subject to 340B 
discounts and (2) the drugs are subject to 340B discounts. Therefore, 
CODs covered by MCOs, PIHPs, and PAHPs are within the scope of this 
provision designed to prevent duplicate discounts. The existing 
regulation at Sec.  438.3(s)(3) already reflects the position that CODs 
covered by MCOs, PIHPs, and PAHPs must be identified to prevent 
duplicate discounts under both section 1927 of the Act and section 340B 
of the PHS Act. The identification of a Medicaid beneficiary at the 
point of dispensing can result in the pharmacy placing a code on the 
prescription, such as the NCPDP ``20'' submission clarification code, 
so that the claim will be excluded from the Medicaid rebate pool.
    Medicare Part D has supported the inclusion of BIN/PCN numbers for 
pharmacy cards. That is, 42 CFR 423.120(c)(4) requires that Part D 
sponsors assign and exclusively use a unique Part D BIN or RxBIN and 
Part D processor control number (RxPCN) combination in its Medicare 
line of business. The use of the BIN/PCN ensures that a pharmacy claim 
can be accurately billed by the pharmacy. Medicare made the BIN/PCN 
unique to Part D so that a Part D sponsor clearly identifies the 
Medicare enrollee as part of a particular Part D plan and the pharmacy 
knows that Medicare statute and rules may apply, such as not allowing 
certain manufacturer coupons, which plan benefits apply, appeals 
rights, etc.
    In the absence of Medicaid-specific BIN, PCN, and group numbers to 
identify beneficiaries as being Medicaid participants, it is difficult 
for pharmacies and other providers, such as physicians and hospitals 
that administer drugs to Medicaid beneficiaries, to determine whether 
the beneficiary is enrolled in a Medicaid managed care plan, since a 
group number alone is not sufficient for Medicaid identification. 
Adding unique identifiers would make the beneficiary's Medicaid managed 
care status distinguishable from the other lines of business offered by 
the same organization or entity that contracts with the State to offer 
an

[[Page 34249]]

MCO, PIHP or PAHP for Medicaid beneficiaries.
    Accordingly, we propose to amend the regulatory language in Sec.  
438.3(s) to add paragraph (s)(7) to mandate that Medicaid managed care 
contracts require that Medicaid MCO, PIHPs, or PAHPs that provide 
coverage of CODs must assign and exclusively use unique Medicaid BIN, 
PCN, and group number identifiers for all Medicaid managed care 
beneficiary identification cards for pharmacy benefits. We propose that 
Medicaid managed care contract must include this new requirement (which 
would require compliance by MCOs, PIHPs, and PAHPs) no later than the 
next rating period for Medicaid managed care contracts, following the 
effective date of the final rule adopting this new provision. We are 
soliciting comments on the implementation time frame and other possible 
operational issues of requiring unique Medicaid BIN, PCN, and group 
numbers to be on Medicaid managed care beneficiary identification 
cards.
2. Drug Cost Transparency in Medicaid Managed Care Contracts
    We propose that the contracts between States and MCOs, PIHPs, or 
PAHPs that provide coverage of CODs require those plans to structure 
contracts with any subcontractor for the delivery or administration of 
CODs, in a manner that ensures drug cost spending transparency by 
requiring the subcontractor to report separately certain expenses and 
costs. These subcontractors may include PBMs.
    Most Medicaid beneficiaries receive either all or part of their 
health care benefits, including CODs, through Medicaid managed care 
plans. Because of the specialized nature of the COD benefit, many 
Medicaid managed care plans (that is, the MCOs, PIHPs, or PAHPs) may 
contract with, or have their own PBMs to administer the COD benefit.
    PBMs are the middlemen of the relationship between the managed care 
plans and the health care (medical and pharmacy) providers that provide 
CODs. That is, they have contracts with both the managed care plans to 
administer the pharmacy benefit, as well as with the health care 
providers that administer or provide the drugs to patients that are 
enrolled in the managed care plan. Among other tasks in the 
marketplace, a PBM may be responsible for developing a drug formulary, 
collecting manufacturer rebates on behalf of the managed care plan, 
performing drug utilization review (DUR), adjudicating claims, and 
contracting with retail community pharmacies and other health care 
providers to develop a network of pharmacy providers that can dispense 
drugs to managed care enrolled patients.
    The PBM also negotiates reimbursement rates on behalf of the 
various health plans, including managed care plans with which it 
contracts, and pays the pharmacy and other health care providers for 
the drugs that are dispensed or administered. In most cases, the 
pharmacy reimbursement rates are specified in the contract between the 
PBM and the pharmacy providers, and these include reimbursement rates 
for brand name and generic prescription drugs, as well as the 
dispensing fees paid to dispense or administer the prescription drug to 
the beneficiary. There are also administrative fees paid to the PBM by 
the managed care plans for its administration and operation of the 
pharmacy benefit.
    PBMs' methods of reimbursing health care providers for prescription 
drugs may differ from those used to determine the charges to managed 
care plans for the dispensed prescription. That is, a PBM's set of 
reimbursement benchmarks can be used in one relationship, and another 
set of reimbursement benchmarks in another, making it difficult for 
health plans or Medicaid managed care plans to know how much they are 
paying for the actual cost of the drug compared to the fees for 
administering the benefit. For this reason, under Part D, CMS requires 
that the price the PBM pays to the pharmacy for the cost of the drug is 
passed through to the plan, and any ``spread'' that the PBM keeps is an 
administrative cost that must be reported to the plan.
    Medicaid-contracted PBMs (that is, PBMs contracted with or on 
behalf of Medicaid managed care plans) often reimburse health care 
providers using methods similar to those used in the commercial and 
Medicare Part D markets, which are heavily dependent on drug pricing 
benchmarks provided by manufacturers, and published by commercial 
publishers of drug pricing data (that is Average Wholesale Price (AWP) 
or Wholesale Acquisition Cost (WAC)). The PBMs may also use a Maximum 
Allowable Cost (MAC) benchmark for generic drugs, which is a PBM 
proprietary benchmark that reimburses pharmacy providers for generics.
    For PBMs' payment to contracted health care providers, 
reimbursement might be based on a discount off AWP, a markup on WAC, or 
the Maximum Allowable Cost (MAC) for generics, plus any contractually 
defined professional dispensing fee (PDF), which determines the total 
reimbursement for each COD. In contrast, the PBM might charge the 
managed care plans for dispensing that same COD based upon a different 
fixed percentage discount from AWP, or a higher percentage of WAC, 
either on a per-claim or aggregate spend basis. That is, a PBM's 
benchmarks, markups, or discount percentages may differ for the same 
COD. The result is that there is little to no transparency to the 
managed care plan as to how much the plan actually pays for the COD 
administered or dispensed to the patient, and how much is paid to the 
PBM for fees related to the administration of the COD benefit. The cost 
charged to the managed care plan for the COD by the PBM often includes 
both the amount that the PBM reimbursed the medical or pharmacy 
provider for the COD as well as the PBM's administrative fees for 
operating the benefit program.
    The margin between the amount charged to a managed care plan for a 
COD, and the amount paid by a PBM to a pharmacy provider is referred to 
as the ``spread'' or ``spread pricing.'' This margin or ``spread'' may 
only be known by the PBM, unless a State Medicaid program or managed 
care plan (or other prime contractor in other contexts) specifically 
requires disclosure of the charge and payment data that are used to 
make these calculations. This information deficit results in a lack of 
accountability and transparency to the Medicaid program, which we 
believe is contrary to proper and efficient operation of the State 
Medicaid program and potentially creates conflicts of interest in 
connection with payment for CODs.
    Section 1902(a)(4)(A) of the Act requires that the State Plan for 
medical assistance comply with methods of administration that are found 
by the Secretary to be necessary for the proper and efficient operation 
of the State Plan. Greater transparency and accountability by Medicaid 
managed care plans (and their subcontractors) to the States for how 
Medicaid benefits are paid compared to how administrative fees or 
services are paid are necessary for efficient and proper operation of 
Medicaid programs. Moreover, this lack of transparency makes it more 
difficult for Medicaid managed care plans to assure that the plan's MLR 
calculation is limited to the true medical costs associated with the 
provision of CODs.
    Medicaid managed care regulations at Sec.  438.8 require States, 
through their contracts with managed care plans, to require each 
managed care plan to calculate and report an annual MLR starting on or 
after July 2017, consistent with the requirements of the regulation

[[Page 34250]]

detailing the calculation, including which expenses are in the 
numerator and the denominator. We issued a Center for Medicaid & CHIP 
Services (CMCS) Informational Bulletin on May 15, 2019, for Medicaid 
Managed Care plans, titled ``Medicaid Loss Ratio (MLR) Requirements 
Related to Third Party Vendors'' (``2019 CIB'') (see https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/cib051519.pdf), regarding calculation of the MLR when a managed care 
plan uses subcontractors for plan activities.
    MLR calculations are used to develop capitation rates paid to 
Medicaid managed care plans, thus their accuracy is critical in 
assuring that Medicaid payments are reasonable, appropriate and 
necessary for health care services when using a Medicaid managed care 
plan. Managed care capitation rates must (1) be developed such that the 
plan would reasonably achieve an 85 percent MLR (Sec.  438.4(b)(9)) and 
(2) are developed using past MLR information for the plan (Sec.  
438.5(b)(5)). In addition to other standards outlined in Sec. Sec.  
438.4 through 438.7, these requirements for capitation rates related to 
the MLR are key to ensuring that Medicaid managed care capitation rates 
are actuarially sound. In addition, Medicaid managed care plans may 
need to pay remittances (that is, refund part of the capitation 
payments) to States should they not achieve the specific MLR target. 
Thus, the accuracy of MLR calculation is important to conserving 
Medicaid funds.
    This 2019 CIB provided additional guidance regarding the 
calculation of the MLR when third party vendors, such as PBMs, are 
involved. The purpose was to assist States in ensuring that revenues, 
expenditures and amounts are appropriately identified and classified 
for the MLRs submitted by managed care plans, especially when a 
subcontractor is used. The 2019 CIB uses PBM spread pricing as a 
specific example. Several States have already implemented prohibitions 
or other restrictions on the PBM practice of spread pricing. Although 
there is not currently a Federal prohibition on using spread pricing in 
Medicaid, as noted, we issued the 2019 CIB regarding the impact of the 
lack of transparency between costs for administrative functions versus 
actual Medicaid services on the managed care plan's MLR calculation. 
The 2019 CIB is clear that when the subcontractor, in this case the 
PBM, is performing administrative functions, such as eligibility and 
coverage verification, claims processing, utilization review, or 
network development, the expenditures and profits on these functions 
are a non-claims administrative expense as described in Sec.  
438.8(e)(2)(v)(A), and should not be counted as an incurred claim for 
the purposes of MLR calculations.
    In addition, the Medicaid managed care regulation at Sec.  
438.230(c)(1) requires, through contractual requirements in the managed 
care contract between the managed care plan and the State, certain 
agreements to be in subcontracts, including that subcontractors agree 
to perform the delegated activities and reporting responsibilities in 
compliance with the managed care plan's contract obligations. Moreover, 
the reporting standards at Sec.  438.8(k)(3) specify that managed care 
plans must require any third-party vendor providing claims adjudication 
activities to provide all underlying data associated with MLR 
calculation and reporting. The 2019 CIB explains how these regulatory 
obligations mean that all subcontractors that administer claims for the 
managed care plan must report the incurred claims, expenditures for 
activities that improve health care quality, and information about 
mandatory deductions or exclusions from incurred claims (overpayment 
recoveries, rebates, other non-claims costs, etc.) to the managed care 
plan.
    The requirements and definitions in Sec.  438.8 for these 
categories of costs and expenditures must be applied to the required 
reporting. The reporting from the subcontractor must have sufficient 
detail to allow a managed care plan to accurately incorporate the 
expenditures associated with the subcontractor's activities into the 
managed care plan's overall MLR calculation. The level of detail must 
meet the requirements in Sec.  438.8(k)(3) and the level of detail that 
is required may vary based on what is necessary to accurately calculate 
an overall MLR or to comply with any additional reporting requirements 
imposed by the State in its contract with the managed care plan.
    Medicaid managed care plans are generally paid by States using 
single monthly capitation payments that for the plan's coverage of the 
health care services covered under the Medicaid managed care contract, 
including CODs. If the managed care plan contracts with a PBM, there 
are different options for the managed care plan to pay the PBM for the 
administrative services provided by the PBM. Payment for administrative 
services is made in addition to the amount the managed care plan would 
reimburse the PBM for the actual COD and dispensing fee costs. In 
general, managed care plans have paid PBMs for administrative services 
in one of two ways, or a mix of these approaches--either through a flat 
administrative fee per prescription, or, as described above, by 
including it in the overall COD payment (that is through ``spread 
pricing'').
    When payments to the PBM for the administration services are 
included in the managed care plans' total COD payment without a clear 
delineation of which amount is for administrative services, it obscures 
how much of that total payment is actually paid to the provider for the 
prescription and what is paid for administrative services furnished by 
the PBM. In other words, it is difficult for the managed care plan to 
determine the proportion of the payment to the PBM that is attributable 
to the administrative service costs provided by the PBM.
    Furthermore, incorrectly attributing administrative service costs 
as medical expenditures, may increase the MLR numerator, and thus 
increase the per-member-per-month (PMPM) revenue a managed care entity 
can receive while appearing to meet MLR requirements. Given this lack 
of transparency, the ``spread'', which has been the basis for 
generating significant PBM profit, obscures from Medicaid and the 
managed care plans the actual cost of the CODs dispensed to plan 
enrollees. This makes it difficult for managed care plans and State 
Medicaid agencies to determine whether the amount that the PBM is 
charging to administer the benefit is a reasonable expense to be borne 
by a Medicaid program. Moreover, it makes it difficult for plans to 
ensure that their MLR calculations appropriately classify and account 
for expenditures.
    We provide a representative example of how spread pricing occurs in 
the context of Medicaid prescription drug coverage provided by a 
managed care plan. Specifically, in Table 2, we illustrate how a PBM 
might leverage a 5 percent difference in the AWP value between the 
amount charged to the plan and the amount paid to the pharmacy for a 
commonly-dispensed generic drug product, to ultimately capture 30.76 
percent of the dollars spent by the managed care plan for the 
prescription.

[[Page 34251]]



                   Table 2--Example of Spread Pricing
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Drug Product...........................  NDC 1234567890, Drug 300 MG
                                          CAPSULE, 60 capsules in
                                          prescription.
Published AWP..........................  $1.33 per capsule.
PBM Reimbursement to pharmacy (MAC)....  ((AWP-90%) * 60) + $1
                                          dispensing fee = $8.98.
Amount PBM billed to Managed care plan.  ((AWP-85%) * 60) + $1
                                          dispensing fee = $12.97.
PBM spread =...........................  ($12.97-$8.98) = $3.99.
PBM spread percentage =................  ($3.99/$12.97) = 30.76% of
                                          total cost to managed care
                                          plan.
------------------------------------------------------------------------

    Table 2 shows that, while the pharmacy only received $8.98 in 
reimbursement from the PBM for the prescription, PBM charged the 
managed care plan $12.97, or about 31 percent more for the same 
prescription. Depending on the specifics of the contract that the PBM 
has with the managed care plan, some of this margin or spread might be 
used to pay the PBM for managing or administering the pharmacy benefit 
but in some cases, this spread may be in addition to administrative 
fees paid by the plan to the PBM. For example, there may already be 
included in the contract a specific fee that the Medicaid MCO is paying 
for the administration of the COD benefit. These fees would be in 
addition to the amounts being paid as part of the ``spread pricing.''
    However, unless the managed care plan knows the amounts that the 
pharmacy providers are being paid by the PBM, the managed care plan is 
unable to assess the full scope of payments to the PBM for 
administrative services furnished by the PBM. As a result, the plan may 
not know whether the PBM is being appropriately compensated for 
administering the COD benefit.
    While the per-prescription dollar amounts above may not appear 
substantial, the overall impact to a Medicaid managed care pharmacy 
program may be significant given generic claims represent greater than 
90 percent of total pharmacy claims. For example, an analysis of Ohio's 
Medicaid managed care program by the Ohio Auditor of State revealed 
$208.4 million of spread within their managed care plan's PBM 
transactions for generic drug claims between April 1, 2017, and March 
31, 2018.\6\ For the time period analyzed, this amount of PBM spread 
represented 31.4 percent of total generic drug expenditures within the 
State's Medicaid managed care program.
---------------------------------------------------------------------------

    \6\ David Yost, Ohio's Medicaid Managed Care Pharmacy Services 
Auditor of the State Report (2018), available at https://tinyurl.com/mbn75c.
---------------------------------------------------------------------------

    CMS has determined that 11 States \7\ have enacted relevant 
legislation related to the practice of spread pricing. Four of these 
States (Arkansas, Delaware, Michigan, and Oklahoma) have complete 
State-wide prohibitions on the practice of spread pricing for any PBM 
operating within the State, regardless of the payer. Five States 
(Kentucky, Louisiana, New York, Pennsylvania, and Virginia) prohibit 
the practice of spread pricing by PBMs or MCOs in Medicaid, explicitly. 
One State (Pennsylvania) further requires that all Medicaid MCOs 
include a spread pricing prohibition clause in all contracts with PBMs. 
Only 2 of the 11 States with spread pricing laws (Alabama and Montana) 
merely require disclosure of certain spread pricing information (that 
is, annual report of aggregate rebate information and whether the PBM 
engages in spread pricing). Spread pricing can increase Medicaid 
pharmacy program costs, reduce efficient operation of the Medicaid 
program, and reduce the transparency of State Medicaid expenditures 
within managed care programs. This makes it more difficult for managed 
care plans and States to discern which participants of the pharmacy 
supply chain retain the bulk of the COD reimbursement.
---------------------------------------------------------------------------

    \7\ https://nashp.org/comparison-of-state-pharmacy-benefit-managers-laws/.
---------------------------------------------------------------------------

    For these reasons, we are proposing to amend Sec.  438.3(s) to 
require Medicaid MCOs, PIHPs, and PAHPs that provide coverage of CODs 
to structure any contract with any subcontractor for the delivery or 
administration of the COD benefit require the subcontractor to report 
separately the amounts related to the incurred claims described in 
Sec.  438.8(e)(2), such as reimbursement for the CODs, payments for 
other patient services, and the dispensing or administering providers 
fees, and subcontractor administrative fees. The proposal would ensure 
that MLRs reported by MCOs, PIHPs, and PAHPs that use subcontractors in 
the delivery of COD coverage would be more accurate and transparent. 
The separate payment requirements would help States and managed care 
plans better understand whether they are appropriately and efficiently 
paying for the delivery of CODs, a significant part of which is funded 
by the Federal Government. We note that this proposal does not change 
the applicability of the 2019 CIB to PBM subcontractors or to other 
subcontracting arrangements used by a Medicaid managed care plan; the 
2019 CIB remains CMS' position on how Sec. Sec.  438.8 and 438.230 
apply. This proposal would create additional requirements for MCOs, 
PIHPs and PAHPs that help ensure that the objectives and 
responsibilities outlined in the 2019 CIB are met.
    The proposal requires MCOs, PIHPs, and PAHPs that cover CODs to 
require their subcontractors to report their costs in a way that aligns 
more fully with the specific categories specified in Sec.  438.8(e)(2) 
regarding the MLR numerator. Fully aligning the subcontractor's reports 
and billing (invoices) with how the MLR regulation categorizes and 
treats specific costs and expenditures would make clearer for the MCOs, 
PIHPs, and PAHPs how its payments to a subcontractor are used that 
would be subject to proposed Sec.  438.3(s)(8), and allow those managed 
care plans to incorporate the subcontractor's costs into the MLR 
reporting and calculation. However, having the subcontractor's (in 
particular a PBM's) expenditures and costs reported in the categories 
that we are proposing might not be representative of how the industry 
works, might require systems changes and impose burden that we have not 
taken into account, or might result in unintended consequences. 
Therefore, we are specifically soliciting comment on this point and on 
other alternatives for how MCOs, PIHPs, and PAHPs should require 
information from their subcontractors and how they should structure 
payment or billing arrangements to achieve the policy goals we have 
outlined.
    We believe this new transparency requirement would assist States 
and Medicaid managed care plans in complying with Sec.  438.8 and 
related guidance because subcontractor PBMs would be required to 
appropriately identify certain costs, so that the managed care plan can 
appropriately calculate its MLR. In particular with COD spending, the 
managed care plan would have to separately identify prescription drug 
and dispensing or administration fee claim costs when calculating the 
MLR, in contrast to

[[Page 34252]]

administrative costs. As a result, any payments for costs over and 
above the cost of the prescription and dispensing fee would be 
separately identifiable by the managed care plan and cannot be used to 
inappropriately inflate the MLR which may result in managed care plan 
capitation rates that are not actuarially sound.

C. MDRP Administrative and Program Integrity Changes

1. Proposed Definitions (Sec.  447.502)
a. Proposal To Modify the Definition of Covered Outpatient Drug (Sec.  
447.502)
    Sections 1927(k)(2) and (3) of the Act provide a definition of the 
term ``covered outpatient drug'' (COD) and a limiting definition, which 
excludes certain drugs, biological products, and insulin provided as 
part of, or as incident to and in the same setting as, enumerated 
services and settings from the definition of COD. This exclusion is 
subject to a parenthetical, however, which limits the exclusion to when 
payment may be made as part of payment for the enumerated service or 
setting, and not as direct reimbursement for the drug.
    In the COD final rule, we finalized a regulatory definition of COD 
in Sec.  447.502 that substantially mirrors the statutory definition. 
Consistent with section 1927(k)(3) of the Act, the regulatory 
definition includes a limiting definition in paragraph (2) of the 
definition of covered outpatient drug at Sec.  447.502 that excludes 
from the definition of COD any drug, biological product, or insulin 
provided as part of or incident to and in the same setting as any one 
in a list of services, and for which payment may be made as part of 
that service instead of as a direct reimbursement for the drug.
    Over the years we have received questions about when a payment is 
considered to be a direct reimbursement for a drug and whether 
identifying a drug separately on a claim for payment may qualify as 
direct reimbursement for a drug, rendering the drug eligible for 
rebates under section 1927 of the Act as a COD, or in other words, 
garnering the limiting definition exclusion inapplicable. If a drug and 
its cost can be separately identified on a claim for payment it can be 
considered subject to direct reimbursement. That is, if the payment to 
the provider includes any reimbursement for the drug and the drug is 
separately identified, then the reimbursement for the drug is a direct 
reimbursement. Additionally, if the payment to the provider is solely 
for the drug (and no other services), and the drug is separately 
identified, it is also a direct reimbursement. Therefore, direct 
reimbursement may be reimbursement for a drug alone, or reimbursement 
for a drug plus the service, in one inclusive payment, if the drug plus 
the itemized cost of the drug are separately identified on the claim. 
In other words, the payment for the drug is not required to be a 
separate payment in order for such payment to be considered direct 
reimbursement.
    To provide greater clarity on this point and the application of the 
limiting definition, we propose to amend the regulatory definition of 
the term covered outpatient drug at Sec.  447.502 to add that direct 
reimbursement for the drug includes when a claim for payment identifies 
the drug plus the itemized cost of the drug. Specifically, we propose 
to add to the regulatory definition of covered outpatient drug at Sec.  
447.502 that the direct reimbursement for a drug may include both 
reimbursement for a drug alone, or reimbursement for a drug plus the 
service, in one inclusive payment, if the drug and the itemized cost of 
the drug are separately identified on the claim.
    Additionally, the limiting definition in section 1927(k)(3) of the 
Act includes the following parenthetical: ``. . . (and for which 
payment may be made under this subchapter as part of payment for 
[certain services] and not as direct reimbursement for the drug).'' The 
term covered outpatient drug is defined in Sec.  447.502 and includes 
this limiting definition parenthetical at paragraph (2): ``. . . (and 
for which payment may be made as part of that service instead of as a 
direct reimbursement for the drug).''
    There is no meaningful distinction between the statutory and 
regulatory language for purposes of the MDRP, and thus, we are 
proposing to make a technical change by modifying the regulatory 
language so that it more closely mirrors the statutory language. We 
propose to add ``payment for'' after ``and for which payment may be 
made as part of'' and to delete ``instead of as a'' in the limiting 
definition of covered outpatient drug and replace it with ``and not 
as''.
    The proposed definition would then read, in significant part, as 
``. . . (and for which payment may be made as part of payment for that 
service and not as direct reimbursement for the drug).''
b. Proposal To Define Drug Product Information (Sec.  447.502)
    Section 6(a)(1)(A)(iv) of MSIIA amended section 1927(b)(3) of the 
Act by adding the words ``and drug product'' to the title of section 
(b)(3), and adding section (b)(3)(A)(v), to require a manufacturer to 
report drug product information that the Secretary shall require for 
each of the manufacturer's CODs no later than 30 days after the last 
day of each month of a rebate period. Section 1927(b)(3)(A) of the Act 
describes the manufacturer drug product and pricing information that is 
required to be reported to the agency by statute, and with respect to 
the pricing information, specifically provides for the reporting of 
such information, such as AMP and best price. To support the 
implementation of this new statutory requirement to report drug product 
information, we propose to define drug product information at Sec.  
447.502.
    We currently require manufacturers to submit drug product 
information when the covered outpatient drug is entered into the MDP 
system, although there is no regulatory definition of drug product 
information. When initially reporting drug product data upon the 
execution of an NDRA, manufacturers have 30 days after the date on 
which they enter into an NDRA to report drug product data for their 
existing CODs under section 1927(b)(3)(A) of the Act. After the 
execution of an NDRA, manufacturers have 30 days from the end of each 
rebate period to report drug product data for new CODs under section 
1927(b)(3)(A)(v) of the Act.
    We propose to define ``drug product information'' in Sec.  447.502 
as information that includes, but is not limited to, NDC number, drug 
name, units per package size (UPPS), drug category (``S'', ``I'', 
``N''), unit type (for example, TAB, CAP, ML, EA), drug type 
(prescription, over-the counter), base date AMP, therapeutic equivalent 
code (TEC), line extension drug indicator, 5i indicator and route of 
administration, if applicable, FDA approval date and application number 
or OTC monograph citation if applicable, market date, COD status, and 
any other information deemed necessary by the agency to perform 
accurate URA calculations.
    As previously discussed in this proposed rule, the drug category 
for an NDC should be single source or innovator for the entire history 
of the NDC if it was always produced, distributed, or marketed under an 
NDA, unless a narrow exception applies, or single source if marketed 
under a BLA. If a narrow exception has been granted by CMS, the drug 
category for that NDC should historically be reported as single source 
or innovator, and can be changed to noninnovator, effective April 1, 
2016. We use the FDA ``applications.txt'' file to verify the type of 
application associated with an application number. The file may be 
accessed using the link to the Drugs@FDA download file found

[[Page 34253]]

on the FDA web page at https://www.fda.gov/drugs/drug-approvals-and-databases/drugsfda-data-files.
    The only situation in which a drug that is produced or marketed 
under an NDA may be reported as a noninnovator drug is if a narrow 
exception was granted by CMS in accordance with the process established 
in the COD final rule. See 81 FR 5191. Definitions for these drug 
categories can be found at section 1927(k)(7) of the Act and at Sec.  
447.502.
    Manufacturers should evaluate all of their NDCs for compliance with 
drug product information reporting, and if they determine corrections 
are required, they should contact the agency for assistance. In 
Manufacturer Release No. 113, we address a manufacturer's 
responsibility to ensure that all of their CODs are correctly 
classified and reported in the Drug Data Reporting system (DDR) for the 
history of the NDC, including such NDCs that may no longer be active: 
https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf.
    As part of a manufacturer's evaluation of their NDCs for compliance 
with accurate drug product information reporting, they should ensure 
that each NDC is reported with an accurate market date. In this 
proposed rule, we are proposing to add a definition for ``market date'' 
for the purposes of the MDRP. Please see proposed Sec.  447.502 for 
that proposed definition and elsewhere in this preamble for an 
explanation of how market date is used to determine the quarter that 
establishes each drug's base date AMP.
    Generally, a manufacturer cannot make the drug product information 
corrections in the CMS system without our intervention. To request 
corrections, a manufacturer should contact CMS using instructions that 
are available on Medicaid.gov (https://www.medicaid.gov/medicaid/prescription-drugs/medicaid-drug-rebate-program/medicaid-drug-rebate-program-change-request/index.html) to correct drug product and pricing 
information. If we identify a misclassified or misreported NDC as part 
of the review of the information submitted by the manufacturer to 
support these drug pricing or product information changes, and notify 
the manufacturer, the link to the instructions for correcting the data 
would generally be included as part of that notification.
    For most drug product information changes, as outlined above, we 
would make the requested changes on behalf of the manufacturer in the 
CMS system, and those changes would subsequently be available for 
manufacturer certification. However, in some situations where monthly 
and/or quarterly pricing data must be updated as a result of the drug 
product information change, if necessary, we would notify the 
manufacturer that certain pricing data fields have been ``unlocked'' in 
the CMS system to allow the manufacturer to enter or correct required 
pricing information if applicable.
    Regardless of whether we make a data change on behalf of a 
manufacturer or whether the manufacturer enters required data directly 
in the CMS system, manufacturers would be required to certify the 
information in accordance with Sec.  447.510. If we make a data change 
at the request of a manufacturer, the manufacturer is not relieved of 
its responsibility to ensure the accuracy of such data, nor should it 
be inferred that we have approved a variance from the requirements of 
the statute.
    Until certification is complete, the changes in the CMS system are 
not considered final and would not be used in any quarterly rebate 
calculations or transmitted to the States as part of the quarterly 
rebate files; however, the manufacturer is still responsible for 
correct URA calculations and rebate payments. If drug product 
information changes are left uncertified, the previously certified 
values would remain in effect; therefore, corrections made in the CMS 
system that remain uncertified would result in the drug continuing to 
be considered misclassified or misreported. We would consider this to 
be late reporting of product data for which a manufacturer's rebate 
agreement may be suspended from the MDRP under section 1927(b)(3)(C)(i) 
of the Act, and eventually terminated as authorized under section 
1927(b)(4)(B) of the Act.
c. Proposal To Define Internal Investigation for Purposes of Pricing 
Metric Revisions (Sec. Sec.  447.502 and 447.510)
    In accordance with section 1927(b)(3) of the Act, Sec.  447.510 of 
the implementing regulations, and the terms of the NDRA, manufacturers 
are required to report certain pricing and drug product information to 
CMS on a timely basis or else they could incur penalties or be subject 
to other compliance and enforcement measures. As explained in the final 
time limitation rule, in an effort to improve the administration and 
efficiency of the MDRP and assist States and manufacturers that would 
otherwise be required to retain drug utilization pricing data records 
indefinitely, we established the 12-quarter time frame for reporting 
revisions to AMP or best price information. Notwithstanding the 12-
quarter time frame for reporting revisions, we continued to receive 
requests outside of the 12-quarter period from manufacturers to revise 
pricing data. These types of manufacturer requests, which could span 
multiple years prior to the 12-quarter timeframe, and could sometimes 
result in substantial recoupment of Medicaid rebates already paid to 
States, impede the economic and efficient operation of the Medicaid 
program.
    Consequently, in the COD final rule (81 FR 5278) we finalized Sec.  
447.510(b)(1), which provides that a manufacturer must report to CMS 
any revision to AMP, best price, customary prompt pay discounts or 
nominal prices (pricing data) for a period not to exceed 12 quarters 
from the quarter in which the data were due unless one of a number of 
enumerated exceptions applies. See Sec.  447.510(b)(1)(i) through (vi). 
Of note, Sec.  447.510(b)(1)(v) provides an exception to the 12-quarter 
price reporting rule 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 Department of 
Justice (DOJ) investigation.
    In a response to comment in the preamble of the COD final rule, 
which added Sec.  447.510(b)(1)(v), we indicated that internal 
investigation is intended to mean a manufacturer's internal 
investigation, and we further explained that in the event that a 
manufacturer discovers any discrepancy with its reported product and 
pricing data to the MDRP that are outside of the applicable timeframes, 
the manufacturer should determine if the change satisfies one of the 
enumerated exceptions. (81 FR 5280)
    However, we did not further define or give any greater explanation 
for the applicability of the exception to the 12-quarter rule, 
particularly in instances when manufacturers perform an internal 
investigation of the prices (AMP and best price) reported and certified 
in the Medicaid Drug Product systems by another manufacturer. Given the 
absence of a definition of internal investigation or specificity as to 
when this exception applies, some manufacturers have broadly 
interpreted the internal investigation exception to the 12-quarter 
rule.
    Some manufacturers have requested revisions to AMP and best price 
outside of the 12-quarter rule based upon an internal investigation 
related to newly acquired products or lines of business

[[Page 34254]]

previously certified by the prior manufacturers without making findings 
that the prior manufacturer violated any law. For example, some 
requests from manufacturers to revise AMP or best price for drug 
product and drug pricing information previously reported and certified 
from another manufacturer were based on internal reviews that did not 
result in proof that the prior manufacturer misapplied the laws or 
regulations, or acted in a fraudulent or illegal manner.
    In cases when a manufacturer requests an exception to the 12-
quarter rule due to an internal investigation, we propose to specify 
that the manufacturer must make a finding that indicates a violation of 
statute or regulation made by the prior manufacturer before we consider 
such a request. For example, a request to restate or revise pricing 
outside of the 12-quarter time frame by a manufacturer to previously 
reported and certified data of a prior manufacturer based upon a mere 
disagreement with the prior manufacturer's government pricing 
calculations and assumptions would not be considered a valid reason to 
revise a prior manufacturer's pricing outside of the 12-quarter time 
frame. The manufacturer must make findings that include actual data as 
evidence that the prior manufacturer violated statute or regulation.
    Manufacturers should not use the internal investigation exception 
to permit restatements to allow manufacturers to apply a different 
methodology or reasonable assumption to determine AMP and best price to 
its favor when the methodology originally applied was consistent with 
statute and regulation, and drug product and pricing information was 
properly reported and certified by the manufacturer at the time. To 
ensure clarity on when the internal investigation exception may be 
appropriately applied, we are proposing to define internal 
investigation at Sec.  447.502 to mean a manufacturer's investigation 
of its AMP, best price, customary prompt pay discounts or nominal 
prices that have been previously certified in MDRP that results in a 
finding made by the manufacturer of fraud, abuse or violation of law or 
regulation. A manufacturer must make data available to CMS to support 
its finding. We are also proposing to amend Sec.  447.510(b)(1)(v) to 
reference the proposed definition of internal investigation at Sec.  
447.502.
d. Proposal To Revise Definition of Manufacturer for NDRA Compliance 
(Sec.  447.502)
    When Congress passed the drug rebate provisions in 1990, they 
established a framework for coverage and payment of covered outpatient 
drugs under Medicaid, and prescribed drugs, generally. Often referenced 
as the ``grand bargain'' between the States, the Federal Government, 
and manufacturers, the MDRP made clear that if manufacturers paid 
rebates for the covered outpatient drugs dispensed and paid for under 
the State Plan, States would be required to cover their covered 
outpatient drugs, subject to limited permissible restrictions and 
exclusions. These policies would help increase Medicaid beneficiaries' 
access to medications, while assisting States in striving to deliver an 
economic and efficient Medicaid program. A key piece of the coverage 
and payment framework the MDRP established is captured in section 
1927(a)(1) of the Act, which provides that in order for payment to be 
available under section 1903(a) or under part B of title XVIII for 
covered outpatient drugs of a manufacturer, the manufacturer must have 
entered into and have in effect a rebate agreement with the Secretary 
as described in section 1927(b) of the Act.
    With an effectuated rebate agreement in place, manufacturers 
participating in the MDRP are required to provide periodic rebates for 
CODs dispensed and paid for under the State Plan, and also provide 
certain drug price and drug product information on a monthly and/or 
quarterly basis to the agency. While entering into a rebate agreement 
is voluntary, a manufacturer that does not enter into such an agreement 
forgoes payment and coverage, for their covered outpatient drugs under 
Medicaid. It also affects coverage under the 340B Drug Pricing Program 
and may affect Medicare Part B reimbursement.
    To implement the important requirement set forth at section 
1927(a)(1) of the Act, and in an effort to prevent selective reporting 
of NDCs, the agency has required manufacturers to ensure that all their 
associated labeler codes with CODs enter into a rebate agreement to 
comply with the terms of the NDRA. This requirement has been included 
in the NDRA since the inception of the program. (See section II., 
Manufacturer's Responsibilities, subsection (a) of the previous NDRA, 
and section II., Manufacturer's Responsibilities, subsection (b) of the 
updated NDRA.) We also reiterated this point most recently in the 
preamble to the updated NDRA, 83 FR 12770 (Mar. 23, 2018). In that 
final notice, we explained that manufacturers are required to report 
all CODs under their labeler code(s) to the MDRP, and may not be 
selective in reporting their national drug codes (NDCs) to the program.
    We continue to maintain that this requirement applies to all the 
manufacturer's labeler codes, including newly acquired labeler codes, 
newly formed subsidiaries, and labeler codes previously omitted from 
the original rebate agreement. 83 FR 12771; see also Manufacturer 
Releases #13 and #48. Thus, once we review a request for a rebate 
agreement and the manufacturer confirms, among other things, that all 
of a manufacturer's CODs are listed, a rebate agreement will be issued. 
Manufacturers are then responsible for paying a rebate on those CODs 
that were dispensed and/or paid for, as applicable, under the State 
Plan. These rebates are paid by manufacturers on a quarterly basis to 
States, and are shared between the States and the Federal Government to 
partially offset the overall cost of prescription drugs under the 
Medicaid program.
    The term ``manufacturer'' was first defined in statute in 1990, 
when section 1927 of the Act was established, and was interpreted in 
regulation in 2007 at Sec.  447.502. Section 1927(k)(5) of the Act 
defines the term ``manufacturer'' as any entity which is engaged in: 
(1) the production, preparation, propagation, compounding, conversion, 
or processing of prescription drug products, either directly or 
indirectly by extraction from substances of natural origin, or 
independently by means of chemical synthesis, or by a combination of 
extraction and chemical synthesis; or (2) in the packaging, 
repackaging, labeling, relabeling, or distribution of prescription drug 
products.
    The regulations at Sec.  447.502 define ``manufacturer'' to mean 
any entity that holds the NDC for a covered outpatient drug or 
biological product and meets the following criteria:
     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
     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.

[[Page 34255]]

     For authorized generic products, the term ``manufacturer'' 
will also include the original holder of the NDA.
     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.
    The labeler code is a unique 5-digit number within the NDC,\8\ 
assigned by the FDA, and one manufacturer may be assigned multiple 
labeler codes by FDA. A manufacturer can obtain a different labeler 
code for each manufacturing establishment or company under the same 
ownership since the labeler code identifies a company marketing a drug 
product.\9\ Some drug companies that have several divisions have more 
than one labeler code, and a single manufacturer may be marketing its 
drugs across or under multiple labeler codes. Furthermore, a 
manufacturer may own, operate, or be associated or affiliated with 
several labeler code subsidiaries, each of which makes CODs.
---------------------------------------------------------------------------

    \8\ See 21 CFR 207.33.
    \9\ Electronic Drug Registration and Listing Instructions 
[verbar] FDA.
---------------------------------------------------------------------------

    Consistent with the statute and regulation, our current policy is 
that each of these associated labeler codes would have to have an 
effectuated rebate agreement in order for the single manufacturer to be 
considered to be in compliance with the requirement under section 
1927(a)(1) of the Act that a manufacturer have a rebate agreement in 
effect, and this has been noted in related guidance.\10\ We treat each 
associated labeler code as part of the single manufacturer, and if any 
of the labeler codes of a manufacturer do not have an NDRA in effect, 
no FFP would be available for any of the CODs of the labeler codes of 
the manufacturer, and all of the labelers would be subject to potential 
termination from the MDRP.
---------------------------------------------------------------------------

    \10\ Manufacturer Release 013 (October 6, 1994), Manufacturer 
Release 048 (November 15, 2000) and 83 FR 12770, 12771 (Mar. 23, 
2018).
---------------------------------------------------------------------------

    We also explained in the final notice for the updated NDRA that 
manufacturers that wish to terminate an NDRA that have active CODs must 
request termination for all associated labeler codes, and provide a 
reason for the request (for example, all CODs under the labeler code 
are terminated), or if the request for termination is only for certain 
labeler codes, provide justification for such request (83 FR 12770, 
12771). In that same final notice, we indicated that for purposes of 
ensuring beneficiary access to single source drugs and/or drugs that 
are not otherwise available in the MDRP, we may choose to grant an 
exception to issuing or reinstating an NDRA for certain labeler codes 
of a manufacturer prior to issuing an NDRA for all of the labeler codes 
of the manufacturer, or terminating certain labeler codes as mentioned 
above (83 FR 12771).
    The requirement that manufacturers that enter into a rebate 
agreement cannot exclude any covered outpatient drug from their 
listings applies to all CODs associated with any of the manufacturer's 
labeler codes that market CODs, including newly-purchased labeler 
codes, and newly-formed subsidiaries. This means a manufacturer has to 
be ``all in'' for all its drugs, or ``all out''. Otherwise, there is a 
possibility that a manufacturer would create separate labeler codes for 
some of its drugs, and enter into a rebate agreement for some of its 
labeler codes, and not others. Permitting a manufacturer to do so would 
allow them the benefit of receiving FFP for some of their CODs, while 
potentially avoiding the financial obligation to pay rebates for other 
drugs that would otherwise qualify as CODs and be subject to rebates. 
If a product meets the definition of a covered outpatient drug, but the 
manufacturer of such drug does not have a rebate agreement in effect, 
that drug is not eligible for FFP and may not be claimed on the CMS-64 
form, even though the drug may meet the definition of a prescribed 
drug. In these situations, while States would not be required to 
provide mandatory coverage of such drugs, a State may still elect to 
cover these products with State only funds.
    While we believe that the overwhelming majority of manufacturers 
are compliant with section 1927(a)(1) of the Act, and have had all 
their associated labelers enter into and maintain drug rebate 
agreements, this issue has been challenged by a few manufacturers. In 
more recent times, manufacturers have suggested certain associated 
labelers are exempt or not required to be included in the program under 
the manufacturer's rebate agreement, stating that such associated 
companies, parent entities and brother-sister entities are distinct 
separate manufacturers. They have stated that the agency has not 
required such a policy through final regulations, but rather has 
articulated this policy only in program releases and preamble 
statements, which are subregulatory guidance that do not carry the 
force of law.
    To codify the requirement at section 1927(a)(1) of the Act, that a 
manufacturer have entered into and have in effect an agreement with the 
Secretary to receive FFP for its CODs, we are now proposing to modify 
the regulatory definition of manufacturer to specify how the term 
``manufacturer'' is defined for purposes of complying with this 
statutory requirement. To satisfy the requirement that a manufacturer 
have entered into and have in effect an agreement with the Secretary, 
we are specifying at proposed Sec.  447.510(h) that manufacturers must 
provide CMS with all labeler codes for all the manufacturer's 
applicable drugs. More specifically, we are proposing at Sec.  
447.510(h)(2) that if any manufacturer with a signed rebate agreement 
in effect, acquires or purchases another labeler, acquires or purchases 
covered outpatient drugs from another labeler code, or forms a new 
subsidiary, they must ensure that a signed rebate agreement is in 
effect for these entities or covered outpatient drugs, consistent with 
the definition of manufacturer at Sec.  447.502, within the first 30 
days of the next full calendar quarter beginning at least 60 days after 
the acquisition, purchase, asset transfer, or formation of the 
subsidiary.
    As first described in the ``Medicaid Program; Payment for Covered 
Outpatient Drugs Under Drug Rebate Agreements With Manufacturers'' 
proposed rule (95 FR 48442; hereinafter referenced as the ``1995 
proposed rule''), we have noted our intent that each associated 
manufacturer's labeler codes would have to have an effectuated rebate 
agreement in order for the single manufacturer to be considered to be 
in compliance with the requirement under section 1927(a)(1) of the Act 
that a manufacturer have a rebate agreement in effect. This 1995 
proposed rule is informative and helpful to understanding and 
describing the agency's initial proposed policy and intentions with the 
Medicaid Drug Rebate Program.\11\ In this proposal, CMS proposed to 
interpret the term ``manufacturer'' to specify that if a corporation 
meets the statutory definition of manufacturer (that is, section 
1927(k)(5) of the Act) and possesses legal title to the NDC, the agency 
would consider the term to include associated companies, including 
parent corporations, brother-sister corporations, and subsidiary 
corporations. In addition, we further proposed to interpret the term to 
specify that if a corporation meets the statutory definition of 
manufacturer, and possesses legal title to the NDC number, we would 
consider the term to include: (1) Any corporation that owns at least 80 
percent of the total combined voting power of all classes of stock or 
80 percent of the total value of shares in all

[[Page 34256]]

classes of stock in such entity (that is a parent corporation); (2) Any 
other corporation in which a parent corporation of the entity owns at 
least 80 percent of the total combined voting power of all classes of 
stock or 80 percent of the total value of shares. (60 FR 48447-48448)
---------------------------------------------------------------------------

    \11\ 60 FR 48447 through 48448.
---------------------------------------------------------------------------

    This policy comports with Congress' desire to maximize recipient 
access to medically necessary drugs, while at the same time providing a 
more favorable drug purchasing arrangement for State Medicaid 
programs.\12\ When Congress passed the drug rebate provisions in 1990, 
they made it clear that States that elect to cover prescription drugs 
must, except for certain restrictions or exclusions allowed under the 
statute, cover the CODs of a manufacturer that enters into and complies 
with a drug rebate agreement. In return for such coverage, a 
manufacturer would be responsible for providing a rebate to the State 
that would give the Medicaid program the benefit of those discounts 
that other large public and private purchasers receive.\13\
---------------------------------------------------------------------------

    \12\ H.R. Conf. Rept. No. 964, 101st Cong., 2d Sess. 822, 832 
(1990); H.R. Rept. No. 881, 101st Cong., 2d Sess. 996 (1990).
    \13\ Id.
---------------------------------------------------------------------------

    We believe it would be directly contrary to Congressional intent to 
apply the definition of a manufacturer in a manner that would permit a 
manufacturer (that is by forming a subsidiary corporation) to exclude 
some of its drugs from the drug rebate program.\14\ Our proposal would 
prevent manufacturers from manipulating the system as to select drugs 
by assigning separate labeler codes, without consequence to all of 
their CODs, and codify a longstanding policy that has faced scrutiny 
more recently. As such, we continue to believe that when defining a 
manufacturer, the term ``entity'' should be interpreted to include 
parent, brother-sister, or subsidiary corporations, as well as, 
labelers that are owned, acquired, subsidiaries, affiliates, parent 
companies, franchises, business segments, part of holding companies, or 
under common corporate ownership or control.
---------------------------------------------------------------------------

    \14\ Id.
---------------------------------------------------------------------------

    Therefore, to provide a clearer definition of the meaning of 
manufacturer with respect to section 1927(a)(1) of the Act, we are 
proposing to amend the regulatory definition of manufacturer at Sec.  
447.502. Consistent with the statute and our understanding of 
Congressional intent of the MDRP, which was increasing access to 
medications while at the same time helping States manage pharmacy 
program costs and maximizing Medicaid savings, we are proposing to 
include a new paragraph (5) as part of the definition of a 
manufacturer. This change explains that, for purposes of meeting the 
requirements in section 1927(a)(1) of the Act of maintaining an 
effectuated rebate agreement, that the term ``manufacturer'' means that 
all associated labeler entities of the manufacturer that sell 
prescription drugs, including, but not limited to, owned, acquired, 
affiliates, brother or sister corporations, operating subsidiaries, 
franchises, business segments, part of holding companies, divisions, or 
entities under common corporate ownership or control, must each 
maintain an effectuated rebate agreement in order for a manufacturer to 
satisfy the requirement at section 1927(a)(1) of the Act to have 
entered into and have in effect a rebate agreement with the Secretary.
    Additionally, we are proposing a new paragraph (h), ``Participation 
in the Medicaid Drug Rebate Program (MDRP),'' in Sec.  447.510 to 
further specify the responsibilities of a manufacturer, specifying in 
Sec.  447.510(h)(1) that manufacturers participating in the MDRP must 
have a signed rebate agreement that complies with paragraph (5) in the 
definition of the manufacturer in Sec.  447.502.
    Furthermore, with respect to rebate agreements when a manufacturer 
acquires or purchases another manufacturer, acquires or purchases 
covered outpatient drugs from another manufacturer, or forms a new 
subsidiary, we are proposing to add Sec.  447.510(h)(2), ``Newly 
purchased labeler codes and covered outpatient drugs.'' We are 
proposing that any manufacturer with a rebate agreement in effect that 
acquires or purchases another labeler code, acquires or purchases 
covered outpatient drugs from another labeler, or forms a new 
subsidiary, must have in effect a rebate agreement for these entities 
or covered outpatient drugs consistent with definition of manufacturer 
at Sec.  447.502. The newly associated entity of the manufacturer must 
also have a rebate agreement in effect within the first 30 days of the 
next full calendar quarter beginning at least 60 days after the 
acquisition, purchase, asset transfer, or creation of a subsidiary has 
occurred. By including these provisions in regulation, we would better 
specify that a manufacturer must, in part, assure that a NDRA is in 
effect with the Secretary for all associated labeler codes and that 
MDRP requirements apply to all CODs of a manufacturer, including newly 
associated entities.
    Finally, we are proposing to add a provision on termination in at 
Sec.  447.510(h)(3) specifying that each associated labeler code of a 
manufacturer is considered to be part of the single manufacturer, and 
if any of the associated labeler codes as defined in paragraph (5) of 
the definition of manufacturer at Sec.  447.502 do not have an NDRA in 
effect, or are terminated, then all of the labeler codes will be 
subject to termination.
e. Proposal To Define Market Date (Sec.  447.502)
    Section 1927 of the Act governs the MDRP and payment for CODs which 
are defined in section 1927(k)(2) of the Act. Manufacturers that 
participate in the MDRP are required to pay rebates for CODs that are 
dispensed and paid for under the State Medicaid plan. (See section 
1927(b)(1)(A) of the Act.) Section 1927 of the Act provides specific 
requirements for program implementation, including requirements for 
rebate agreements, submission of drug pricing and product information, 
confidentiality, the formulas for calculating rebate payments, and many 
others related to State and manufacturer obligations under the program. 
The rebates due by manufacturers are calculated based on statutory 
formulas described in section 1927(c) of the Act and consist of a basic 
rebate and, in some cases, an additional rebate that is applicable when 
an increase in the AMP, with respect to each dosage form and strength 
of a drug, exceeds the rate of inflation. This additional rebate 
formula is set forth in sections 1927(c)(2) and 1927(c)(3)(C) of the 
Act, and codified in regulation at Sec.  447.509(a)(2) and (7).\15\
---------------------------------------------------------------------------

    \15\ Section 602 of the Bipartisan Budget Act (BBA) of 2015 
amended section 1927(c)(3) of the Act, to require that manufacturers 
pay additional rebates when their covered outpatient drugs other 
than single source or innovator multiple source drugs' average 
manufacturer prices increase at a rate that exceeds the rate of 
inflation. In accordance with section 1927(c)(3) of the Act, as 
revised by section 602 of the BBA of 2015, manufacturers must 
calculate these additional rebates for these drugs beginning with 
the January 1, 2017 quarter (that is, first quarter of 2017).
---------------------------------------------------------------------------

    The additional rebate calculation requires a determination of the 
AMP for the dosage form and strength of the drug for the current rebate 
quarter, and a comparison of that AMP to the AMP for the dosage form 
and strength of that drug for a certain calendar quarter, generally 
referenced as the base date AMP quarter.\16\ For S or I drugs, that

[[Page 34257]]

base date AMP quarter is the third quarter of 1990, for drugs that were 
first marketed prior to fourth quarter of 1990, or the first full 
calendar quarter after the day on which the drug was first marketed for 
drugs that were first marketed on or after October 1, 1990.\17\ See 
sections 1927(c)(2)(A) and 1927(c)(2)(B) of the Act. For other drugs 
(including N drugs and other drugs reported as N), that base date AMP 
quarter is the third quarter of 2014 for drugs that were first marketed 
prior to April 1, 2013, or the fifth full calendar quarter after the 
day on which the drug was first marketed for drugs that were first 
marketed on or after April 1, 2013. See section 1927(c)(3)(C) of the 
Act. To determine the applicable base date AMP, and ultimately, to 
calculate the additional rebate for a quarter, a critical data point is 
the day on which the drug was first marketed. We reference this date as 
a COD's ``market date.'' Manufacturers are required to report to CMS 
the market date of each dosage form and strength of a COD for all of 
its CODs.
---------------------------------------------------------------------------

    \16\ Base Date AMP is defined in the National Drug Rebate 
Agreement (NDRA) at I.(c) as follows: ``Base Date AMP'' will have 
the meaning set forth in sections 1927(c)(2)(A)(ii)(II) and 
1927(c)(2)(B) of the Act. See also I.(l) definition of ``marketed''. 
Section VIII.a, provides that the agreement is subject to any 
changes in the Medicaid statute or regulations that affect the 
rebate agreement. Thus, any changes to regulations will be 
incorporated into rebate agreements without further action. See also 
Manufacturer Release 113--Misclassification of Drugs (medicaid.gov); 
https://www.medicaid.gov/medicaid-chip-program-information/by-topics/prescription-drugs/downloads/rx-releases/mfr-releases/mfr-rel-009.pdf Manufacturer release No. 9; form 367c data definitions.
    \17\ For a drug with a market date prior to October 1, 1990, the 
MDRP reporting system defaults to a market date of September 30, 
1990. The system assigns a base date AMP quarter of fourth quarter 
of 1990 to such drugs as the statute defines (section 
1927(c)(2)(A)(ii) of the Act).
---------------------------------------------------------------------------

    Section 1927(c)(2)(A)(ii)(II) of the Act expressly provides that 
the base date AMP quarter, with respect to a dosage form and strength 
of a drug, is established ``without regard to whether or not the drug 
has been sold or transferred to an entity, including a division or 
subsidiary of the manufacturer. . .'' This means the market date of a 
drug is the date that the drug was first marketed, regardless of the 
entity that marketed the drug. Consistent with the statute, the market 
date of a drug is not and cannot be based on the first date upon which 
a subsequent manufacturer first markets the drug, but rather the 
earliest date on which the drug was first marketed, by any 
manufacturer, or under any NDC.
    A new market date cannot be established for a drug that is marketed 
under the same FDA-approved NDA number, ANDA number or BLA license 
unless the drug is a new dosage form or strength because the rebate 
statute requires an additional rebate amount based on the market date 
for each dosage form and strength of a COD.\18\ Thus, if a drug is 
purchased or otherwise acquired from another manufacturer, the market 
date should not change, and should equal the market date of the drug 
first marketed under the approved application.
---------------------------------------------------------------------------

    \18\ The FDA approved application (for example the NDA itself) 
includes all FDA approved supplements to the application.
---------------------------------------------------------------------------

    Some manufacturers have attempted to set a new market date to 
establish a new base date AMP for a drug by making changes to a drug 
already approved under an FDA application that are something other than 
changes to the dosage form or strength. If changes to the drug are 
approved under the same FDA application and do not constitute changes 
to the dosage form or strength, a new base date AMP is not appropriate.
    Over the years, manufacturers have sporadically engaged in debate 
regarding the determination of a COD's market date, base date AMP 
quarter, and base date AMP under varied fact-driven scenarios. This 
proposed definition seeks to clarify the term ``market date'' as used 
in the MDRP and to end any further such debates.
    AMP is defined in section 1927(k)(1) of the Act and the definition 
includes that it is ``. . . the average price paid to the manufacturer 
for the drug. . . .'' If there have not been any sales of the drug, 
there is no data upon which to determine an average price paid to the 
manufacturer to most accurately calculate the AMP value. Historically, 
in such cases where no sales may have occurred in a base date AMP 
quarter (because sometimes a new NDC may be available for sale during a 
quarter, but no sales occurred during that quarter), we have advised 
manufacturers to use reasonable assumptions, as appropriate, and 
consistent with applicable law to establish an AMP.
    To assist manufacturers in reporting a more accurately calculated 
AMP, we are proposing to define market date based on the first sale of 
the drug, rather than the date the drug was first available for sale. 
Linking the market date determination to the date of the first sale, 
rather than the date the drug was first available for sale, would 
permit a manufacturer to establish and report a base date AMP without 
reliance on reasonable assumptions, and based on actual data. As a 
result, the URA would also be calculated more accurately because actual 
sales would be available for reporting.
    For purposes of determining the base date AMP quarter and base date 
AMP, we propose that market date be based upon the earliest date on 
which the drug was first sold, by any manufacturer, or under any NDC, 
and define the term to mean the date on which the COD was first sold by 
any manufacturer.
    We propose that first sold means any sale of the COD. We understand 
defining market date, for purposes of determining a COD's base date 
AMP, based on when the COD was first sold, may not completely eliminate 
a manufacturer's need to make reasonable assumptions because the first 
sales may include only AMP ineligible sales. For example, if all the 
sales during the first quarter of a drug's availability are made to 
entities other than retail community pharmacies or wholesalers, and are 
not eligible for a 5i AMP calculation, then there may not be any AMP 
eligible sales to use for the calculation of AMP for that quarter. In 
such cases, a manufacturer may still need to use reasonable assumptions 
to report an AMP for that quarter.
    We propose that ``sold'' means that the drug has been transferred 
(including in transit) to a purchasing entity. We are requesting 
comments on this topic to determine what qualifies as ``sold'' for the 
purposes of determining the market date of a drug, as we have also 
experienced manufacturers interpreting the term ``sold'' differently 
across the industry.
    Because the term market date has not been previously defined in 
regulation and it is data used in the determination of base date AMP, 
we are proposing a definition of market date for the purposes of the 
MDRP. We are proposing at Sec.  447.502 that market date, for the 
purpose of establishing the base date AMP quarter, means the date on 
which the COD was first sold by any manufacturer.
f. Proposal To Modify the Definition of Noninnovator Multiple Source 
Drug (Sec.  447.502)
    As discussed previously in this proposed rule, section 6(c) of the 
MSIAA included a number of amendments to statutory definitions in 
section 1927 of the Act. Generally, those statutory amendments were 
discussed in the December 31, 2020 final rule (85 FR 87000, 87032) 
where the regulatory definitions of multiple source drug, innovator 
multiple source drug, and single source drug were amended consistent 
with the MSIAA.
    Although we made conforming changes to the regulatory definition of 
an I drug in the December 31, 2020 final rule, because the MSIAA did 
not

[[Page 34258]]

expressly amend or clarify the statutory definition of an N drug we did 
not consider whether any changes to the regulatory definition of an N 
drug were necessary at that time. After further evaluation, we propose 
to amend the regulatory definition of an N drug to conform the 
regulatory definition of an N drug to the regulatory definition of an I 
drug. When we established a regulatory definition of an N drug in the 
July 17, 2007 final rule, we did so to distinguish between multiple 
source drugs approved under an ANDA (generally referenced as N drugs) 
and multiple source drugs approved under an NDA (that is, S or I 
drugs). Both I drugs and N drugs are generally multiple source drugs. 
The main difference between the definitions is the authority under 
which the drug is marketed. Generally speaking, I drugs are marketed 
under an NDA and N drugs are marketed under ANDA, or are unapproved.
    Section 1927(k)(7)(A)(iii) of the Act, which was not expressly 
amended or clarified by the MSIAA, defines a noninnovator multiple 
source (N) drug as a multiple source drug that is not an I drug. As 
noted, the MSIAA amended the statutory definition of an I drug by 
removing ``was originally marketed'' and adding ``is marketed,'' and we 
made conforming changes to the regulatory definition of an I drug in 
the December 31, 2020 final rule. When we modified the regulatory 
definition of an I drug to replace ``was originally marketed'' with 
``is marketed'', we neglected to make a corresponding change to the 
definition of an N drug to maintain the clear distinction between an I 
drug, which is marketed under an NDA, and an N drug, which is not 
marketed under an NDA. Paragraph (3) of the regulatory definition of an 
N drug, codified at Sec.  447.502, continues to refer to a COD that 
entered the market before 1962 that was not originally marketed under 
an NDA.
    To maintain the clear distinction between an I drug and an N drug, 
we propose to amend paragraph (3) of the definition of an N drug at 
Sec.  447.502 by removing ``was not originally marketed'' and inserting 
in place ``is not marketed.'' As amended, the regulatory definition of 
an N drug would, in relevant part, have the same structure as the 
statutory and regulatory definitions of an I drug and distinguish 
between a multiple source drug approved under an ANDA (that is, an N 
drug) and a multiple source drug approved under an NDA (that is, an S 
or I drug) based on the authority under which the drug is marketed, not 
how the drug was originally marketed.
    Accordingly, we propose to amend Sec.  447.502 by revising 
paragraph (3) of the definition of an N drug to read, a COD that 
entered the market before 1962 that is not marketed under an NDA. We 
believe this to be a technical correction to the regulatory text.
g. Proposal To Define Vaccine for Purposes of the MDRP Only (Sec.  
447.502)
    States that opt to cover prescribed drugs under section 1905(a)(12) 
of the Act in their State Plan are required to do so consistent with 
section 1927 of the Act, as set forth at section 1902(a)(54) of the 
Act. With limited exceptions, if a manufacturer wants payment to be 
available under Medicaid for their CODs, the manufacturer must 
participate (have entered into and have in effect a rebate agreement) 
in the MDRP, and agree to pay rebates for CODs dispensed and paid for 
under the State Plan. States are then required to cover the drugs of a 
manufacturer participating in the MDRP, if the drug satisfies the 
definition of COD, and then are required to invoice manufacturers for 
rebates on those CODs that are dispensed and paid for under the State 
Plan. If a particular drug or biological product of a participating 
manufacturer is excluded from or does not satisfy the definition of 
COD, then with limited exceptions, a State is not required to cover the 
product under the prescribed drugs benefit nor would it be subject to 
section 1927 of the Act. Moreover, those drugs or biological products 
are not eligible for rebate invoicing, even though a State may cover 
them and seek FFP.
    Section 1927(k)(2)(B) of the Act specifically excludes vaccines 
from the definition of COD for purposes of the MDRP. This exclusion is 
codified in paragraph (1)(iv) of the regulatory definition of COD at 
Sec.  447.502. Section 1927 of the Act, specifically, does not define 
vaccine. Nor is there a definition of vaccine in Title XI, XVIII, XIX, 
or XXI of the Act (applicable to Medicare, Medicaid, and CHIP), that 
speaks to the specific kinds of biological products that qualify as 
vaccines, in terms of their actions in the human body and how and when 
they are used. Moreover, we are not aware that any authorizing statutes 
for any other Department of Health and Human Services agencies include 
such a statutory definition of the term ``vaccine.'' We have not 
established a regulatory definition of vaccine for purposes of the 
MDRP, and we are not aware of any other statutory or regulatory 
definition of vaccine (that speaks to the actions of a product in the 
human body and how and when it is used) that would be applicable for 
purposes of the MDRP. However, for the reasons discussed in this 
section, we believe that a regulatory definition of vaccine is 
necessary for the purposes of the MDRP to specify which products are 
considered vaccines and thus excluded from the definition of COD.\19\
---------------------------------------------------------------------------

    \19\ Currently, for vaccines other than COVID-19 vaccines, 
Medicaid coverage of vaccines and vaccine administration for adults 
is generally optional for States. Coverage of certain vaccinations 
recommended by the Advisory Committee on Immunization Practices 
(ACIP) is required for children and youth under age 21 who are 
eligible for the Early and Periodic Screening, Diagnostic, and 
Treatment (EPSDT) benefit and for beneficiaries receiving Medicaid 
coverage through an Alternative Benefit Plan. Additionally, to 
receive a one percentage point increase in the Federal medical 
assistance percentage for certain expenditures, States must cover 
certain services, including approved adult vaccinations recommended 
by the Advisory Committee on Immunization Practices (ACIP), without 
cost-sharing. See https://www.medicaid.gov/state-resource-center/downloads/covid-19-vaccine-toolkit.pdf for more information. 
Beginning October 1, 2023, under section 11405 of the Inflation 
Reduction Act of 2022, States are required to cover approved adult 
vaccines recommended by the ACIP, and their administration, for many 
adults enrolled in Medicaid and the CHIP program, without cost 
sharing.
---------------------------------------------------------------------------

    Generally, drugs and biological products that are used to treat a 
disease fall into one of the categories of CODs set forth at section 
1927(k)(2) of the Act. Since Congress excluded vaccines from the 
definition of COD in the original 1990 law, and vaccines that were 
licensed at that time have a different intended use than therapeutics, 
we believe that vaccines were excluded because of their unique 
characteristics among medical products marketed at the time of 
preventing disease by inducing an immune response.
    When the MDRP statute was enacted as part of the Omnibus Budget 
Reconciliation Act of 1990 (Pub. L. 101-508, enacted November 5, 1990), 
the term ``vaccine'' referred to a product administered to provide 
active immunity to a person to prevent an infectious disease.\20\ At 
the time, it was generally understood that vaccines are administered 
prophylactically, to prevent the development of an infectious disease, 
not to treat an existing non-infectious disease (such as a cancer). 
Although we have not found any legislative history specifically 
indicating why Congress chose to exclude vaccines from the definition 
of COD, it is likely Congress understood the term ``vaccine'' to refer 
to preventive vaccines only (that is, we do not believe that Congress 
understood the term to

[[Page 34259]]

include therapeutic vaccines) because all licensed vaccines at the time 
the law was enacted shared those characteristics.
---------------------------------------------------------------------------

    \20\ See https://purplebooksearch.fda.gov/. The database at this 
link provides information about all FDA-licensed biological 
products, including the date on which they were licensed. All the 
vaccines listed in the ``Purple Book'' are licensed to prevent an 
infectious disease.
---------------------------------------------------------------------------

    As the science of immunology has become more advanced, drugs and 
biological products have been, and continue to be, developed that treat 
diseases using immunotherapy, such as immunotherapy used to treat 
certain cancers. Some manufacturers refer to such products as 
``therapeutic'' vaccines. While both preventive vaccines and 
``therapeutic vaccines'' work by creating an immune response, each type 
of product has a unique role in health care.
    In general, a preventive vaccine provides active immunity to a 
disease, that is, it causes the body's immune system to produce an 
antigen-specific immune response (for example, antibodies and/or a 
cellular immune response) to antigens of the disease-causing 
organism.\21\ A preventive vaccine is generally administered to induce 
immunity and a ``memory'' response to a particular infectious disease-
causing organism so that in the event an individual is later exposed to 
that disease, the body will recognize the disease and respond before 
the disease has a chance to manifest or to reduce the severity of 
illness. There are also situations in which a preventive vaccine may be 
administered to an individual who has already been exposed to a 
disease-causing organism but the disease has not yet developed and may 
be prevented by a timely and robust vaccine-induced immune response 
(for example, rabies and anthrax vaccines).
---------------------------------------------------------------------------

    \21\ CDC describes active immunity as a long-lasting immunity 
that develops by triggering antibody production. Conversely, they 
describe passive immunity as a short-term immunity provided by the 
administration of antibody-containing products. See https://www.cdc.gov/vaccines/vac-gen/immunity-types.htm.
---------------------------------------------------------------------------

    In contrast, ``therapeutic vaccines'' are generally biological 
products that are intended to induce an antigen specific immune 
response to treat an already established disease (for example, 
treatment of cancer by inducing a specific immune response to the 
tumor). This type of product is generally intended to be a treatment 
modality similar to other forms of immunotherapy such as the checkpoint 
inhibitors or strategies that are based on the transfer of a preformed 
immune response (for example, transfer of antibodies or immune effector 
cells.)
    If ``therapeutic vaccines'' were considered vaccines that are 
excluded from the definition of COD at section 1927(k)(2)(B) of the 
Act, a Medicaid beneficiary's access to these products under the 
prescribed drugs benefit could be limited because States would not be 
required to cover them under that benefit. Moreover, coverage of such a 
product under other benefits might only be available if the CDC's 
Advisory Committee on Immunization Practices (ACIP) issued a 
recommendation for such a product. This potential lack of access to 
important therapies for Medicaid beneficiaries is a critical concern. 
Clinical research into ``therapeutic vaccines'' has been increasing and 
several have been licensed by FDA that offer treatments for diseases 
that previously had limited or no effective treatment available. 
Similarly, if products that provide passive immunity, such as immune 
globulins, were excluded from the definition of a COD, because they 
were identified as vaccines, such treatments may not be made available 
to Medicaid beneficiaries.
    Thus, with the increasing development and availability of products 
that use immunology to treat diseases, and because sometimes these 
products are referred to as ``therapeutic vaccines'', we believe that 
adopting an MDRP regulatory definition of ``vaccine'' that reflects 
Congress' likely intent at the time of the enactment of section 1927 of 
the Act is imperative to ensure that only the appropriate products are 
excluded from the definition of a COD. This would ensure manufacturers 
are able to report their drug product and drug pricing data for all 
CODs accurately, pay appropriate rebates to States, and most 
critically, that Medicaid beneficiaries have access to these important 
therapies under the prescribed drugs benefit.\22\
---------------------------------------------------------------------------

    \22\ Even if a ``therapeutic vaccine'' product is required 
coverage under other Medicaid benefits, this proposal would help to 
ensure that manufacturers report product and pricing data accurately 
and pay rebates to States, as applicable.
---------------------------------------------------------------------------

    Therefore, we are proposing to define ``vaccine'' at Sec.  447.502 
for the specific purposes of the MDRP, so that manufacturers understand 
which products are considered vaccines under the MDRP and are excluded 
from the definition of COD, and not subject to rebates. The definition 
would be applicable only to the MDRP and would not be applicable to any 
other agencies or agency program implementation, including FDA, CDC, 
and HRSA. The proposed definition of vaccine would not apply under any 
Title XIX statutory provisions other than section 1927(k)(2), or to 
separate CHIPs operating pursuant to Sec.  457.70(a)(1) and (d), or for 
purposes of the Vaccines for Children Program. The definition would 
apply to the MDRP for purposes of Medicaid expansion CHIPs, pursuant to 
Sec.  457.70(c)(2). This proposed policy would not alter any applicable 
Federal or State requirements to cover immunizations for Medicaid 
beneficiaries, as applicable. Specifically, we are proposing to define 
``vaccine'' to mean a product that is administered prophylactically to 
induce active, antigen-specific immunity for the prevention of one or 
more specific infectious diseases and is included in a current or 
previous FDA published list of vaccines licensed for use in the United 
States.
    We are including in the proposed definition that a vaccine must be 
administered prophylactically--that is, to prevent a disease and not to 
treat a disease--because we believe that States should generally not 
exclude from coverage, under the prescribed drugs benefit, drugs or 
biologicals that treat disease. We are also proposing that a vaccine 
must be administered to induce active, antigen-specific immunity 
because that is a characteristic of preventive vaccines.
    Finally, we are proposing to limit the definition of vaccine to 
those products that satisfy the conditions of being administered 
prophylactically, to prevent a disease, and induce active antigen-
specific immunity, that also appear on a current or previous list 
compiled by FDA. FDA publishes a list of vaccines licensed for use in 
the United States.\23\ As FDA is the agency responsible for licensing 
vaccines, we believe that if a product satisfying the previously 
described conditions appears on this list, it should be treated as a 
vaccine for the purposes of the MDRP. We seek comment on whether the 
proposed definition of vaccine, for purposes of the MDRP only, 
appropriately distinguishes between preventive vaccines (which would 
satisfy the definition of vaccine and, therefore, not satisfy the 
definition of a covered outpatient drug and would not be eligible for 
statutory rebates), and therapeutic vaccines (which would not satisfy 
the definition of vaccine and therefore could satisfy the definition of 
a covered outpatient drug and could therefore be eligible for statutory 
rebates).
---------------------------------------------------------------------------

    \23\ Vaccines Licensed for Use in the United States.
---------------------------------------------------------------------------

    Additionally, while we propose to cabin this definition to the 
MDRP, we seek comment on whether this definition might result in 
indirect consequences for Medicaid benefits other than the prescribed 
drugs benefit. We are also requesting comment about the consequences 
for Medicaid of ACIP recommending immunization with a

[[Page 34260]]

product that would not qualify as a vaccine under this definition.

D. Proposal To Account for Stacking When Determining Best Price--(Sec.  
447.505)

    Section 1927(c)(1)(C) of the Act defines the term ``best price'' to 
mean with respect to a single source drug or innovator multiple source 
drug of a manufacturer (including the lowest price available to any 
entity for any such drug of a manufacturer that is sold under a new 
drug application approved under section 505(c) of the Federal Food, 
Drug, and Cosmetic Act), the lowest price available from the 
manufacturer during the rebate period to any wholesaler, retailer, 
provider, health maintenance organization, nonprofit entity, or 
governmental entity within the United States, subject to certain 
exceptions and special rules. The implementing regulations for the 
determination of best price are at Sec.  447.505.
    In the COD final rule, we addressed a comment to our proposal to 
make revisions to the determination of best price, and specify which 
prices are included in best price. The comment requested that CMS 
further adopt a policy with regard to the practice of a manufacturer 
stacking two different price concessions provided to two different 
entities, such that under these circumstances, the best price for a 
drug should reflect all rebates and payments associated with a 
transaction of a covered outpatient drug to a particular customer. (See 
81 FR 5252.) In response to the commenter's request, we indicated that 
a manufacturer is responsible for including all price concessions that 
adjust the price realized by the manufacturer for the drug in its 
determination of best price. We also explained that 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, in addition to 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 final price of that drug when 
determining best price (81 FR 5252 through 5253).
    In the COD final rule with comment, we made minor revisions to the 
regulatory text at Sec.  447.505(b) by deleting the reference to 
``associated'' rebate and discounts and inserting a reference to 
``applicable discounts, rebates'' so that it presently reads 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).
    We addressed the question regarding stacking in the response to 
comments in the COD final rule, specifying that if multiple price 
concessions are provided to two entities for the same drug transaction, 
all discounts related to that transaction which adjust the price 
available from the manufacturer should be considered when determining 
best price. However, we did not revise or propose to revise the 
regulation text at Sec.  447.505(d)(3) to address stacking in such 
detail. Section 447.505(d)(3) currently indicates that the manufacturer 
must adjust the best price for a rebate period if cumulative discounts, 
rebates or other arrangements subsequently adjust prices available, to 
the extent that such cumulative discounts, rebates or other 
arrangements are not excluded from the determination of best price by 
statute or regulation.
    However, in the case United States ex rel. Sheldon v. Allergan 
Sales, LLC., a relator alleged that a drug manufacturer failed to 
aggregate discounts provided to separate customers for purposes of 
determining best price, and the manufacturer argued that the stacking 
requirement was not sufficiently clear. The district court granted 
Allergan's motion to dismiss, ruling that relator failed to plausibly 
allege either falsity or knowledge because Allergan's interpretation 
``is objectively reasonable'' and CMS' rule had not specifically warned 
against it. On appeal, a panel of the United States Court of Appeals 
for the Fourth Circuit stated that, in that case, the drug manufacturer 
had not been ``warned . . . by the authoritative guidance from CMS'' 
and that CMS had ``failed to clarify'' the stacking issue.\24\ The 
Government filed an amicus brief supporting the relator's petition for 
rehearing en banc, which the Fourth Circuit granted. Following 
argument, the Fourth Circuit issued its decision with no substantive 
opinion that vacated the prior panel decision and affirmed the district 
court by an equally divided court.
---------------------------------------------------------------------------

    \24\ United States ex rel. Sheldon v. Allergan Sales, LLC, 24 
F.4th 340, 351, 354 (4th Cir. 2022), reh'g en banc granted, No. 20-
2330, 2022 WL 1467710 (4th Cir. May 10, 2022).
---------------------------------------------------------------------------

    As noted, section 1927(c)(1)(C) of the Act defines the term ``best 
price'' to mean with respect to a single source drug or innovator 
multiple source drug of a manufacturer (including the lowest price 
available to any entity for any such drug of a manufacturer that is 
sold under a new drug application approved under section 505(c) of the 
Federal Food, Drug, and Cosmetic Act), the lowest price available from 
the manufacturer during the rebate period to any wholesaler, retailer, 
provider, health maintenance organization, nonprofit entity, or 
governmental entity within the United States. We interpreted this 
section expansively as the statute refers to a manufacturer's lowest 
price ``available'' ``to any'' entity on this statutory list. That is, 
if a manufacturer provides a discount to a wholesaler, then a rebate to 
the provider who dispensed the drug unit, and then another rebate to 
the insurer who covered that drug unit, CMS has concluded that ``best 
price'' must include (or ``stack'') all the discounts and rebates 
associated with the final price, even if the entity did not buy the 
drug directly from the manufacturer. By stacking, best price reflects 
the lowest realized price at which the manufacturer made that drug unit 
available. We also note that manufacturers are required to take rebates 
into account for multiple entities when calculating AMP, and for 
logical reasons, best price should do so as well, since including them 
in AMP and not accounting for them in best price could result in AMP 
being lower than best price.
    Therefore, to remove any potential doubt prospectively, we are 
proposing to revise Sec.  447.505(d)(3) to add to the existing 
regulatory statement that the manufacturer must adjust the best price 
for a covered outpatient drug for a rebate period if cumulative 
discounts, rebates or other arrangements to best price eligible 
entities subsequently adjust the price available from the manufacturer 
for the drug. We are adding the clarifying statement that cumulative 
discounts, rebates or other arrangements must be stacked to generate a 
final price realized by the manufacturer for a covered outpatient drug, 
including discounts, rebates or other arrangements provided to 
different best price eligible entities.

E. Proposal To Rescind Revisions Made by the December 31, 2020 Final 
Rule to Determination of Best Price (Sec.  447.505) and Determination 
of Average Manufacturer Price (AMP) (Sec.  447.504) Consistent With 
Court Order

    Pharmaceutical manufacturers have provided purported financial 
assistance payments (for example, in the form of copay coupons) to 
patients for purposes of paying the patient cost obligation of certain 
drugs.

[[Page 34261]]

    On June 19, 2020, CMS proposed regulations to address the effect of 
PBM accumulator adjustment programs on best price calculations (85 FR 
37286) in relation to these purported manufacturer financial assistance 
payments by instructing manufacturers on how to consider the 
implementation of such programs when determining best price and AMP for 
purposes of the Medicaid Drug Rebate Program (MDRP). In particular, CMS 
proposed revising its regulations to provide that the exclusions for 
manufacturer's financial assistance payments ``apply only to the extent 
the manufacturer ensures the full value of the assistance or benefit is 
passed on to the consumer or patient'' (85 FR 37299). On December 31, 
2020, CMS finalized its proposed revisions (85 FR 87000, 87048 through 
87055, and 87102 through 87103). The final rule codified the proposed 
language to require that ``the manufacturer ensures that the full 
value'' of the assistance or benefit is passed on to the consumer or 
patient to exclude that assistance or benefit to an insured patient 
from the manufacturer's best price calculation and AMP. The final rule 
also delayed the effective date of the change until January 1, 2023, to 
``give manufacturers time to implement a system that will ensure the 
full value of assistance under their manufacturer-sponsored assistance 
program is passed on to the patient.''
    In May 2021, the Pharmaceutical Research and Manufacturers of 
America (PhRMA) filed a complaint against the Secretary asking the 
court to vacate these amendments to Sec.  447.505(c)(8) through (11) 
(85 FR 87102 and 87103), as set forth in the 2020 final rule (referred 
to by the Court as ``the accumulator adjustment rule of 2020''). On May 
17, 2022, the United States District Court for the District of Columbia 
ruled in favor of the plaintiff and ordered that the accumulator 
adjustment rule of 2020 be vacated and set aside.
    In response to this court order, we propose to withdraw the changes 
made to best price and to also withdraw the changes to AMP to apply 
consistent rules for determining best price and AMP. Therefore, we 
propose to remove the language added to these sections as part of the 
2020 final rule: Sec. Sec.  447.504(c)(25) through (29) and (e)(13) 
through (17) and 447.505(c)(8) through (12). See 85 FR 87102 and 87103. 
Specifically, we would remove ``the manufacturer ensures'' from these 
provisions. As a result, these regulations would maintain the language 
that has been in place since 2016. To be clear, the changes to these 
regulations made by the 2020 final rule on January 1, 2023, were not 
effective as a result of the court's order.

F. Drug Classification; Oversight and Enforcement of Manufacturer's 
Drug Product Data Reporting Requirements--Proposals Related to the 
Calculation of Medicaid Drug Rebates and Requirements for Manufacturers 
(Sec. Sec.  447.509 and 447.510)

1. Medicaid Drug Rebates (MDR) and Penalties (Sec.  447.509)
    Section 6 of the MSIAA, titled ``Preventing the Misclassification 
of Drugs Under the Medicaid Drug Rebate Program,'' amended sections 
1903 and 1927 of the Act to clarify the definitions for multiple source 
drug, single source drug and innovator multiple source drug, and to 
provide the Secretary with additional compliance, oversight and 
enforcement authorities to ensure compliance with program requirements 
with respect to manufacturers' reporting of drug product and pricing 
information, which includes the appropriate classification of a drug. 
Drug classification refers to how a drug should be classified--as a 
single source, innovator multiple source, or noninnovator multiple 
source drug--for the purposes of determining the correct rebates that a 
manufacturer owes the States.\25\ When manufacturers misclassify their 
drugs in the rebate program, it can result in manufacturers paying 
rebates to States that are different than those that are supported by 
statute and regulation, and in some cases, can result in the 
manufacturer paying a lower per-unit rebate amount to the States.
---------------------------------------------------------------------------

    \25\ Note that section 1927(c)(3) of the Act describes rebates 
for covered outpatient drugs other than single source and innovator 
multiple source drugs in section 1927(c)(3) of the Act as ``rebates 
for other drugs.'' The MDRP reporting system provides for all 
``other drugs'' that are covered outpatient drugs to be classified 
in the system as N drugs, regardless of whether they expressly meet 
the statutory definition of noninnovator multiple source drug. This 
reporting methodology has been in effect for the history of the 
program and interested parties have understood that a covered 
outpatient drug that was not an S or an I drug is reported in the 
system as an N drug.
---------------------------------------------------------------------------

    Specifically, section 1927(c)(4)(A) of the Act, ``Recovery of 
Unpaid Rebate Amounts due to Misclassification of Drugs,'' was added to 
the statute to provide new authorities to the agency to identify and 
correct a manufacturer's misclassification of a drug, as well as impose 
other penalties on manufacturers that fail to correct their 
misclassifications. In general, a misclassification in the MDRP occurs 
when a manufacturer reports and certifies its covered outpatient drug 
under a drug category, or uses drug product information, that is not 
supported by the statutory and regulatory definitions of S, I, or N.
    We published guidance to manufacturers regarding compliance with 
drug pricing and drug product information reporting under this new law 
in Manufacturer Release #113 on June 5, 2020. See https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf.
    Although much of this law is self-implementing, we are proposing a 
series of regulatory amendments at Sec. Sec.  447.509 and 447.510 to 
implement and codify the statutory changes in regulation. We propose 
that a misclassification of a drug under the MDRP has occurred or is 
occurring when a manufacturer reports its drug under a category that is 
not supported by the statutory and regulatory definitions of S, I, or 
N. A misclassification can also occur when a manufacturer's drug is 
appropriately classified, but the manufacturer is paying rebates at a 
different amount than required by the statute, or where the drug 
manufacturer's certified drug product information for the COD is also 
inconsistent with statute and regulation.
    The MSIAA also amended the Act to expressly require a manufacturer 
to report not later than 30 days after the last day of each month of a 
rebate period under the agreement, such drug product information as the 
Secretary shall require for each of the manufacturer's covered 
outpatient drugs. In a separate section, we are proposing a definition 
of ``drug product information'' for the purposes of the MDRP.
    Similarly, the MSIAA amended the Act to clarify that the reporting 
of false drug product information and data related to false drug 
product information would also be subject to possible CMPs by the HHS 
Office of the Inspector General (OIG), and to provide specific new 
authority to the Secretary to issue civil monetary penalties related to 
knowing misclassifications of drug product or misreported information. 
These new OIG authorities will not be the subject of this rulemaking.
    Under the MSIAA, if a manufacturer fails to correct the 
misclassification of a drug in a timely manner after receiving 
notification from the agency that the drug is misclassified, in 
addition to the manufacturer having to pay past unpaid rebates to the 
States for the misclassified drug if applicable, the Secretary can take 
any or all of the following actions: (1) correct the misclassification, 
using drug product information provided by the manufacturer on behalf 
of the manufacturer; (2) suspend the misclassified drug, and the drug's 
status as a covered outpatient drug under the

[[Page 34262]]

manufacturer's national rebate agreement, and exclude the misclassified 
drug from FFP (correlating amendments to section 1903 of the Act); and, 
(3) impose civil monetary penalties (CMP) for each rebate period during 
which the drug is misclassified subject to certain limitations. The Act 
expressly provides that the imposition of such penalties may be in 
addition to other remedies, such as termination from the MDRP, or CMPs 
under Title XI.
    In Sec.  447.509, we propose to include a new paragraph (d), 
``Manufacturer misclassification of a covered outpatient drug and 
recovery of unpaid rebate amounts due to misclassification and other 
penalties,'' to implement additional penalty and compliance authorities 
outlined in section 6 of the MSIAA, which amended sections 1903 and 
1927 of the Act. As some manufacturers may continue to misclassify drug 
products, we believe these proposed penalties are necessary so that 
manufacturers do not neglect to correct and certify their information, 
to assure that States receive the rebates that they deserve, to assure 
that public MDRP data are accurate, to protect the integrity of the 
MDRP, and to ensure the efficient and economic administration of the 
Federal Medicaid program.
    Under the MDRP, a drug should be classified as a single source, 
innovator multiple source, or noninnovator multiple source drug for the 
purposes of determining the correct rebates that a manufacturer owes 
the States. We propose that a misclassification in the MDRP occurs when 
a manufacturer reports and certifies its covered outpatient drug under 
a drug category or other drug product data related to a COD that is not 
supported by the statutory and regulatory definitions of S, I, or N. We 
also propose to define as a misclassification a situation in which the 
manufacturer accurately reports and certifies its COD under a drug 
category or other related drug product data for a COD, but is paying a 
different rebate amount than that required by the statute and 
regulations. The statute expressly indicates at section 1927(d)(4) of 
the Act that a misclassification can occur without regard to whether 
the manufacturer knowingly made the misclassification or should have 
known that the misclassification was being made.
    It is the legal responsibility of the manufacturer to report and 
certify the correct classification of its covered outpatient drugs to 
the agency, and the drug product information related to a COD. The 
agency does not as a routine matter review or verify the drug category 
classifications and related drug product information reported and 
certified by the manufacturer. However, in its oversight role, the 
agency will review the classification and other drug product and 
pricing information reported by the manufacturer for a drug to 
determine its accuracy, as needed. For example, when questions arise, 
the agency will generally review the drug product and pricing 
information reported and certified by a manufacturer. To this end, we 
generally rely upon various sources of information to determine if a 
drug is misclassified in the MDRP. This includes information reported 
by manufacturers to CMS in combination with publicly available 
information in making determinations of whether a drug is misclassified 
in the MDRP. The agency also uses manufacturer reported information, 
such as the COD status code, in combination with information available 
on the FDA's Comprehensive NDC SPL Data Elements file (NSDE) https://download.open.fda.gov/Comprehensive_NDC_SPL_Data_Elements_File.zip, and 
information from FDA's Drugs@FDA web page https://www.accessdata.fda.gov/scripts/cder/daf/ to verify that the national 
drug codes (NDCs) reported to the MDRP by manufacturers are 
appropriately classified and reported to MDRP.
    Therefore, we propose in the new Sec.  447.509(d), the following 
process to identify, notify and correct a manufacturer's drug category 
misclassifications, and impose other penalties, while at the same time 
notifying the HHS OIG and/or other governmental agencies about possible 
violations of MDRP requirements.
a. Identification and Notification to Manufacturer To Correct 
Misclassification (Sec.  447.509(d)(1) Through (4))
    We are proposing in new paragraphs (d)(1) through (4) of Sec.  
447.509, requirements relating to the process by which the agency would 
identify when a misclassification of a drug has occurred in MDRP, 
subsequently notify a manufacturer that we have determined that a drug 
is misclassified in MDRP, indicate the penalties that may be imposed on 
the manufacturer, as well that the manufacturer may owe past due 
rebates.
    We propose to define what constitutes a misclassification in 
paragraph (d)(1). As proposed at Sec.  447.509(d)(1)(i), 
misclassification in the MDRP occurs when a manufacturer reports and 
certifies to the agency its drug category or drug product information 
related to a covered outpatient drug that is not supported by 
applicable statute or regulation. For example, a drug is misclassified 
by the manufacturer if it is reported as a noninnovator multiple source 
drug when the correct classification for the COD, as determined by the 
agency, is a single source drug or an innovator multiple source drug, 
based on application of relevant statutes and regulations. In such an 
example, it is likely that the manufacturer has paid or is paying a 
lower per unit rebate amount to a State as a result of the 
misclassification, and the agency would notify the manufacturer as part 
of the communication regarding the misclassification that rebates are 
owed to the States.
    However, there may be circumstances where a manufacturer is 
reporting its drug as a S or I drug, when the appropriate category is a 
N drug. For example, a manufacturer may be categorizing a non-
prescription drug as a brand drug, when it should be classified as a 
noninnovator drug for the purposes of MDRP. These situations would be 
considered misclassifications as well. These situations may result in 
States needing to pay rebates back to the manufacturer, which creates 
recordkeeping and fiscal issues for the States, as well as the need for 
the States to request FFP from the Federal Government to pay its share 
of the rebates that are due back to the manufacturer. There are two-
year timely claims filing deadlines under section 1132(A) of the Act, 
which may prohibit States from claiming FFP in these situations.
    A manufacturer may also have reported and certified an incorrect 
base date AMP to calculate its inflation penalty rebates, thus paying 
overall lower rebates to the States. This example would also be 
considered a misclassification under paragraph (d)(1)(i), as the 
incorrect drug product information related to a COD is being used by 
the manufacturer.
    We also propose in Sec.  447.509(d)(1)(ii) that a misclassification 
includes a situation where a manufacturer has correctly reported and 
certified its drug classification as well its drug product information 
for a COD, but is paying rebates to States at a level other than that 
supported by statute and regulation applicable to the reported and 
certified data. For example, if a manufacturer is correctly reporting 
and certifying a COD as an S or I drug, but paying rebates that would 
be expected for that of an N drug, we would consider that to be a 
misclassification as well. Note that while the statute and regulations 
specify that rebates are paid to States based on classifications of 
CODs as S, I, or ``other

[[Page 34263]]

drugs'', the MDP system only allows for the classification of CODs as 
S, I, or N. The N category would include any drug that is not an S or 
I, which may include non-prescription drugs. Manufacturers should 
assure that those drugs that are classified as N in the MDP system are 
drugs other than S or I drugs.\26\
---------------------------------------------------------------------------

    \26\ Since the beginning of the MDRP, the term noninnovator 
multiple source drug, and its abbreviation (N), has been used very 
generally to identify a covered outpatient drug other than a single 
source drug or an innovator multiple source drug. The rebate is 
calculated using the same formula for all drugs other than a single 
source drug or an innovator multiple source drug, including both 
those that satisfy the definition of noninnovator multiple source 
drug and those that do not. Therefore, manufacturers are to report 
all of their drugs other than a single source drug or an innovator 
multiple source drug and identify them with the drug category of N, 
regardless if they satisfy the statutory definition of noninnovator 
multiple source drug.
---------------------------------------------------------------------------

    We propose at Sec.  447.509(d)(2) that if the agency makes a 
determination of a misclassification, the agency would send a written 
and electronic notification to the manufacturer that misclassified a 
drug of such misclassification, and any past rebates due, and the 
manufacturer would have 30 calendar days from date of the notification 
to submit to the agency the drug product and pricing information 
necessary to correct the misclassification or the incorrect product 
information, and calculate rebate obligations. If the manufacturer 
misclassified the drug as an N when it should have been an S or I, then 
the data submitted to the agency must include the drug's ``best price'' 
data for the period or periods during which it was misclassified. Once 
the information is changed in the MDP, the manufacturer must certify 
the data.
    Upon receipt from the manufacturer of the requested corrected 
information as proposed in Sec.  447.509(d)(2), we propose in Sec.  
447.509(d)(4) to review the information submitted by the manufacturer 
in response to the notice sent under proposed Sec.  447.509(d)(2) to 
ensure consistency with published drug product information, and if the 
manufacturer fails to correct the misclassification, fails to certify 
applicable pricing and product data, and/or fails to pay rebates due as 
a result of misclassification in the timeframes proposed, we propose 
the enforcement actions the agency may further take. Upon notification 
by CMS that the manufacturer's information was updated in the system, 
we propose that the manufacturer certify the applicable price and drug 
product data. The proposed time period the manufacturer has to correct 
the misclassification, and respond to the agency's request to certify 
the information in the system, is 30 calendar days from the date of the 
original notification to the manufacturer of the misclassification.
    The determination made by CMS and notification provided by CMS to 
the manufacturer as a result of the process proposed in Sec.  
447.509(d) regarding misclassification is limited by the information 
available to CMS and is specific to the facts and circumstances for 
each scenario. It does not release the manufacturer from any additional 
liabilities, or preclude actions against manufacturers by HHS, OIG, 
DOJ, or otherwise.
b. Manufacturer Payment of Unpaid Rebates Due to Misclassification 
(Sec.  447.509(d)(3))
    As required in section 1927(c)(4)(A) of the Act, the manufacturer 
is required to pay unpaid rebates to the State for a misclassified drug 
in an amount equal to the product of the difference of the URA paid to 
the State for the period, and the URA that the manufacturer would have 
paid to the State for the period, as determined by the agency, if the 
drug had been correctly classified or correctly reported by the 
manufacturer, or the drug product information had been reported 
correctly, and the total units of the drug paid for under the State 
Plan in the rebate period(s).
    Therefore, once we determine that a misclassification has occurred 
in Sec.  447.509(d)(1) and notify the manufacturer of the 
misclassification in accordance with the proposed process steps at 
Sec.  447.509(d)(2), we are proposing in Sec.  447.509(d)(3) the 
process by which manufacturers would pay unpaid rebates to the States 
resulting from a misclassification of a drug in the MDRP.
    Specifically, we propose at Sec.  447.509(d)(3) that when the 
agency determines that a misclassification of COD occurs as proposed 
under Sec.  447.509(d)(1), and notification has been provided to the 
manufacturer as proposed under Sec.  447.509(d)(2), a manufacturer 
shall pay to each State an amount equal to the sum of the products of 
the difference between: the per URA paid by the manufacturer for the 
COD to the State for each period during which the drug was 
misclassified, and the per URA that the manufacturer would have paid to 
the State for the COD for each period, as determined by the agency 
based on the data provided by the manufacturer under proposed paragraph 
(d)(2), if the drug had been correctly classified by the manufacturer, 
multiplied by the total units of the drug paid for under the State Plan 
in each period.
    Consistent with section 1927(d)(4)(A) of the Act, we are proposing 
regulatory text in Sec.  447.509(d)(3)(i) that requires manufacturers 
to pay these unpaid rebates amounts. We are also proposing to codify at 
Sec.  447.509(d)(3) the time frame by which the manufacturer shall pay 
such unpaid rebates to the States for the period or periods of time 
that such COD was misclassified, based upon the proposed URA provided 
to the States by the agency for the unpaid rebate amounts. We are 
proposing to include a regulatory provision that requires such rebates 
be paid to the States by the manufacturer within 60 calendar days of 
the date of the notice that is sent by the agency to the manufacturer 
indicating that the drug is misclassified, and specifies that it is the 
manufacturer's burden to contact the States and pay the rebates that 
are due. We are also proposing that a manufacturer would be required to 
provide documentation to the agency that all past due rebates have been 
paid to the States within the 60 calendar day timeframe.
c. Agency Authority To Correct Misclassifications and Additional 
Penalties for Drug Misclassification (Sec.  447.509(d)(4))
    Consistent with section 1927(c)(4)(B) of the Act, which provides 
the authority to the Secretary to correct drug misclassifications in 
the system and impose other penalties, we propose to add Sec.  
447.509(d)(4), allowing CMS to correct the drug's misclassification on 
behalf of the manufacturer, as well as provide a plan of action for 
enforcement against the manufacturer. Specifically, we propose at Sec.  
447.509(d)(4) that the agency would review the information submitted by 
the manufacturer based on the notice sent under proposed paragraph 
(d)(2), and if a manufacturer fails to correct the misclassification 
within 30 calendar days from the date of the notification of the 
misclassification by the agency to the manufacturer, fails to certify 
applicable pricing and drug product data, and/or fails to pay the 
rebates that are due to the States as a result of the misclassification 
within 60 calendar days of receiving such notification, the agency may 
do any or all of the following:
     Correct the misclassification of the drug in the system, 
using any pricing and drug product information that may have been 
provided by the manufacturer, on behalf of the manufacturer;
     Suspend the misclassified drug, and the drug's status as a 
COD under the manufacturer's rebate agreement from the MDRP, and 
exclude the

[[Page 34264]]

misclassified drug from FFP in accordance with section 1903(i)(10)(E) 
of the Act;
     Impose a Civil Monetary Penalty (CMP) for each rebate 
period during which the drug is misclassified, not to exceed an amount 
equal to the product of:
    ++ The total number of units of each dosage form and strength of 
such misclassified drug paid for under any State Plan during such a 
rebate period; and
    ++ 23.1 percent of the AMP for the dosage form and strength of such 
misclassified drug for that period.
    Also, we propose at Sec.  447.509(d)(4)(iv) to indicate that, in 
addition to the actions described previously in this proposed rule, we 
may take other actions or seek additional penalties that are available 
under section 1927 of the Act (or any other provision of law), against 
manufacturers that misclassify their drugs including referral to the 
HHS OIG and termination from the MDRP. Section 1927(b)(4)(B)(i) of the 
Act provides that the Secretary may terminate a manufacturer from the 
program for violation of the rebate agreement or other good cause. 
Furthermore, section 1927(c)(4)(D) of the Act indicates that other 
actions and penalties against a manufacturer for misclassification of a 
drug include termination from the program.
    Therefore, we propose that a manufacturer is subject to termination 
from the program if it fails to meet agency's specifications for 
participation in the MDRP program as proposed when it is in violation 
of section 1927(b)(4)(B)(i) or 1927(c)(4)(D) of the Act, which includes 
failing to correct misclassified drugs as identified to the 
manufacturer by the agency, and continuing to have one or more drugs 
suspended from MDRP because of the lack of certification of the correct 
drug classification data in the system.
    We note that as provided in section 1927(b)(4)(C) of the Act, a 
manufacturer with a terminated NDRA is prohibited from entering into a 
new NDRA for a period of not less than one calendar quarter from the 
effective date of the termination until all of the above or any 
subsequently discovered violations have been resolved, unless the 
Secretary finds good cause for an earlier reinstatement. In accordance 
with section 1927(b)(4)(B)(ii) of the Act, and section VII.(e) of the 
NDRA, termination shall not affect the manufacturer's liability for the 
payment of rebates due under the agreement before the termination 
effective date. Consequently, invoicing by States may continue beyond 
the manufacturer's termination from the program for any utilization 
that occurred prior to the effective date of the termination.
    In addition to affecting Medicaid coverage of a manufacturer's 
drugs, the termination of the manufacturer's NDRA may impact the 
coverage of the drugs under the Medicare Part B program as well as the 
340B Drug Pricing Program. Alternatively, we propose that suspension of 
a drug under this section as a COD would not affect its status as a 
reimbursable drug under the 340B Drug Pricing Program or Medicare Part 
B.
d. Transparency of Manufacturer Misclassification (Sec.  447.509(d)(5))
    Section 1927(c)(4)(C)(i) and (ii) of the Act requires information 
on CODs that have been identified as misclassified be reported to 
Congress on an annual basis, and that the annual report be made 
available to the public on a public website. Therefore, we propose to 
add new paragraph (d)(5) to Sec.  447.509 to indicate that the agency 
would make available on a public website an annual report as required 
under section 1927(d)(4)(C)(ii) of the Act on the COD(s) that were 
identified as misclassified during the previous year. This report would 
include a description of any steps taken by the agency with respect to 
the manufacturer to reclassify the drugs, ensure the payment by the 
manufacturer of unpaid rebate amounts resulting from the 
misclassifications, and disclose the use of the expenditures from the 
fund created in section 1927(b)(3)(C)(iv) of the Act.
2. Proposed Requirements for Manufacturers Relating to Drug Category--
Requirements for Manufacturers (Sec.  447.510)
    To implement section 1927(c)(4) of the Act, we propose to rename 
Sec.  447.510 as ``Requirements and penalties for manufacturers''.
a. Suspension of Manufacturer NDRA for Late Reporting of Pricing and 
Drug Product Information (Sec.  447.510(i))
    In accordance with section 1927(b)(3)(C)(i) of the Act, we propose 
to add paragraph (i) to Sec.  447.510 to describe the process by which 
the suspension of a manufacturer's NDRA would occur when a manufacturer 
fails to report timely information, which includes drug pricing and 
drug product information, as described in section 1927(b)(3)(A) of the 
Act, which also includes the reporting timeframes for such information. 
This drug product and pricing information includes, but is not limited 
to AMP, best price, and drug product information as described in the 
proposed definition of drug product information included in this rule.
    Specifically, the new paragraph Sec.  447.510(i)(1) proposes that 
if a manufacturer fails to provide timely information required to be 
reported to the agency under Sec.  447.510(a) and (d) of this section, 
the agency would provide written notice to the manufacturer of the 
failure to provide timely information. If such information is not 
reported within 90 calendar days of a deadline determined by the 
agency, and communicated to the manufacturer electronically and in 
writing by the agency, it shall result in suspension of the 
manufacturer's rebate agreement for all CODs furnished after the end of 
the 90-calendar day period for purposes of Medicaid and the MDRP only, 
and the rebate agreement shall remain suspended for Medicaid until such 
information is reported in full and certified, but not for a period of 
suspension of less than 30 calendar days. This section also proposes 
that continued suspension of the rebate agreement could result in 
termination for cause.
    During the period of the suspension, the CODs of the manufacturer 
are not eligible for Medicaid coverage or reimbursement and Medicaid 
FFP. However, the manufacturer must continue to offer its CODs for 
purchase by 340B eligible entities, and reimbursement availability for 
such drugs under Medicare Part B would not change because, while 
suspended for purposes of the MDRP, the Medicaid drug rebate agreement 
with the manufacturer would remain in effect for purposes of Medicare 
Part B reimbursement and the 340B Drug Pricing Program.
    Under proposed Sec.  447.510(i)(2), the agency would notify the 
States 30 calendar days before the effective date of the manufacturer's 
suspension, which is 60 calendar days after the notice is sent to the 
manufacturer that the data are late. If a manufacturer fails to report 
and certify the complete information within this 30-calendar day period 
before the suspension begins, they would continue to be suspended from 
the program until such information is reported and certified, and would 
be subject to termination of the manufacturer rebate agreement.
    We understand that suspension of a manufacturer's agreement, and 
loss of the availability of FFP for a period of time, would likely mean 
that these manufacturers' drugs would not be available to Medicaid 
beneficiaries during the period of the suspension. We would give States 
sufficient time before

[[Page 34265]]

the suspension begins--30 calendar days--to work with beneficiaries and 
their prescribers to transition to other covered outpatient drugs that 
would meet the clinical needs of the beneficiaries during the 
suspension period. We believe that the intermediate step of suspension 
rather than termination should be sufficient incentive to manufacturers 
to report pricing and product information within the statutory and 
regulatory requirements, without initially resorting to termination, 
which means that a manufacturer's drug could be unavailable to 
beneficiaries for a possible longer period of time.
    We believe this proposed process provides clearer implementation of 
the statutory authority to suspend a manufacturer's rebate agreement in 
the event of a failure to provide timely information, and would 
hopefully incentivize manufacturers to ensure the timely reporting of 
pricing and drug product information, which would further the efficient 
and economic operation of the MDRP.
    For example, every month it is common that several manufacturers 
either do not report or only partially report their AMP data to the 
agency, which are used to calculate the Federal Upper Limits (FULs) for 
multiple source drugs, among other purposes. Such conduct reduces the 
agency's ability to set FULs on Medicaid payment for certain drugs, 
which means States may spend more money on multiple source drugs than 
they otherwise should. As a standard practice, we already notify these 
manufacturers that they are late in reporting or only have partially 
reported their information, and we also provide information about late 
reporting by manufacturers to OIG for possible imposition of CMPs. We 
consider partial reporting of information to also be late reporting, as 
the information that was not reported is late.
    Consistent with the proposed clarification to the definition of 
manufacturer, the proposed suspension of the manufacturer's NDRA would 
be applied to all the associated labeler rebate agreements of the 
manufacturer.

G. Proposals Related to Amendments Made by the American Rescue Act of 
2021--Removal of Manufacturer Rebate Cap (100 Percent AMP)

    Section 9816 of the American Rescue Plan Act of 2021 sunsets the 
limit on maximum rebate amounts for single source and innovator 
multiple source drugs by amending section 1927(c)(2)(D) of Act by 
adding ``and before January 1, 2024,'' after ``December 31, 2009''. In 
accordance with section 1927(c)(3)(C)(i) of the Act and the special 
rules for application of provision in sections 1927(c)(3)(C)(ii)(IV) 
and (V) of the Act, this sunset provision also applies to the limit on 
maximum rebate amounts for CODs other than single source or innovator 
multiple source drugs.
    Section 2501(e) of the Affordable Care Act amended section 
1927(c)(2) of the Act by adding a new subparagraph (D) and established 
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. This limit on maximum rebate amounts was codified at Sec.  
447.509(a)(5) for single source and innovator multiple source drugs, 
effective January 1, 2010. This limit was later extended to apply to 
drugs other than single source or innovator multiple source drugs by 
section 602 of the Bipartisan Budget Act of 2015 (Pub. L. 114-74, 
enacted November 2, 2015) (BBA 2015), which amended section 1927(c)(3) 
of the Act to require that manufacturers pay additional rebates on such 
drugs if the AMPs of the drug increase at a rate that exceeds the rate 
of inflation. This provision of BBA 2015 was effective beginning with 
the January 1, 2017 quarter, and the limit on maximum rebates for drugs 
other than single source or innovator multiple source drugs was added 
at Sec.  447.509(a)(9).
    Therefore, to conform Sec.  447.509 with section 1927(c)(2)(D) of 
the Act, as amended by the American Rescue Plan Act of 2021, and 
sections 1927(c)(3)(C)(i), (ii)(IV), and (ii)(V) of the Act, we are 
proposing to make conforming changes to Sec.  447.509 to reflect the 
removal of the maximum rebate amounts for rebate periods beginning on 
or after January 1, 2024. Specifically, we propose to amend Sec.  
447.509(a)(5) and (9) to state that the limit on maximum rebate amounts 
applies to certain time frames, which for all drugs, ends on December 
31, 2023. That is, no maximum rebate amount would apply to rebate 
periods beginning on or after January 1, 2024.

H. Proposal To Clarify Sec.  447.509(a)(6), (7), (8), and (9) and 
(c)(4) With Respect to ``Other Drugs''

    Section 1927(c) of the Act describes how the unit rebate amount 
(URA) is determined for a covered outpatient drug. There is a defined 
calculation of the applicable basic rebate and additional rebate for a 
covered outpatient drug that is either a single source drug or 
innovator multiple source drug at sections 1927(c)(1) and (2) of the 
Act, and a different defined calculation for ``other drugs,'' that is, 
a covered outpatient drug that is a drug other than a single source 
drug or an innovator multiple source drug at section 1927(c)(3) of the 
Act.
    Section 1927(c)(3) of the Act, titled ``Rebate for other drugs,'' 
describes in subsections (c)(3)(A) and (B) the basic rebate calculation 
for covered outpatient drugs other than single source drugs and 
innovator multiple source drugs. Section 1927(c)(3)(C) of the Act 
describes the additional rebate calculation for a covered outpatient 
drug other than a single source drug or an innovator multiple source 
drug. Thus, the statute makes it clear that rebates are applicable to 
all covered outpatient drugs, whether they are single source drugs, 
innovator multiple source drugs, or drugs other than such drugs.
    Manufacturers are required to report all of their covered 
outpatient drugs in our MDRP reporting system and must select the 
appropriate drug category for each (that is, S, I, or N). Since the 
beginning of the MDRP, the term noninnovator multiple source drug, and 
its abbreviation (N), have been used very generally to identify a 
covered outpatient drug other than a single source drug or an innovator 
multiple source drug in our system for operational purposes. Choosing N 
in our reporting system thus can result in capturing drugs that satisfy 
the statutory definition of an N drug, but also other drugs that are 
not single source or innovator multiple source drugs. Because 
manufacturers are to report all of their covered outpatient drugs and 
identify the applicable drug category, all covered outpatient drugs 
other than a single source drug or an innovator multiple source drug 
should be identified with the drug category of N, regardless if they 
satisfy the definition of noninnovator multiple source drug.
    In the July 17, 2007 final rule, we finalized a definition for 
``noninnovator multiple source drug'' to clarify the distinction 
between multiple source drugs approved under an abbreviated new drug 
application (ANDA) and multiple source drugs approved under a new drug 
application (NDA). We also finalized that the term includes a drug that 
entered the market prior to 1962 that was not originally marketed under 
an NDA (72 FR 39162).
    Over the years, interested parties too have used the term 
``noninnovator multiple source drug'' synonymously with ``a covered 
outpatient drug that is a drug other than a single source drug or an 
innovator multiple source drug.'' However, the statute specifically 
defines ``noninnovator multiple source drug'' at section 
1927(k)(7)(iii) of the Act as a multiple source drug that is not an

[[Page 34266]]

innovator multiple source drug. The regulatory definition of 
noninnovator multiple source drug goes beyond this statutory definition 
but does not capture every covered outpatient drug that is something 
other than a single source drug or an innovator multiple source drug 
because not every ``other drug'' is a multiple source drug. As a 
result, ``other drugs'' and ``noninnovator multiple source drugs'' are 
not synonymous. While the terms are not synonymous, they are treated so 
for purposes of reporting the COD in the MDRP system, as ``other 
drugs'' should be classified as N, if not an S or I drug.
    As noted previously, the statute makes it clear that rebates apply 
to all covered outpatient drugs, regardless if they are single source 
drugs, innovator multiple source drugs or something other than a single 
source drug or innovator multiple source drug. To align our 
longstanding policy and practices of identifying ``other drugs 
referenced in section 1927(c)(3) of the Act as N drugs, for purposes of 
the MDRP, we are proposing to modify language in Sec.  447.509 by 
replacing each appearance of ``noninnovator multiple source drug(s)'' 
with ``drug(s) other than a single source drug or an innovator multiple 
source drug.'' \27\
---------------------------------------------------------------------------

    \27\ Drugs other than single source drugs and innovator multiple 
source drugs should continue to be reported in the MDRP system with 
the drug category of ``N''.
---------------------------------------------------------------------------

    We propose to delete each appearance of ``noninnovator multiple 
source drug(s)'' in Sec.  447.509 and replace it with ``drug other than 
a single source drug or innovator multiple source drug(s).'' The 
clarification is proposed to be made in Sec.  447.509(a)(6), (7), (8), 
and (9) and (c)(4), and the language would change as set out in the 
proposed regulatory text at the end of the document.
     In paragraph (a)(8), we would specify the ``total 
rebate''. Specifically, the total rebate amount for a drug other than a 
single source drug or innovator multiple source drug is equal to the 
basic rebate amount plus the additional rebate amount, if any.
     In paragraph (a)(9), we would specify the ``limit on 
rebate''. Specifically, in no case would the total rebate amount exceed 
100 percent of the AMP for a drug other than a single source drug or 
innovator multiple source drug.
     In paragraph (c)(4), we would specify that for a drug 
other than a single source drug or innovator multiple source drug, 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).

I. Proposal To Establish a 12-Quarter Rebate Audit Time Limitation 
(Sec.  447.510)

    In accordance with sections 1927(b)(1) and 1927(c) of the Act, and 
section II. (b) of the NDRA, manufacturers are required to pay 
quarterly rebates to States for the CODs dispensed and paid for under 
the State Plan for the rebate period. Section 1927(b)(2)(B) of the Act 
provides that a manufacturer may audit the rebate billing information 
provided by the State as set forth under section 1927(b)(2)(A) of the 
Act on the total number of units of each dosage form, strength and 
package size of each COD dispensed and paid for under the State Plan 
during a rebate period, and authorizes that adjustments to rebates 
shall be made to the extent that the information provided by States 
indicates that utilization was greater or less than the amount 
previously specified. The statute does not impose a specific timeframe 
on a manufacturer's audit authority or limit when adjustments to 
rebates may occur.
    For the purposes of this proposed regulation, audit authority is 
intended to refer to any process a manufacturer is using to seek an 
adjustment to utilization data under section 1927(b)(2)(B) of the Act. 
That audit authority encompasses many processes for seeking adjustments 
in utilization data, including disputes, assessments, reviews and 
hearings, and may involve paper procedures, informal phone calls, and 
emails or other mechanisms. This proposed provision is intended to 
provide a 12-quarter timeline for any of those processes related to 
initiation of audits.
    Section V. of the NDRA describes how the agency operationalizes the 
manufacturer audit authority; that is, it describes the procedures for 
dispute resolution once an audit identifies a dispute with the 
utilization data (that is, number of units for any given quarter) for 
which States are requesting rebates using a rebate invoice. A 
manufacturer can dispute State utilization on an original invoice or 
initiate a dispute on utilization that was previously paid. See section 
V, Dispute Resolution, ``Medicaid Program: Announcement of Medicaid 
Drug Rebate Program National Rebate Agreement,'' Final Notice, 83 FR 
12770 (Mar. 23, 2018). The audit/dispute resolution processes are 
further discussed in a number of manufacturer releases (State Release 
177,\28\ State Release 181,\29\ Manufacturer Release 95,\30\ 
Manufacturer Release 105,\31\ and Manufacturer Release 115 \32\).
---------------------------------------------------------------------------

    \28\ https://www.law.cornell.edu/definitions/index.php.
    \29\ https://www.cbo.gov/system/files/2020-03/PDPRA-SFC.pdf.
    \30\ https://www.medicaid.gov/medicaid-chip-program-information/by-topics/prescription-drugs/downloads/rx-releases/mfr-releases/mfr-rel-095.pdf.
    \31\ https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf.
    \32\ https://www.accessdata.fda.gov/scripts/cder/daf/.
---------------------------------------------------------------------------

    As provided at section 1927(b)(2)(A) of the Act, no later than 60 
days of the end of each quarter, States invoice manufacturers for 
rebates based on utilization of the manufacturer's drugs in that 
quarter (Sec.  447.511(a)). Consistent with section 1927(b)(2)(B) of 
the Act, manufacturers may audit State utilization data for their 
covered outpatient drugs reported under section 1927(b)(2)(A) of the 
Act to determine if the data are accurate and appropriate. If a 
manufacturer's review of a quarterly State invoice determines that no 
adjustments are necessary, and that the total quarterly rebate amount 
can be paid as reflected on the invoice, the manufacturer pays the 
total invoiced amount in full. The manufacturer will use identifying 
documentation about payment from the State's records which may include, 
for example, the labeler code, the labeler name, the quarter and 
applicable Federal program(s) covered by the payment, or any other such 
pertinent information that would help identify from whom the rebate 
payment is being sent and for which quarter and Federal program the 
payment applies.
    In the event a potential discrepancy with State drug utilization 
data on the rebate invoice is discovered for a current period, the 
manufacturer will submit a Reconciliation of State Invoice (ROSI) form 
to the State, or if such a discrepancy is discovered for a prior rebate 
period's invoice after that rebate period has already been invoiced and 
paid, the manufacturer will submit a Prior Quarter Adjustment Statement 
(PQAS) to the State. When completing the ROSI or the PQAS, 
manufacturers must enter the appropriate code(s) to explain the bases 
or reasons for any adjustments. Both forms assist in standardizing data 
exchange elements and improving communication between manufacturers and 
States. Consistent with section 1927(b)(2)(B) of the Act, adjustments 
to rebates are made to the extent that the audit results in information 
indicating that utilization was greater or less than the amount 
previously specified by the State in its rebate invoice, and can result 
in manufacturers owing additional rebate

[[Page 34267]]

amounts to the States, or the States owing credits to manufacturers.
    In State Release 56 and Manufacturer Release 20, we explained an 
adjustment is a correction in the number of units for any given NDC, or 
a correction to the unit rebate amount (URA) by the labeler for any 
given NDC. We clarified a dispute to mean ``a disagreement between the 
labeler and the State regarding the number of units the State invoiced 
for any given quarter.'' Consistent with section 1927(b)(2)(B) of the 
Act, all disputes must be resolved on a unit basis only, and not on any 
other factor (for example, monetary amounts, percentages, etc.) (State 
Release 181).
    State Release Number 45 sets forth the Dispute Resolution Process 
for manufacturers and States to follow when engaged in a dispute. In 
that release, we specified that the manufacturer should notify a State 
of the disputed data no later than 38 days after the State utilization 
data is sent. However, we have been made aware that manufacturers 
initiate disputes far past this suggested timeline. For example, States 
have reported receiving new disputes on claims from more than 30 years 
ago.
    Previous OIG reports indicated that manufacturers have initiated 
disputes dating back many years. Although the rebate agreement notes 
that States and manufacturers should strive to resolve disputes within 
a reasonable timeframe, there is no mention of how far back a dispute 
can be initiated once a manufacturer receives an invoice.\33\ While 
section V. of the NDRA, along with several CMS-issued program releases 
address dispute resolution procedures for when a manufacturer 
identifies State drug utilization data (SDUD) discrepancies based on 
the audit authority at section 1927(b)(2)(B) of the Act, no law or 
regulation, provides a specific time limitation for initiating a 
dispute over drug utilization data.\34\
---------------------------------------------------------------------------

    \33\ United States, Congress, Office of Inspector General. 
Medicaid Drug Rebate Dispute Resolution Could Be Improved, OEI-05-
11-00580. Available at https://oig.hhs.gov/oei/reports/oei-05-11-00580.pdf.
    \34\ https://www.ncpdp.org/NCPDP/media/pdf/WhitePaper/Medicaid-Drug-Rebate-Program-Challenges-Across-the-Industry.pdf?ext=.pdf.
---------------------------------------------------------------------------

    Section V of the NDRA describes the dispute resolution processes 
available to manufacturers and States when a manufacturer discovers a 
potential discrepancy with State drug utilization data on the rebate 
invoice, when the manufacturer and State in good faith are unable to 
resolve prior to the payment due date. As noted above, manufacturers 
use the ROSI or PQAS process, and shall use their best efforts to 
resolve a dispute within a reasonable timeframe, and if they are not 
able to resolve the dispute within a reasonable time frame, CMS will 
employ best efforts to ensure the State makes available to 
manufacturers (in accordance with Sec.  447.253(e)) and as explained in 
State Release 181, the same State hearing mechanism available to 
providers for Medicaid payment disputes. The State hearing option is 
available to both States and manufacturers when they have reached an 
impasse through the normal dispute resolution process, or when one of 
the parties is not being responsive to another's efforts to engage in 
dispute resolution. Once a hearing has taken place and a finding is 
issued, States and manufacturers are expected to act in accordance with 
the finding. We believe having an unlimited timeframe to initiate such 
disputes on rebates can result in manufacturer, State and Federal 
resources being spent to adjudicate excessively old disputes and is not 
an efficient use of resources.
    Given the lack of timeframe for dispute resolution, both States and 
manufacturers have requested greater CMS involvement in resolving 
disputes.\35\ More specifically, States have requested we establish a 
time limit for when a manufacturer may initiate a dispute. Establishing 
a time limit for manufacturers to initiate a dispute concerning State 
utilization data on the rebate invoice would promote the timely 
identification of outstanding disputes. Having an unlimited period to 
initiate disputes is not consistent with the proper and efficient 
operation of the rebate program. Due to recalculations involving 
hundreds of millions of State and Federal Medicaid dollars involving 
years of paperwork, we believe it is essential that a standard 
timeframe be established within which disputes are permitted.
---------------------------------------------------------------------------

    \35\ United States, Congress, Office of Inspector General. 
Medicaid Drug Rebate Dispute Resolution Could Be Improved, OEI-05-
11-00580. Available at https://oig.hhs.gov/oei/reports/oei-05-11-00580.pdf.
---------------------------------------------------------------------------

    We propose to use our authority under sections 1102 and 1902(a)(4) 
of the Act to require efficient handling of disputes by limiting the 
period for manufacturers to initiate disputes, hearing requests and 
audits concerning State-specified COD utilization data to 12 quarters 
from the last day of the quarter from the date of the State invoice. 
Section 1102 of the Act requires the Secretary to ``make and publish 
such rules and regulations, not inconsistent with this Act, as may be 
necessary to the efficient administration of the functions with which 
[he or she] is charged'' under the Act.
    Consistent with this authority, and with the authority found in 
section 1902(a)(4) of the Act, which allows the Secretary to specify 
such methods necessary for the proper and efficient operation of the 
plan, we are proposing to establish a 12-quarter time limit for 
manufacturers to initiate disputes, hearing requests, and audits for 
State-invoiced units on current rebates as well as to initiate 
disputes, hearing requests, and audits on rebates that have been paid 
in full. We are proposing a time limitation to help ensure that 
discrepancies are timely identified and resolved, thereby providing 
increased financial certainty to manufacturers and States and promoting 
the efficient operation of the MDRP. This limitation would only apply 
to disputes regarding State drug utilization data on State rebate 
invoices. We would continue to work with manufacturers to process 
appropriate change requests (for example: COD Status change requests, 
Market Date change requests, Base Date AMP change requests, and 5i Drug 
Indicator change requests).
    We understand this proposal implicates the authority at section 
1927(b)(2)(B) of the Act, and would result in adding a time limitation 
to a manufacturer's authority to audit information provided by States 
under section 1927(b)(2)(A) of the Act. However, we believe that this 
proposal and implications to the authority to audit comport with our 
policy goals and the authority bestowed by Congress to ensure the 
proper and efficient operation of the program.
    In considering an approach that is fair for both States and 
manufacturers, we believe that a regulation adopted in 2003 provides a 
way forward. The ``Medicaid Program; Time Limitation on Price 
Recalculations and Recordkeeping Requirements Under the Drug Rebate 
Program'' final rule with comment period, 68 FR 51912 (August 29, 
2003), set forth a 12-quarter time limitation during which 
manufacturers must report changes to average manufacturer price and 
best price for purposes of reporting data to CMS.\36\ Establishing a 
12-quarter time limitation for manufacturers to initiate disputes 
concerning State-invoiced utilization data would align with the 
timelines for manufacturers to report changes to data elements relevant 
to the calculation of

[[Page 34268]]

MDRP rebate amounts and for manufacturers to initiate disputes 
concerning State-supplied utilization data also necessary to the rebate 
calculation (Sec.  447.510(b)(1)), and would allow for more efficient 
administration of State operated drug rebate programs. This 12-quarter 
timeframe would also assist States that would otherwise be required to 
retain their drug utilization data indefinitely to verify changes in 
rebate amounts resulting from retroactive manufacturer recalculations. 
We would also like to specify, whenever we refer to a 3-year timeframe 
for disputes, we are interpreting it as 12 quarters from the last day 
of the quarter from the date of the State invoice.
---------------------------------------------------------------------------

    \36\ As stated in current regulation in Sec.  447.510(b), 
manufacturers 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, 
with limited exceptions.
---------------------------------------------------------------------------

    We recognize the potential burden for States and manufacturers to 
comply with a 38-day dispute initiation timeframe as mentioned in State 
Release Number 45; however, we believe that a 12-quarter timeframe is 
reasonable because it comports with requirements for maintenance of 
records on State Medicaid expenditures at Sec.  433.32. It also mirrors 
the manufacturer's timeline for reporting revisions to monthly AMP at 
Sec.  447.510(d)(3). We also understand that there are two-year timely 
claims filing deadlines under section 1132(A) of the Act, and 
regulations at 45 CFR 95.7, which may prohibit States from claiming FFP 
in these situations, unless under a good cause waiver. Therefore, 
consistent with our authority at sections 1102 and 1902(a)(4) of the 
Act, we propose to ensure the efficient handling of rebate disputes, by 
limiting the period for manufacturers to initiate disputes, hearing 
requests or audits concerning State utilization data submitted pursuant 
to section 1927(b)(2)(A) of the Act to 12 quarters from the last day of 
the quarter from the date of the State invoice.
    Accordingly, we are proposing a new paragraph (j), titled 
``Manufacturer audits of State-provided information,'' at Sec.  
447.510, specifying that a manufacturer may, within 12 quarters from 
the last day of the quarter from the State invoice date, initiate a 
dispute, request a hearing or seek an audit with a State for any 
discrepancy with State drug utilization data reported under section 
1927(b)(2)(A) of the Act on the State rebate invoices.

J. Proposal To Establish a Drug Price Verification Survey Process of 
Certain Reported CODs (Sec.  447.510)

    In this section of the proposed regulation, we describe the legal 
basis, rationale, and process we propose to survey manufacturers and 
wholesalers that directly distribute their CODs using our authority at 
section 1927(b)(3)(B) of the Act to obtain information about the prices 
they are reporting to us under section 1927(b)(3)(A) of the Act and in 
accordance with Sec.  447.510. The purpose of this survey is to verify 
prices reported under section 1927(b)(3)(A) of the Act to assure that 
Medicaid payments and applicable rebates for CODs can be made, and that 
Medicaid payments are economical and efficient, as well as sufficient, 
to provide access to care.
    Currently, there is no centralized collection of specific data from 
manufacturers (or wholesalers) used by CMS to verify prices 
manufacturers reported to us under section 1927(b)(3)(A) of the Act. 
Our proposal to survey manufacturers for certain information on 
specific CODs and our proposal to make certain manufacturer information 
publicly available (unless it is proprietary), would allow States to 
access this information and understand the derivation of a COD's price 
so that States may establish and negotiate payment for Medicaid CODs 
consistent with section 1902(a)(30)(A) of the Act. For example, 
transparency into a manufacturer's costs and process for establishing a 
drug price via the survey, along with other factors, would give States 
the ability to better negotiate supplemental rebates, and better 
understand the impact of the drug on its budget as supplemental rebates 
are negotiated.
    The proposed drug price verification survey is not intended to 
limit or deny access to any of the CODs included on the survey list, 
assess cost effectiveness of such drugs, or supplant findings from the 
applicable FDA approval process. That is, we would not be using the 
survey data to further assess either the clinical or cost effectiveness 
of the COD. Furthermore, neither the selection of CODs subject to the 
survey, nor the information collected in response to a survey under 
this proposal, would impact coverage of a COD consistent with section 
1927 of the Act, or supplant any of the Federal requirements 
established under section 1927 of the Act and the implementing 
regulations at 42 CFR part 447, subpart I. Section 1902(a)(30)(A) of 
the Act (42 U.S.C. 1396a(a)(30)(A)) requires that States have a State 
Plan that provides methods and procedures to ensure that payments are 
consistent with efficiency, economy, and quality of care and are 
sufficient to enlist enough providers so that care and services are 
available at least to the extent that such care and services are 
available to the general population in the geographic area. In turn, 
the agency has an overarching obligation under section 1902(a)(30)(A) 
of the Act to ensure that Medicaid payments are made in an economical 
and efficient, as well as sufficient, manner to provide access to care.
    Section 1927(b)(3)(B) of the Act authorizes the Secretary to survey 
wholesalers and manufacturers that directly distribute their CODs, when 
necessary, to verify manufacturer prices reported to us under section 
1927(b)(3)(A) of the Act. We are proposing to interpret this language 
broadly to provide authority to verify prices and charges from 
wholesalers and manufacturers that distribute their own drugs, 
including when the manufacturer distributes drugs directly to 
pharmacies and other providers. In other words, we believe it is meant 
to allow the Secretary to verify prices reported in both situations in 
which a manufacturer sells to wholesalers and/or distributes them 
directly on their own. The statute expressly provides at section 
1927(b)(3)(B) of the Act the authority to verify ``manufacturer prices 
and manufacturer's average sales prices (including wholesale 
acquisition cost)'' and that requests for information may span 
``charges or prices.'' We discuss later in this section which charges 
and prices we may request to verify the reported manufacturer prices.
    The meaning of the term ``verify,'' as set forth in the Oxford 
English Dictionary means ``make sure or demonstrate that (something) is 
true, accurate, or justified''. Viewing the authority provided under 
section 1927(b)(3)(B) of the Act through the lens of section 
1902(a)(30)(A) of the Act obligations, we are proposing the following: 
(1) to describe the criteria by which we would develop a list of CODs 
(identified by NDC) that may be subject to a survey, and the 
manufacturers to whom the agency intends to send such a survey, to 
obtain additional information from said manufacturers or wholesalers to 
verify prices or charges of certain CODs that are reported to us under 
section 1927(b)(3)(A) of the Act; and, (2) the information that 
manufacturers and wholesalers would be required to report to satisfy 
the verification survey request.
    Under our proposal, a process would be established such that once 
the agency determines that a manufacturer and its COD would be subject 
to verification, the prices or charges that would be subject to 
verification may include those that are described in section 
1927(b)(3)(A) of the Act and reported by manufacturers, including a 
manufacturer's AMP, best price, ASP, and WAC for a drug. We note that 
WAC is generally available through public sources, while the 
manufacturer reported AMP, best price, and ASP for

[[Page 34269]]

CODs are generally not available through public sources.
    The CODs to which this verification survey would apply would be 
limited to those for which manufacturers that have a National Drug 
Rebate Agreement in place with the Secretary of HHS, as required under 
section 1927(a)(1) of the Act. Only these manufacturers would report 
applicable product and pricing data under section 1927(b)(3)(A) of the 
Act and proposed Sec.  447.510. We note this rulemaking does not 
address the separate authority to conduct surveys under section 
1847A(f)(2) of the Act to verify prices reported under section 
1847A(f)(2).
    We note that participating manufacturers are required to report and 
certify certain product and pricing data for each of their CODs on a 
monthly and quarterly basis to CMS. The COD pricing and product 
information is primarily used for the determination of the quarterly 
Medicaid drug rebates paid by participating manufacturers, but also 
serves as the basis for Medicaid payment for CODs. For example, the 
AMPs that are reported to the agency are used in the calculation of the 
Medicaid Federal Upper Limits (FULs) for payment of certain multiple 
source CODs under section 1927(e)(5) of the Act. The 340B Drug Pricing 
Program uses the AMP and the Unit Rebate Amount (which is the amount 
calculated to determine the Medicaid rebate for each dosage form and 
strength of a COD, and is based in part on AMP) to calculate the 340B 
ceiling price. Many States require that 340B entities are paid no more 
than the 340B ceiling price for CODs dispensed by 340B entities. 
Additionally, many State Medicaid programs use the ASP (as defined in 
section 1847A(b)(4)(A) of the Act) and the Wholesale Acquisition Cost 
(as defined in section 1847A(b)(4)(B) of the Act) for Medicaid payment 
for physician administered drugs, such as those administered in 
hospital outpatient departments and physician offices.
    Since the aforementioned pricing data that manufacturers report to 
us under section 1927(b)(3)(A) of the Act (AMP, ASP, WAC) are often 
used by States for reimbursement under Medicaid, serve as a basis for 
payment to providers for CODs, including physician administered drugs, 
and thus have a significant impact on how much the Federal Government 
pays for CODs under Medicaid, CMS must ensure, in accordance with 
section 1902(a)(30)(A) of the Act, that Medicaid payments for CODs 
based on these reported prices, are made in an economical and 
efficient, as well as sufficient manner, to provide access to care.
    To provide additional background on the need for the agency to use 
this survey authority, we note that Medicaid pays for CODs under both 
FFS programs and through Medicaid managed care plans. State Medicaid 
programs and their contracted managed care plans have been successful 
in managing the costs of the pharmacy benefit programs through the 
implementation of various drug cost containment strategies. The primary 
mechanisms used by States and managed care plans to manage their 
pharmacy program spending consist of manufacturer rebates that are 
collected under the MDRP, the use of lower-cost generic or multiple 
source drugs, prior authorization, and preferred drug lists, which 
allow States to leverage crowded therapeutic classes to negotiate 
supplemental rebates with manufacturers. Manufacturer rebates collected 
by the States totaled $42.9 billion on a total drug spending of $77.6 
billion for the four-quarter period Q1 2022 through Q4 2022 or 55.3 
percent of total drug spending.
    We also finalized regulations in the COD final rule that require 
that reimbursement for drugs dispensed through retail pharmacies be 
based on a two-part formula which consists of: (1) the ingredient cost 
of the drug based on actual acquisition costs (AAC); and, (2) a 
professional dispensing fee (PDF) for the drug based on the pharmacy's 
cost of professional dispensing. See Sec. Sec.  447.502, 447.512, and 
447.518. States establish reimbursement methodologies for these two 
components based on actual acquisition cost data and costs associated 
with dispensing. To further assist States to pay for CODs, the agency 
publishes the National Average Drug Acquisition Cost (NADAC) file on a 
monthly basis, which is based on community pharmacy invoice prices for 
CODs. The NADAC is one source States can use to support their 
ingredient cost AAC-based portion of pharmacy reimbursement. This 
methodology provides greater transparency into Medicaid payment for 
prescription drugs dispensed through community pharmacies, and most 
States use this file to help assure that pharmacies are paid for the 
cost of the drug that is dispensed and the professional dispensing 
costs. No such survey process, however, exists for CODs paid for by 
Medicaid that are not traditionally dispensed through retail 
pharmacies, such as many physician-administered drugs and gene therapy 
drugs, which are not required to follow the regulations noted above 
with regard to pharmacy reimbursement and AAC and PDF requirements.
    Thus, while Medicaid has implemented policies that generally 
provide effective management of traditional retail community pharmacy 
drug spending, while creating greater transparency around payment for 
drugs dispensed by retail community pharmacies, there are fewer 
effective policies in place for management of COD purchasing and 
reimbursement to non-retail health care providers.
    Substantial growth in non-retail community pharmacy drug spending 
is expected to continue. In March 2022, we estimated that for CY 2022, 
drugs that may require special handling or inpatient or outpatient 
hospitals stays will account for about 50 percent of the drug supply 
chain spending.\37\ Additionally, Medicaid expenditures for CODs 
dispensed in non-retail community pharmacy settings continue to 
experience similar growth. Based on an analysis of CMS State 
utilization data from 2012 to 2019, total Medicaid non-retail community 
pharmacy drug expenditures as a percentage of total Medicaid drug 
expenditures grew from 28 percent to 47 percent, and total Medicaid 
non-retail community pharmacy dispensed drug expenditures grew from 
$10.58 billion to $30.70 billion.\38\
---------------------------------------------------------------------------

    \37\ Iqvia, National Sales Perspective, February 2022. 
Presentation given by Doug Long at Asembia, May 2022.
    \38\ Myers and Stauffer LC, Specialty Drugs Spend Trend 2012-
2019 (2020) (unpublished analysis) (on file with Agency) (this 
analysis reviewed FFS and MCO combined spend for specialty drugs 
included on the Myers and Stauffer LC specialty list, based upon 
eight years of CMS National Utilization Data).
---------------------------------------------------------------------------

    Thus, it is evident that the evolution in the types of drugs paid 
for by Medicaid, manufacturers' pricing structures for these drugs, as 
well as the methods used by manufacturers to distribute these drugs, 
have changed since the enactment of the MDRP, as well as the enactment 
of the MMA. While the model of distribution from manufacturer to 
wholesaler to provider still exists, and the predominant provider of 
pharmacy services remains the community-based pharmacy, there are other 
distribution and pricing arrangements for certain drugs, including 
high-cost gene therapy drugs that were not necessarily in existence in 
the market when the MDRP was enacted.
    In some of these situations, there is a need for more information 
or verification regarding how certain prices or charges reported to us 
for these high-cost CODs are calculated in order to make payment under 
Medicaid. For example, there is little or no public information 
available about the factors

[[Page 34270]]

that influence the pricing of drugs dispensed in non-retail community 
pharmacy settings in Medicaid, the prices that pharmacies or 
wholesalers pay for these CODs, whether the prices or charges bear any 
relationship to the cost components of the COD, or whether the costs of 
distribution or preparation methods are included in the prices reported 
to us.
    States do not have access to invoice data of manufacturers or 
purchasers, or information as to how manufacturers have arrived at the 
prices they charge wholesalers or direct distributers. Therefore, 
States may assume that manufacturer prices reflect the manufacturer's 
cost inputs such as research, development, and production costs. 
However, States do not know how those costs relate to the prices 
available from the manufacturer. Manufacturers may also consider the 
relative value of that drug to the patient/payer versus other 
treatments for similar conditions when developing their prices. As 
such, States may assume that the manufacturer prices its drug(s) at a 
certain value because it either has the potential to cure the patient 
or substantially reduce other medical costs (for example, reduces a 
patient's need for higher cost inpatient hospital care). However, these 
assumptions may not be accurate since how the manufacturer arrives at 
its price is generally opaque.
    We believe our proposed drug price verification survey process, 
along with the NADAC that we publish for retail community pharmacy 
costs, should provide CMS and the States a clearer understanding into a 
manufacturer's pricing for its covered outpatient drug to verify those 
prices and charges, and ensure that Medicaid payments are made in an 
economical and efficient, as well as sufficient manner, to provide 
access to care. A lack of current understanding of manufacturer pricing 
bears directly on whether payments can be made consistent with section 
1902(a)(30)(A) of the Act. Moreover, Medicaid managed care plans may be 
able to use such public information about the prices or charges that 
are collected under this process to determine the appropriateness of 
their payments to PBMs, or for States and managed care plans to 
determine the appropriateness of the drug spending component of the 
overall Medicaid managed care capitation rate attributable to pharmacy 
services.
    For the foregoing reasons, and as described below, we propose to 
use the statutory authority in section 1927(b)(3)(B) of the Act, 
coupled with that in section 1902(a)(30)(A) of the Act, and this 
proposed regulatory process, to collect additional charges and pricing 
information from manufacturers to verify the prices reported to us for 
CODs. We believe this verification is extremely important given the 
significant number of high cost drugs and biologics, including cell and 
gene therapy drugs entering the market; the prices associated with new 
and different distribution channels; and the continued use of WAC as a 
pricing metric in instances when actual acquisition cost data are not 
available. Gene and cell therapy drugs especially, while transformative 
in terms of therapeutic benefits, are being priced in the millions of 
dollars. States, with their limited budgets, are concerned about how 
they would be able to afford these medications as they are generally 
required to pay for these drugs that are CODs as part of the prescribed 
drugs benefit in accordance with the requirements of section 1927 of 
the Act and the Medicaid drug rebate program. As stated earlier in this 
rule, our proposal to survey manufacturers to verify price(s) and 
charge(s) involves collecting certain information on specific CODs, and 
our proposal to make certain manufacturer information publicly 
available (unless it is proprietary), would give States an additional 
tool to negotiate payment for Medicaid CODs consistent with section 
1902(a)(30)(A) of the Act. For instance, while the survey would be used 
by CMS to verify prices, the access to certain non-proprietary data via 
the survey, for example, patient outcomes of the covered outpatient 
drug, could give States the ability to negotiate supplemental rebates 
with a full understanding of the impact of the drug on its budget and 
Medicaid patient population. This is important, particularly in light 
of the limited ability of States to negotiate additional supplemental 
rebates because of the few novel products in a particular drug class.
    We have also seen pricing-related issues relating to the production 
methods for these drugs, and query whether and how such methods should 
factor into the prices that are reported to us under section 
1927(b)(3)(A) of the Act. For example, there are new preparation 
methods that modify or treat a patient's own cells, which are then 
placed back into the body to treat the patient's condition. This type 
of preparation method, while novel, raises issues of how such costs are 
included in the prices that are reported to us. We have also observed 
that certain manufacturers are using limited-distribution specialty 
pharmacies to distribute their drugs to providers and patients. Certain 
closed-door specialty pharmacies may have access to limited-
distribution specialty drugs due to specific arrangements with 
pharmaceutical manufacturers or special monitoring provisions required 
by FDA.\39\ Of the drugs approved by FDA in 2020 that were distributed 
through specialty pharmacies, 96 percent were for limited-distribution 
drugs.\40\
---------------------------------------------------------------------------

    \39\ Erin M. Turingan, et al., Financial Effect of a Drug 
Distribution Model Change on a Health System. 52 Hosp. Pharm. 422 
(2017).
    \40\ Anton Health, 2020 Specialty Approvals--96% Via Limited 
Distribution, Anton RX Report (Jan. 15, 2021), https://antonhealth.com/2020-specialty-pharmacy-approvals/.
---------------------------------------------------------------------------

    In addition to retail community and closed-door specialty 
pharmacies, other provider types may dispense and/or administer drugs 
dispensed in non-retail community pharmacy settings to Medicaid 
beneficiaries. These providers include, but are not limited to, 
physicians, home infusion pharmacies, hemophilia treatment centers, and 
clinics. In these situations, there may be questions regarding how a 
manufacturer calculates its AMP and best price that are reported to us 
under section 1927(b)(3)(A) of the Act, and how those data points 
compare to the actual invoice cost of the drug to the pharmacy. This 
directly affects Medicaid payments and rebates.
    Manufacturers are also using innovative versions of third-party 
logistic arrangements to distribute their drugs, which include 
specialty pharmacies, under which the title of the drug does not 
transfer to the pharmacy. Questions have been raised by States as to 
how such arrangements work with respect to the Medicaid program's 
payment to the pharmacy, as well as the calculation of the covered 
outpatient drug's AMP and best price that are reported to us under 
section 1927(b)(3)(A) of the Act and used for purposes of calculating 
Medicaid rebates.
    And we note that many States and Medicaid programs continue to use 
WAC as the basis for reimbursement of many drugs dispensed in a non-
retail community pharmacy setting--because of the lack of availability 
of acquisition cost data. However, we have observed that there may be a 
trend in Medicaid by some manufacturers with recently-marketed high 
cost CODs to increase their WACs at a rate faster than their AMPs, 
especially for specialty drugs. We have not identified this trend with 
respect to long-marketed drugs covered by Medicaid and dispensed at 
retail community pharmacies based upon a

[[Page 34271]]

May 2023 CMS comparison research of changes to invoice prices vs. 
changes in WAC. This comparison showed consistent changes in invoice 
pricing and WAC. We believe consistent changes in invoice pricing and 
WAC also occur for drugs covered by Medicare Part D and dispensed at 
retail community pharmacies. Generally, when manufacturers increase 
their WACs at a rate faster than their AMPs, the higher the WAC for the 
COD, the greater the spread between the Medicaid reimbursement and the 
actual acquisition cost. This trend could affect whether Medicaid 
payments are consistent with sections 1927 and 1902(a)(30)(A) of the 
Act, as discussed previously in this proposed rule. That is, the use of 
WAC by the State for reimbursement purposes for certain drugs, such as 
high cost specialty drugs, may result in States overspending for a drug 
and manufacturers underpaying in rebates because of the much lower 
reported AMP for the drug.
    For example, based on an agency analysis of the relationship 
between WAC and AMP for a specific high-cost specialty drug, we found 
in 2018 that there was an 8.5 percent difference between the WAC and 
the AMP. Based on the latest data available, that difference is now 23 
percent. Thus, States that use WAC that is reported to us under section 
1927(b)(3)(A) of the Act to pay providers may significantly overspend 
for specialty drugs, given that AMP has traditionally been considered a 
closer proxy for the approximate revenues received by the manufacturer 
from sales of the drugs in the non-retail community pharmacy setting.
    Given these situations, we propose that significant enough changes 
have occurred in the marketplace to warrant the use of the Secretary's 
authority to survey manufacturers and wholesalers in certain situations 
with respect to the prices and charges reported to us under section 
1927(b)(3)(A) of the Act to make payment. Specifically, section 
1927(b)(3)(B) of the Act gives the Secretary the authority to survey 
wholesalers and manufacturers that directly distribute their CODs, when 
necessary, to verify manufacturer prices and manufacturer's average 
sales prices (including wholesale acquisition cost) if required to make 
payment reported under section 1927(b)(3)(A) of the Act.
    Therefore, we propose at Sec.  447.510(k)(1) to use the authority 
granted to the Secretary under section 1927(b)(3)(B) of the Act to 
survey manufacturers with rebate agreements in effect with the 
Secretary to verify prices or charges for certain CODs for which drug 
product and pricing information is submitted under section 
1927(b)(3)(A) of the Act and Sec.  447.510, to make payment for the 
COD.
    We do not believe it is required or necessary that we survey every 
manufacturer's price or charge submitted under section 1927(b)(3)(A) of 
the Act, as the authority to verify via a survey of the prices under 
section 1927(b)(3)(B) of the Act indicates that the Secretary ``may'' 
verify. Notably, we propose to exclude those CODs that are subject to 
certain CMS drug pricing program(s) or initiatives under which 
participating manufacturers negotiate the COD's price directly with 
CMS. For example, under the Medicare Drug Price Negotiation program 
established under sections 11001 and 11002 of the Inflation Reduction 
Act of 2022, or potentially certain CMMI models that are developed in 
response to the President's Executive Order 14087 (see HHS response at 
https://innovation.cms.gov/data-and-reports/2023/eo-rx-drug-cost-response-report), participating manufacturers will negotiate and 
collaborate with CMS on prices for certain CODs. This being the case, 
we propose to exclude CODs subject to these programs and initiatives 
from the survey verification, as CMS may have already successfully 
negotiated lower prices for the Medicare and/or Medicaid programs with 
these manufacturers. We intend to include a list of CMS drug pricing 
programs and initiatives under which manufacturers directly negotiate 
with CMS on a public website and would expect to update that list to 
reflect any future CMS drug pricing programs and initiatives that 
result in manufacturers' directly negotiating COD pricing with CMS.
    We further note that under section 1927(c)(1)(C)(ii)(V) of the Act, 
maximum fair prices (MFPs) that are negotiated for selected drugs under 
the Medicare Drug Price Negotiation Program would be included in the 
Medicaid best price; thus, State Medicaid programs will benefit from 
the MFPs negotiated under Medicare Part B and Part D to the extent that 
such drugs are CODs. In other words, the MFP negotiated for these drugs 
could potentially lower the best price and potentially increase the 
Federal Medicaid drug rebate. Furthermore, it is unlikely that CODs 
with an MFP would be selected for the proposed drug price verification 
survey under section 1927(b)(3)(B) of the Act because we expect that 
our proposal would verify drug prices that are more recently marketed 
high cost drugs not typically dispensed at non-retail community 
pharmacies, while drugs for which an MFP has been negotiated must have 
been approved for at least 7 years, in the case of drugs approved and 
marketed under section 505(c) of the FFDCA, or licensed for at least 11 
in the case of biological products that are licensed and marketed under 
section 351 of the PHS Act. Moreover, as noted previously in this 
proposed rule, we do not believe the trend of WACs increasing at a rate 
faster than their AMPs is relevant for the types of drugs for which MFP 
likely will be negotiated. Therefore, in this rule, we are proposing to 
survey manufacturers to verify price (or prices) and/or charges 
regarding specific CODs based on a three-step process.
    The first step would use objective measures related to Medicaid 
spending to identify CODs with the highest drug spending per claim, 
highest total Medicaid drug spending, highest 1 year price increase, or 
highest launch price, as determined and explained below. Specifically, 
we propose at Sec.  447.510(k)(2) that CMS, on an annual basis, would 
compile a list of single source CODs that may be subject to a survey 
based on one or more of the criteria proposed at Sec.  447.510(k)(2)(i) 
through (iv).
    The proposed measures in Sec.  447.510(k)(2)(i) (highest drug 
spending per claim) and (ii) (highest total Medicaid drug spending) 
would use Medicaid drug spending data as reported from States to CMS in 
accordance with the State drug utilization data (SDUD) reporting 
(https://www.medicaid.gov/medicaid/prescription-drugs/state-drug-utilization-data/index.html). We note that the per claim Medicaid 
spending data used in Sec.  447.510(k)(2)(i) is not reduced by Federal 
rebates since such rebates are not reported at the claim level. 
Further, the supplemental rebate data are reported in the aggregate to 
CMS from States on a quarterly basis, thus it is difficult to identify 
individual State supplemental rebate data to net State supplemental 
rebates from per claim Medicaid spending. However, we would review the 
reported annual total Medicaid spending at Sec.  447.510(k)(2)(ii) as 
reported by the States net of Federal rebates when determining if a COD 
spend is greater than 0.5 percent of total annual Medicaid drug spend, 
net of Federal rebates.
    For proposed measure Sec.  447.510(k)(2)(iii), we would look at 
published WACs to determine when a COD's price increase falls in the 
top 1 percent of CODs with the highest median WAC increase over a 12-
month period.
    In proposed measure Sec.  447.510(k)(2)(iv), we propose to look at 
the highest launch price, which we

[[Page 34272]]

propose to do by estimating whether or not the covered outpatient 
drug's cost would be in the top 5th percentile of Medicaid spending by 
comparing a manufacturer's published launch price (available as a 
published WAC or published by the manufacturer) to Medicaid per claim 
spending or if treatment costs are greater than $500,000 (indexed for 
inflation using the CPI-U).
    We expect application of the measures proposed at Sec.  
447.510(k)(2)(i) through (iv) would capture an initial set of high-cost 
CODs that could significantly impact Medicaid covered outpatient drug 
spending. From a process standpoint, in subregulatory guidance, we 
would provide the applicable time periods that CMS would review the 
data in order to determine the initial list of CODs, which we propose 
to be finalized in April following publication of this final rule, and 
each April thereafter. We expect that we would use data from the prior 
calendar year or Federal fiscal year. The list of CODs as a result of 
this analysis would not be made public.
    We propose at Sec.  447.510(k)(3) to further refine this initial 
survey list of CODs in the second step by considering additional 
criteria such as a manufacturer's willingness to negotiate further 
rebates either through a CMS-authorized supplemental rebate, or a 
manufacturer's participation in a CMS drug pricing program or 
initiative under which participating manufacturers negotiate directly 
with CMS (see discussion above about proposal to exclude drugs under a 
CMS drug pricing program or initiative). At Sec.  447.510(k)(3)(i), CMS 
proposes to exclude the CODs of manufacturers that participate in any 
CMS pricing program or initiative under which participating 
manufacturers negotiate a COD's price directly with CMS.
    CMS believes that a manufacturer's willingness to negotiate also 
may be demonstrated by the manufacturer's level of effort to work with 
States to make the identified COD more affordable, especially 
considering States' limited budgets. Therefore, by way of a State 
survey to determine a manufacturer's level of effort, we propose at 
Sec.  447.510(k)(3)(ii) to further exclude covered outpatient drugs of 
manufacturers that have negotiated CMS-authorized supplemental rebates 
with at least 50 percent of the States, that when in combination with 
the Federal rebate results in a total (State and Federal) rebate for 
the drug of interest to total Medicaid spend (State and Federal) for 
the drug of interest, that is greater than the total Medicaid rebates 
(State and Federal) to total Medicaid drug spend for States that cover 
CODs only through fee-for-service, as reflected in the most recent 
Medicaid Financial Management Report (FMR).\41\ The FMR reflects annual 
State expenditures collected on the CMS-64 report.\42\ We propose to 
use the Federal fiscal year Medicaid FMR and analyze the rebates for 
those States that currently provide coverage of covered outpatient 
drugs only through fee-for-service (fee-for-service States). 
Specifically, we would determine total computable prescribed drugs 
expenditures for the States that cover CODs only through fee-for-
service (currently 10 States) and determine the percentage of 
prescribed drug expenditures that are offset by State and Federal drug 
rebates. We propose to consider only States that cover CODs entirely 
through fee-for-service because the prescribed drugs expenditures in 
the FMR do not include COD expenditures made by managed care entities, 
while the rebate lines do include the managed care rebate offset. In 
other words, the denominator in the comparison of rebates to total 
expenditures would be understated, resulting in a higher percentage, if 
we included managed care COD expenditures and rebates in the 
calculation. Based upon the Federal fiscal year 2021 Medicaid FMR, the 
total Federal and State rebates range from 38 percent to 72 percent of 
total prescribed drug expenditures based upon analysis of eight States 
that pay for CODs entirely through fee-for-service (2 of the 10 such 
States had insufficient data reported for Federal fiscal year (FFY) 
2021). We request comment on this proposal to refine the list of 
covered outpatient drugs to be surveyed, based upon a manufacturer's 
level of effort at reducing the price for the identified high cost 
drugs (that is, those drugs identified by applying measures proposed at 
Sec.  447.510(k)(2)).
---------------------------------------------------------------------------

    \41\ https://www.medicaid.gov/medicaid/financial-management/state-expenditure-reporting-for-medicaid-chip/expenditure-reports-mbescbes/index.html.
    \42\ https://www.medicaid.gov/medicaid/financial-management/state-expenditure-reporting-medicaid-chip/index.html.
---------------------------------------------------------------------------

    We also propose Sec.  447.510(k)(3)(iii)(A) that if after 
application of Sec.  447.510(k)(3)(i) and (ii), more than 10 CODs still 
remain, CMS would proceed to the third step and consider soliciting 
State-specific Medicaid program information as to the manufacturer's 
level of effort to lower drug price for the Medicaid program, such as a 
manufacturer offering other programs to lower the cost of the drug to 
the State such as subscription models, VBP arrangements under the 
multiple best price approach, or other special arrangements. We do not 
intend these examples of manufacturer effort to lower drug prices in 
Sec.  447.510(k)(3)(iii)(A) to be exclusive or to encourage or 
discourage specific pricing approached; CMS recognizes that the 
pharmaceutical pricing market is fluid and States and manufacturers may 
pursue or negotiate arrangements not specifically listed in regulation. 
Additionally, we propose at Sec.  447.510(k)(3)(iii)(B) that we would 
consider narrowing the list based on the highest cost CODs based on the 
factors outlined under Sec.  447.510(k)(2) of this section, and before 
application of Sec.  447.510(k)(3). We propose to collect the 
information in Sec.  447.510(k)(3)(ii) and (k)(3)(iii)(A) using a State 
survey tool that we would develop if the rule is finalized as proposed. 
Once CMS determines a final list of CODs to be verified after the 
application of 447.510(k)(3), we would send a letter to the 
manufacturers of the identified drugs sometime in August, as discussed 
further below.
    While currently not proposed in regulation at Sec.  447.510(k)(2) 
and (3), we also invite comments on whether CMS should consider 
surveying manufacturers of certain CODs that are identified under the 
proposed criteria at Sec.  447.510(k)(2)(i) through (iv) that are also 
granted accelerated approval by FDA. The approval of a COD using the 
accelerated approval pathway relies on demonstrating an effect on 
surrogate or intermediate endpoint(s) that is reasonably likely to 
predict clinical benefit. Drug sponsors have been required by the FDA 
to conduct confirmatory trials after approval to verify and describe 
the predicted clinical benefit. However, the HHS OIG \43\ found that 
drug sponsors do not always complete trials promptly, which can result 
in drugs staying on the market--often at high prices with limited 
competition--and being administered for years with unverified clinical 
benefit. Subjecting accelerated approval drugs to the drug price 
verification survey process would not supplant any determination made 
by the FDA. However, CMS surveying manufacturers for verification of 
prices may be warranted by recent trends of high costs of some of these 
therapies, particularly in view of some manufacturers' noncompliance 
with FDA's requirement for further confirmatory trials. Accordingly, we 
seek comments regarding whether CODs included on the list under the 
proposed

[[Page 34273]]

Sec.  447.510(k)(2) that are approved under the FDA accelerated 
approval pathway should be surveyed when a manufacturer has failed to 
demonstrate the clinical benefits of the drug through further 
confirmatory trials required by the FDA.
---------------------------------------------------------------------------

    \43\ https://oig.hhs.gov/oei/reports/OEI-01-21-00401.asp.
---------------------------------------------------------------------------

    We propose at Sec.  447.510(k)(4) that after a survey list of CODs 
is compiled after the application of the criteria in Sec.  
447.510(k)(2) and (3), the agency would post on a publicly accessible, 
government website the letter sent to the manufacturer indicating the 
name of the COD to be surveyed and the request for completion of the 
drug price verification survey.
    In proposed Sec.  447.510(k)(5), we propose that such survey to a 
manufacturer or wholesaler would request in a standard reporting format 
specific information that would include the information proposed at 
Sec.  447.510(k)(5)(i) through (iv). The survey tool would be developed 
after the publication of the final rule, if this proposal is finalized.
    In Sec.  447.510(k)(5)(i), we propose to collect information on the 
pricing, charges, distribution and utilization for the COD. We propose 
to collect these utilization and pricing metrics from manufacturers to 
verify that the prices reported at section 1927(b)(3)(A) of the Act do 
not have the potential to negatively impact State budgets to the extent 
States are not able to cover the drugs, thus impeding Medicaid 
beneficiary access to treatment.
    In Sec.  447.510(k)(5)(ii), we propose to collect product and 
clinical information for the COD described in the proposed regulation 
text at Sec.  447.511(k)(5)(ii)(A) through (E) to understand the 
clinical benefits and risks of the covered outpatient drug to verify 
that the price reported fairly represents the benefits and/or risks of 
the COD.
    In Sec.  447.510(k)(5)(iii), we propose to collect information on 
the costs of production, research, and marketing of the COD. We believe 
it is important to understand the costs to the manufacturer of 
researching, producing, and marketing of the drug and how those costs 
are accounted for in the prices and charges they report. We also note 
in this proposed subparagraph that research and development costs of a 
line extension drug shall not include the research and development 
costs of the initial single source or innovator multiple source covered 
outpatient drug.
    In Sec.  447.510(k)(5)(iv), we propose to collect other information 
as determined by the Secretary specific to the particular COD in 
question that would help inform CMS and States with their verification 
of drug prices. This additional information would likely be specific to 
each individual covered outpatient drug and may include additional 
requests associated with changes to the pharmaceutical marketplace. We 
may consider issuing additional guidance on the nature and scope of the 
other information we may request.
    The agency understands that some of the data proposed to be 
collected would be confidential and likely protected under section 
1927(b)(3)(D) of the Act, in addition to other privacy and 
confidentiality provisions, including the Trade Secrets Act.
    Although the statute does not prescribe a method to verify prices 
or charges, we propose in Sec.  447.510(k)(6) that CMS may post non-
proprietary information provided by the manufacturer and wholesaler in 
response to the verification survey. By posting the non-proprietary 
information on our website, the public, beneficiaries, State Medicaid 
agencies, other Federal Government agencies and other affected 
interested parties would be afforded the opportunity to comment on 
public information as part of the verification process to ensure that 
those Medicaid payments are economical and efficient, as well as 
sufficient, to provide access to care and are sufficient to enlist 
enough providers so that care and services are available at least to 
the extent that such care and services are available to the general 
population in the geographic area.
    Finally, section 1927(b)(3)(B) of the Act allows the Secretary to 
impose a civil monetary penalty in an amount not to exceed $100,000 on 
a wholesaler, manufacturer, or direct seller, if the wholesaler, 
manufacturer, or direct seller of a covered outpatient drug refuses a 
request for information about charges or prices by the Secretary in 
connection with a survey as proposed under Sec.  447.510(k) or 
knowingly provides false information. The provisions of section 1128A 
of the Act (other than subsections (a) (with respect to amounts of 
penalties or additional assessments) and (b)) shall apply to a civil 
money penalty (CMP) under this subparagraph in the same manner as such 
provisions apply to a penalty or proceeding under section 1128A(a) of 
the Act. The civil monetary penalty authority set forth in section 
1927(b)(3)(B) of the Act has been delegated to OIG. We would provide 
information obtained through, and in connection with, this survey to 
OIG for the purposes of potential imposition of CMPs for failure to 
report information in connection with a survey or for knowingly 
providing false information. Therefore, we propose at Sec.  
447.510(k)(7) that if a manufacturer or wholesaler refuses a request 
for information pursuant to a drug price verification survey within 90 
calendar days of CMS' request, or knowingly provides false information, 
the manufacturer or wholesaler would be referred to OIG for possible 
imposition of civil monetary penalties (CMPs) as set forth in section 
1927(b)(3)(B) of the Act and section IV of the National Drug Rebate 
Agreement.

K. Proposals Related to State Plan Requirements, Findings, and 
Assurances (Sec.  447.518)

    Section 1902(a)(30)(A) of the Act requires that States include in 
their State Plan, methods and procedures to ensure that payments to 
providers are consistent with efficiency, economy, and quality of care 
and are sufficient to enlist enough providers so that care and services 
are available to the general population in the geographic area. Under 
that authority, the Secretary issued Federal regulations at Sec. Sec.  
447.502, 447.512, and 447.518 that further elaborate that generally, 
payments to pharmacies for drugs that they dispense, and are paid for 
under the State Plan, are to be based on a two-part formula which 
consists of: (1) the ingredient cost of the drug that is dispensed 
based on the actual acquisition cost (AAC); and, (2) a professional 
dispensing fee (PDF) for the drug based on the pharmacy's cost of 
dispensing, that is, the cost of the pharmacist's professional services 
for ensuring that the appropriate COD is dispensed or transferred to a 
Medicaid beneficiary.
    AAC is defined at Sec.  447.502 to mean the agency's determination 
of the pharmacy providers' actual prices paid to acquire drug products 
marketed or sold by specific manufacturers. As discussed in the COD 
final rule implementing this definition of AAC, a State can implement 
an AAC model of reimbursement based on various pricing methodologies 
for the ingredient cost of the drug so long as the ingredient cost 
represents the actual, current ingredient cost of the drug and is 
calculated based on the amounts that pharmacies pay for the drug (Sec.  
447.518).
    We also discussed our view that the definition of AAC requires that 
States establish payment rates based on pharmacies' actual prices paid 
to acquire drug products, and explained that the expectation is that 
those prices would reflect current prices (see 81 FR 5176). In 
accordance with Sec.  447.502, the professional dispensing fee is 
incurred at the point of sale or service and pays for pharmacy costs in 
excess of the

[[Page 34274]]

ingredient cost of a COD each time a COD is dispensed. The fee 
includes, but is not limited to, reasonable costs associated with 
delivery, special packaging and overhead associated with maintaining 
the facility and equipment necessary to operate the pharmacy. Costs 
also include a pharmacist's time spent checking the computer for 
information about an individual's coverage, performing drug utilization 
review (DUR) and preferred drug list review activities, measuring or 
mixing, filling the prescription, counseling a beneficiary; and 
physically providing the completed prescription to the Medicaid 
beneficiary.
    Under Sec.  447.518, States are required to ensure that pharmacy 
providers are reimbursed adequately for both their pharmacy ingredient 
costs and professional dispensing services in accordance with the 
requirements of section 1902(a)(30)(A) of the Act. The State Plan must 
comprehensively describe the agency's payment methodology for 
prescription drugs, including the agency's payment methodology for 
drugs and the professional dispensing fee. As provided under Sec.  
447.518(d)(1), when proposing changes to either AAC (ingredient cost 
reimbursement) or PDF reimbursement, States are required to evaluate 
their proposed changes consistent with section 1927 of the Act, and 
must consider both parts of the reimbursement formula to ensure that 
total reimbursement under the proposed changes are consistent with 
section 1902(a)(30)(A) of the Act.
    These reimbursement formulas and any proposals to change either or 
both components of the reimbursement formula are subject to review and 
approval by CMS through the State Plan Amendment (SPA) process. In 
their SPA submission, 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.
    While States are afforded the flexibility to adjust their 
professional dispensing fees through the SPA process in accordance with 
the requirements of sections 1902(a)(30)(A) and 1927 of the Act, they 
must substantiate how their reimbursement to pharmacy providers 
reasonably reflects the actual cost of the ingredients used to dispense 
the drug, and the actual costs of dispensing the drug, consistent with 
the regulatory definitions of AAC and professional dispensing fee. We 
review each State's proposed reimbursement methodology to assure it 
meets Federal requirements under sections 1902(a)(30)(A) and 1927 of 
the Act, and the implementing regulations, specifically at Sec. Sec.  
447.502, 447.512, and 447.518.
    More recently, we have seen States submit proposed changes to 
either or both of the components of the reimbursement methodology 
without adequate supporting data that reflects current drug acquisition 
cost prices or actual costs to dispense. This is inconsistent with 
applicable law because the data submitted should reflect the actual 
cost of dispensing, consistent with Federal requirements under sections 
1902(a)(30)(A) and 1927 of the Act and the implementing regulations, 
specifically at Sec. Sec.  447.502, 447.512 and 447.518.
    The professional dispensing fee should be based on pharmacy cost 
data, and not be based on a market-based review, such as an assessment 
or comparison of what other third-party payers may reimburse pharmacies 
for dispensing prescriptions. A State's periodic review and examination 
of market-based research for a comparison of what other payers 
reimburse for dispensing costs is an insufficient basis for determining 
or proposing changes to professional dispensing fees because it does 
not reflect actual costs to pharmacies to dispense prescriptions. The 
State must submit adequate cost data to CMS as part of its SPA process 
to justify its professional dispensing fee amounts. We are proposing 
that the data submitted cannot solely rely on the amounts that 
pharmacies are accepting from other private third-party payers.
    Similarly, with respect to reimbursement of drug ingredient costs, 
which must be consistent with AAC, States must support determinations 
or proposed changes for ingredient cost reimbursement with adequate 
cost based data. With respect to the AAC, we discussed in the preamble 
of the COD final rule our view that the definition of AAC requires that 
States establish payment rates based on pharmacies' actual prices paid 
to acquire drug products, and explained that the expectation is that 
those prices would reflect current prices. (See 81 FR 5176.)
    Pharmacy purchase prices for drugs are subject to many external 
factors and market conditions which can cause purchase prices to go up 
or down. Many of these factors are out of the control of the purchasing 
pharmacy. We explained various ways States could establish pharmacy 
reimbursement methodologies, noting that the pricing benchmarks CMS 
provide to States, for example, the weekly NADAC files, and the weekly 
and monthly AMP are updated regularly to reflect current prices.
    After the COD final rule was issued, we issued further guidance to 
States in the State Medicaid Directors Letter, SHO #16-001, dated 
February 11, 2016, and Frequently Asked Questions (FAQs), dated July 6, 
2016. In that SHO, CMS provided further detail on ways States can 
implement an AAC model of reimbursement, including utilizing a 
nationwide survey, like the NADAC files (which are published on a 
monthly basis and updated weekly, and are designed to represent a 
current national pricing methodology based upon a simple average of 
voluntarily-submitted retail pharmacy acquisition costs for most 
covered outpatient drugs), a State survey of retail community pharmacy 
providers' pricing, published compendia prices, or average manufacturer 
price-based pricing. In each of these instances, the ingredient cost 
represents the actual, current ingredient cost of the drug and is 
calculated based on the amounts that pharmacies pay for the drug.
    Freezing AAC rates and establishing a static provider reimbursement 
would not be consistent with applicable laws and regulations. Reduced 
beneficiary access to medically necessary drugs can result if pharmacy 
providers are unable to purchase drugs at a rate reflective of current 
market conditions. Pharmacies are not likely to purchase and dispense a 
covered outpatient drug to a Medicaid beneficiary if the reimbursement 
for the drug is not sufficient. Certain pharmacies, such as small rural 
pharmacies, rely primarily on revenue from prescriptions. When 
reimbursement rates for drugs do not adapt to changing market 
conditions, pharmacies may stop filling prescriptions for Medicaid 
beneficiaries, or, depending on the number of Medicaid prescriptions 
they fill, could have to permanently go out of business. This can 
result in reduced access to medications and negatively impact health 
equity, as Medicaid beneficiaries may have to go to multiple pharmacies 
to obtain the medication, or may not be able to obtain it at all. This 
can also result in the need for other costlier medical interventions, 
such as hospitalization.
    In this proposed rule, we are proposing to clarify the data 
requirements that States must submit to establish the adequacy of both 
the current ingredient cost and the professional dispensing fee 
reimbursement. Furthermore, we are specifying professional dispensing 
fees cannot simply be determined by a market-based review of what other

[[Page 34275]]

third-party payers may reimburse for dispensing prescriptions. That is, 
we are proposing to clarify in regulatory text that in a State's 
periodic review of the rates being paid to pharmacies, the examination 
of market-based research data used to justify dispensing costs is an 
inappropriate basis for determining professional dispensing fees. A 
State cannot rely on the amounts that pharmacies are accepting from 
other third-party payers as a means of determining professional 
dispensing costs. The data that are acceptable could be a State's own 
survey, a neighboring States' survey, or other credible survey data, 
but it must be adequate and must reflect the current cost of dispensing 
a prescription in the State (81 FR 5311).
    To pay based on costs, States need to periodically assess whether 
current rates being paid to pharmacies to reflect current costs. There 
is no specific requirement as to how often and when States have to 
review their current fees. However, any State currently reimbursing 
pharmacy providers a professional dispensing fee that does not reflect 
the pharmacy's actual acquisition cost and cost of dispensing must come 
into compliance.
    Therefore, in consideration of ensuring that payments to providers 
are consistent with efficiency, economy, and quality of care and are 
sufficient to enlist enough providers, we believe an update to the 
regulatory text is necessary so that care and services continue to be 
available to the general population. Accordingly, we are proposing to 
update Sec.  447.518(d) heading as ``Data requirements'' and to include 
paragraph (d)(1) as set out at in the regulatory text at the end of 
this document.
    Updating this language would assure that States provide adequate 
data to establish pharmacy reimbursement for ingredient costs and 
professional dispensing fees, and that such reimbursement is based on 
current actual costs.

L. Federal Financial Participation (FFP): Conditions Relating to 
Physician-Administered Drugs (Sec.  447.520)

    Generally, physician-administered drugs (PADs) may satisfy the 
definition of a covered outpatient drugs (COD) under section 1927(k)(2) 
of the Act, subject to the limiting definition at section 1927(k)(3) of 
the Act, and manufacturer rebates can be collected on these PADs.
    Prior to section 6002 of the DRA of 2005, which added sections 
1927(a)(7) and 1903(i)(10)(C) to the Act to require the States to 
collect and submit certain utilization data on certain PADs in order 
for FFP to be available for these drugs, and for States to secure 
rebates, many States did not collect rebates on PADs when they were not 
identified by a National Drug Code (NDC) number because the NDC number 
is necessary for States to bill manufacturers for rebates. The NDC 
identifies the specific manufacturer, product, and package size.
    In the past, many PADs were classified by Healthcare Common 
Procedure Coding System (HCPCS) \44\ codes (commonly referred to as J-
codes), which group together different manufacturers of the same drug 
in the same code. These broad codes cannot be used to bill for rebates, 
as they do not identify the specific manufacturer. Many providers were 
submitting only these HCPCS codes to the States, rather than the NDC 
code of the specific drug, making it difficult for the State to bill 
for rebates.
---------------------------------------------------------------------------

    \44\ HCPCS is a collection of standardized codes that represent 
medical procedures, supplies, products and services. The codes are 
used to facilitate the processing of health insurance claims by 
Medicare and other insurers. HCPCS is divided into two subsystems, 
Level I and Level II. Level I is comprised of Current Procedural 
Terminology codes (HCPT). Level II HCPCS codes identify products, 
supplies, and services not included in CPT.
---------------------------------------------------------------------------

    In its report titled ``Medicaid Rebates for Physician Administered 
Drugs'' (April 2004, OEI-03-02-00660),\45\ the OIG reported that, by 
2003, 24 States either required providers to bill using NDC numbers or 
identified NDC numbers using a HCPCS-to-NDC crosswalk for PADs to 
collect rebates. Four of the 24 States were able to collect rebates for 
all PADs, both single source and multiple source drugs (one State only 
collected these rebates from targeted providers).
---------------------------------------------------------------------------

    \45\ https://oig.hhs.gov/oei/reports/oei-03-02-00660.pdf.
---------------------------------------------------------------------------

    To address this situation, and to increase the rebates being 
invoiced by States for PADs, section 6002 of the DRA added sections 
1927(a)(7) and 1903(i)(10)(C) to the Act to require the States to 
collect and submit certain utilization data on certain PADs in order 
for FFP to be available for these drugs, and for States to collect 
manufacturer rebates. More specifically, these provisions required that 
for payment to be available under section 1903(a) of the Act for a COD 
that is a PAD, States had to provide for the collection and submission 
of utilization data and coding (such as J-codes and NDC numbers) for a 
PAD that is a single source (after January 1, 2006) or a multiple 
source drug (after January 1, 2008) that is a top 20 high dollar volume 
PAD on a published list (based on highest dollar volume dispensed under 
Medicaid identified by the Secretary, after January 1, 2007) that the 
Secretary may specify in order for payment to be available under 
section 1903 of the Act and for States to secure applicable Medicaid 
rebates.
    This list of the top 20 multiple source drugs may be modified year 
to year to reflect changes in such volume. (See section 
1927(a)(7)(B)(i) of the Act.) The statute also required that only NDCs 
be used after January 1, 2007 for billing for all PADs that are CODs, 
unless the Secretary authorized that another alternative coding system 
be used. If States are not collecting NDCs and submitting the 
appropriate utilization data for these drugs, States should not receive 
Federal matching payments. In addition, States would be foregoing 
available rebates for these drugs.
    Regulations at Sec.  447.520 were established to implement these 
statutory provisions in the 2007 Medicaid Program; Prescription Drugs; 
Final Rule, specifying the conditions for FFP for PADs (72 FR 39142). 
Section 447.520(a) specifies that no FFP is available for PADs if the 
State has not required the submission of codes from its providers that 
allow it to appropriately bill manufacturers for rebates for PADs. For 
single source PADs, the requirement to submit appropriate coding went 
into effect as of January 1, 2006, and specifies under Sec.  
447.520(a)(1) that States must require providers to submit claims for 
single source PADs using HCPCS or NDC codes to secure rebates. Section 
447.502(a)(2) further specifies that as of January 1, 2007, a State 
must require providers to submit claims for single source and the top 
20 multiple source PADs identified by the Secretary, using NDC codes.
    Under Sec.  447.520(b), as of January 1, 2008, a State must require 
providers to submit claims for the top 20 multiple source drugs 
identified by the Secretary as having the highest dollar volume using 
NDC numbers to secure rebates, and Sec.  447.520(c) provided the 
opportunity for States that require additional time to comply with the 
requirements of the applicable laws and regulations to apply for an 
extension to comply with the requirements. We proposed to retain this 
current regulatory language without modification in the 2012 COD 
proposed rule (77 FR 5367) and since no comments were received on that 
proposal, the current regulations were finalized without any 
modifications in the 2016 COD final rule. See 81 FR 5322.
    We propose to update the regulatory language at Sec.  447.520 to 
more

[[Page 34276]]

specifically and accurately conform with the statutory requirements 
captured at section 1927(a)(7) of the Act. In proposed Sec.  
447.520(a)(1) through (3) we specify the conditions under which FFP is 
available for States, as they relate to the codes they must require 
providers to use in order for the State to secure rebates for PADs that 
are CODs. The proposed language clarifies that rebates are only due for 
PADs that are CODs, and provides the conditions that data must be 
submitted by providers in the State in order for States to receive FFP 
and secure applicable rebates. We are proposing at Sec.  447.520(b) a 
State require providers to submit claims for all covered outpatient 
drug single source and multisource physician-administered drugs using 
NDC numbers to collect FFP and secure rebates.
    States also need to ensure that their managed care plans report 
required drug utilization data in order for States to invoice 
manufacturers for rebates for CODs, consistent with Sec.  438.3(s)(2) 
and (3), which were adopted in the 2016 Medicaid Managed Care final 
rule.\46\ Per Sec.  438.3(s)(2) and (3), an MCO, PIHP or PAHP that 
covers CODs under its Medicaid managed care contract must (1) report 
drug utilization data to the State that is necessary for the State to 
bill manufacturers for rebates under section 1927 of the Act using NDC 
numbers for all CODs, including all single and multiple source PADs; 
and, (2) establish procedures to exclude utilization data for covered 
outpatient drugs that are subject to discounts under the 340B Drug 
Pricing Program from those reports if the State does not require 
submission of managed care drug claims data from covered entities 
directly to the State.
---------------------------------------------------------------------------

    \46\ 86 FR 27498, May 6, 2016 (https://www.govinfo.gov/content/pkg/FR-2016-05-06/pdf/2016-09581.pdf).
---------------------------------------------------------------------------

    Additionally, we are proposing at Sec.  447.520(c) to continue to 
publish the top 20 list of multiple source PADs on an annual basis, as 
statutorily required, but it is our expectation that States would 
invoice rebates for all multiple source physician-administered drugs 
that are CODs. This section would make it clear that States are 
required to invoice for rebates for multiple source PADs on this list 
to receive Federal matching funds and to secure rebates. The proposed 
regulation would specify to States that they should invoice for rebates 
for all multiple source PADs that are CODs, and not limit such rebate 
invoicing to the top 20 high dollar volume list. As technology and 
systems are currently in place, this proposed regulation would reduce 
the administrative burden of monitoring any revisions to the top 20 
multiple source PADs and allow States to secure rebates for these PADs 
that are CODs.

M. Request for Information on Requiring a Diagnosis on Medicaid 
Prescriptions

    Generally, a COD is a prescribed drug approved under section 505(c) 
or 505(j) of the FFDCA or section 351 of the Public Health Service 
(PHS) Act when used for a medically accepted indication. The term 
``medically accepted indication'' is defined in statute at section 
1927(k)(6) of the Act and means any use for a COD which is approved 
under the FFDCA or the use of which is supported by one or more 
citations included or approved for inclusion in compendia described in 
section 1927(g)(1)(B)(i) of the Act, which is the American Hospital 
Formulary Service-Drug Information (AHFS-DI), Drugdex, or United States 
Pharmacopoeia-Drug Information (USP-DI). Medicaid COD claims do not 
currently require a diagnosis code as a condition for payment. When 
reviewing claims, without a diagnosis, it is difficult to determine 
whether a drug is indeed being used for a medically accepted 
indication, and appropriately satisfies the definition of a COD, and 
therefore, is rebate eligible. Despite statutory language limiting 
Medicaid payment for covered outpatient drugs to when used for a 
``medically accepted indication,'' there are not systems in place for 
States to determine whether a patient's outpatient prescription drug 
use is in fact for a medically accepted indication, or in other words, 
there is no mechanism to cross-reference a prescription drug use with a 
Medicaid patient's medical diagnoses to ensure a drug is being used for 
a medically accepted indication.
    In 2011, the OIG discovered in a Medicare audit that without a 
diagnosis, it is difficult for Part D sponsors to determine whether a 
drug claim is medically appropriate.\47\ OIG stated that without access 
to diagnosis information, Part D sponsors cannot determine the 
indications for which drugs were used. Although this audit referenced 
Medicare, the same issue is applicable to Medicaid prescriptions. If 
States are not aware of the diagnosis for which the medication is being 
used, they are unable to determine if the drug is being used for a 
medically accepted indication and cannot determine if they should bill 
for rebates or if coverage is mandatory. Additionally, an article 
written by then Principal Deputy Inspector General (and now current 
Inspector General) and Chief Medical Officer from OIG. recently 
advocated for a new mandate that physicians include a diagnosis code 
with prescriptions.\48\ In 2011, CMS did not concur with OIG's finding, 
stating that diagnosis information is not a required data element of 
pharmacy billing transactions, nor is it generally included on 
prescriptions.
---------------------------------------------------------------------------

    \47\ https://oig.hhs.gov/oei/reports/oei-07-08-00150.pdf.
    \48\ STAT Op-Ed by Christi A. Grimm & Julie K. Taitsman [bond] 
Office of Inspector General [bond] Government Oversight [bond] U.S. 
Department of Health and Human Services (hhs.gov).
---------------------------------------------------------------------------

    Since 2011, automation of prescribing has grown significantly, and 
in 2020 an estimated 84 percent of all prescriptions were e-
prescriptions.\49\ Electronic prescribing has increased so much so that 
in early 2021, most prescriptions for controlled substances under 
Medicare Part D must be transmitted electronically.\50\
---------------------------------------------------------------------------

    \49\ E-prescription rate U.S. 2020 [bond] Statista available at 
https://www.statista.com/statistics/864380/share-of-us-e-prescriptions/?msclkid=a1c545e9b44d11ec81f5391e8e8d23cb.
    \50\ E-Prescribing [bond] CMS available at https://www.cms.gov/Medicare/E-Health/Eprescribing?msclkid=27a13cf3b44e11ecb30d5dd85675d203.
---------------------------------------------------------------------------

    There are several instances in which a diagnosis on a prescription 
could help States implement certain Medicaid programs in which they are 
eligible for enhanced Federal matching funds, or for which they must 
implement a mandatory benefit. Federal funds support States in 
responding to the increased need for services, such as testing and 
treatment during the COVID-19 public health emergency, family planning, 
or allows States to provide innovative treatment services. For certain 
conditions, an increase in States' Federal medical assistance 
percentage (FMAP) leverages Medicaid's existing financing structure and 
allows enhanced Federal funds to treat that condition. For example, to 
be eligible for enhanced Federal funds in certain instances, such as 
when birth control drugs are used for family planning as opposed to 
other indications such as acne, moderate to severe abnormal vasomotor 
function, or postmenopausal osteoporosis the State needs to document 
when expenditures are being used to treat that condition. Without 
access to diagnosis information, States cannot accurately determine the 
indications for which drugs were used, especially when drugs have 
multiple indications, making identification of these costs very 
difficult, if not impossible, and very resource intensive. For example, 
if a family planning drug has multiple indications, and the family 
planning indication is eligible for enhanced Federal matching, then the 
State will only know when the drug is

[[Page 34277]]

being used for birth control if there is a related diagnosis on the 
prescription. A requirement of diagnosis on prescriptions would allow 
States to easily and accurately identify drug expenditures qualifying 
for these enhanced Federal matching funds. State programs will be able 
to better determine if prescriptions meet payment requirements and can 
more accurately capture expenditures required for Federal matching.
    There are additional benefits for adding diagnosis on prescriptions 
for both providers and beneficiaries. For example, practitioners and 
beneficiaries benefit from systematic authorizations that are diagnosis 
based. Vulnerable groups, such as pregnant women, or specific diagnoses 
(COVID-19) can be easily exempt from out-of-pocket costs and copayments 
for certain services or conditions. Diagnosis information on 
prescriptions can help pharmacists identify safety issues and helps 
supplement prior DUR standards under section 1927(g) of the Act in 
ensuring prescriptions are appropriate, medically necessary, and not 
likely to result in adverse medical results. Adding diagnosis to 
prescriptions can contribute to safer prescribing, improved patient 
outcomes and medication use in multiple, synergistic ways. Including 
diagnosis on prescriptions may be a way to ensure drugs are being only 
used for FDA approved indications. State Medicaid programs may also be 
able to better manage drug utilization by mandating diagnosis codes on 
drug claims to ensure payments are limited to drugs with medically 
accepted indications as required by statute.
    Finally, we believe, if such a provision were implemented, that the 
design and implementation of any adjudication specifications would be 
left to the States' discretion to meet State-specific needs. Given this 
flexibility, States can continue to monitor and fine-tune program 
specifics as they determine what works best for their population's 
health and well-being. For continuity of care among programs, if this 
provision was implemented in the future, we envision all Medicaid 
managed care programs would be included in this requirement, including 
MCOs, PIHPs, or PAHPs.
    There are many interested parties that would have views on this 
requirement to include diagnosis on a prescription: patients, 
prescribers, pharmacists, States, and drug manufacturers. We are 
specifically soliciting comments on this topic, its impact on 
beneficiaries, providers, States, Medicaid, and any operational 
implications. We are particularly interested in understanding the 
burden with such a proposal and seeking comments on how to negate any 
foreseeable impact on beneficiaries and providers and steps which would 
be needed by States to successfully implement a Medicaid requirement 
for diagnosis on prescriptions as a condition of FFP. We are requesting 
comments regarding the potential impact of supporting such a policy to 
require Medicaid diagnoses on prescriptions on payment, health care 
quality, stigma and access to care, and program integrity. We are also 
requesting comments on what steps we should take to protect beneficiary 
access to commonly used, medically accepted, compendia supported, off-
label prescriptions if we propose to implement such a policy. We are 
seeking comments from all interested parties on potential approaches 
and invite all comments on this topic.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et 
seq.), 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. For the purposes of the PRA and this section 
of the preamble, collection of information is defined under 5 CFR 
1320.3(c) of the PRA's implementing regulations.
    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.
    We are soliciting public comment (see section III.D. of this 
proposed rule) on each of these issues for the following sections of 
this document that contain collection of information requirements. 
Comments, if received, will be responded to within the subsequent final 
rule.

A. Wage Estimates

    To derive average costs, we used data from the U.S. Bureau of Labor 
Statistics' (BLS') May 2021 National Occupational Employment and Wage 
Estimates for all salary estimates (http://www.bls.gov/oes/current/oes_nat.htm). In this regard, Table 3 presents BLS' mean hourly wage, 
our estimated cost of fringe benefits and other indirect costs 
(calculated at 100 percent of salary), and our adjusted hourly wage.

                          Table 3--National Occupational Employment and Wages Estimates
----------------------------------------------------------------------------------------------------------------
                                                                                Fringe benefits
                                                                 Mean hourly       and other     Adjusted hourly
              Occupation title                Occupation code    wage ($/hr)     indirect costs    wage ($/hr)
                                                                                     ($/hr)
----------------------------------------------------------------------------------------------------------------
Operations Research Analyst.................         15-2031            46.07            46.07            92.14
----------------------------------------------------------------------------------------------------------------

    As indicated, we are adjusting our hourly wage estimates by a 
factor of 100 percent. This is necessarily a rough adjustment, both 
because fringe benefits and other indirect costs vary significantly 
from employer to employer, and because methods of estimating these 
costs vary widely from study to study. Nonetheless, we believe that 
doubling the hourly wage to estimate the total cost is a reasonably 
accurate estimation method.

B. Proposed Information Collection Requirements (ICRs)

1. ICRs Regarding Identification and Notification to Manufacturer To 
Correct Misclassification (Sec.  447.509(d)(1) Through (4))
    As discussed in section II.F.1.a. of this proposed rule, we are 
proposing to add

[[Page 34278]]

new paragraphs (d)(1) through (4) to Sec.  447.509 that would add new 
requirements relating to the process by which CMS would identify when a 
misclassification of a drug has occurred in MDRP and subsequently 
notify the manufacturer of the misclassified drug. As such, a 
manufacturer's efforts to address the misclassification is currently 
approved by OMB under control number 0938-0578 (CMS-367). This package 
currently takes into account the time and cost incurred by 
manufacturers when compiling and reporting, or changing, Medicaid drug 
product and price information on a monthly, quarterly, and on an as-
needed basis. The burden, however, is subject to a regulatory impact 
analysis which can be found in section V. of this proposed rule.
2. ICRs Regarding Definitions (Sec.  447.502)
    As discussed in section II.C.1.d. of this proposed rule, we are 
proposing to modify the definition of manufacturer for NDRA purposes. 
The modification would establish a regulatory definition of 
manufacturer for purposes of satisfying the requirement that a 
manufacturer maintain an effectuated rebate agreement with the 
Secretary consistent with section 1927(a)(1) of the Act. Specifically, 
we are proposing that the term ``manufacturer'' means that all 
associated labeler entities of the manufacturer that sell CODs, 
including, but not limited to, owned, acquired, affiliates, brother or 
sister corporations, operating subsidiaries, franchises, business 
segments, part of holding companies, divisions, or entities under 
common corporate ownership or control, must each maintain an 
effectuated rebate agreement. The preparation and maintenance of an 
effectuated rebate agreement has been a long-standing requirement that 
we propose to codify in this rule. The effectuated rebate agreement 
requirement and burden are currently approved by OMB under control 
number 0938-0578 (CMS-367). This rule's proposed actions have no impact 
on our currently approved requirements and burden estimates and 
assumptions, including the universe of manufacturers. Consequently, we 
are not making any changes under that control number.
    Additionally, we do not believe any of the following new terms and 
definition modifications and clarifications would require any effort or 
impose burden on any public or private entities: (1) proposal to modify 
the definition of ``covered outpatient drug (Sec.  447.502), (2) 
proposal to define ``drug product information'' (Sec.  447.502), (3) 
proposal to define ``market date'' (Sec.  447.502), (4) proposal to 
modify the definition of ``noninnovator multiple source drug'' (Sec.  
447.502), (5) proposal to clarify Sec.  447.509(a)(6) through (9) and 
(c)(4) with respect to ``other drugs'', and (6) proposal to define 
``vaccine for purposes of the MDRP only'' (Sec.  447.502). 
Consequently, none of the definition changes are subject to the 
requirements of the PRA.
3. ICRs Regarding Proposals Related to State Plan Requirements, 
Findings, and Assurances (Sec.  447.518)
    As discussed in section II.K. of this proposed rule, we are 
proposing to specify in Sec.  447.518(d)(1) that the professional 
dispensing fee (PDF) must be based on pharmacy cost data, and that it 
cannot be solely determined or supported by a market-based review or by 
an assessment or comparison of what other payers may reimburse 
pharmacies for dispensing prescriptions. The clarification also 
specifies the type of supporting data that we would accept as adequate 
to support a change to the PDF. The proposed clarification would not 
add any new or revised requirements or burden. If a State chooses to 
revise their State Plan for any updates to include a modification to 
their PDF, a SPA can be submitted to CMS for review and approval. The 
burden for such SPA submissions is currently approved by OMB under 
control number 0938-0193 (CMS-10398 #179 under attachment 4.19-B 
pertaining to the: methods and standards used for the payment of 
certain services, and methods and standards used for establishing 
payment rates for prescribed drugs). Since the proposed clarification 
would not add any new or revised requirements or burden, we are not 
making any changes under that control number.
4. ICRs Regarding Federal Financial Participation (FFP): Conditions 
Relating to Physician-Administered Drugs (Sec.  447.520)
    We propose to update Sec.  447.520 to make it consistent with 
section 1927(a)(7) of the Act, and to codify the requirement that 
States must collect NDC information on all single and multiple source 
physician-administered drugs that are CODs for the purposes of 
invoicing manufacturers for rebates, and ensuring that FFP is 
available, as appropriate. We are proposing to require that States must 
be invoicing for rebates for all physician-administered drugs that are 
CODs. We propose to continue to publish the top 20 high dollar volume 
list of multiple source physician-administered drugs, as statutorily 
required, to provide a means of prohibiting Federal matching funds, as 
necessary, if States are not requiring the use of NDC codes, and 
invoicing for rebates on these drugs. This proposal would be applicable 
to all 50 States and the District of Columbia; however, we believe that 
this proposal would have no additional burden because States, based on 
their State Drug Utilization Data (SDUD) reported to CMS, are currently 
collecting NDC numbers for all CODs, including all single and multiple 
source physician-administered drugs and invoicing manufacturers for 
rebates as applicable under OMB control number 0938-1026 (CMS-10215). 
Since the proposed provisions would not add any new or revised 
requirements or burden, we are not making any changes under that 
control number.
5. ICRs Regarding Verification Survey of Reported CODs Through Data 
Collection (Sec.  447.510)
    We are proposing at Sec.  447.510(k) a process to survey 
wholesalers and manufacturers to verify prices and charges for certain 
CODs by requesting and collecting certain information about such prices 
and charges for a drug reported to us under section 1927(b)(3)(A) of 
the Act. The proposed survey instruments will be submitted to OMB for 
review after this proposed rule is finalized and our survey instruments 
(one for requesting information from States as proposed under Sec.  
447.510(k)(3)) and another for surveying manufacturers) have been 
developed. The tools are not ready yet, but will be made available to 
the public for its review under the standard non-rule PRA process which 
includes the publication of 60- and 30-day Federal Register notices. 
The CMS ID number for that package is CMS-10822 (OMB control number 
0938-TBD 1). Since this would be a new collection of information 
request, the OMB control number has yet to be determined. OMB would 
issue that number upon its approval of the non-rule collection of 
information request. We are however setting out our preliminary burden 
figures (see below) as a means of scoring the impact of the proposed 
provisions.
    Since the beginning of the MDRP in 1991, the Secretary has had the 
authority, under section 1927(b)(3)(B) of the Act, to survey 
wholesalers and manufacturers that directly distribute their covered 
outpatient drugs, when necessary, to verify manufacturer prices, such 
as AMP and ASP, including wholesale acquisition cost (WAC), reported 
under section 1927(b)(3)(A) of

[[Page 34279]]

the Act, if required to make payment. Furthermore, section 
1902(a)(30)(A) of the Act (42 U.S.C. 1396a(a)(30)(A)) requires that 
States have a State Plan that provides methods and procedures to ensure 
that such payments are consistent with efficiency, economy, and quality 
of care and are sufficient to enlist enough providers so that care and 
services are available at least to the extent that such care and 
services are available to the general population in the geographic 
area. Therefore, the agency has an overarching obligation under section 
1902(a)(30)(A) of the Act to ensure that Medicaid payments are made in 
an efficient, economical, as well as sufficient manner to provide 
access to care.
    We have never used the section 1927(b)(3)(B) of the Act authority 
to survey manufacturers or wholesalers, nor have we interpreted this 
statutory section in regulation. Therefore, we are proposing at Sec.  
447.510(k) to identify a process to survey wholesalers and 
manufacturers to verify prices and charges for certain CODs by 
requesting and collecting certain information about such prices and 
charges for a drug reported to us under section 1927(b)(3)(A) of the 
Act. As part of the drug price verification survey process, CMS 
proposes to post the survey's non-proprietary information on its 
website.
    In addition to the manufacturer survey, CMS also proposes to 
collect information from States to determine which drugs would be 
surveyed under Sec.  447.510(k)(3). The simplified State survey would 
ask States whether or not manufacturers meet any of the criteria for 
excluding drugs from the list from application of Sec.  447.510(k)(2) 
from such drug verification surveys, such as the level of 
manufacturer's effort in accordance with proposed Sec.  
447.510(k)(3)(ii). That is, the survey will ask a State if they were 
able to negotiate with the manufacturer a CMS-authorized supplemental 
rebate that when in combination with the Federal rebate results in a 
total (State and Federal) rebate that is greater than the average 
percentage of total national average Medicaid rebates (State and 
Federal) to total Medicaid drug spend as reflected in the most recent 
Medicaid Financial Management Report.
    With regard to the State survey, we estimate that once a year, 52 
respondents consisting of: the 50 States, the District of Columbia, and 
one territory participating in the Medicaid drug rebate program (Puerto 
Rico), would be surveyed to determine if manufacturers of high cost 
drugs are participating in negotiating supplemental rebates and any 
additional State Medicaid input under Sec.  447.510(k)(3)(iii)(A). At 
this time, we estimate that the simplified State survey would take 15 
minutes at $92.14/hr for an operations research analyst to complete. In 
aggregate, we estimate an annual burden of 13 hours ((52 surveys x 0.25 
hr/survey) at a cost of $1,198 (13 hr x $92.14/hr). While CMS may seek 
additional information via non-standardized follow-up questions, the 
burden associated with such a request is not subject to the 
requirements of the PRA as described under 5 CFR 1320.3(h)(9).
    With regard to the manufacturer survey, there are currently 792 
labelers participating in the MDRP. While there is no way to know the 
exact number of labeler codes used by these manufacturers, most 
manufacturers have at least 2 labeler codes, so we are estimating 
approximately selecting from a universe of 396 (792 labelers/2 labeler 
codes) manufacturers could potentially be subject to completing a 
verification survey. However, the proposed requirement to survey would 
be limited to only when the Secretary determines it is necessary, such 
as when the drug prices reported under section 1927(b)(3)(A) of the Act 
exceed a proposed criteria. While we anticipate that there is the 
potential that 396 manufacturers may be eligible to receive a survey, 
we estimate that based upon the criteria proposed at Sec.  447.510(k) 
for when a COD would be identified and selected and a manufacturer 
would be surveyed with respect to that drug, we would likely to 
undertake a minimum of three manufacturer surveys per year, with a 
maximum of ten surveys per year, taking 5 hours at $92.14/hr for an 
operations research analyst to complete the survey. So as to not under 
estimate the impact of this rule's proposed provisions, we are using 
the maximum of ten manufacturers surveyed per year. In aggregate, we 
estimate an annual burden of 50 hours (10 surveys x 5 hr/survey) at a 
cost of $4,607 (50 hr x $92.14/hr). While CMS may seek additional 
information via non-standardized follow-up questions, the burden 
associated with such a request is not subject to the requirements of 
the PRA as described under 5 CFR 1320.3(h)(9).
    Through this proposed rule we are soliciting comments to help us 
develop the manufacturer survey and the State survey.
6. ICRs Regarding Standard Medicaid Managed Care Contract Requirements 
(Sec.  438.3(s))
    The following proposed changes regarding drug cost transparency in 
Medicaid managed care contracts will be submitted to OMB for review 
under control number 0938-TBD 2 (CMS-10855).
    We are proposing to amend Sec.  438.3(s) to require MCOs, PIHPs, 
and PAHPs that provide coverage of covered outpatient drugs to assign 
and exclusively use unique Medicaid-specific BIN, PCN, and group number 
identifiers on all issued Medicaid managed care beneficiary 
identification cards for pharmacy benefits. It is a usual and customary 
business practice for the MCOs, PIHPs, and PAHPs to routinely issue 
identification cards for pharmacy benefits, as they do routinely for 
all of their lines of business across the industry, to include 
commercial/private and public sector programs, such as Medicare and 
Medicaid. Since we believe that this is a usual and customary business 
practice that is exempt from the PRA (see 5 CFR 1320.3(b)(2)), we are 
not setting out such burden for managed care entities to program the 
new codes onto the cards and to issue such cards under this section of 
the preamble. The burden, however, is subject to a regulatory impact 
analysis which can be found in section V. of this proposed rule.
    Additional proposed amendments to Sec.  438.3(s) would require that 
MCOs, PIHPs, and PAHPs that provide coverage of covered outpatient 
drugs structure any contract with any subcontractor for the delivery or 
administration of the covered outpatient drug benefit to require the 
subcontractor to report separately the amounts related to:
    (1) The incurred claims described in Sec.  438.8(e)(2) such as 
reimbursement for the covered outpatient drug, payments for other 
patient services, and the fees paid to providers or pharmacies for 
dispensing or administering a covered outpatient drug; and
    (2) Administrative costs, fees and expenses of the subcontractor.
    We estimate that the proposed reporting requirements would affect 
282 managed care plans in the country and 40 States. We further 
estimate that it would take an operations research analyst at the State 
level, 25 hours at $92.14/hr to restructure 282 managed care contracts 
to require those plans to structure their subcontracts to require the 
subcontractor to separately report incurred claims expenses described 
in Sec.  438.8(e)(2) from fees paid for administrative activities. In 
aggregate, we estimate a one-time burden of 1,000 hours (40 State 
responses x 25 hr/response) at a cost of $92,140 (1,000 hr x $92.14/
hr).

[[Page 34280]]

    For the same contract changes between the MCOs and the 
subcontractors (mainly PBMs), we also estimate a one-time private 
sector burden of 7,050 hours (282 managed care plans x 25 hr/response) 
at a cost of $649,587 (7,050 hr x $92.14/hr).
    With respect to the reporting burden, we estimate that 282 PBMs of 
those 282 managed care plans to separately report incurred claims 
expenses described in Sec.  438.8(e)(2) from fees paid for 
administrative activities would take approximately 2 hours to identify 
these costs separately and report separately to the managed care plans. 
In aggregate we estimate an annual burden of 564 hours (282 PBMs x 2 
hr/response) at a cost of $51,967 (564 hr x $92.14/hr).

C. Summary of Proposed Burden Estimates

    In Table 4, we present a summary of this rule's proposed collection 
of information requirements and associated burden estimates.

                                                      Table 4--Summary of Proposed Burden Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Total       Time per
 Regulatory section(s) under title 42  OMB control No. (CMS ID   Number of respondents    number of     response    Total time   Labor cost   Total cost
              of the CFR                         No.)                                     responses       (hr)         (hr)        ($/hr)        ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   447.510.......................  0938-TBD 1 (CMS-10822).  52 States..............           52         0.25           13        92.14        1,198
Sec.   447.510.......................  0938-TBD 1 (CMS-10822).  10 manufacturers.......           10            5           50        92.14        4,607
Sec.   438.8(e)(2)...................  0938-TBD 2 (CMS-10855).  40 States..............           40           25        1,000        92.14       92,140
Sec.   438.8(e)(2)...................  0938-TBD 2 (CMS-10855).  282 managed care plans.          282           25        7,050        92.14      649,587
Sec.   438.8(e)(2)...................  0938-TBD 2 (CMS-10855).  Subcontractor PBMs of            282            2          564        92.14       51,967
                                                                 the 282 managed care
                                                                 plans.
                                      ------------------------------------------------------------------------------------------------------------------
    Total............................  344....................  (52 States + 10                  666       Varies        8,677        92.14      799,499
                                                                 manufacturers + 282
                                                                 managed care plans).
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Submission of PRA-Related Comments

    We have submitted a copy of this proposed rule's information 
collection requirements to OMB for their review. The requirements are 
not effective until they have been approved by OMB.
    To obtain copies of the supporting statement and any related forms 
for the proposed collections discussed above, please visit the CMS 
website at https://www.cms.gov/regulations-and-guidance/legislation/paperworkreductionactof1995/pra-listing, or call the Reports Clearance 
Office at 410-786-1326.
    We invite public comments on these potential information collection 
requirements. If you wish to comment, please submit your comments 
electronically as specified in the DATES and ADDRESSES sections of this 
proposed rule and identify the rule (CMS-2434-P), the ICR's CFR 
citation, and OMB control number.

IV. Response to Comments

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

V. Regulatory Impact Analysis

A. Statement of Need

    The intent of this proposed rule is to implement several new 
legislative requirements relating to the operation of the MDRP and 
other program integrity, and program administration proposals.
    For example, section 6 of the MSIAA was signed into law on April 
18, 2019. Section 6 of the MSIAA amended sections 1903 and 1927 of the 
Act to grant the Secretary additional authorities needed to address 
drug misclassification, drug pricing, and product data misreporting by 
manufacturers for purposes of the MDRP. This proposed rule includes 
policies to implement these new statutory authorities, as required.
    This proposed regulation also aims to implement a provision in 
section 9816 of the American Rescue Plan Act of 2021, which amended 
section 1927(c)(2)(D) of the Act, by inserting a sunset date on the 
limitation on the maximum rebate amount for single source and innovator 
multiple source drugs, and other drugs.
    We are also proposing several important MDRP program administration 
and integrity policies, which include the following: clarifying the 
definition of manufacturer for NDRA purposes; adopting a regulatory 
definition of vaccine for MDRP purposes; and, implementing a time 
limitation on manufacturer disputes and audits with States regarding 
rebates. This proposed rule also proposes to specify a number of 
existing policies, including: requirements for manufacturers for 
determining their best price for a covered outpatient drug; the 
requirements for State reimbursement for prescribed drugs, and the 
conditions relating to payment of FFP for PADs that are CODs dispensed 
and paid for under the State Plan.
    We are proposing to include two new requirements for the contracts 
between States and their Medicaid managed care plans, specifically 
MCOs, PIHPs, and PHAPs. That is, States would be required to include in 
their contracts with MCOs, PIHPs, and PHAPs a requirement that each 
Medicaid enrollee's identification card used for pharmacy benefits 
would include a unique Medicaid-specific BIN/PCN. This inclusion of 
this unique Medicaid-specific BIN/PCN on these cards would have to be 
effective no later than the next rating period for Medicaid managed 
care contracts, following the effective date of the final rule adopting 
this new regulatory requirement. This requirement would assist 
providers in identifying patients as Medicaid beneficiaries.
    In addition, we are proposing that Medicaid managed care plans that 
subcontract with a pharmacy benefit administrator or pharmacy benefit 
manager require the subcontractor to provide specific details to the 
Medicaid managed care plans about the various pharmacy and non-pharmacy 
(administrative) costs associated with providing the pharmacy benefit, 
so the managed care plan can appropriately calculate its Medicaid 
managed care MLR.
    Moreover, we are also proposing additional program integrity and 
administration policies including: amending the regulatory definition 
of noninnovator multiple source drug; adding regulatory definitions of 
a manufacturer's internal investigation; drug product information; 
market date; and, modifying the definition of COD. There is also 
included a proposal

[[Page 34281]]

unrelated to MDRP; that, is a proposed revision to third party 
liability regulation resulting from statutory changes in the BBA 2018.
    We are solicitating comments relating to the issues, benefits and 
challenges of requiring a patient's diagnosis be included on Medicaid 
prescriptions, and the patient care and operational aspects of such a 
requirement. We are particularly interested in understanding the burden 
with such a proposal and seeking comments on how to mitigate any 
foreseeable impact on beneficiaries and providers, and steps which 
would be needed by States to successfully implement a Medicaid 
requirement for diagnosis on prescriptions.
    On May 17, 2022, the United States District Court for the District 
of Columbia vacated and set aside the ``accumulator adjustment rule of 
2020'' in response to a complaint filed against the Secretary regarding 
the accumulator provisions within the December 31, 2020 final rule.
    The December 31, 2020 final rule had revised the various the 
regulatory patient assistance program exclusions from AMP and best 
price at Sec. Sec.  447.504(c)(25) through (29) and (e)(13) through 
(17) and 447.505(c)(8) through (12), to add language (effective January 
1, 2023), such that they would require manufacturers to ``ensure'' the 
full value of the assistance provided by these patient assistance 
programs is passed on to the consumer and that the pharmacy, agent, or 
other AMP or best price eligible entity does not receive any price 
concession, before excluding such amounts from the determination of 
best price or AMP. In response to the district court's order, we 
propose to withdraw the changes made to these sections by the December 
31, 2020 final rule.

B. Overall Impact

    We have examined the impacts of this proposed 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). Section 
3(f) of Executive Order 12866 defines a ``significant regulatory 
action'' as an action that is likely to result in a rule: (1) having an 
annual effect on the economy of $200 million or more in any 1 year, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local, or tribal governments or communities; (2) 
creating a serious inconsistency or otherwise interfering with an 
action taken or planned by another agency; (3) materially altering the 
budgetary impacts of entitlement grants, user fees, or loan programs or 
the rights and obligations of recipients thereof; or (4) raising legal 
or policy issues or which centralized review would meaningfully further 
the President's priorities or the principles set forth in the Executive 
order.
    Based on our estimates, OMB's Office of Information and Regulatory 
Affairs has determined this rulemaking is significant per section 
3(f)(1) as measured by $200 million or more in any 1 year. Therefore, 
OMB has reviewed this proposed rule, and the Departments have provided 
the following assessment of their impact.

C. Detailed Economic Analysis

    There is a need for greater clarity regarding some of the 
administrative policies of the MDRP, and this proposed rule aims to 
establish regulations to provide guidance to States, manufacturers and 
other related parties. This proposed rule addresses these policy issues 
after considering the evolution of the pharmaceutical marketplace since 
the development of the MDRP, and the economic, social and other factors 
affecting Medicaid providers and beneficiaries. At the same time, this 
proposed rule is mindful of the impact of changes in regulations on 
affected interested parties, and the degree of compliance promulgated 
by the agency. Therefore, for these reasons, we prepared the economic 
impact estimates utilizing a baseline of ``no action,'' comparing the 
effect of the proposals against not proposing the rule at all.
    If the proposals in this rule are not implemented, there would be 
no specific policies in place in the MDRP related to the new 
legislative requirements in the MSIAA, and no clear policies to address 
drug misclassification, drug pricing and product data misreporting by 
manufacturers. Accordingly, this proposed rule would address other 
situations in which manufacturers are paying fewer rebates to States 
than are supported by the pricing and product data that they are 
currently reporting to MDP. While we believe that most of the drugs in 
MDP are appropriately classified, we do not know an exact number of 
those which may be misclassified. For this reason, a robust analytical 
framework, with baseline scenarios and benchmarks, cannot be conducted 
at this time.
    Additionally, if these proposals are not implemented, there would 
be no regulatory policies for addressing the authority for the American 
Rescue Plan Act to sunset the date on the limitation on the maximum 
rebate amount paid by manufacturers for single source and innovator 
multiple source drugs, in addition to noninnovator multiple source 
drugs.
    At this time, program integrity and program administration 
provisions need to be proposed or specified to address the definitions 
for: covered outpatient drug (COD); drug product information; internal 
investigation; manufacturer; market date; noninnovator multiple source 
drug; and vaccine. Moreover, at this time there is a need to: establish 
a time limitation on manufacturer rebate disputes and audits with 
States; refine State requirements for State reimbursement for 
prescribed drugs; specify conditions relating to payment for PAD; 
specify the process for manufacturer to accumulate price concessions 
and discounts (``stacking'') when determining best price; establish a 
drug price verification survey process through data collection. The 
reasons and rationales for these provisions were detailed in the 
preamble section of this proposed rule. The economic impacts of these 
provisions are detailed below.
    We are solicitating comments relating to the issues, benefits and 
challenges of requiring a diagnosis be included on Medicaid 
prescriptions, as well as any current data and estimates that could be 
used to develop an analytical framework for the proposals in this rule.
1. Benefits
    The provision requiring that PBAs and PBMs report specific 
categories of drug expenditures to their contracted managed care entity 
would benefit States and Medicaid managed care plans, since it can help 
assure a more accurate calculation of their MLRs and managed care plan 
capitation rates, resulting in more accurate Medicaid spending. Some 
States have already eliminated ``spread pricing'' in their managed care 
contracts, meaning that the State requires the PBM pays the

[[Page 34282]]

pharmacy the same price that the managed care plan is charged for the 
prescription, such that there would be no ``spread'' or difference 
between the two prices. That is, the PBM would not be allowed to charge 
the managed care plan a higher price than the amount paid to the 
pharmacy. This removes the ``spread'' or the difference of which is 
traditionally kept by the PBM to pay for administrative and other fees. 
Instead, such administrative fees would have to be separately 
identified by the PBM for the managed care plan. While this shift in 
policy has begun in many States, this benefit cannot be quantified at 
the national level as we do not have data on which States do this now 
versus States that would need to implement this because of the proposed 
rule.
    However, a March 2020 Congressional Budget Office (CBO) estimate of 
the Federal proposal \51\ to require pass through pharmacy pricing 
finds the spread pricing provision would produce Federal savings of 
$929 million over 10 years, which translates to a less than 1 percent 
drop in Federal Medicaid prescription drug spending. It is unclear what 
analysis or assumptions went into these estimates, but they are highly 
dependent on assumptions or understanding of the extent to which spread 
pricing currently exists in Medicaid. We are soliciting comments 
relating to this provision.
---------------------------------------------------------------------------

    \51\ https://www.kff.org/medicaid/issue-brief/costs-and-savings-
under-federal-policy-approaches-to-address-medicaid-prescription-
drug-spending/
#:~:text=This%20estimate%20is%20based%20in,between%20states%20and%20t
he%20federal.
---------------------------------------------------------------------------

    In regards to Medicaid Drug Rebates (MDR) and penalties with 
respect to manufacturer misclassification of drugs, benefits also 
include monetary and non-monetary penalties, which are not quantifiable 
at this time. For example, these provisions would implement the 
existing statute and would benefit States as they would be receiving 
any past rebates that are due to them as a result of a manufacturer's 
misclassification of drugs. That is, the manufacturers would be finally 
paying the appropriate amount in past due rebates.
    The overwhelming majority of drugs are appropriately classified in 
the manufacturer discount program (MDP) at this time, but there may be 
some manufacturers that continue to list their drug as a noninnovator 
multiple-source drug in MDP, when the drug should be listed as a 
single-source drug or an innovator multiple source drug. The provision 
allows us to also pursue penalties against manufacturers that will not 
change their classification as a result of the denial of their narrow 
exception request, and would also allow us to impose penalties on 
manufacturers that pay a different amount in rebates to States than is 
supported by the product and pricing data that they are reporting to 
MDP.
    For example, manufacturers have the opportunity to request that 
certain drugs be classified in the MDP as a noninnovator multiple 
source drug instead of a single source or innovator multiple source 
drug. If this request is denied, and the manufacturer will not change 
the classification, CMS can use the authority under the 
misclassification provisions of the statute to change the 
classification. Moreover, we have had instances of manufacturers who 
have decided to take it upon themselves to pay fewer rebates to States, 
even though the product and pricing information they report to MDP 
would support a different rebate amount, in most cases, a higher rebate 
than they are paying to States. This provision would allow us to 
consider both these situations to be misclassifications, subject to the 
penalties that are identified in the statute, and that we further 
describe in the proposed regulation.
    Modifying the definition of covered outpatient drug would benefit 
the manufacturers, States, and CMS. The provision would support the 
States' ability to collect rebates on drugs administered in certain 
settings when a drug and its reimbursement amount are separately 
identified on a claim billed. It would benefit manufacturers by 
providing clarity on drugs that would satisfy the definition of covered 
outpatient drug and for which compliance with section 1927 of the Act 
is required. This is currently not quantifiable because we do not know 
how many drugs this would affect.
    Defining internal investigation for purposes of pricing metric 
revisions would benefit States and manufacturers. It would benefit 
manufacturers because it would provide a clear definition of what CMS 
views as an internal investigation for purposes of requesting CMS 
consideration of recalculation of AMP, best price, and customary prompt 
pay outside of the 12-quarter rule as permitted under Sec.  447.510. 
Additionally, defining this term would benefit States because it would 
deter manufacturers from submitting to CMS a request for restatement of 
AMP, best price, and customary prompt pay discounts outside of the 12-
quarter timeframe, which could trigger manufacturers seeking to collect 
overpaid rebates unexpectedly. This benefit is not quantifiable as it 
is not known how many manufacturers would be deterred from submitting 
the request to restate outside of the 12-quarter timeframe. However, we 
do not get these requests frequently.
    Revising the definition of manufacturer for greater NDRA compliance 
would benefit CMS and States, as well as manufacturers, by providing 
greater clarity, codifying existing policy, and specifying direction on 
an area of statutory and regulatory compliance that some manufacturers 
previously interpreted as ambiguous. Manufacturers would now know, with 
certainty, that all of their associated labeler codes with CODs must 
enter into a rebate agreement to comply with section 1927(a)(1) of the 
Act and the terms of the NDRA. The benefit is not quantifiable as we do 
not know how many manufacturers are not reporting all of their CODs 
because they do not have rebate agreements in effect for all of their 
associated labeler codes. However, we believe the majority of 
manufacturers have entered into a rebate agreement for all of their 
associated labeler codes.
    The States also benefit as noncompliant manufacturers must now 
enter into the rebate program and pay rebates on all their CODs. While 
the clear majority of manufacturers are compliant with this provision, 
any manufacturer that is noncompliant must ensure that every labeler 
code that satisfies the definition of manufacturer has a rebate 
agreement in effect and that the manufacturer pays rebates on all of 
their CODs for all labeler codes. Rebates are paid by drug 
manufacturers on a quarterly basis to States and are shared between the 
States and the Federal Government. These outstanding manufacturers' 
rebates would be paid to the States and shared with the Federal 
Government to offset the overall cost of prescription drugs under the 
Medicaid program. This requirement helps ensure program integrity and 
prevents future underpayments of rebates by noncompliant manufacturers. 
As previously stated, the benefit is not quantifiable as we do not know 
how many manufacturers are not reporting all of their CODs because they 
do not have rebate agreements for all of their associated labeler 
codes. However, we believe the majority of manufacturers have entered 
into a rebate agreement for all of their associated labeler codes.
    The proposal to define market date using the date of first sale, 
rather than the date first available for sale, would benefit some 
manufacturers, CMS, and States. Manufacturers would not be required to 
report AMP information until they have actual data to report. They will 
appreciate not having to rely on reasonable assumptions to report AMP 
without actual data on which to

[[Page 34283]]

base the AMP. CMS and States would also benefit because we would now 
have regulatory support for the longstanding policy of determining the 
baseline information for a drug based on the date the drug was first 
sold by any manufacturer. Some manufacturers have been incorrectly 
interpreting that the market date of their drug is the date on which 
their NDC was first sold or marketed, regardless of any prior 
manufacturer's marketing or sale of the same drug. That is, some 
manufacturers believe that they can reset the baseline information for 
a drug once they purchase the drug.
    States are likely to benefit from the proposal to establish a 12-
quarter rebate manufacturer dispute, hearing, and audit time limitation 
in Sec.  447.510(j). While the NDRA addresses rebate disputes, the lack 
of policy on audit and dispute-initiation timeframes has been 
interpreted as there being no timeline on initiation of disputes on 
drug utilization data, unreasonably burdening State rebate programs. We 
have heard from States that manufacturers are initiating rebate audits 
and disputes on claims greater than 30 years old. Some States have even 
stated that there have been repeated disputes on the same paper claim 
over the years. With this provision, States would no longer have to 
look back at and research paper claims dating back to as early as 1991 
and the origin of the Medicaid Drug Rebate Program. We estimate this 
proposal would reduce the amount of time it would take States to 
research disputes on rebate claims since manufacturer disputes, hearing 
requests, and audits initiated after 12-quarters from the last day of 
the quarter from the date of State invoice would no longer be 
considered.
    In regards to the proposed regulatory revisions regarding Federal 
Financial Participation for conditions relating to physician-
administered drugs, these provisions would benefit States and the 
Federal Government. By revising the regulations to be consistent with 
the statute, States would gain a better understanding of the 
requirement that they must invoice for all covered outpatient single 
and multiple source physician-administered drugs. This proposed rule 
would assure Federal financial participation and provide additional 
rebate collection to increase State and Federal revenue. This benefit 
is not quantifiable because PAD utilization and costs vary among all 
State programs, but we believe that most if not all States are already 
billing for rebates for all PADs.
    The proposal for inclusion of a BIN/PCN on Medicaid Managed Care 
Cards would benefit States, the Federal Government, providers and 
manufacturers. With the inclusion of Medicaid-specific BIN/PCN and 
group numbers on the pharmacy identification cards issued to the 
enrollees of MCOs, PHIPs and PAHPs, pharmacies would be able to 
identify patients as Medicaid beneficiaries. This would be helpful to 
all parties to ensure that Medicaid benefits are applied appropriately. 
This would also help avoid duplicate discounts between Medicaid and the 
340B Drug Pricing Program, which occurs when a State bills for a 
Medicaid rebate on a discounted 340B drug, by providing notice to the 
provider that the claim should be identified as being for a 340B drug. 
This benefit is not quantifiable because it is currently unknown how 
often patients are not identified as Medicaid beneficiaries. However, 
we do believe that a significant number of duplicate discounts can be 
avoided through better identification of a 340B eligible individual at 
the time the prescription is being filled.
    The provision for drug cost transparency in Medicaid Managed Care 
Contracts would benefit States and the Federal Government. It would 
assist Medicaid managed care plans in complying with Federal 
regulations regarding MLRs and guidance by effectively requiring 
subcontractors to appropriately identify and classify certain costs, so 
that the managed care plan can appropriately calculate their MLR.
    In particular, we propose that managed care plans that provide 
coverage of covered outpatient drugs must structure any contract with 
any subcontractor for the delivery or administration of the covered 
outpatient drug benefit to require the subcontractor to report 
separately the amounts related to the incurred claims described in 
Sec.  438.8(e)(2) (such as reimbursement for the covered outpatient 
drug, payments for other patient services, and the fees paid to 
providers or pharmacies for dispensing or administering a covered 
outpatient drug) from administrative costs, fees and expenses of the 
subcontractor. By receiving reports that separately identify fees that 
are outside of the prescription and dispensing fee costs of a drug, the 
MCO, PIHP, or PAHP would be able to accurately calculate and report its 
MLR.
    MLR calculations are used to develop capitation rates paid to 
Medicaid managed care plans, thus their accuracy is critical in 
assuring that Medicaid payments are reasonable, appropriate and 
necessary for health care services when using a Medicaid managed care 
plan. Managed care capitation rates must (1) be developed such that the 
plan would reasonably achieve an 85 percent MLR (Sec.  438.4(b)(9)) and 
(2) are developed using past MLR information for the plan (Sec.  
438.5(b)(5)). In addition to other standards outlined in Sec. Sec.  
438.4 through 438.7, these requirements for capitation rates related to 
the MLR are key to ensuring that Medicaid managed care capitation rates 
are actuarially sound. In addition, Medicaid managed care plans may 
need to pay remittances (that is, refund part of the capitation 
payments) to States should they not achieve the specific MLR target. 
Thus, the accuracy of MLR calculation is important to conserving 
Medicaid funds.
    The payment of claims provision would benefit States, the Federal 
Government, providers, and beneficiaries. This provision would benefit 
both the Federal Government and States as it corrects omissions in 
regulatory language to align with statutory language, permitting 
Medicaid to remain the payer of last resort. These revisions would also 
benefit beneficiaries and providers as it permits States to pay claims 
sooner than the specified waiting period, when doing so is cost-
effective and necessary to ensure access to care.
    The proposal to account for manufacturer stacking of discounts when 
determining best price would benefit the States and Federal Government. 
It would remove any potential doubt prospectively that when determining 
the best price for a COD, the manufacturer should aggregate discounts 
such that cumulative discounts, rebates or other arrangements must be 
stacked to generate a final price realized by the manufacturer for a 
covered outpatient drug, including discounts, rebates or other 
arrangements provided to different best price eligible entities.
    The proposal regarding verification of manufacturer drug prices for 
certain CODs through data collection would benefit the States, Federal 
Government, consumers, and insurers. The impact is that it would allow 
the Federal Government to verify prices by obtaining from the 
manufacturer various related information used by the manufacturer to 
determine a drug's list price and, when permissible, share the non-
proprietary information submitted by the manufacturer with the general 
public. This would benefit States in that it could help them negotiate 
further rebates with manufacturers for certain

[[Page 34284]]

high cost or high spending Medicaid CODs.
2. Costs
a. Medicaid Drug Rebates (MDR) and Penalties
    In regards to the costs associated with this provision, if CMS 
identifies a drug misclassification, or other situations that would 
fall under the misclassification provisions, the manufacturer would be 
responsible for paying back past rebates to the States as a result of 
the misclassification. This would mean that the manufacturers would 
have to determine which prices to use to calculate the past due 
rebates, and for which units rebates are owed, and pay the States for 
these rebates. They would also have to proactively determine that all 
States that are due rebates are subsequently paid. In some cases, the 
States may have to pay rebates back to the manufacturer if the 
manufacturer's misclassification resulted in overpayment of rebates to 
the States.
    This provision will not impose new costs on States, rather it will 
help assure that manufacturers are accurately paying rebates to States, 
thus benefitting the States. However, the amount of rebates that would 
be recovered because of these new misclassification provisions cannot 
be estimated. While there are several validation checks, we cannot 
predict how many, if any, drugs are or would be misclassified 
especially since the amount would also include penalties for 
misclassification of future drugs that have yet to be released to 
market.
    b. Suspension of Manufacturer NDRA for Late Reporting of Pricing 
and Drug Product Information
    This provision would implement existing statute and is being 
implemented to encourage manufacturer adherence with program 
requirements and enhance administrative efficiency. Manufacturers that 
are not reporting their pricing or product information in a timely 
manner per statutory and regulatory requirements would have their 
rebate agreement (and those of their associated labelers) suspended for 
purposes of Medicaid and the MDRP. This means that States would not 
have to cover or pay for the drugs of the manufacturer during the 
period of the suspension. Lack of timely reporting by manufacturers can 
also reduce rebates that are owed to States by a manufacturer, and can 
affect the number of multiple source drugs for which Federal Upper 
Limits (FULs) can be established. Thus, this suspension authority would 
serve as an incentive for manufacturers to report their product and 
pricing information timely so that drugs of the manufacturer would 
continue to be covered under Medicaid and the drug rebate program.
    This provision would have minimal cost to the States as their only 
responsibility would be to notify prescribers and patients that a drug 
is not available under the MDRP for the period of the suspension. 
Similar to Sec. Sec.  431.211 and 435.917, we are requiring that States 
notify beneficiaries at least 30 days before a drug is no longer 
available because of a suspension of a manufacturer's drug rebate 
agreement. Since States may choose their preferred method of 
notification of beneficiaries including through email, form letters, 
list serves, or Medicaid portals, we are requesting comments on how to 
develop a cost estimate.
c. Modify the Definition of Covered Outpatient Drug
    This proposed provision may increase manufacturers' rebate 
liability to the States because it would clarify those CODs that could 
be billed for rebates. At this time, we cannot determine an estimate of 
burden for manufacturers regarding this item because we do not have an 
estimate of the number of drugs that could potentially be billed for 
rebates as result of this clarification. States only have to report 
utilization of drugs for which rebates are invoiced. If States were not 
invoicing for rebates for certain types of claims previously, we do not 
have quantifiable information about the additional rebates that may be 
now collected. Additionally, States may need to educate their providers 
on billing procedures. We believe this would be involve minimal burden, 
as States could inform their providers as part of their regular 
communications.
d. Define Internal Investigation for Purposes of Pricing Metric 
Revisions
    The cost of this new proposed definition would be the amount of 
time that needs to be taken by manufacturers' personnel to determine 
how to apply the definition of internal investigation when considering 
submitting a request to CMS for a recalculation. Furthermore, this 
legal analysis would not apply to every manufacturer or to every drug 
of the manufacturer. It would only apply if the manufacturer wants to 
submit a request for CMS to consider recalculation outside of 12-
quarters for one or more of its CODs. At this time, we have received 
only a minimal number of such requests from manufacturers. We assume 
the time to perform legal analysis is 5 hours. Using the May, 2021 mean 
(average) wage information from the BLS for lawyers (Code 23-1011), we 
estimate that the cost of reviewing this provision is $142.34 per hour, 
including fringe benefits and other indirect costs (https://www.bls.gov/oes/current/oes231011.htm) with a total cost of ($142.34 x 
5) is $711.70 for each manufacturer. We estimate that only one percent 
of manufacturers would submit a request for a recalculation annually 
outside of the 12-quarters. One percent of 792 manufacturers is 
approximately 8 manufacturers, with a total one-time cost of $5,693.60 
(8 x $711.70). We estimated one percent because currently only one 
manufacturer has submitted such a request. This proposed provision will 
not impose substantial costs on the State.
e. Revise Definition of Manufacturer for NDRA Compliance
    To better assess current manufacturer compliance with the 
requirement that all associated labeler codes of a manufacturer have a 
rebate agreement in effect, several analyses and reviews were 
performed. Our initial analysis identified 24 instances of related-
party manufacturers and labelers that appear to have included some, but 
not all, of their product line within the MDRP representing 144 
products, approximately 0.3 percent of all products in MDRP.
    Additionally, if a manufacturer is noncompliant, the manufacturer 
would be responsible for having associated entities sign a rebate 
agreement and agree to participate in MDRP. That is, the manufacturers 
would have to determine which labelers are not currently participating 
in the program, submit rebate agreements, and pay the States for 
rebates for CODs of those labelers. For this reason, we are estimating 
a collection burden to allow manufacturers time to review and ensure 
compliance with this requirement. Manufacturers would need to review 
their respective labeler codes in the CMS-hosted online information 
technology system and ensure the list is complete.
    We estimate that the burden associated with the proposed 
modification to the definition of manufacturer is a one-time cost of 
$43,884.72, estimating it would take 792 manufacturers 0.5 hours at 
$110.82 per hour, including fringe benefits and other indirect costs, 
for an operations manager to log onto the CMS system and review 
associated labeler codes. This provision will not impose substantial 
costs on States. States would receive additional monetary rebates if a 
noncompliant manufacturer comes into compliance.

[[Page 34285]]

    While this policy has already been specified in guidance and 
preambles, codifying the requirement is necessary to ensure compliance 
and eliminate ambiguity.
f. Define Market Date
    In regards to costs associated with defining market date, if 
manufacturers have not provided CMS with accurate market dates, they 
may need to develop a methodology to determine the accurate dates. In 
addition, going forward, manufacturers will have to identify when their 
first sales of the COD occur to accurately identify the market date of 
the COD. At this time, we cannot determine cost estimates associated 
for this provision. This provision will not impose substantial costs on 
States.
g. Modify the Definition of Noninnovator Multiple Source Drug
    This provision proposes a technical correction to the regulatory 
text to conform the language in the definition of an N drug to the 
language in the definition of an I drug. We do not anticipate any 
impact on interested parties.
h. Define Vaccine for Purposes of the MDRP Only
    In regards to costs associated with the provision, if a 
manufacturer has not been reporting and paying rebates on a product 
because it believed the product was a vaccine, and the proposed 
definition would result in the product being a COD, not a vaccine, then 
the manufacturer would have both reporting and rebate liability on that 
product if the proposed definition is finalized. At this time, we 
cannot determine an estimate for this item. This provision would not 
impose substantial costs on the State.
i. Proposal To Establish a 12-Quarter Rebate Audit Time Limitation
    We are estimating a decrease in burden associated with this 
proposal. After contacting several States, we estimate that per State, 
between 10 and 80 disputes are initiated routinely in a quarter on 
rebate claims greater than 3 years old, and those disputes on average 
take an Operations Research Analyst between 30 minutes to 4 months to 
resolve, depending on the complexity of the dispute and how long ago 
the claim was paid. For our best estimate of the quantifiable impact, 
with all 50 States, the District of Columbia, and Puerto Rico being 
affected, we estimate it would take 52 Operations Research Analysts (1 
for each State) 7 hours to resolve a dispute at $92.14/hr (https://www.bls.gov/oes/current/oes152031.htm) $644.98 ($92.14 x 7) (for 45 
outstanding disputes [(10 disputes + 80 disputes)/2] per State for 
claims greater than 3 years old. We, therefore, estimate a one-time 
decreased burden reduction of $6,037,012.80 (45 disputes x $644.98 hr/
dispute x 52 States x 4 quarters (1 year)). Once this rule is 
finalized, manufacturers will only have the ability to dispute claims 
for up to 12-quarters, from the last day of the quarter from the date 
of State invoice.
j. Proposals Related to State Plan Requirements, Findings, and 
Assurances
    This proposed clarification is necessary so payments to pharmacy 
providers are consistent with efficiency, economy, and quality of care, 
and are sufficient to provide access to care equivalent to the general 
population. Pharmacists must be accurately reimbursed by the State for 
drug ingredient costs and professional dispensing services under Sec.  
447.518.
    All but one State, are currently in compliance with the PDF 
requirements. We have not included time and cost burdens for individual 
State dispensing fee surveys in this proposed rule because we cannot 
accurately determine whether a State would choose to conduct a State-
specific cost of dispensing survey or use another State's survey. As 
such, this is an unquantifiable cost to States and therefore, we have 
not included an estimate. 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).
    In this proposed rule, we specify that the type of data that States 
must submit to justify their professional dispensing fees must be based 
on actual costs of dispensing.
k. Federal Financial Participation: Conditions Relating to Physician-
Administered Drugs
    All States currently have an existing process in place to collect 
and invoice for covered outpatient single source and the top 20 high 
volume multiple source physician-administered drugs in accordance with 
regulatory language in Sec.  447.520, which may limit the additional 
burden associated with collecting and invoicing NDC information for all 
covered outpatient single and multiple source physician-administered 
drugs.
    It is difficult to quantify a specific dollar value for the 
expected revenue increase at this time. PAD utilization and costs vary 
among all State programs; however, once implemented, and all States are 
collecting rebates for all single and multiple source COD PADs, a 
baseline can be established. All States currently have this process 
well established pursuant to regulatory language in Sec.  447.520.
    These provisions clarity the existing statute to ensure Federal 
financial participation and rebate collection for all covered 
outpatient single and multiple source physician-administered drugs.
l. BIN/PCN on Medicaid Managed Care Cards
    The cost is limited to the time the Medicaid managed care entities 
need to program the new codes onto the cards.
m. Drug Cost Transparency in Medicaid Managed Care Contracts
    The costs associated with this change is the cost to managed care 
plans and their subcontractors to negotiate and revise contracts to 
ensure administrative fees are separately identifiable from 
reimbursement for CODs, dispensing fee costs and other patient costs 
that need to be captured as incurred claims under Sec.  483.8(e)(2). As 
discussed in the section III. of this proposed rule, we estimate that 
these requirements would affect 282 managed care plans and their 
subcontractors (mainly PBMs) in the country and 40 States. We estimate 
it would take an Operations Research Analyst (Code 15-2031) 25 hours at 
$92.14 per hour, including fringe benefits and other indirect costs, to 
renegotiate and restructure 282 Medicaid managed care contracts to 
require the MCO, PIHP or PAHP to require its subcontractors to 
separately report information on incurred costs (as described in Sec.  
438.8(e)(2)) and fees paid to the subcontractor for administrative 
services. We, therefore, estimate that the burden associated with the 
proposed dispute timeline limitation would be a one-time cost for each 
managed care plan of $2,303.50 or $649,587 for all managed care plans. 
There are 40 States with Medicaid managed care plans, therefore, we 
estimate the State's Operations Research Analyst (Code 15-2031) 25 
hours at $92.14 per hour including fringe benefits and other indirect 
costs to restructure State contracts for a one-time cost per State of 
$2,303.50 or $92,140 for all 40 States.
    Federal savings may be captured by an estimate associated with a 
statutory change to eliminate PBM spread pricing

[[Page 34286]]

at $929 Million over 10 years.\52\ A March 2020 CBO estimate for the 
Federal proposal to require pass through pricing finds the spread 
pricing provision would produce Federal savings of $929 million over 10 
years, which translates to a less than 1 percent drop in Federal 
Medicaid prescription drug spending. It is unclear what analysis or 
assumptions went into these estimates, but they are highly dependent on 
assumptions or understanding of the extent to which spread pricing 
currently exists in Medicaid.
---------------------------------------------------------------------------

    \52\ https://www.kff.org/medicaid/issue-brief/costs-and-savings-
under-federal-policy-approaches-to-address-medicaid-prescription-
drug-spending/
#:~:text=This%20estimate%20is%20based%20in,between%20states%20and%20t
he%20federal.
---------------------------------------------------------------------------

    There is not currently a Federal prohibition on using spread 
pricing in Medicaid. As noted, we issued guidance in 2019 regarding the 
impact of the lack of transparency between costs for administrative 
functions versus actual costs for Medicaid-covered benefits on the 
managed care plan's MLR calculation. The 2019 CIB is clear that when 
the subcontractor, in this case the PBM, is performing administrative 
functions such as eligibility and coverage verification, claims 
processing, utilization review, or network development, the 
expenditures and profits on these functions are a non-claims 
administrative expense as described in Sec.  438.8(e)(2)(v)(A), and 
should not be counted as an incurred claim for the purposes of MLR 
calculations.
    If a subcontractor incorrectly categorizes these administrative 
fees as incurred claims under Sec.  438.8(e)(2), it increases the MLR 
numerator, and thus increases the per-member-per-month (PMPM) revenue a 
managed care entity can receive from the State while still appearing to 
meet MLR requirements. By proposing to require that managed care plans 
require subcontractors to separately report their administrative fees 
(that is, separately identified from incurred claims such as 
reimbursement for covered outpatient drugs, dispensing fees, and other 
patient services), the managed care plan is better able to ensure the 
accuracy of MLR, which sets the PMPM revenue for Medicaid managed care 
plans, and accurately reflects only medical expenditures, thus 
generating savings to the Medicaid program. For those States that may 
not already have this requirement as part of its contract with the 
managed care plan, this provision would be a cost to the State to 
revise managed care plan contracts. It provides transparency to the 
State and the managed care plan as to which subcontractor costs are 
incurred claims under Sec.  438.8(e)(2) (costs of CODs and dispensing 
fees) versus administrative fees.
n. Proposals Related to Amendments Made by the American Rescue Act of 
2021--Removal of Manufacturer Rebate Cap (100 Percent AMP)
    This provision is a direct result of a statutory change to remove 
the cap on Medicaid drug rebates (the maximum rebate amount). Medicaid 
savings would be generated by the increased rebates due to the removal 
of the cap on rebates with an estimate of an average of $14.21 billion 
over 10 years.53 54 By removing the cap on the amount 
manufacturers would be required to pay for Medicaid drug rebates, 
Medicaid rebate revenue would increase thus producing savings to the 
Federal Government (Table 6 includes the savings which are CBO 
estimates from when statute was amended). The costs associated with 
this requirement are to manufacturers. Manufacturers would also need to 
make minor changes to their systems to address the removal of the cap. 
As stated previously in this proposed rule, States would realize some 
savings because of the increase in rebates; however, it is not known if 
manufacturer drug prices to Medicaid would decrease because of the 
removal of the cap as manufacturers adjust pricing to reflect the 
increase in Medicaid drug rebates.
---------------------------------------------------------------------------

    \53\ https://www.kff.org/medicaid/issue-brief/costs-and-savings-
under-federal-policy-approaches-to-address-medicaid-prescription-
drug-spending/
#:~:text=This%20estimate%20is%20based%20in,between%20states%20and%20t
he%20federal.
    \54\ https://www.macpac.gov/wp-content/uploads/2019/06/Next-Steps-in-Improving-Medicaid-Prescription-Drug-Policy.pdf.
---------------------------------------------------------------------------

o. Payment of Claims
    At this time, there is no need to determine cost estimates for this 
item. The December 31, 2020 final rule revised the regulations and 
captured cost estimations and collection of information. This revision 
would add omitted statutory language to the existing regulation. This 
change would not produce new burden not already captured in final rule 
CMS-2482-F.
p. Requests for Information on Requiring a Diagnosis on Medicaid 
Prescriptions
    This provision is a request for information only. We are seeking 
comments on how to negate any foreseeable impact on beneficiaries and 
providers and steps which would be needed by States to successfully 
implement a Medicaid requirement for diagnosis on prescriptions.
q. Proposal To Account for Stacking When Determining Best Price
    When calculating the lowest price realized by a manufacturer by 
aggregating discounts and rebates across all best price eligible 
entities, the Medicaid drug rebate to the State and Federal Government 
increases. At this time, we cannot determine cost estimates for this 
item.
r. Proposal Regarding Drug Price Verification Survey Through Data 
Collection
    The costs for States to determine which manufacturers would be 
included in the State survey would be 0.25 hours per State for an 
Operations Research Analyst (Code 15-2031) at $92.14 an hour, including 
fringe benefits and other indirect costs, or $23.04 per State. We 
estimate that the Federal Government would survey 52 States (including 
the District of Columbia and Puerto Rico) annually for a cost of 
$1,198.08 (52 States x $23.04 per State).
    The costs for the manufacturer/wholesaler who are selected for 
completing the survey would be 50 hours per manufacturer for an 
Operations Research Analysts (Code 15-2031) at $92.14 an hour, 
including fringe benefits and other indirect costs, or $4,607.00 per 
manufacturer (50 hrs x $92.14/hr). Federal Government would survey a 
minimum of three manufacturers per year, with a maximum of ten surveys 
per year, for an annual cost of $46,070.00 ($4,607.00 x 10 surveys), 
using the maximum of ten surveys per year. Savings is not quantifiable 
because we do not know if manufacturers would revise pricing in the 
event they are requested to verify their drug prices.
s. Proposal To Rescind Revisions Made by the December 31, 2020 Final 
Rule to Determination of Best Price (Sec.  447.505) and Determination 
of Average Manufacturer Price (AMP) (Sec.  447.504) Consistent With 
Court Order
    In the December 31, 2020 final rule, CMS revised the various 
patient assistance program exclusions from AMP and best price at 
Sec. Sec.  447.504(c)(25) through (29) and (e)(13) through (17) and 
447.505(c)(8) through (12) to add language that would require 
manufacturers ``to ensure'' the assistance provided by these patient 
assistance programs is passed on to the consumer, to the pharmacy, to 
the agent, or to other AMP or best price eligible

[[Page 34287]]

entity who does not receive any price concession.
    As part of the December 31, 2020 final rule, the impact analysis 
for the exclusions to ensure such patient assistance is passed on to 
the patient is discussed at length (see 85 FR 87098 through 87100). We 
concluded at that time that based upon the studies noted in the 
analysis, the value of patient assistance programs are being eroded by 
PBM copay accumulator programs because the patient assistance is 
accumulating to the economic benefits of health plans, not to patients, 
given that the health plans' spending on drugs for patient decreases. 
We also believed even with the changes in the rule, that manufacturers 
would continue to offer patient assistance because the infrastructure 
was there to ensure, in accordance with the regulation, the patient 
assistance accrued to the patient, rather than the plan. Therefore, we 
believed that patients would not be significantly impacted by the 
modifications that the manufacturers may have needed to do to ensure 
the pass through of the patient assistance to the patient consistent 
with section 1927 of the Act.
    In May 2021, the Pharmaceutical Research and Manufacturers of 
America (PhRMA) filed a complaint against the Secretary asking the 
court to vacate these amendments to Sec.  447.505(c)(8) through (11) 
(85 FR 87102 and 87103), as set forth in the 2020 final rule (referred 
to by the Court as ``the accumulator adjustment rule of 2020''). On May 
17, 2022, the United States District Court for the District of Columbia 
ruled in favor of the plaintiff and ordered that the accumulator 
adjustment rule of 2020 be vacated and set aside.
    In response to the order made by the United States District Court 
for the District of Columbia to vacate the ``accumulator adjustment 
rule of 2020,'' we are proposing to withdraw the changes made to these 
sections and, for consistency, withdraw revisions to regulations 
addressing AMP made by the accumulator adjustment rule. At the time of 
the December 31, 2020 final rule, we could not quantify to what degree 
the changes would impact manufacturers or patients. Therefore, we 
cannot quantify the impact on manufacturers and patients because of the 
rescinding of this rule.

                        Table 5--Summary of the One-Time Quantitative Costs and Benefits
----------------------------------------------------------------------------------------------------------------
               Line item                        Cost                  Entity                   Timeframe
----------------------------------------------------------------------------------------------------------------
Regulatory review......................        $851,977.32  Manufacturers, States,     One-time cost.
                                                             Trade Association.
Define manufacturer internal                      5,693.60  Manufacturers............  One-time cost.
 investigation.
Modify definition of manufacturer/               43,884.72  Manufacturers............  One-time cost.
 labeler.
Establish a 12-Quarter Rebate Audit         (6,037,012.80)  States and Federal         One-time cost savings.
 Time Limitation.                                            Government.
Restructure State Contracts............          92,140.00  States...................  One-time cost.
                                        ------------------------------------------------------------------------
    Total..............................     (5,043,317.16)
----------------------------------------------------------------------------------------------------------------


                          Table 6--Summary of the Annual Quantitative Costs and Benefit
----------------------------------------------------------------------------------------------------------------
              Line item                          Cost                    Entity                 Timeframe
----------------------------------------------------------------------------------------------------------------
Federal Government Survey for States.                $1,198.08  Federal Government.....  Annually over 10 years.
Federal Government Survey for                        46,607.00  Federal Government.....  Annually over 10 years.
 Manufacturers.
Drug cost transparency in Medicaid            (929,000,000.00)  Federal Government.....  Annually over 10 years.
 managed care contracts.
Removal of manufacturer rebate cap         (14,211,000,000.00)  Federal and State        Annually over 10 years.
 (100% of AMP).                                                  Governments.
                                      --------------------------------------------------------------------------
    Total............................      (15,139,952,731.92)
----------------------------------------------------------------------------------------------------------------

3. Regulatory Review Cost Estimation
    If regulations impose administrative costs on private entities, 
such as the time needed to read and interpret this proposed rule, we 
should estimate the cost associated with regulatory review. Due to the 
uncertainty involved with accurately quantifying the number of entities 
that will be directly impacted and will review this proposed rule, we 
assume that the total number of unique commenters are based on the 
current 792 manufacturers participating in the MDRP. While there is no 
way for CMS to specify the exact number of how many labeler codes are 
associated with each other, most manufacturers have at least 2 labeler 
codes. Nevertheless, we are estimating that the current 792 
manufacturers would need to review the proposed rule.
    Furthermore, we anticipate one medical and health service manager 
(Code 11-9111) from each of the 50 States, the District of Columbia, 
and Puerto Rico that cover prescription drugs under the MDRP, will 
review this proposed rule. Additionally, we estimate that 19 trade 
organizations may review the proposed rule. This estimate of trade 
organizations is based on a previous rule pertaining to the MDRP, in 
which 19 formal comments were received from trade organizations. It is 
possible that not all commenters or drug manufacturers will review this 
proposed rule in detail, and it is also possible that some reviewers 
will choose not to comment on the proposed rule. In addition, we assume 
that some entities will read summaries from trade newsletters, trade 
associations, and trade law firms within the normal course of keeping 
up with current news, incurring no additional cost. Therefore, we 
assume that approximately 863 (792 manufacturers + 52 States + 19 trade 
associations) entities may review the proposed rule. For these reasons, 
we thought that the number of commenters would be a fair estimate of 
the number of reviewers who are directly impacted by this proposed 
rule. We are soliciting comments on this assumption.
    We also recognize that different types of entities are in many 
cases affected by mutually exclusive sections of this proposed rule. 
However, for the purposes of our estimate, we assume

[[Page 34288]]

that each reviewer reads 100 percent of this proposed rule.
    Using the May 2021 mean (average) wage information from the BLS for 
medical and health service managers (Code 11-9111), we estimate that 
the cost of reviewing this proposed rule is $115.22 per hour, including 
fringe benefits and other indirect costs (https://www.bls.gov/oes/current/oes119111). Assuming an average reading speed of 250 words per 
minute, we estimate that it would take approximately 230 minutes (3.833 
hours) for the staff to read this proposed rule, which is approximately 
57,500 words. For each medical and health service manager (Code 11-
9111) that reviews the proposed rule, the estimated cost is (3.833 x 
$115.22) or $441.64. In part, we estimate that the cost of reviewing 
this proposed rule by medical and health service managers is 
$381,133.82 ($441.64 x 863 reviewers). Additionally, there is also a 
lawyer who will review this proposed rule. Using the May, 2021 mean 
(average) wage information from the BLS for lawyers (Code 23-1011), we 
estimate that the cost of reviewing this proposed rule is $142.34 per 
hour, including fringe benefits and other indirect costs (https://www.bls.gov/oes/current/oes231011.htm). Assuming an average reading 
speed of 250 words per minute, we estimate that it would take 
approximately 230 minutes (3.833 hours) for the staff to review this 
proposed rule, which is approximately 57,000 words. For each lawyer 
(Code 23-1011) that reviews the proposed rule, the estimated cost is 
(3.833 x $142.34) or $545.59. In part, we estimate that the cost of 
reviewing this proposed rule by lawyers is $470,843.50 ($545.59 x 863 
reviewers). In total, we estimate the one-time cost of reviewing this 
proposed rule is $851,977.32 ($381,133.82 + $470,843.50).
    We acknowledge that these assumptions may understate or overstate 
the costs of reviewing this proposed rule.

D. Alternatives Considered

    Some provisions are directly linked to statute and therefore 
alternatives cannot be considered. Nevertheless, alternatives which we 
have considered are detailed below.
    We are proposing to modify the definition of manufacturer for 
purposes of satisfying the requirement at section 1927(a)(1) of the Act 
which requires a manufacturer to have entered into and have in effect a 
NDRA. While this policy has already been specified in guidance and 
preambles, codifying the requirement is necessary to ensure compliance 
and eliminate ambiguity. We have reiterated this point several times in 
subregulatory guidance; however, some manufacturers still challenge our 
policy. We do not permit manufacturers to selectively report CODs which 
would allow a manufacturer to benefit from the coverage of some of 
their CODs, while avoiding their financial obligation to pay rebates.
    Therefore, we considered an alternative to retain the current 
definition of manufacturer for the NDRA, however, we believe the term 
``manufacturer'' needs to be updated in regulation to ensure legal 
compliance with this requirement.
    In regards to proposing to define vaccine, we could have refrained 
from defining the term and relied on manufacturers to make their own 
determination. At this time, we are only aware of one manufacturer who 
is making a claim that a product that would not be a vaccine under the 
proposed definition should be treated as a vaccine for the purposes of 
the Medicaid Drug Rebate Program. However, we are endeavoring to 
prevent future disputes of this type given that there may be more 
products coming to market for which this definition might help provide 
clarity.
    We are proposing to specify the time limitation on manufacturers 
initiating disputes, hearings, or audits with States. While the NDRA 
addresses dispute resolution, it provides no guidance on whether a 
timeline applies to the initiation of such disputes, hearings or 
audits. There have been reports of new disputes being initiated on 
claims dating back several decades to paper claims, which is placing 
unnecessary burden on many State rebate programs. Implementation of 
this provision is necessary to ensure administrative efficiency. An 
alternative considered was to not clarify this provision; however, then 
disputes initiated on claims would continue to be disputed ongoing for 
any defined time-period, causing undue strain, work hours and costs on 
rebate programs, which directly counters the purpose of the program to 
offset the Federal and State costs of most outpatient prescription 
drugs dispensed to Medicaid patients.

E. Accounting Statement and Table

    As required by OMB Circular A-4 (available at https://www.whitehouse.gov/wp-content/uploads/legacy_drupal_files/omb/circulars/A4/a-4.pdf), we have prepared an accounting statement in 
Table 7 showing the classification of the impact associated with the 
provisions of this proposed rule.

                    Table 7--Accounting Statement: Classification of Estimated Costs/Savings
----------------------------------------------------------------------------------------------------------------
                                                                                           Units
                                                                          --------------------------------------
                          Category                             Estimates                  Discount      Period
                                                                           Year dollar    rate (%)     covered
----------------------------------------------------------------------------------------------------------------
Costs/Savings:
Annualized Monetized ($million/year)........................      ($0.67)         2021            7    2024-2034
                                                                   (0.57)         2021            3    2024-2034
Costs/Savings...............................................    -1,328.91         2021            7    2024-2034
Annualized Monetized ($million/year)........................    -1,433.49         2021            3    2024-2034
----------------------------------------------------------------------------------------------------------------

F. Regulatory Flexibility Act (RFA)

    The 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, we estimate that 
almost all Pharmaceutical and Medicine manufacturers are small 
entities, as that term is used in the RFA (including small businesses, 
nonprofit organizations, and small governmental jurisdictions). 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 (SBA) definition of a 
small business (having employees of less than 1,250 in any 1 year) for 
businesses classified in the Pharmaceutical and Medicine

[[Page 34289]]

Manufacturing industries. Note, the SBA does not provide any revenue 
data at this time as a measure of size for these industries.
    According to the SBA's website at https://www.sba.gov/content/small-business-size-standards, the drug manufactures referred to in 
this proposed rule fall into both NAICS 325412, Pharmaceutical 
Preparation Manufacturing and NAICS 325414, Biologic Product (except 
Diagnostic) Manufacturing. The SBA defines small businesses engaged in 
Pharmaceutical and Medicine Manufacturing as businesses having less 
than 1,250 employees annually each for Pharmaceutical Preparation 
Manufacturing and Biologic Product (except Diagnostic) manufacturing 
industries. Table 8 presents the total number of small businesses in 
each of the two industries mentioned.

                  Table 8--NAICS 32541 Pharmaceutical and Medicine Manufacturing Size Standards
----------------------------------------------------------------------------------------------------------------
                                                                   SBA size standard/small entity    Total small
        NAICS (6-digit)         Industry subsector description               threshold                businesses
----------------------------------------------------------------------------------------------------------------
325412........................  Pharmaceutical Preparation      1,250 Employees....................        2,722
                                 Manufacturing.
325414........................  Biologic Product (except        1,250 Employees....................          587
                                 Diagnostic).
----------------------------------------------------------------------------------------------------------------
Source: 2019 Economic Census.


                     Table 9--Concentration Ratios (NAICS 325412) Pharmaceutical Preparation
----------------------------------------------------------------------------------------------------------------
                                                                      Percentage of                Employee per
          Firm size (by number of employees)             Firm count    small firms      Total      firm to total
                                                                           (%)        employees    employee (%)
----------------------------------------------------------------------------------------------------------------
Small Firms:                                                  2,722             100       93,181             100
    02: <5 employees..................................          390              14          633           0.679
    03: 5-9 employees.................................          159               6        1,058           1.135
    04: 10-14 employees...............................           65               2          752           0.807
    05: 15-19 employees...............................           48               2          766           0.822
    06: <20 employees.................................          662              24        3,209           3.444
    07: 20-24 employees...............................           25               1          535           0.574
    08: 25-29 employees...............................           25               1          648           0.695
    09: 30-34 employees...............................           19               1          587           0.630
    10: 35-39 employees...............................           21               1          700           0.751
    11: 40-49 employees...............................           30               1        1,329           1.426
    12: 50-74 employees...............................           45               2        2,600           2.790
    13: 75-99 employees...............................           31               1        2,439           2.617
    14: 100-149 employees.............................           49               2        5,292           5.679
    15: 150-199 employees.............................           27               1        3,793           4.071
    16: 200-299 employees.............................           42               2        6,853           7.355
    17: 300-399 employees.............................           22               1        6,204           6.658
    18: 400-499 employees.............................           13               0        3,907           4.193
    19: <500 employees................................        1,011              37       38,096          40.884
    20: 500-749 employees.............................           19               1        6,514           6.991
    21: 750-999 employees.............................           10               0        3,635           3.901
    22: 1,000-1,499 employees.........................            9               0        3,631           3.897
Large Firms:
    Employees >1,499..................................           68              NA       94,707              NA
----------------------------------------------------------------------------------------------------------------
Source: 2019 Economic Census.


        Table 10--Concentration Ratios (NAICS 325414) Biologic Product (Except Diagnostic) Manufacturing
----------------------------------------------------------------------------------------------------------------
                                                                      Percentage of                Employee per
          Firm size (by number of employees)             Firm count    small firms      Total      firm to total
                                                                           (%)        employees    employee (%)
----------------------------------------------------------------------------------------------------------------
Small Firms:                                                    587             100       21,789             100
    02: <5 employees..................................           71              12          141            0.65
    03: 5-9 employees.................................           42               7          282            1.29
    04: 10-14 employees...............................           13               2          145            0.67
    05: 15-19 employees...............................           13               2          224            1.03
    06: <20 employees.................................          139              24          792            3.63
    07: 20-24 employees...............................           12               2          261            1.20
    08: 25-29 employees...............................            7               1          167            0.77
    09: 30-34 employees...............................            6               1          184            0.84
    11: 40-49 employees...............................            6               1          247            1.13
    12: 50-74 employees...............................           13               2          624            2.86
    13: 75-99 employees...............................            5               1          384            1.76
    14: 100-149 employees.............................            8               1          799            3.67
    15: 150-199 employees.............................            6               1          720            3.30
    16: 200-299 employees.............................            8               1        1,561            7.16

[[Page 34290]]

 
    18: 400-499 employees.............................            5               1        1,758            8.07
    19: <500 employees................................          219              37        8,012           36.77
    20: 500-749 employees.............................            4               1        1,293            5.93
    21: 750-999 employees.............................            5               1        1,868            8.57
    22: 1,000-1,499 employees.........................            5               1        2,327           10.68
Large Firms:
    Employees >1,499..................................           41              NA       42,822              NA
----------------------------------------------------------------------------------------------------------------
Source: 2019 Economic Census.
Note: data are not available for businesses with 1,500 to 2,500 employees.

    As can be seen in Tables 9 and 10, the economic impacts are 
disproportionate for small firms. Tables 9 and 10 show the employees 
for each of the size categories and the employee impact per small 
entity. For example, in Table 9, 390 of the smallest firms employ only 
0.68 percent of the employees in its industry; while, in Table 10, 71 
of the smallest firms employ only 0.65 percent of the employees in its 
industry.
    Therefore, as can be seen in Tables 9 and 10, almost all 
Pharmaceutical and Medicine Manufactures are small entities as that 
term is used in the RFA. Additionally, Tables 9 and 10 show the 
disproportionate impacts among firms, and between small and large 
firms. In Tables 9 and 10, each industry, Pharmaceutical Preparation 
Manufacturing and Biologic Product (except Diagnostic) manufacturing 
(by employment), firm count, percentage of small firms, total employee 
and percentage of total employee per firm size to total employees of 
the small firms were estimated separately to determine the 
Pharmaceutical and Medicine manufacturer concentration ratios.
    For purposes of the RFA, approximately 98 percent of Pharmaceutical 
Preparation Manufacturing (2,722/2,790 firms) and approximately 93 
percent of Biologic Product (except Diagnostic) (587/628) firms are 
considered small businesses according to the SBA's size standards with 
total employee of 1,250 in any one year.
    At this time, revenue data are not currently available. However, 
2012 revenue data from the U.S. Economic Census was used to obtain a 
proxy for revenue earned in the Pharmaceutical Preparation 
Manufacturing industry. Therefore, as of 2012, the total annual 
receipts for small establishments in the Pharmaceutical Preparation 
Manufacturing industry, earning less than $45 million accounted for 
approximately 3.1 percent of the revenue. Similarly, according to the 
2012 data, total annual receipts for small establishments in the 
Biologic Product (except Diagnostic) accounted for approximately 3.5 
percent of the revenue in its industry.
    Individuals and States are not included in the definition of a 
small entity. This proposed rule will not have a significant impact 
measured change in revenue of 3 to 5 percent on a substantial number of 
small businesses or other small entities. As its measure of significant 
economic impact on a substantial number of small entities, HHS uses a 
change in revenue of more than 3 to 5 percent. At this time, we do not 
believe that this threshold will be reached by the requirements in this 
proposed rule. Therefore, the Secretary has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities.
    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 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. This proposed rule will 
not have a significant impact on small rural hospitals. We are not 
preparing an analysis for section 1102(b) of the Act because we have 
determined, and the Secretary has certified, that this proposed rule 
will not have a significant impact on the operations of a substantial 
number of small rural hospitals.

G. Unfunded Mandates Reform Act (UMRA)

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2023, that 
threshold is approximately $177 million.
    This proposed rule imposes mandates that would result in 
anticipated costs to State, local, and Tribal governments or private 
sector, but the transfer costs will be less than the threshold. Some of 
the costs that the States may incur for the requirements of 
reimbursement for prescribed drugs is the cost of conducting an 
individual State survey as an optional tool. This proposed rule would 
result in multiple benefits to the States including assuring that 
rebates would be paid accurately and timely to the States. States would 
receive additional monetary rebates from manufacturers brought into 
compliance with drug misclassification, would limit the timeframe 
manufacturers have to dispute rebates, identify patients to the 
pharmacist as Medicaid beneficiaries, provide transparency to the State 
as to which PBM costs are true services costs (costs of prescriptions 
and dispensing fees) versus administrative costs, and permit States to 
pay claims sooner than the specified waiting period, when doing so is 
cost-effective and necessary to ensure access to care.
    As a result, this proposed rule would not impose a mandate that 
would result in the expenditure by State, local, and Tribal 
Governments, in the aggregate, or by the private sector, of more than 
$165 million in any 1 year.

H. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency

[[Page 34291]]

must meet when it promulgates a proposed rule that imposes substantial 
direct requirement costs on State and local governments, preempts State 
law, or otherwise has federalism implications. This proposed rule will 
not have a substantial direct effect on State or local governments, 
preempt States, or otherwise have a federalism implication, therefore 
the requirements of Executive Order 13132 are not applicable.
    Chiquita Brooks-LaSure, Administrator of the Centers for Medicare & 
Medicaid Services, approved this document on May 2, 2023.

List of Subjects

42 CFR Part 433

    Administrative practice and procedure, Child support, Claims, Grant 
programs--health, Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 438

    Citizenship and naturalization, Civil rights, Grant programs--
health, Individuals with disabilities, Medicaid, Reporting and 
recordkeeping requirements, Sex discrimination.

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 proposes to amend 42 CFR chapter IV as set forth 
below:

PART 433--STATE FISCAL ADMINISTRATION

0
1. The authority citation for part 433 continues to read as follows:

    Authority:  42 U.S.C. 1302.

0
2. Amend Sec.  433.139 by revising paragraphs (b)(3)(i) and 
(b)(3)(ii)(B) to read as follows:


Sec.  433.139  Payment of claims.

* * * * *
    (b) * * *
    (3) * * *
    (i) The claim is for preventive pediatric services, including early 
and periodic screening, diagnosis and treatment services provided for 
under part 441, subpart B, of this chapter, that are covered under the 
State Plan that requires a State to make payments without regard to 
third party liability for pediatric preventive services except that the 
State may, if the State determines doing so is cost-effective and will 
not adversely affect access to care, only make such payment if a third 
party so liable has not made payment within 90 days after the date the 
provider of such services has initially submitted a claim to such third 
party for payment for such services; or
    (ii) * * *
    (B) For child support enforcement services beginning February 9, 
2018, the provider certifies that before billing Medicaid, if the 
provider has billed a third party, the provider has waited up to 100 
days after the date of the service and provider of such services has 
initially submitted a claim to such third party for payment for such 
services, except that the State may make such payment within 30 days 
after such date if the State determines doing so is cost-effective and 
necessary to ensure access to care.
* * * * *

PART 438--MANAGED CARE

0
 3. The authority citation for part 438 continues to read as follows:

     Authority:  42 U.S.C. 1302.
0
 4. Amend Sec.  438.3 by adding paragraphs (s)(7) and (8) to read as 
follows:


Sec.  438.3  Standard contract requirements.

* * * * *
    (s) * * *

    (7) Assign and exclusively use unique Medicaid-specific Beneficiary 
Identification Number (BIN), Processor Control Number (PCN), and group 
number identifiers for all Medicaid managed care beneficiary 
identification cards for pharmacy benefits, beginning no later than the 
State's next rating period for the applicable Medicaid managed care 
contract, following [effective date of final rule].
    (8) Structure any contract with any subcontractor for the delivery 
or administration of the covered outpatient drug benefit to require the 
subcontractor to report separately the amounts related to:
    (i) The incurred claims described in Sec.  438.8(e)(2) such as 
reimbursement for the covered outpatient drug, payments for other 
patient services, and the fees paid to providers or pharmacies for 
dispensing or administering a covered outpatient drug; and,
    (ii) Administrative costs, fees and expenses of the subcontractor.
* * * * *

PART 447--PAYMENTS FOR SERVICES

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

    Authority:  42 U.S.C. 1302 and 1396r-8.

0
6. Amend Sec.  447.502 by--
0
a. In the definition of ``Covered outpatient drug'':
0
i. In the introductory text, adding ``(COD)'' immediately following 
``Covered outpatient drug''; and
0
ii. Revising paragraph (2) introductory text;
0
b. Adding the definitions of ``Drug product information'' and 
``Internal investigation'' in alphabetical order;
0
c. In the definition of ``Manufacturer,'' adding paragraph (5);
0
d. Adding the definition of ``Market date'' in alphabetical order;
0
e. In the definition of ``Noninnovator multiple source drug,'' revising 
paragraph (3); and
0
f. Adding the definition of a ``Vaccine'' in alphabetical order.
    The revisions and additions read as follows:


Sec.  447.502  Definitions.

* * * * *
    Covered outpatient drug (COD) * * *
    (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 services in paragraphs (2)(i) through (viii) of 
this definition (and for which payment may be made as part of payment 
for that service and not as direct reimbursement for the drug). Direct 
reimbursement for a drug may include both reimbursement for a drug 
alone, or reimbursement for a drug plus the service, in one inclusive 
payment if the drug and the itemized cost of the drug are separately 
identified on the claim.
* * * * *
    Drug product information includes but is not limited to National 
Drug Code (NDC), drug name, units per package size (UPPS), drug 
category (``S'', ``I'', ``N''), unit type (for example, TAB, CAP, ML, 
EA), drug product type (prescription, over-the-counter), base date AMP, 
therapeutic equivalent code (TEC), line extension indicator, 5i 
indicator and route of administration, if applicable, FDA approval 
date, FDA application number or OTC monograph citation as applicable, 
market date, COD status, and any other information deemed necessary by 
the agency to perform accurate unit rebate amount (URA) calculations.
* * * * *
    Internal investigation means a manufacturer's investigation of its 
AMP,

[[Page 34292]]

best price, customary prompt pay discounts or nominal prices that have 
been previously certified in the Medicaid Drug Rebate Program (MDRP) 
that results in a finding made by the manufacturer of fraud, abuse, or 
violation of law or regulation. A manufacturer must make data available 
to CMS to support its finding.
* * * * *
    Manufacturer * * *
    (5) For the purposes of maintaining an effectuated rebate agreement 
consistent with section 1927(a)(1) of the Social Security Act, the term 
``manufacturer'' means that all associated entities of the manufacturer 
that sell prescription drugs, including, but not limited to, owned, 
acquired, affiliates, brother or sister corporations, operating 
subsidiaries, franchises, business segments, part of holding companies, 
divisions, or entities under common corporate ownership or control, 
must each maintain an effectuated rebate agreement.
    Market date, for the purpose of establishing the base date AMP 
quarter, means the date on which the covered outpatient drug was first 
sold by any manufacturer.
* * * * *
    Noninnovator multiple source drug * * *
    (3) A covered outpatient drug that entered the market before 1962 
that is not marketed under an NDA;
* * * * *
    Vaccine means a product that is administered prophylactically to 
induce active, antigen-specific immunity for the prevention of one or 
more specific infectious diseases and is included in a current or 
previous FDA published list of vaccines licensed for use in the United 
States.
* * * * *
0
7. Amend Sec.  447.504 by revising paragraphs (c)(25) through (29) and 
(e)(13) through (17) to read as follows:


Sec.  447.504  Determination of average manufacturer price.

* * * * *
    (c) * * *
    (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.
* * * * *
    (e) * * *
    (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.
* * * * *
0
8. Amend Sec.  447.505 by revising paragraphs (c)(8) through (12) and 
(d)(3) to read as follows:


Sec.  447.505  Determination of best price.

* * * * *
    (c) * * *
    (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.
* * * * *
    (d) * * *
    (3) The manufacturer must adjust the best price for a drug for a 
rebate period if cumulative discounts, rebates, or other arrangements 
to best price eligible entities subsequently adjust the price available 
from the manufacturer. Cumulative discounts, rebates, or other 
arrangements must be stacked to determine a final price realized by the 
manufacturer for a covered outpatient drug, including discounts, 
rebates, or

[[Page 34293]]

other arrangements provided to different best price eligible entities.
0
9. Amend Sec.  447.509 by--
0
a. Revising paragraphs (a)(5), (a)(6) introductory text, (a)(7) 
introductory text, (a)(8) and (9), and (c)(4); and
0
b. Adding paragraph (d).
    The revisions and addition read as follows:


Sec.  447.509  Medicaid drug rebates (MDR).

    (a) * * *
    (5) Limit on rebate. For a rebate period beginning after December 
31, 2009, and before January 1, 2024, in no case will the total rebate 
amount exceed 100 percent of the AMP of the single source or innovator 
multiple source drug.
    (6) Rebate for drugs other than a single source drug or innovator 
multiple source drug. The amount of the basic rebate for each dosage 
form and strength of a drug other than a single source drug or 
innovator multiple source drug will be equal to the product of:
* * * * *
    (7) Additional rebate for drugs other than a single source drug or 
innovator multiple source drug. In addition to the basic rebate 
described in paragraph (a)(6) of this section, for each dosage form and 
strength of a drug other than a single source drug or innovator 
multiple source drug, the rebate amount will be increased by an amount 
equal to the product of the following:
* * * * *
    (8) Total rebate. The total rebate amount for a drug other than a 
single source drug or innovator multiple source drug is equal to the 
basic rebate amount plus the additional rebate amount, if any.
    (9) Limit on rebate. For a rebate period beginning after December 
31, 2014, and before January 1, 2024, in no case will the total rebate 
amount exceed 100 percent of the AMP for a drug other than a single 
source drug or innovator multiple source drug.
* * * * *
    (c) * * *
    (4) For a drug other than a single source drug or innovator 
multiple source drug, 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).
    (d) Manufacturer misclassification of a covered outpatient drug and 
recovery of unpaid rebate amounts due to the misclassification and 
other penalties--(1) Definition of misclassification. A 
misclassification in the MDRP has occurred when a manufacturer has:
    (i) Reported and certified to the agency its drug category or drug 
product information related to a covered outpatient drug that is not 
supported by the statute and applicable regulations; or,
    (ii) Reported and certified to the agency its drug category or drug 
product information that is supported by the statute and applicable 
regulations, but pays rebates to States at a level other than that 
associated with that classification.
    (2) Manufacturer notification by the agency of drug 
misclassification. If the agency determines that a misclassification 
has occurred as described in paragraph (d)(1) of this section, the 
agency will send written and electronic notification of this 
misclassification to the manufacturer of the covered outpatient drug, 
which may include a notification that past rebates are due. The 
manufacturer has 30 calendar days from the date of notification to:
    (i) Provide the agency such drug product and drug pricing 
information needed to correct the misclassification of the covered 
outpatient drug and calculate rebate obligations due, if any pursuant 
to paragraph (d)(3) of this section. The required pricing data 
submitted by the manufacturer to the agency shall include the best 
price information for the covered outpatient drug, if applicable, for 
the rebate periods for which the manufacturer misclassified the covered 
outpatient drug; and,
    (ii) Certify applicable price and drug product data after entered 
into the system by the agency.
    (3) Manufacturer payment of unpaid rebates due to misclassification 
determined by agency. (i) When the agency has determined that a 
manufacturer has misclassified a covered outpatient drug as described 
in paragraph (d)(1) of this section, such that rebates are owed to the 
States, and notification has been provided to the manufacturer as 
provided under paragraph (d)(2) of this section, a manufacturer must 
pay to each State an amount equal to the sum of the products of:
    (A) The difference between:
    (1) The per URA paid by the manufacturer for the covered outpatient 
drug to the State for a period during which the drug was misclassified; 
and
    (2) The per URA that the manufacturer would have paid to the State 
for the covered outpatient drug for each period, as determined by the 
agency based on the data provided and certified by the manufacturer 
under paragraph (d)(2) of this section, if the drug had been correctly 
classified by the manufacturer; and,
    (B) The total units of the drug paid for under the State Plan in 
each period.
    (ii) Manufacturers must pay such rebates to the States for the 
period or periods of time that such covered outpatient drug was 
misclassified, based on the formula described in this section, within 
60 calendar days of notification by the agency to the manufacturer of 
the misclassification, and provide documentation to the agency that the 
States were contacted by the manufacturer, and that such payments were 
made to the States within the 60 calendar days.
    (4) Agency authority to correct misclassifications and additional 
penalties for drug misclassification. The agency will review the 
information submitted by the manufacturer based on the notice sent 
under paragraph (d)(2) of this section. If a manufacturer fails to 
comply with paragraph (d)(2) of this section within 30 calendar days 
from the date of the notification by the agency of the 
misclassification to the manufacturer under paragraph (d)(1) of this 
section, fails to pay the rebates that are due to the States as a 
result of the misclassification within 60 calendar days from the date 
of the notification, if applicable, and/or fails to provide to the 
agency such documentation that such rebates have been paid, as 
described in paragraph (d)(3) of this section, the agency may do any or 
all of the following:
    (i) Correct the misclassification of the drug in the system on 
behalf of the manufacturer, using any pricing and drug product 
information that may have been provided by the manufacturer.
    (ii) Suspend the misclassified drug and the drug's status as a 
covered outpatient drug under the manufacturer's rebate agreement from 
the MDRP, and exclude the misclassified drug from FFP in accordance 
with section 1903(i)(10)(E) of the Act.
    (iii) Impose a civil monetary penalty (CMP) for each rebate period 
during which the drug is misclassified, not to exceed an amount equal 
to the product of:
    (A) The total number of units of each dosage form and strength of 
such misclassified drug paid for under any State Plan during such a 
rebate period; and
    (B) 23.1 percent of the AMP for the dosage form and strength of 
such misclassified drug for that period.
    (iv) Other actions and penalties available under section 1927 of 
the Act (or any other provision of law), including referral to the HHS 
Office of the Inspector General and termination from the MDRP.

[[Page 34294]]

    (5) Transparency of manufacturers' drug misclassifications. The 
agency will make available on a public website an annual report as 
required under section 1927(c)(4)(C)(ii) of the Act on the covered 
outpatient drug(s) that were identified as misclassified during the 
previous year, any steps taken by the agency with respect to the 
manufacturer to reclassify the drugs and ensure the payment by the 
manufacturer of unpaid rebate amounts resulting from the 
misclassifications, and a disclosure of the expenditures from the fund 
created in section 1927(b)(3)(C)(iv) of the Act.
0
10. Amend Sec.  447.510 by--
0
a. Revising the section heading and paragraph (b)(1)(v);
0
b. Adding paragraphs (h) through (k).
    The additions and revision read as follows:


Sec.  447.510  Requirement and penalties for manufacturers.

* * * * *
    (b) * * *
    (1) * * *
    (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 as defined at Sec.  447.502 or an Office of 
Inspector General (OIG) or Department of Justice investigation.
* * * * *
    (h) Participation in the Medicaid Drug Rebate Program (MDRP). 
Manufacturers that participate in MDRP must meet the following 
requirements:
    (1) Signed rebate agreement with the Secretary. Manufacturers 
participating in the MDRP must have a signed rebate agreement in effect 
that complies with paragraph (5) in the definition of manufacturer in 
Sec.  447.502.
    (2) Newly purchased labeler codes and covered outpatient drugs. Any 
manufacturer with a signed rebate agreement in effect that acquires or 
purchases another labeler, acquires or purchases covered outpatient 
drugs from another labeler code, or forms a new subsidiary, must ensure 
that a signed rebate agreement is in effect for these entities or 
covered outpatient drugs, consistent with the definition of 
manufacturer at Sec.  447.502, within the first 30 days of the next 
full calendar quarter beginning at least 60 days after the acquisition, 
purchase, asset transfer, or formation of the subsidiary.
    (3) Termination. Each associated labeler code of a manufacturer is 
considered to be part of the single manufacturer. If any of the 
associated labeler codes as defined in paragraph (5) in the definition 
of manufacturer at Sec.  447.502 do not have a National Drug Rebate 
Agreement (NDRA) in effect, or are terminated, all of the labeler codes 
will be subject to termination.
    (i) Suspension of manufacturer's NDRA for late reporting of drug 
pricing and drug product information. (1) If a manufacturer fails to 
timely provide information required to be reported to the agency under 
section 1927(b)(3)(A) of the Act, and paragraphs (a) and (d) of this 
section, the agency will provide written notice to the manufacturer of 
failure to provide timely information. If such information is not 
reported within 90 calendar days of the date of the notice communicated 
to the manufacturer electronically and in writing by the agency, such 
failure by the manufacturer to report such information in a timely 
manner shall result in suspension of the manufacturer's rebate 
agreement for all covered outpatient drugs furnished after the end of 
the 90-day calendar period. The rebate agreement will remain suspended 
until the date the information is reported to the agency in full and 
certified, and the agency reviews for completeness, but not for a 
period of fewer than 30 calendar days. Continued suspension of the 
rebate agreement could result in termination for cause. Suspension of a 
manufacturer's rebate agreement under this section applies for Medicaid 
purposes only, and does not affect manufacturer obligations and 
responsibilities under the 340B Drug Pricing Program or reimbursement 
under Medicare Part B during the period of the suspension.
    (2) During the period of the suspension, the covered outpatient 
drugs of the manufacturer are not eligible for FFP. The agency will 
notify the States 30 calendar days before the beginning of the 
suspension period for the manufacturer's rebate agreement and any 
applicable associated labeler rebate agreements.
    (j) Manufacturer audits of State-provided information. A 
manufacturer may only initiate a dispute, request a hearing, or seek an 
audit of a State regarding State drug utilization data, during a period 
not to exceed 12 quarters from the last day of the quarter from the 
date of the State invoice.
    (k) Verification survey of reported covered outpatient drug 
pricing--(1) Survey of manufacturers. CMS may survey a manufacturer 
with a rebate agreement with the Secretary under this section, or a 
wholesaler as defined in Sec.  447.502, to verify prices or charges for 
a covered outpatient drug identified through paragraphs (k)(2) and (3) 
of this section, reported to the agency under section 1927(b)(3)(A) of 
the Act and this section, to make payment for the covered outpatient 
drug.
    (2) Identification of covered outpatient drugs potentially subject 
to price verification. On an annual basis, CMS will compile a list of 
single source covered outpatient drugs that may be subject to a survey 
based on one or more of the following criteria (further refined based 
upon criteria in paragraph (k)(3) of this section). This list will 
identify drugs that have:
    (i) The highest Medicaid drug spend per claim, which is when the 
claim is in the top 5th percentile of Medicaid spending per claim;
    (ii) The highest total Medicaid drug spend, which is when the 
annual Medicaid drug spend, net of Federal Medicaid drug rebates, is 
greater than 0.5 percent of total annual Medicaid drug spend, net of 
Federal Medicaid drug rebates;
    (iii) The highest 1-year price increase among single source covered 
outpatient drugs, which is when the covered outpatient drug falls in 
the top 1 percent of covered outpatient drugs with the highest median 
Wholesale Acquisition Cost (WAC) increase over 12 months; or
    (iv) The highest launch price, which is a launch price estimated to 
be in the top 5th percentile of Medicaid spending per claim, or a 
launch price that is estimated to result in a total annual treatment 
price that is greater than $500,000 (indexed annually for inflation 
using the Consumer Price Index for all Urban Consumers (CPI-U)).
    (3) Selection of covered outpatient drugs for price verification. 
The survey list compiled under paragraph (k)(2) of this section will be 
further refined by excluding covered outpatient drugs of manufacturers 
that have:
    (i) Participated in any CMS drug pricing program or initiative 
under which participating manufacturers negotiate a covered outpatient 
drug's price directly with CMS; or,
    (ii) Negotiated CMS-authorized supplemental rebate with at least 50 
percent of States, that when in combination with the Federal rebate 
results in a total (State and Federal) rebate for the drug of interest 
to total Medicaid spend (State and Federal) for the drug of interest, 
that is greater than the total Medicaid rebates (State and Federal) to 
total Medicaid drug spend for States that cover CODs only through the 
FFS delivery system, as reflected in the most recent Medicaid Financial 
Management Report.
    (iii) If after application of the criteria in paragraphs (k)(3)(i) 
and (ii) of this section more than 10 covered outpatient drugs remain 
on the survey list, CMS

[[Page 34295]]

will consider narrowing the list based on:
    (A) State-specific Medicaid program input regarding manufacturer 
effort to lower drug price (including through mechanisms such as 
subscription models, value-based purchasing arrangements under the 
multiple best price approach, or other purchasing arrangements 
favorable to the Medicaid program); or,
    (B) Highest cost covered outpatient drugs based on the factors 
outlined under paragraph (k)(2) of this section, and before application 
of paragraph (k)(3) of this section.
    (4) Posting of survey request. After a survey list is compiled 
based on the application of the criteria in paragraphs (k)(2) and (3) 
of this section, the agency will post on a publicly accessible, 
government website, the letter sent to the manufacturer indicating the 
name of the covered outpatient drug to be surveyed and the request for 
completion of the drug price verification survey.
    (5) Covered outpatient drug price verification survey. Such survey 
to a manufacturer or wholesaler will request in a standard reporting 
format specific information that will include:
    (i) Pricing, charges, distribution, and utilization. (A) WAC of the 
covered outpatient drug, including the types of discounts available to 
purchasers on the commercial market, or for a wholesaler or pharmacy 
affiliated with a manufacturer or wholesaler, the invoice price for the 
drug;
    (B) Calculated average price of the drug from the manufacturer to 
wholesalers and other direct purchasers for sales outside of the U.S.;
    (C) Actual or expected utilization of the covered outpatient drug 
in the United States, including among the Medicare and Medicaid 
populations;
    (D) Public prices for the drug to other Federal agencies, such as 
the Department of Veterans Affairs; and,
    (E) Information relating to the costs of distribution of the 
covered outpatient drug.
    (ii) Product and clinical information. (A) Characteristics of the 
covered outpatient drug, including route and setting of administration, 
dosing frequency, duration of therapy, side effects, interactions and 
contraindications, and potential for misuse or abuse.
    (B) Manufacturer information regarding the clinical efficacy, 
effectiveness and outcomes of the drug.
    (C) Therapeutic benefits to the patient including information such 
as the:
    (1) Seriousness and prevalence of the disease or condition that is 
treated by the covered outpatient drug.
    (2) The extent to which the covered outpatient drug addresses an 
unmet medical need.
    (3) The extent to which the use of the covered outpatient drug will 
reduce or eliminate the need for other health care services.
    (4) Whether there are therapeutic equivalents and the number of 
such equivalents available for the covered outpatient drug.
    (D) Whether there are other existing therapies (pharmacological and 
non-pharmacological) available to a patient to address the indicated 
medical condition and the estimated costs of such other therapies to 
the patient compared to the price of the covered outpatient drug.
    (E) If the drug is approved using FDA's accelerated approval 
pathway in section 506(c) of the FFDCA, any additional post-market 
studies required by FDA.
    (iii) Costs of production, research, and marketing. (A) 
Manufacturer expenditures on materials and manufacturing for such 
covered outpatient drug, any costs of purchasing or acquiring the 
covered outpatient drug, and other processes needed to obtain, 
manufacture or license the covered outpatient drug.
    (B) Research and development costs, including total public funds 
used for such research and development. If the covered outpatient drug 
is a line extension of a single source or innovator multiple source 
drug, manufacturers shall not include the research and development 
costs of the initial single source or innovator multiple source covered 
outpatient drug.
    (C) Total expenditures of the manufacturer associated with 
marketing and advertising for the applicable covered outpatient drug.
    (D) Total revenue and net profit generated from the covered 
outpatient drug for each calendar year since drug approval, if 
applicable.
    (iv) Secretary information. Any other information as determined by 
the Secretary to verify the price or charge of the covered outpatient 
drug reported under section 1927(b)(3)(A) of the Act and this section.
    (6) Posting of manufacturer/wholesaler information from survey for 
further verification. To further verify the prices and charges 
submitted by the manufacturer for a covered outpatient drug, CMS may 
post publicly non-proprietary information provided by the manufacturer 
and wholesaler in response to the verification survey. CMS may request 
that a manufacturer address the non-proprietary information specified 
in paragraph (k)(6) of this section in a public forum. CMS will seek 
comments from the public, beneficiaries, State Medicaid agencies, other 
governmental agencies, and other affected interested parties on the 
information posted.
    (7) Civil monetary penalties (CMPs). A manufacturer or wholesaler 
that refuses a request for information pursuant to the drug price 
verification survey within 90 calendar days of CMS' request for such 
information, or knowingly provides false information, will be referred 
to the OIG for possible imposition of CMPs as set forth in section 
1927(b)(3)(B) of the Act and section IV of the National Drug Rebate 
Agreement.
0
11. Amend Sec.  447.518 by adding a heading to paragraph (d) and 
revising paragraph (d)(1) to read as follows:


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

* * * * *
    (d) Data requirements. (1) 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 cost-based data, such as a State or national survey of retail 
pharmacy providers or other reliable cost-based 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 formal review process. Research and data must be 
based on pharmacy costs and be sufficient to establish the adequacy of 
both current ingredient cost reimbursement and professional dispensing 
fee reimbursement. Submission by the State of data that are not based 
on pharmacy costs, such as market-based research (for example, third 
party payments accepted by pharmacies) to support the professional 
dispensing fee would not qualify as supporting data.
* * * * *
0
12. Revise Sec.  447.520 to read as follows:

[[Page 34296]]

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

    (a) Availability of FFP. No FFP is available for physician-
administered drugs that are covered outpatient drugs for which a State 
has not required the submission of claims using codes that identify the 
drugs sufficiently for the State to invoice a manufacturer for rebates.
    (1) Single source drugs. For a covered outpatient drug that is a 
single source, physician-administered drug, administered on or after 
January 1, 2006, a State must require providers to submit claims for 
using National Drug Code (NDC) numbers to secure rebates and receive 
FFP.
    (2) Multiple source drugs. For a covered outpatient drug that is a 
multiple source, physician-administered drug on the list published by 
CMS described in paragraph (c) of this section, administered on or 
after January 1, 2008, a State must require providers to submit claims 
using NDC numbers to secure rebates and receive FFP. States are 
required to invoice for rebates for all multiple source physician-
administered drugs that are CODs, and not limit such rebate invoicing 
to the top 20 multiple source physician-administered drug list.
    (b) Required coding. As of January 1, 2007, a State must require 
providers to submit claims for a covered outpatient drug that is 
described in paragraph (a)(1) or (2) of this section (any covered 
outpatient drug that is a physician-administered drug) using NDC 
numbers.
    (c) Top 20 multiple source physician-administered drug list. The 
top 20 multiple source physician-administered drug list, identified by 
the Secretary as having the highest dollar volume of physician 
administered drugs dispensed under the Medicaid program, will be 
published and may be modified from year to year to reflect changes in 
such volume.
    (d) Hardship waiver. A State that requires additional time to 
comply with the requirements of this section may apply to the Secretary 
for an extension.

    Dated: May 18, 2023.
Xavier Becerra,
Secretary, Department of Health and Human Services.
[FR Doc. 2023-10934 Filed 5-23-23; 4:15 pm]
 BILLING CODE 4120-01-P