Medicaid Program: Covered Outpatient Drugs, Final Rule with Comment Period Summary

On January 21, 2016, the Centers for Medicare & Medicaid Services (CMS) published a long-awaited final rule entitled “Medicaid Program:  Covered Outpatient Drugs.”  CMS actually proposed this rule in February, 2012, so it’s taken almost four years for the agency to finalize the many policies on which they sought comment – almost all of which flow from the enactment of the federal health care reform law that was enacted in 2010, the Affordable Care Act (ACA).  The rule is 658 triple-spaced pages (probably a couple of hundred pages when published in the Federal Register).  It’s a major accomplishment for CMS and the staff who worked on it.

Just by way of background, outpatient prescription drugs are not a mandatory benefit under Medicaid, although all 50 states, Washington, D.C., and the territories cover prescription drugs.  Since 1990, if a manufacturer wants their drugs covered under Medicaid, they are required to pay rebates that are, generally, split between the states and federal government.  As a result of amendments made to the statute by the ACA, rebates for brand name drugs are set at 23.1% of the average manufacturers price (AMP) of the drug, and 13% for generic drugs.  So, if the AMP for a brand-name drug is $100, the manufacturer pays CMS and the states $23.10.  Sounds pretty simple, right?

As you learn pretty quickly in health care, nothing is simple.  For example:  what is the AMP of a drug?  What sales are used to determine AMP and what sales are excluded?  What if the manufacturer tries to pay for the rebates by raising the price of the drug?  What if the state receives the rebate and then refuses to cover the drug?  What about drugs dispensed to Medicaid beneficiaries who are enrolled in Medicaid managed care plans?  What if the manufacturer wants to cut a better deal for a purchaser that serves low-income or otherwise underserved populations?  Can they?  What if the federal government decides that it needs to capture more of the rebates?  And what happens when a third party – a pharmacy – enters the picture?  How should Medicaid pay pharmacies to make sure they’re adequately compensated but not overpaid?  How should drugs that are bundled as part of a medical procedure be treated?  Should manufacturers pay rebates on those drugs, even if they’re not paid separately by Medicaid?

Add up all the questions and it’s easy to see why the rule is 658 pages.

CMS had to grapple with a lot of thorny issues in the final rule.  Some of the issues that I had my eyes on for clients were:

  • What constitutes a “bona-fide service fee” paid from a manufacturer to another entity? When can it be excluded from AMP?
    • Answer: When it is (1) paid by the manufacturer to an entity; (2) that represents fair market value for a bona-fide, itemized service; (3) that is actually performed on behalf of the manufacturer that the manufacturer would have otherwise had to perform for himself; (4) that is not passed on, in whole or in part, to a client or customer of the entity, regardless of whether they take title to the drug.
  • When is a drug used as part of a bundled service exempt from rebates?
    • Answer: When the drug is used incident to a bundled service (such as an outpatient hospital procedure) and not paid for separately.
  • When is a drug that is a “line extension” of the original drug subject to the CPI penalty?
    • Answer: CMS has decided to defer a decision on this question.  But, when a manufacturer is distributing a drug that was acquired from another manufacturer, CMS has said that the new manufacturer can re-set the base AMP for the drug as long as there is no corporate relationship between the two manufacturers.
  • How do manufacturer coupons, voucher programs, drug discount programs, refund/rebate programs and patient assistance programs affect AMP?
    • Answer: In general, they don’t, as long as the benefit goes directly and entirely to the patient, and the pharmacy dispensing the drug (or any other entity) does not receive a price concession.
  • To what extent do CMS regulations or policies prevent pharmaceutical manufacturers from entering into value based purchasing arrangements?
    • Answer: CMS acknowledges that this may be an issue and the agency states that they are considering further guidance in the area.
  • How do manufacturers ensure that they don’t have to pay twice when a drug is dispensed to a Medicaid beneficiary from a 340B pharmacy?
    • Answer: “Double dipping” is prohibited.  States need to have policies in effect to ensure that they don’t claim a rebate on a drug dispensed via a 340B pharmacy.  This issue is especially important now that rebates are owed on drugs dispensed to Medicaid managed care enrollees.

My take is that CMS staff did an amazing job with this rule.  Not all of my clients are happy and not all of my clients’ questions got answered.  But reading this rule, one comes away with the perception that CMS staff took a great deal of time and care to analyze every comment that they received and tried to respond thoughtfully to each one.

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