On May 23, 2023, the U.S. Centers for Medicare & Medicaid Services (CMS) issued a proposed rule that addresses a variety of important drug pricing matters under the Medicaid Drug Rebate Program (MDRP). Among other provisions, the proposed rule, if finalized, would potentially affect participating manufacturers by (i) revising CMS’s prior guidance and requiring manufacturers to “stack” cumulative price concessions provided to different entities when determining Best Price (BP); (ii) authorizing the Secretary of the Department of Health and Human Services (HHS) to identify certain high-cost drugs that would be subject to potential CMS information requests for pricing, production cost, and utilization data; and (iii) addressing certain “misclassification” considerations for purposes of rebate calculations.

The proposals are part of CMS’s efforts to lower prescription drug costs and reduce the government’s expenditures for prescription drugs under the MDRP, but they create significant risk to manufacturers and may have an adverse impact on investment and innovation in the pharmaceutical industry. Importantly, the proposals have significant enforcement implications, both under the MDRP and under the 340B Program.

Comments are due by July 25, 2023. Aspects of the proposed rule, if finalized, are likely subject to legal challenge.

Stacking of Cumulative Discounts to Different Entities

In a stark reversal from prior policy, CMS proposes to amend existing BP regulations to require manufacturers to “stack” cumulative discounts, rebates, or other arrangements “provided to different [BP] eligible entities” for purposes of determining a final BP realized by the manufacturer. Under the MDRP statute, “best price” is defined as “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or government entity within the United States.”1 Current regulations state that manufacturers must adjust BP “if cumulative discounts, rebates, or other arrangements subsequently adjust the prices available, to the extent that such cumulative discounts, rebates, or other arrangements are not excluded from the determination of best price by statute or regulation.”2 In explaining the proposal, CMS discusses its understanding of United States ex rel. Sheldon v. Allergan Sales, LLC, which concerned the interpretation of CMS’s price concession stacking guidance as set forth in the Medicaid Program, Covered Outpatient Drug Final Rule, 81 Fed. Reg. 5170 (Feb. 1, 2016). Notably, in the preamble to the proposed rule, CMS states that the proposed revision is a “clarifying statement” intended “to remove any potential doubt prospectively” but does not consider manufacturers’ reliance interests in the prior guidance. Manufacturers should carefully evaluate the effect the proposed revision would have in their determination of BP.

“High-Cost” Drug Surveys

CMS proposes to develop a process to collect data from manufacturers and wholesalers regarding what the agency describes as “high-cost drugs” that are reimbursed under the MDRP. The stated goal is to provide states with additional tools to manage their drug spending (and presumably negotiate lower prices with manufacturers) in the wake of certain new treatment options, such as gene and cell therapies. The survey would be conducted according to the following three-step process:

  1. Step 1: Each year, CMS would use a variety of measures (e.g., drugs with highest launch prices or top 5% in price) to develop an initial list of drugs. CMS estimates that approximately 200 National Drug Codes (NDCs) will result from this step.
  2. Step 2: From the list in Step 1, CMS would exclude drugs for which manufacturers have (i) participated in any CMS drug pricing program or initiative under which manufacturers would negotiate the price of a covered outpatient drug (COD) directly with CMS or (ii) negotiated supplemental rebates with at least 50% of states.
  3. Step 3: If, after application of the criteria above, more than 10 CODs remain on the survey list, CMS would further refine the list of drugs to be surveyed by consulting with states and/or determining highest Medicaid drug spend.

Under the survey proposal, CMS would be authorized to request information such as a manufacturer’s costs of production, research, and marketing of a selected product; the average price of the product for purchasers outside of the United States; and the expected use of the product within the United States. CMS would be permitted to post nonproprietary information provided in response to a survey and may further request that a manufacturer address such nonproprietary information in a public forum. CMS would also seek comments from the public, beneficiaries, state Medicaid agencies, and other interested parties on the information posted. CMS expects that approximately three to 10 products will ultimately be subject to the survey each year.

Notably, CMS’s proposal, if finalized, would represent the first price transparency measure of this nature adopted at the federal level, following a long list of states that have adopted similar price transparency laws and regulations in recent years. CMS fails to identify an authority supporting this significant new regulatory requirement, and it does not discuss whether it and the states would protect trade secrets or other confidential and proprietary information. Related federal legislation addressing drug price transparency is pending and receiving serious consideration in Congress.

Misclassification of Drugs

CMS proposes to codify the changes made by the Medicaid Services Investment and Accountability Act of 2019 (MSIAA), which amended the statutory definitions of “single source drugs” (S drugs), “innovator multiple source drugs” (I drugs), and “noninnovator multiple source drugs” (N drugs), while also expanding HHS’s enforcement authority in connection with the classification of such drugs. CMS’s stated rationale for these regulatory changes is that “many manufacturers have disregarded our reasonable interpretation of the statute and have continued to misreport drugs marketed under an NDA as noninnovator multiple source drugs.”

CMS’s proposed amendments to 42 C.F.R. § 447.509 would (i) define drug misclassifications to include the scenario where a certified drug classification is not supported by applicable statute or regulation and where the classification is reported correctly but the manufacturer is paying an allegedly incorrect rebate rate; (ii) require manufacturers to pay any unpaid rebates attributable to misclassifications within 60 days of receiving notice from the agency that the drug is misclassified; and (iii) implement CMS authority to correct misclassifications and impose additional penalties for such misclassifications. Specifically, the proposed rule would authorize CMS to (i) correct a drug’s misclassification “on behalf of” the manufacturer; (ii) suspend the misclassified drug as a COD under the MDRP and exclude the misclassified drug from Federal Financial Participation (FFP); and (iii) impose a civil monetary penalty (CMP) for each rebate period the drug was misclassified that would equal the total number of units of the misclassified drug paid for under Medicaid multiplied by 23.1% of the drug’s Average Manufacturer Price (AMP) for that period.

Modification of “Manufacturer” Definition Under the National Drug Rebate Agreement (NDRA)

CMS proposes to revise the definition of “manufacturer” for purposes of the NDRA to purportedly “clarify” that all labelers associated or affiliated with a manufacturer must have an NDRA in effect in order to satisfy the statutory requirement for the manufacturer to have an NDRA in effect. CMS contends that this revision will prevent manufacturers from excluding certain drugs from the scope of the NDRA by assigning separate labeler codes through “a new subsidiary or associated entity.” The proposed rule also seeks to clarify that manufacturers with an NDRA in effect must include all newly purchased labeler codes and CODs in their MDRP reporting.

Definition of Market Date

CMS proposes to define “market date” for purposes of AMP calculations as “the date on which the COD was first sold by any manufacturer.” Prior guidance defined market date as when the drug was first “available for sale.” This proposal, if finalized, may affect baseline information reported by manufacturers.

Additional Proposals

CMS includes a number of other proposals in the proposed rule, including the following:

  • Proposed Suspension of a Manufacturer’s Drug Rebate Agreement. The proposed rule would establish a process to implement a statutorily imposed 90-calendar-day deadline on manufacturers for failing to timely report drug pricing or drug product information, such as AMP and BP data, to the agency. Under the proposed rule, if a manufacturer fails to abide by the deadline, CMS would be authorized to suspend the manufacturer’s NDRA, after providing written notice to manufacturers and states, until the information is reported. During such a suspension, the CODs of the manufacturer would not be eligible for Medicaid coverage or reimbursement or Medicaid FFP. The suspension would only affect a manufacturer’s Medicaid program participation and not its participation in Medicare Part B or the 340B Drug Pricing Program. CMS would also be entitled to terminate a manufacturer’s NDRA if the manufacturer continuously fails to report required information, which would affect the manufacturer’s participation in Medicaid, Medicare Part B, and the 340B Drug Pricing Program.
  • Time Limitation on Manufacturer Audit Requests. In the proposed rule, CMS proposes to establish a 12-quarter time limit for manufacturers to initiate disputes, hearing requests, and audits for state-invoiced units on any current rebates as well as on rebates that have been paid in full. Current law does not impose a specific time limitation on a manufacturer’s ability to initiate an audit or review of a state’s rebate calculations. As a result, manufacturers are currently able to dispute rebate invoices for all prior quarters.
  • Revision to Definition of Covered Outpatient Drug. CMS proposes to revise the definition of COD to clarify when a COD is subject to the limiting definition (i.e., when the drug is packaged and not a COD). Specifically, the proposed rule would purport to clarify that any separately identified drug and its cost on a claim form would satisfy the COD definition. Thus, even if payment is made as one inclusive payment for the drug and service, as long as the drug and its cost are separately identifiable, the COD definition would be met, and the payment for the drug would not need to be separately identified.
  • Definition of Internal Investigation in Connection With Restatements. Currently, manufacturers may restate prices outside of the 12-quarter window only in certain circumstances, including based on an “internal investigation.” In an attempt to curb these restatements, which, CMS states, “impede the economic and efficient operation of the Medicaid program,” CMS proposes to define “internal investigation” to narrow the circumstances in which a manufacturer may extend the restatement period beyond 12 quarters. Specifically, the proposed rule defines “internal investigation” to mean a manufacturer’s investigation of its AMP, BP, customary prompt pay discounts, or nominal prices that have been previously certified in MDRP that results in a finding made by the manufacturer of fraud, abuse, or a violation of law or regulation.
  • Drug Cost Transparency in Medicaid Managed Care Contracts. CMS proposes to increase transparency in the context of Medicaid Managed Care contracts by requiring Medicaid managed care plans that contract with subcontractors to require subcontractors (including pharmacy benefit managers (PBMs)) to itemize amounts related to incurred claims. The proposal, if implemented, would seek to limit “spread pricing,” where a PBM retains the difference between what a Medicaid managed care plan pays a PBM and what the PBM pays a provider for the cost of dispensing a drug, through the disclosure of pricing information.
  • Required Collection of NDC information for All Covered Outpatient Physician-Administered Drugs. The proposed rule would require states to collect NDC information on all covered outpatient single- and multiple-source physician-administered drugs. Further, the rule would specify that states must ensure that their managed care plans report drug utilization data so that states can invoice manufacturers for rebates for CODs consistent with the Deficit Reduction Act of 2005 and 42 C.F.R. § 438.3(s)(2) and (3).
  • Withdrawal of Accumulator Rule. On May 17, 2022, the U.S. District Court for the District of Columbia vacated the BP provisions of the Accumulator Adjustment Rule, holding that copay assistance amounts offered from a manufacturer to a patient but diverted by a commercial health plan through an accumulator program do “not qualify as a price made available from a manufacturer to a best-price-eligible purchaser,” as required by statute, and that CMS thus lacked the authority to adopt the Accumulator Adjustment Rule. In accordance with this order, the proposed rule would withdraw the AMP and BP provisions of the Accumulator Adjustment Rule.
  • Elimination of Medicaid Rebate Cap. The American Rescue Plan Act of 2021 eliminated the Medicaid rebate cap for single-source and innovator multiple-source drugs so that rebates would no longer be capped at 100% of the AMP. The proposed rule would make conforming changes to the regulations to reflect the removal of the rebate cap and state that the limit on maximum rebate amounts ends on December 31, 2023.
  • Definition of Vaccine. To clarify which products are considered vaccines under the MDRP and therefore excluded from the definition of COD, CMS proposes to define “vaccine” as “a product that is administered prophylactically to induce active, antigen-specific immunity for the prevention of one or more specific infectious diseases and is included in a current or previous FDA published list of vaccines licensed for use in the United States.” This definition would be applicable only to the MDRP and not to any other agency or agency program implementation, including FDA, CDC, or HRSA, and would not alter any applicable federal or state requirements to cover immunizations for Medicaid beneficiaries.