Calculating average manufacturer price
Determining best price
Line extensions
Federal upper limits
Actual acquisition cost
340B and Indian Health Services reimbursement


On July 6 2016 the Centres for Medicare and Medicaid Services (CMS) issued frequently asked questions (FAQs) regarding the Covered Outpatient Drug Final Rule published on February 1 2016 and the state Medicaid director letter issued on February 11 2016. The CMS issued the FAQs just three weeks before labellers are required to submit their first quarterly reports following the final rule's publication earlier this year.

The FAQs address a number of topics covered in the final rule, such as:

  • calculating the average manufacturer price;
  • determining the best price;
  • the treatment of line extensions; and
  • the setting of state reimbursement rates, including certain issues relating to federal upper limits and the effect of 340B prices.

Calculating average manufacturer price

Authorised generics
The FAQs state that:

"Section 1927(k)(1)(C) of the [Social Security] Act requires that in the case of a manufacturer that approves, allows, or otherwise permits any drug of the manufacturer to be sold under a new drug application (NDA) approved under section 505(c) of Federal Food, Drug and Cosmetic Act (FFDCA), AMP shall be inclusive of the average price paid for such drug by wholesalers for drugs distributed to retail community pharmacies."

Where a manufacturer markets both an authorised generic drug and a branded drug under the same new drug application, the CMS stated that in such cases "the price of the drug would be blended for AMP, even if the manufacturer distinguishes the two products using different [National Drug Codes] NDCs".

In response to a question involving the sale of an authorised generic drug and a branded drug by two manufacturers owned by the same parent company, the CMS stated that "[t]ransfer sales that take place between two manufacturers would be included in AMP only to the extent the secondary manufacturer is acting as a wholesaler in accordance with section 1927(k)(11) of the Act". The CMS did not discuss additional requirements or limitations in the context of this response.

The CMS addressed situations in which manufacturers have two different NDC-9 codes (which indicate the manufacturer, drug name and strength) for the same drug – excluding authorised generic drugs – and stated that the CMS does not require the manufacturer to blend both national drug codes when calculating the average manufacturer price, although there may be situations where this would be reasonable. The CMS recommended that manufacturers retain written documentation of any reasonable assumptions made in calculating the average manufacturer price.

Bona fide service fee four-part test
Regarding the exclusion of bona fide service fees from the average manufacturer price, the CMS stated its position that manufacturers are responsible for meeting all components of the four-part test, even for fees that fall into the specific types identified as examples in the statute.

Delivery primarily through the mail
The CMS discussed the threshold for determining whether a pharmacy delivers prescriptions primarily through the mail and is therefore exempt from the 'retail community pharmacy' definition. The CMS clarified that it did not set a specific threshold for making this determination in order to allow flexibility in applying the rule as the pharmaceutical market evolves.

The CMS noted that if a majority of a pharmacy's drugs are not dispensed through the mail, a manufacturer may reasonably conclude that the pharmacy is a retail community pharmacy. Further, if a single entity owns both a retail community pharmacy and a mail order pharmacy, a manufacturer may treat sales to both pharmacies separately for purposes of calculating the average manufacturer price.

The CMS reiterated prior guidance stating that if a specialty pharmacy meets the 'retail community pharmacy' definition, then sales to that pharmacy shall be included in the average manufacturer price, even if the number of eligible sales is low.

Non-5i drugs not available through retail community pharmacies
For drugs that are not available through retail community pharmacies and are not considered 5i drugs (eg, oral solid drugs available only through specialty pharmacies that deliver primarily through the mail), the CMS reiterated its position that an average manufacturer price can be calculated, even if the number of average manufacturer price eligible sales is low.

Reporting requirements
The CMS addressed specific reporting requirements including negative monthly average manufacturer prices and the Affordable Care Act base date average manufacturer price. The CMS stated that due to the delay in the effective date for extending the definition of 'United States' to US territories until April 1 2017, manufacturers should use sales data in their smoothing process beginning with sales that occur after April 1 2017.

Determining best price

Lowest price available
While the CMS repeated a helpful question regarding whether the term 'lowest price available' means the lowest price offered or the lowest price achieved, its answer failed to address the question. The CMS merely stated that the 'lowest price available' means "lowest price available to the best price eligible entity" and must include any discounts, rebates or other transactions that affect prices directly or indirectly. The CMS added that if a rebate to a pharmaceutical benefit manager (that would otherwise be excluded from the best price) is designed to adjust the drug price available to a hospital purchasing the drug from a manufacturer, the rebate must be included in the best price calculation.

Exclusion of 340B sales
The CMS's position in the final rule was that any prices provided by manufacturers to 340B covered entities are excluded from the average manufacturer price and the best price, including inpatient prices provided to children's hospitals, critical access hospitals, rural referral centres, sole community hospitals and freestanding cancer hospitals that qualify as 340B covered entities.

Impact of authorised generics
The CMS stated that separate best prices should not be determined for cases in which two manufacturers of the same parent are selling an authorised generic and brand drug under the same new drug application simply because the two manufacturers use different national drug codes for the same drug.

Nominal price sales
The CMS provided additional clarification on nominal price sales to entities that meet the requirements of 42 CFR Section 447.508(a).

Line extensions

The CMS provided no further guidance on the definition or identification of line extensions. However, the CMS did address the question of whether line extension rebates apply retroactively. In response to a question regarding whether the CMS will set up a special process to handle retroactive rebate adjustments for manufacturers that have been waiting for a final rule before calculating an alternative rebate for their line extension drugs, the CMS stated that:

  • the statutory line extension provisions went into effect on January 1 2010;
  • the CMS does not plan to establish a special process; and
  • in its view, manufacturers should ensure that all rebates for line extension drugs are calculated and paid as of January 1 2010.

The CMS further clarified that manufacturers must identify the initial brand name listed drug by considering which active initial drug has the highest additional rebate ratio from the applicable quarter in order to calculate the alternative rebate and not the highest additional rebate ratio ever incurred on the product.

Federal upper limits

The CMS explained that states will have four quarters from the effective date of the final rule to implement their reimbursement provisions. However, the pharmacy reimbursement limits are effective as of April 1 2016. The CMS noted that federal upper limits need be applied only as an aggregate upper limit, states have flexibility in establishing payment rates for individual drugs.

The CMS stated that it will not publish a federal upper limit price for products that do not have a corresponding national average drug acquisition cost. In response to a question about the potential impact of product shortages, the CMS offered further information on how it will determine whether a product is available nationwide.

Actual acquisition cost

Several FAQs provide guidance on the implementation of the final rule's requirement that states use the actual acquisition cost reimbursement methodology. The CMS stated that the actual acquisition cost methodology requirements under the final rule apply in the aggregate and not at the individual claim level, and do not apply to physician-administered drugs. Moreover, the CMS clarified that each state may establish rates that satisfy or are consistent with the actual acquisition cost, and that the actual acquisition cost can be based on a variety of data sources, including federal supply schedule prices and "other pricing benchmarks".

The CMS confirmed that if a state uses the national average drug acquisition cost to reimburse for drugs that have a federal upper limit calculated, the state will meet the aggregate test. However, if a state uses a different actual acquisition cost metric for drugs that have a federal upper limit calculated, the state must demonstrate that the alternative metric meets the aggregate test.

The FAQs also state that the actual acquisition cost methodology requirements do not apply to Medicaid-managed care organisations, including those that participate in the 340B programme.

340B and Indian Health Service reimbursement

The CMS explained that states can calculate 340B ceiling prices to ensure that the reimbursement is not greater than the 340B ceiling price plus a professional dispensing fee. The CMS also addressed the use of encounter rates for Indian Health Service and tribal providers, noting that drugs included in the encounter rate are not eligible for the Medicaid Drug Rebate Programme because the reimbursement qualifies as a bundled payment, which falls outside the definition of 'covered outpatient drug'.

For further information on this topic, please contact William Sarraille or Stephanie P Hales at Sidley Austin's Washington DC office by telephone (+1 202 736 8000) or email ([email protected] or [email protected]). Alternatively, contact Meenakshi Datta or Trevor L Wear at Sidley Austin's Chicago office by telephone (+1 312 853 7000) or email ([email protected] or [email protected]). The Sidley Austin website can be accessed at