Misclassification of Drugs, Program Administration, and Program Integrity Updates Under the Medicaid Drug Rebate Program Final Rule (CMS-2434-F)

Misclassification of Drugs, Program Administration, and Program Integrity Updates Under the Medicaid Drug Rebate Program Final Rule (CMS-2434-F)

September 23, 2024, Covington Alert

On September 20, 2024, the Centers for Medicare & Medicaid Services (“CMS”) published the Misclassification of Drugs, Program Administration, and Program Integrity Updates Under the Medicaid Drug Rebate Program Final Rule (CMS-2434-F) (“Final Rule”). The Final Rule effectuates several revisions to the Medicaid Drug Rebate Program (“MDRP”), including some related to new statutory authorities included in the Medicaid Services Investment and Accountability Act of 2019 (“MSIAA”). The Final Rule also focuses on enhancing MDRP administration by incorporating policies intended to facilitate more accurate and consistent drug information reporting, data collection, and operations.

CMS received 128 comments on the MDRP Proposed Rule, which was published in May 2023. In the Final Rule preamble, CMS emphasizes that each provision of the Final Rule is severable if “held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further action[.]”

We highlight below select final provisions of interest to life sciences companies. Unless otherwise noted, the Final Rule’s provisions will be effective November 19, 2024. The Final Rule is available here, and the CMS Fact Sheet is available here.

Revised Definition of “Manufacturer” for National Drug Rebate Agreement (“NDRA”) Compliance

CMS declined to finalize its proposal to amend the regulatory definition of “manufacturer.” A manufacturer is required to enter into and have in effect an NDRA as a condition of Medicaid payment for its covered outpatient drugs (“CODs”). The proposed definition would have, among other changes, applied to “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[.]” CMS did not elaborate on the comments received but stated that it may use the feedback to inform future rulemaking.

Revised Definition of COD

For MDRP purposes, a COD is generally a drug approved by the Food and Drug Administration (“FDA”) for safety and effectiveness that may be dispensed upon prescription. The statutory definition of COD incorporates a limiting definition, which excludes certain “drugs, biological products, and insulin provided as part of, or incident to and in the same setting as” certain services (e.g., inpatient hospital services and physicians’ services). This exclusion applies only when payment may be made as part of payment for the defined service or setting, and not as direct reimbursement for the drug.

In response to stakeholder confusion about what constitutes “direct reimbursement” for a drug for purposes of the limiting definition, CMS proposed to amend the regulatory definition of the term “COD” to specify when a payment is considered direct reimbursement for the drug and to better align the regulatory language with the statute. Specifically, CMS proposed to define “direct reimbursement” as inclusive of “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.”

In response to comments that the proposed definition was unclear, CMS has finalized a revised definition. CMS clarified that “[i]n order for a payment to be considered direct reimbursement for a drug, the claim must include the charge for the drug, the number of units utilized, and the payment made to the provider must include an amount directly attributable to the drug and is based on a CMS approved reimbursement methodology.” The final regulatory text follows, with the revision to the existing regulation italicized and the clarification from the proposal underlined:

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, as described in paragraph (4) of this definition).

(4) Direct reimbursement for a drug may include both:

(i) Reimbursement for a drug alone, or

(ii) Reimbursement for a drug plus the service, in a single inclusive payment if:

(A) The drug, charge for the drug, and number of units of the drug are separately identified on the claim, and;

(B) The inclusive payment includes an amount directly attributable to the drug, and,

(C) The amount paid that is attributable to the drug is based on a reimbursement methodology that is included in the applicable section of the State plan.

Notably, CMS explicitly declined to address how the modified COD definition would affect the 340B Drug Pricing Program (“340B Program”), explaining that the 340B Program is outside the scope of this rulemaking. CMS also stated that it does not believe the revised definition “will result in a significant change in the number of CODs, [but] it may increase the number of instances where a COD may qualify for rebates.”

In addition, CMS received several comments on how the revised COD definition would affect payment for gene and cell therapies reimbursed as a bundled service through, for example, DRGs. CMS indicated that manufacturers should work with States to verify rebates for gene and cell therapies, given that each State’s reimbursement methodology—such as carve-out models that reimburse the drug separately—will drive how to identify the drug as well as the number of dispensed or administered units for MDRP reporting purposes. CMS also noted that “[a]ll CODs, including cell and gene therapy drugs that are CODs for which the manufacturer has a rebate agreement, are subject to basic minimum Medicaid rebate requirements, regardless of whether they are provided as part of a value-based purchasing arrangement.”

Policy to Enhance Drug Cost Transparency in Medicaid Managed Care Contracts

CMS finalized a proposal intended to provide more transparency about pharmacy benefit manager (“PBM”) spread pricing. Spread pricing is a practice in which PBMs charge a payer like Medicaid more for a drug than they pay a pharmacy, pocketing the difference. In many instances, the “spread” may be known only to the PBM due to lax reporting requirements. To bring more transparency, CMS finalized a new regulation requiring Medicaid managed care organizations (“MCOs”), prepaid inpatient health plans (“PIHPs”), and prepaid ambulatory health plans (“PAHPs”) “that contract with any subcontractor for the delivery or administration of the covered outpatient drug benefit” to require that such subcontractor report separately (1) the amounts related to the incurred claims (e.g., reimbursement for the COD) and (2) administrative costs, fees, and expenses of the subcontractor.

The revised reporting requirements are intended to result in a more accurate Medical Loss Ratio (“MLR”), which is a measure of the true medical cost of providing CODs. The metric is then used to develop the “capitation rate” paid to MCOs. As CMS explained in the Final Rule, the accuracy of the MLR calculation “is critical in assuring that Medicaid payments are reasonable and appropriate.” By requiring separate reports of administrative costs, fees, and expenses by PBMs, the MLRs reported by MCOs, PIHPs, and PAHPs will more accurately reflect the cost paid for the drug alone, rather than fees or other expenses retained by the PBM.

CMS finalized the proposed policy with only modest changes in response to public comments. In particular, CMS clarified that the regulation would apply to MCOs, PIHPs, and PAHPs. Moreover, CMS added a new subsection noting that the requirement would take effect “the first rating period for contracts with MCOs, PIHPs, and PAHPs beginning on or after 1 year following November 19, 2024.”

Definition of an Internal Investigation for Purposes of Pricing Metric Revisions

In general, manufacturers may not report revisions to certain metrics including average manufacturer price (“AMP”) or best price, more than 12 quarters after the original report. In prior rulemaking, CMS codified an exception to this limitation if a manufacturer is making a revision due to an order by CMS or a court, an investigation by the Department of Health and Human Services Office of Inspector General or Department of Justice, or an “internal investigation.” CMS had not previously defined “internal investigation.”

In the Final Rule, CMS defined an “internal investigation” as an investigation of previously reported metrics, including AMP or best price, “that results in a finding made by the manufacturer of possible fraud, abuse, or violation of law or regulation.” The Final Rule closely mirrors the definition in the Proposed Rule, except that CMS clarified that the investigation had to result in only a possible finding of fraud, abuse, or violation of law or regulation. CMS made this addition in response to comments that, since the proposed definition applied only in instances where a manufacturer admitted legal fault, it may disincentivize manufacturers from conducting such audits. Moreover, commenters noted that manufacturers may have many different good-faith reasons for correcting data submissions that could be affected by the proposed definition. In response, CMS noted it was “amending the definition to add the term ‘possible’ so that such restatements would not be construed as an admission of legal fault.”

Drug Price Verification Survey Process of Certain Reported CODs

CMS declined to finalize its proposal to conduct verification surveys of prices or charges for certain CODs. In the Final Rule, CMS opined that the increasing complexity of the pharmaceutical distribution supply chain makes it more challenging for manufacturers to calculate, and for CMS and States to monitor the accuracy of, drug pricing information. CMS emphasized the criticality of ensuring accurate drug pricing information, especially for high cost drugs, as that information determines the quarterly Medicaid drug rebates paid by participating manufacturers to State Medicaid programs. CMS also specified in the Final Rule that it would have published only non-proprietary information received through the drug price verification survey. CMS stated that it will continue to review the input provided by commenters, which may inform future rulemaking on the topic.

Policy to Require States to Collect National Drug Codes (“NDCs”) for All Physician-Administered Drugs

CMS codified the requirement that States collect NDC information on all physician-administered drugs that are CODs in order to invoice manufacturers for rebates and confirm that Medicaid Federal Financial Participation (“FFP”) is available, as appropriate. CMS finalized the regulation as proposed but updated its justification, stating that it could no longer rely on the previously cited statutory text—the Social Security Act (“SSA”) section 1927(d)(7)—since that section applies only to the 20 highest dollar volume multiple source drugs. Rather, CMS promulgated the rule under its authority in section 1902(a)(4) of the SSA to specify “methods of administration” necessary for the “proper and efficient operation” of a State’s Medicaid state plan.

Other Policies of Interest to Life Science Companies

• Accounting for Stacking When Determining Best Price: As CMS previously announced in a statement on May 15, 2024, CMS did not finalize language that would have required a manufacturer to adjust a drug’s best price based on cumulative (i.e., “stacked”) discounts. CMS indicated that it received comments both supporting and opposing its proposed revisions, but it did not describe or discuss the comments in the preamble to the Final Rule. CMS stated that it plans to collect additional information from manufacturers related to their existing best price stacking methodologies.
• Rescission of Regulatory Provisions Related to Copay Accumulators: In response to a federal court ruling, CMS finalized the rescission of provisions related to copay accumulators that were promulgated in 2020. The regulations addressed the effect of PBM accumulator adjustment programs on best price and AMP calculations. As a result, these regulations will revert to the language established in 2016. CMS stated that it “will continue to explore other ways to protect consumers from accumulator programs that leave vulnerable patient populations with a significant cost-sharing burden once a patient exhausts a manufacturer patient benefit program.”
• Identification and Correction of Misclassified Drug Information: CMS finalized as proposed new requirements by which CMS would identify and subsequently notify a manufacturer when a drug has been misclassified in MDRP by reporting the drug under a category that is not supported by the statutory and regulatory definitions of single-source (“S”) drug, innovator multiple source (“I”) drug, or noninnovator multiple source (“N”) drug. However, CMS did add a provision that a manufacturer must certify the applicable correction within 30 calendar days.
• Modification of the Definition of Noninnovator Multiple Source Drug: CMS finalized the proposed amendment of the regulatory definition of an N drug to track the language in the definition of an I drug and clarify the difference between an I drug and an N drug.
• Definition of “Market Date”: CMS finalized as proposed the definition of “Market Date” for the purpose of establishing the base date AMP quarter as “the date on which the covered outpatient drug was first sold by any manufacturer.” CMS declined to establish a definition of “sold” to determine the market date of a drug.
• Definition of “Vaccine” for the Purposes of the MDRP Only: CMS did not finalize its proposed definition of “vaccine,” which would have applied for the purposes of the MDRP only. CMS stated it will continue to review the input received from commenters, which may inform future rulemaking, but did not describe or discuss any comments on this topic in the Final Rule.
• Removal of Cap on Manufacturer Rebates: Based on a provision in the American Rescue Plan Act of 2021, CMS finalized as proposed the removal of the manufacturer rebate cap, which was previously capped at 100 percent of AMP, on rebate amounts for single source and innovator multiple source drugs. This provision went into effect on January 1, 2024.
• 12-Quarter Rebate Dispute Time Limitation: CMS finalized the proposed time limitation on rebate disputes by manufacturers, with the exception of referring to the “postmarked date” instead of “the date of the State invoice.” As an example, if the invoice postmark date is in the fourth quarter of 2024, then the time period to initiate a dispute ends 12 quarters after the last day of the fourth quarter of 2024, which would be the last day of the fourth quarter of 2027.
• Inclusion of Medicaid-Specific Identifiers on Pharmacy Cards: CMS finalized with modifications the requirement that Medicaid managed care contracts mandate that Medicaid MCOs, PIHPs, and PAHPs incorporate Medicaid-specific identifiers on enrollees’ pharmacy cards. Based on the feedback received, CMS changed the identifier requirement to be a unique Processing Bank Identification Number and Processor Control Number (“BIN/PCN”) combination with a group number identifier. Health plans rely on these codes to identify a patient’s prescription health insurance and benefits. Without these identifiers, CMS stated, it is difficult to determine a Medicaid managed care enrollee’s coverage and benefits. CMS also noted that the use of specific Medicaid identifiers may assist States and their managed care plans in avoiding duplicate discounts to the 340B Program and MDRP. The Final Rule’s requirements are effective for the first rating period for contracts with MCOs, PIHPs, and PAHPs beginning on or after one year after November 19, 2024.

Request for Information

• Issues Relating to Requiring a Diagnosis on Medicaid Prescriptions as a Condition for Claims Payment: In the Proposed Rule, CMS solicited comments to inform a potential future proposal to require that a patient’s diagnosis be included on a prescription as a condition of a State receiving FFP for that prescription. CMS sought feedback on the patient care, clinical, and operational impacts of such a proposal, as well as privacy-related concerns, burden considerations, and how to mitigate any anticipated impact on beneficiaries and providers. CMS also requested information on how States could effectuate such a requirement. Based on the feedback provided, CMS elected to not move forward with a proposed regulation on this topic.

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