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CMS Issues Final Rule Updating Medicaid Drug Rebate Program Regulations

January 8, 2020, Covington Alert

On December 31, 2020, the Centers for Medicare & Medicaid Services (“CMS”) published in the Federal Register a final rule updating the Medicaid Drug Rebate Program (“MDRP”) regulations to, among other things, facilitate value-based purchasing (“VBP”) arrangements for prescription drugs, expand the universe of drugs that would be considered line extensions, and amend the MDRP’s treatment of manufacturer-sponsored copayment assistance programs.

I. Background

Under the MDRP, in order for a manufacturer’s drug products to be covered by state Medicaid programs, the manufacturer must agree to pay a rebate to the state’s Medicaid agency. For single source and innovator multiple source drugs, the basic rebate is equal to the greater of either the difference between a drug’s quarterly Average Manufacturer Price (“AMP”) and the “best price” for the same period, or a flat percentage (23.1%) of the drug’s quarterly AMP. “Best price” is defined as the lowest net price at which the manufacturer sells the drug in the United States during the quarter. An additional rebate is payable if the AMP of the product has increased faster than the Consumer Price Index (“CPI-U”).

Manufacturers and payers increasingly are negotiating agreements to link a drug’s price to clinical outcomes or financial measures, especially for high-cost specialty drugs. To date, the Medicaid best price implications of VBP arrangements represent a key challenge to their adoption. The terms of such arrangements can lead to significant variance in pricing at the per-patient level and potentially drop unit prices for certain patients below the best price traditionally offered for the drug product, leading to higher MDRP rebates.

On July 14, 2016, CMS issued notices to state Medicaid programs and manufacturers encouraging the use of VBPs as a means to address high-cost drug treatments and recommending that stakeholders contact CMS for guidance regarding specific proposals. CMS refrained from providing general guidance on best price implications, instead stating that the impact on a manufacturer’s best price would differ depending on the structure of the VBP arrangement.

The Affordable Care Act (“ACA”) amended the Medicaid statute to establish an alternative rebate formula for a “line extension” of a single source drug or innovator multiple source drug that is in a solid oral dosage form. “Line extension” is defined by statute as “a new formulation of the drug, such as an extended release formulation,” not including abuse-deterrent formulations.

On June 19, 2020, CMS published in the Federal Register a proposed rule permitting the submission and utilization of multiple best prices for a single drug in a single quarter. The proposed rule also introduced regulatory definitions expanding the subset of drugs subject to the alternative rebate formula for line extensions and updated regulations regarding the impact of certain manufacturer-sponsored patient assistance programs on best price and AMP.

II. Summary of the Final Rule

The final rule makes significant changes to the MDRP and the related price reporting obligations for manufacturers. Key provisions are summarized below.

VBP Arrangements

The final rule implements new regulatory policies, and it clarifies existing policies to assist manufacturers and states that seek to participate in VBP arrangements. Most notably, the final rule:

  • Implements a new regulatory definition of VBP. The final rule defines VBP as “an arrangement or agreement intended to align pricing and/or payments to an observed or expected therapeutic or clinical value in a select population and includes, but is not limited to: (1) Evidence-based measures, which substantially link the cost of a covered outpatient drug to existing evidence of effectiveness and potential value for specific uses of that product; and/or (2) Outcomes-based measures, which substantially link payment for the covered outpatient drug to that of the drug’s actual performance in patient or a population, or a reduction in other medical expenses.”
    • CMS declined to clarify when measures are “substantially” linked to the payment or cost of a drug. Instead, CMS states that a “manufacturer[] may make reasonable assumptions and should document how its arrangement substantially links the payment/cost of the drug to the outcome in the arrangement and therefore qualifies as a VBP arrangement under this final rule.”
    • CMS also declined to further define “effectiveness” or “performance,” stating that “[e]ach VBP arrangement will be fact-specific to the drug, the diagnosis it is treating, and patient population being treated, and we expect such terms will be defined as part of the VBP agreement itself.”
  • Allows for two different methods of reporting best price. The final rule implements the approach contemplated under the proposed rule with respect to reporting best price.
    • Manufacturers can choose to report multiple best price points for a single dosage form and strength to reflect the discounts or prices available under the VBP. Manufacturers can report multiple best prices only if they offer a VBP to all state Medicaid programs.
    • Alternatively, manufacturers can “choose not to report [using the] multiple best prices approach for their VBP program, and follow existing rules, or, as appropriate, choose another approach to determining best price (and AMP) such as the bundled sales approach.”
      • CMS acknowledged that many manufacturers already treat VBP arrangements as bundled sales “under the reasonable assumption that a VBP arrangement represents a type of performance requirement.” In the final rule, CMS revised the definition of bundled sale to explicitly state that VBP arrangements may qualify as a bundled sale.
      • Under the bundled sales approach, any discount paid because of failure to meet value parameters can be distributed proportionally to the total dollar value of all units sold as part of the bundled arrangement.
  • Permits AMP and best price restatements beyond the current 12-quarter restatement window. The final rule creates an exception to the 12-quarter MDRP restatement period to allow the manufacturer to request revisions when necessary because of a VBP arrangement that extends beyond three years. To “reopen” the MDRP outside the standard 12-quarter restatement period, the manufacturer must submit a request to CMS.

“Line Extension” Definition

As discussed above, the ACA provided for an alternative rebate formula for so-called line extensions, i.e., new formulations of existing drugs. The final rule:

  • Codifies a regulatory definition of “line extension” that mirrors the statutory definition.“ Line extension” is defined as “a new formulation of the drug, [which] does not include an abuse-deterrent formulation of the drug (as determined by the Secretary).
  • Expands the “new formulations” subject to the line extension alternative rebate. “New formulation” is defined to mean “a change to the drug, including, but not limited to: an extended release formulation or other change in release mechanism, [or] a change in dosage form, strength, route of administration, or ingredients.”   
    • “Change in release mechanism” replaces language in the proposed rule referring to “changes in . . . pharmacodynamics[] or pharmacokinetic properties. ”CMS stated that this revision “simplif[ies] the language to incorporate the more limited types of change in the drug that we intended to capture, using less complex language.”
    • In response to public comment, the finalized definition does not include “changes in indication accompanied by marketing as a separately identifiable drug (for example, a different NDC).”
    • If an initial brand name listed drug is a combination of two or more drugs, and the manufacturer subsequently markets a new formulation of that combination drug, then the new drug satisfies the definition of a new formulation and must be identified as a line extension. However, a new combination of drugs or a new drug/device combination will not qualify as a new formulation.
  • Expands the definition of “solid oral dosage form.” A longstanding FDA definition, previously incorporated into the CMS regulations, limits “solid oral dosage form” to mean “capsules, tablets, or similar drug products intended for oral use.” The final rule defines “solid oral dosage form” more broadly as “an orally administered dosage form that is not a liquid or gas at the time the drug enters the oral cavity.”

  • Clarifies that only the initial drug be in solid oral dosage form. The line extension alternative rebate calculation will apply if the initial drug is a solid oral dosage form, even if the line extension is not a solid oral dosage form. CMS stated in the final rule that “this is consistent with the statutory language and will assist in appropriately identifying drugs that may be line extension drugs.”

  • Provides that the manufacturer should evaluate the rebate for each drug in the line extension family on a quarterly basis. The final rule instructs manufacturers to “identify all potential initial brand name listed drugs by their respective NDCs by considering all strengths of the initial brand name listed drug” on a quarterly basis. The potential initial brand name drug that has the highest additional rebate (calculated as a percentage of AMP) should be used to determine the alternative rebate. Accordingly, the initial brand name listed drug may vary on a quarterly basis.

The above provisions will take effect on January 1, 2022.

Manufacturer-Sponsored Patient Benefit Programs

Pharmacy Benefit Managers (“PBMs”) and insurance plans have increasingly utilized benefit designs such as accumulators to minimize and/or capture the effect of drug manufacturer copayment assistance. Under accumulator programs, the plan does not allow the value of manufacturer copayment assistance to count toward the beneficiary’s deductible or out-of-pocket maximum. Existing regulations provide that a manufacturer may exclude copayment assistance from its best price calculation “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. ”The final rule provides that best price and AMP exclusions apply only where the manufacturer “ensures” that program benefits are provided entirely to the patient.

Commenters raised multiple legal and practical concerns regarding CMS’s proposal, including concerns regarding its impact on manufacturers’ ability to continue offering assistance during the COVID-19 pandemic. CMS finalized the proposed provisions without modification but extended the effective date to January 1, 2023, in order to “give manufacturers time to implement a system that helps them track their programs to ensure the manufacturer assistance is being passed through to the patient in full, and no other entity is receiving any price concession.”

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Health Care practice.

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