On November 9, the Centers for Medicare and Medicaid Services (CMS) issued a final rule withdrawing and amending regulations that have governed the calculation of Average Manufacturer Price (AMP) and the establishment of federal upper limits since October 1, 2007. The final withdrawal rule is available here. The regulations were withdrawn to clear the way for AMP calculation under the recently revised drug rebate statute, but no replacement regulations have yet been proposed. The withdrawal requires manufacturers to base October 2010 AMPs on the statutory language alone, and throws into question several important aspects of AMP calculation that were thought to be unchanged by health reform. An unofficial redlined copy of the regulations is available here.

Background and Proposed Approach

Three health care reform bills passed in 2010 significantly changed the definition of AMP, effective October 1, 2010. See March 24, 2010, K&S Client Alert “Passage of Health Care Reform: Key Provisions Impacting Manufacturers of Pharmaceuticals, Biologics and Devices” and August 10, 2010 K&S Client Alert “AMP ‘Fix’ Amendment Approved.”

With this final withdrawal rule, CMS excises the three year-old AMP and FUL regulations that are, in part, in conflict with the requirements of the 2010 health care reform laws. Specifically, 42 C.F.R. §§ 447.504 (“Determination of AMP”) and 447.514 (“Upper limits for multiple source drugs”) have been deleted, as has the definition of “multiple source drug” in § 447.502, and conforming amendments have been made throughout Part 447.

CMS has not proposed any regulations interpreting the 2010 statutory changes. Nor has it issued substantive sub-regulatory guidance on the new methods for determining AMP. CMS assures the industry that interpretive regulations are forthcoming. Until that time, manufacturers are instructed by CMS to rely on the language of the statute as amended by the health care reform laws.

The statute, however, is neither comprehensive nor is it universally clear. To calculate AMP, manufacturers will have to adopt numerous reasonable assumptions consistent with the statute’s text and intent. In many respects, manufacturers find themselves back in a pre-DRA position with regard to AMP, with no regulation to guide them to compliance. The absence of relevant sub-regulatory guidance means manufacturers have even less to work with than they did in 2005. Moreover, unlike in 2005, AMPs today are subject to certification.

Manufacturers should consider adopting reasonable assumptions that mirror the pre-reform approaches to AMP that are not contrary to the language or intent of the amended statute. Manufacturers “may not rely on regulatory provisions and language that have been withdrawn,” see p.14, but they may make (in fact, must make) reasonable assumptions that are consistent with the statute, regulations and Rebate Agreement. We believe this to be a reasonable approach to AMP until CMS provides specific guidance.

Specific Matters in the Withdrawal Meriting Consideration

  • CMS wrote that “the definition of bona fide service fee at § 447.502 should not be used in the calculation of AMP.” The definition was not withdrawn, however, because it is still to be used for Best Price. The statutory reference to bona fide service fees at 42 U.S.C. § 1396r-8(k)(1)(B)(i)(II) is not a definition. Manufacturers are left to wonder how to define bona fide service fees in AMP, and whether CMS intends manufacturers to have separate, differing definitions of the term for different price types. See p. 9.
  • CMS made it clear that the conforming amendments to § 447.510(c) were not intended to announce manufacturers’ right to restate base date AMP in accordance with the recent statutory changes. CMS appears to be considering base date AMP restatement, but has not yet announced such a policy. See p. 15.
  • CMS clarified its intent to delete the following sentence from § 447.510(d)(2): “In calculating monthly AMP, a manufacturer must estimate the impact of its lagged price concessions using a 12- month rolling average to estimate the value of those discounts.” In the short term, manufacturers may want to consider the reasonableness of adopting as an assumption the ASP-based methodology for smoothing lagged price concessions, particularly if the manufacturer believes that avoiding volatility in monthly AMP is consistent with the intent of the statute. See p. 17.
  • CMS did not speak directly to the use of the so-called “default rule” in AMP, under which sales to wholesalers are included in AMP unless adequate documentation shows the sales to be resold to an AMP-ineligible customer. However, CMS emphasized that § 447.504(g)(1) (requiring such an approach) was being withdrawn. See p. 25.
  • CMS noted that the statutory definition of “wholesaler” should be considered by manufacturers in their treatment of authorized generic transfer sales in AMP. Because primary manufacturer sales to wholesalers are included in AMP, manufacturers of authorized generic products should consider whether their secondary manufacturer partners are “wholesalers” under the new statutory definition. See p. 26.

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In sum, the withdrawal of the AMP regulations was expected, and in some respects it was welcome (in that it removed several obsolete provisions that were plainly contrary to the language and intent of the amended drug rebate statute).

Nevertheless, the withdrawal unnecessarily creates uncertainty with regard to the continued application of practices that were not inconsistent with the terms of the new law. Its overbreadth should not be read by manufacturers as a requirement to abandon many of the approaches articulated in the now-withdrawn regulation. Instead, manufacturers are advised to consider carefully the reasonable assumptions they must adopt – and on which they must rely – in order to meet the AMP submission deadlines that are fast approaching.