On July 6, 2007, the Centers for Medicare & Medicaid Services (CMS) released its final rule with comment period concerning the Medicaid drug rebate program and pharmacy reimbursement. The rule was subsequently published July 17 in the Federal Register.1 The rule seeks to clarify numerous technical aspects relating to pharmaceutical manufacturers’ reporting of average manufacturer price (AMP) and best price (BP) data under the Medicaid rebate statute; implements amendments to the rebate statute passed as part of the Deficit Reduction Act (DRA); and sets forth a new methodology for establishing federal upper limits on reimbursement for prescription drugs by state Medicaid programs. This memorandum summarizes key provisions of the final rule; highlights continuing areas of ambiguity; compares the final rule with CMS’s historical and proposed interpretations; and suggests potential priority areas for review. It bears emphasis that the final rule reflects many significant changes from CMS’s original proposed rule, and that significant ambiguities remain in certain areas. At Appendix A, we have included a chart summarizing some of the key differences between historic CMS interpretations, the proposed rule, and the final rule in key areas.

A. The Medicaid Pharmacy Benefit and Drug Rebate Program: Statutory Background

Under the Medicaid statute, states may cover prescription drugs as an optional service, but have significant flexibility with respect to the establishment of payment methodologies for pharmacy services, subject to aggregate “federal aggregate upper limits” (FULs) on payments.2 For multisource (i.e., generic) drugs, CMS historically established FULs based on 150 percent of the lowest published price generically equivalent product. However, as part of the DRA, Congress now requires that the generic FULs be based upon 250 percent of the AMP (as reported under the Medicaid rebate program) of the least expensive generically equivalent product.

Congress enacted the Medicaid rebate program in 1990 as Section 1927 of the Social Security Act.3 Under the statute, a manufacturer of covered outpatient prescription drugs must enter into a rebate agreement with the Secretary of HHS as a condition to federal Medicaid matching funds being available for the manufacturer’s products. Under the rebate agreement, the manufacturer must pay quarterly rebates to the states based on their respective utilization of the manufacturer’s products.

The amount of the rebate varies depending on whether the product is a single source, innovator multiple source, or noninnovator multiple source drug. For single source and innovator multiple source drugs, the rebate consists of two components. First, the manufacturer must pay a “basic rebate” equal to the greater of (i) 15.1 percent of the AMP of the drug or (ii) the difference between the drug’s AMP and its BP. Second, the manufacturer must pay an “additional” rebate to the extent that the AMP of the drug has increased faster than the rate of inflation since the launch of the product. The AMP is generally defined as the average price paid to the manufacturer by wholesalers for drugs distributed to the retail pharmacy class of trade, while the BP is generally defined as the lowest price available from the manufacturer to specified types of customers, excluding certain specified (primarily governmental) purchasers. Manufacturers report AMP and BP information to CMS on a monthly and quarterly basis. Although CMS has issued some informal guidance to manufacturers concerning the calculation of AMP and BP through various Program Releases, that guidance has been widely criticized as being incomplete, ambiguous, and at times, inconsistent. As part of the DRA, Congress therefore directed the HHS Office of Inspector General to issue recommendations concerning Medicaid pricing calculations, and directed the Secretary to publish regulations governing the administration of the rebate program.

B. Effective Date and Extended Comment Period

The effective date of the final rule is Oct. 1, 2007. The final rule does not specify whether this means that reports of third quarter AMP and BP (ordinarily due Oct. 30) must conform to the terms of the rule, or whether instead that the rule first applies to the monthly report of October AMP and BP (the first of which would be due Nov. 30). However, a communication from the CMS capital markets advisor prior to the publication of the proposed rule suggests that the latter interpretation is correct.4 Companies may wish to seek confirmation of this issue in the interim.

There are several caveats to the Oct. 1 effective date. First, CMS cautions that some amendments to the Medicaid rebate statute as part of the DRA (e.g., exclusion of prompt pay discounts from AMP, revised definition of nominal price, monthly reporting of pricing data) were self-executing and became effective Jan. 1, 2007. Second, in response to comments that urged CMS to clarify that the rule applies prospectively (as is generally the case with regulations), CMS frequently states that many aspects of the rule are mere “clarifications” of longstanding agency interpretations or policies. In some cases, we believe this assertion is inaccurate and that CMS has changed its position in the final rule. Thus, any consideration of whether retrospective recalculations of pricing data are necessary in light of the final rule should be undertaken on a case-by-case basis.

Finally, because of the extensive scope of the rule and the significant changes from the proposed rule, CMS has agreed to accept additional comments on the rule until Jan. 2, 2008. In addition, CMS has established an e-mailbox (DRARxPolicy@cms.hhs.gov) to receive and coordinate policy questions from manufacturers concerning the final rule.

C. Executive Summary

The final rule represents an improvement over existing guidance in many areas. For example, the rule is much clearer with respect to the treatment of various classes of trade in the AMP calculation, and CMS appears to have consistently excluded most payor relationships from the AMP calculations. However, the rule continues to be ambiguous regarding the treatment of PBMs from a BP perspective, and the final rule’s provisions concerning bundled sales could lead to massive changes in some manufacturers’ contracting strategies, depending on how those provisions are interpreted.

Manufacturers should consider a “triage” approach with respect to implementing the final rule. In the short term, manufacturers may wish to seek additional clarifications from the agency regarding bundling, PBMs, and authorized generics. In the short-to-medium term, manufacturers should focus carefully on actual implementation of the rule, and also should consider whether they have products for which a restatement of the Base Period AMP is appropriate or could mitigate additional rebate liability resulting from the changed formula. Finally, in the medium-to-long term, manufacturers should consider the implications of the rule on their pricing and contracting strategies.


In this section, we first discuss aspects of the final rule that relate to the scope of the obligation to participate in the rebate program. As noted, the rebate statute applies to “manufacturers” of “covered outpatient drugs.”

A. Application to “Manufacturers”

The term “manufacturer” has historically been defined broadly to include entities that hold legal title to the National Drug Code (NDC) for a product and that are engaged in activities that would qualify the entity as a manufacturer under the Federal Food Drug and Cosmetic Act (e.g., manufacturing, packaging and distribution activities). The rule expands on several aspects of this definition, including:

  • Confirming that repackagers may qualify as manufacturers
  • Clarifying that entities that market private-labeled drugs may qualify as a manufacturer even though they do not hold title to the NDC of the product.5

CMS does not provide any further definition of the terms “repackager” or “private labeler,” or attempt to distinguish them.

B. Definition and Classification of “Covered Outpatient Drugs”

The rebate statute generally defines “covered outpatient drugs” to include FDA-approved drugs, biologics, and insulin, as well as certain pre-1962 drugs, and a manufacturer generally must include all of its covered outpatient drugs under its Medicaid rebate agreement. CMS declines to define “covered outpatient drug”further in the final rule. However, CMS does provide additional clarifications with respect to the definitions of single source, innovator multiple source, and noninnovator multiple source drugs:

  • Where a generic product is marketed under an abbreviated new drug application, it is not “transformed” into a single source drug where the original brand product and other generic equivalents are withdrawn from the market.
  • Pre-1962 drugs are considered to be noninnovator multiple source drugs unless they were originally marketed under an NDA.


A. General

In this section, we discuss several issues that apply to both the AMP and BP calculations.

1. Recognition of Sales

The starting point for AMP and BP calculations is, of course, the manufacturer’s sales data. The final rule clarifies that pricing calculations are to be based on actual sales, rather than prices that are simply available under the manufacturer’s contracts.6

2. Bundled Sales

The Medicaid rebate agreement has historically required manufacturers to take into account bundled sales in their price calculations by allocating the value of bundled discounts among the products comprising the bundle. The final rule changes the definition of bundled sale as follows:

Bundled sale means an arrangement regardless of physical packaging under which the rebate, discount, or other price concession is conditioned upon the purchase of the same drug, drugs of different types (that is, at the nine-digit National Drug Code [NDC] level) or another product or some other performance requirement (for example, the achievement of market share, inclusion or tier placement on a formulary), or where the resulting discounts or other price concessions are greater than those which would have been available had the bundled drugs been purchased separately or outside the bundled arrangement. For bundled sales, the discounts are allocated proportionally to the total dollar value of the units of all drug sold under the bundled arrangement. For bundled sales where multiple drugs are discounted, the aggregate value of all the discounts in the bundled arrangement shall be proportionally allocated across all drugs in the bundle.7

Unfortunately, CMS’s definition and responses to public comments create significant ambiguity with respect to this definition, and under certain interpretations, the definition could have far-reaching and unanticipated implications for both manufacturers’ rebate liability, and contracting and pricing practices. Manufacturers should carefully assess their reporting approaches as well as their contracting and pricing strategies in light of the final rule, and may wish to consider providing comments to the agency or seeking additional clarifications in the context of specific contracts.

The first issue raised by the bundled sale definition is one that would seem to be straightforward: Must a bundled arrangement in fact involve multiple products? Curiously, the definition contains no such requirement and speaks in terms of requirements to purchase the “same drug,” yet it is difficult to conceive of a bundled arrangement involving a single product. CMS may have been focused on something more specific. Specifically, CMS states that a bundle may exist where the arrangement has either (i) drugs with different 9-digit NDC numbers or (ii) drugs with the same 9-digit NDC number (i.e., different package sizes of the same drug).8 Thus, for example, where a manufacturer enters into a contract to pay rebates on a single form and strength of a compound if a customer lists the compound on its formulary without regard to package sizes (as is typical), the arrangement could be considered to be a bundle with respect to all package sizes of the compound; and if there are differential discounts offered on different package sizes, the manufacturer may need to allocate those discounts across all of the package sizes. It is unclear whether the agency had something more in mind, however.

Second, consistent with the proposed rule, the final rule significantly expands the type of “contingencies” that may trigger a bundle. Under the Medicaid rebate agreement, a bundled sale may occur where a condition of a rebate is that “more than one drug type is purchased.” The final rule now expands those conditions to include “other performance requirements” such as market share or formulary status.

Third, CMS suggests that a contingency that triggers a bundle may occur in a different period. Although one could envision such a contingency where a customer must purchase a volume of product A in calendar quarter 1 to receive a discount on calendar quarter 2 purchases of product B, CMS’s discussion suggests that a cross-quarter contingency could exist where a customer could receive a discount on purchases of product A in calendar quarter 2 where increases its purchases of that same product in that same quarter exceed its purchases of that same product during calendar quarter 1 by a specified percentage.9 Under that hypothetical arrangement, however, there would not appear to be any requirement to purchase products in calendar quarter 1 in order to achieve the discount in calendar quarter 2, but rather simply an increase in the overall volume of purchases during the second quarter. Thus, while the general principle that CMS articulates may be a fair one, the hypothetical does not seem to illustrate that principle, and rather seem to illustrate a simple volume discount on product A.

Fourth, the final rule is extremely troubling with respect to the question of the scope of bundled arrangements. Commercial arrangements often involve a single “contract” covering multiple products, with each product’s discount being determined independently of the discount for other products in the contract, in some cases based on individualized performance criteria relating to that product. The final rule, however, suggests that if any aspect of a contract constitutes a bundled arrangement, all of the products in the contract may be considered to be part of a bundled sale. For example, CMS states that both “contingent and non-contingent drugs” are within a bundled sale if any drug must be purchased in order to get a discount on any drug in the bundle,”10 and further that “routine multiple drug sales to entities such as wholesalers” (e.g., under an agreement that a wholesaler carry a full line of the manufacturer’s products) may constitute a bundle.11 Under this construction, a bundled discount that is “overlayed” (e.g., get an additional 5 percent on all purchases if an overall volume threshhold is met) on top of other independently determined, non-contingent discounts could require an allocation not only of the additional bundled 5 percent discount, but also of the independently determined individual product discounts. The result of such an allocation would be that all products in the contract would be subject to a single uniform discount percentage.

In sum, the final rule may significantly expand the types of arrangements that qualify as “bundled sales,” as well as the scope of drugs considered to fall within a bundled sale in a multi-product contract. If that is the case, the resultant allocation of discounts will tend to “flatten” the discount percentage across the products in the bundle. While this result has the potential to increase rebate liability for some products, it could also suggest bundled contract strategies that could have the effect of diluting discount percentages on other products. Because some of CMS’s proposed interpretations appear to be counter to the economic rationale underlying some bundled arrangements, manufacturers should strongly consider soliciting additional CMS guidance in this area, and should carefully evaluate their existing contracting strategies.

3. Bona Fide Service Fees

The final rule clarifies that “bona fide services fees” are not to be taken into account in price calculations, and explicitly adopts the definition and discussion of that term as it is used in the Medicare regulations governing “average sales price” calculations.12 Under that definition, a financial relationship will be considered to be a bona fide service fee if the fee represents fair market value for a bona fide, itemized service actually performed on behalf of a manufacturer that the manufacturer would otherwise perform or contract for, and that is not passed on in whole or in part to a client or customer of an entity.”13 Although CMS confirms that distribution services are an appropriate subject of service fees, the agency declines to provide additional specificity in this regard and further declined to clarify whether inventory management or stocking fees qualify as bona fide service fees. However, the discussion of comments indicates that fees that are merely related to the administration of a rebate contract would not qualify as bona fide service fees because they do not relate to the efficient distribution of drugs.

With respect to GPO administrative fees, CMS confirms that they may qualify as bona fide service fees, but cautions that the manufacturer may not have “an agreement with the GPO that any of these monies are passed on to the group purchasing organization’s members or customers” and that there must be “no evidence” that the fee is passed through.14 These comments create ambiguity for manufacturers insofar as companies may generally be aware that GPO members may receive a portion of fees – sometimes through price incentives and sometimes through investment returns unrelated to their purchases – but may not be aware of the specific distribution of fees among members. It may be possible to argue that in the absence of data to make such an allocation, the quantum of evidence suggesting a pass-through is insufficient. CMS also clarifies that GPO fees will not need to be taken into account in AMP calculations if the GPO is negotiating prices on behalf of entities that do not fall within the retail pharmacy class of trade.

4. Returned Goods

CMS clarifies that returned goods need not be taken into account when determining AMP.15 This clarification should reduce the potential for negative AMPs, and, in our view, represents a positive change from prior agency guidance.

5. Manufacturer Patient Assistance Programs, Discount Cards, Coupons, and Copay Assistance Programs

Although the final rule’s terms and discussion of patient assistance programs, patient discount cards, manufacturer coupons, and similar arrangements in the context of AMP and BP are not identical, we believe that they suggest an intent on the part of the agency to apply consistent standards to these types of programs in both contexts.

First, the final rule is more flexible with respect to patient coupons than the proposed rule. Whereas the proposed rule would have only allowed manufacturers to disregard patient coupons in pricing calculations where the patient redeemed them directly to the manufacturer, the final rule allows such coupons to be redeemed at the point of sale, as long as: the patient is not required to purchase other products, the manufacturer establishes the benefit amount, the entire benefit inures to the patient, and the redeeming entity collects no additional amount other than a bona fide service fee for redeeming the coupon.16 In addition, the final rule makes clear that both “dollars off” coupons and vouchers redeemable for a quantity of product may qualify as coupon arrangements under these standards, and that vouchers redeemed with “replacement product” do not affect pricing calculations if they meet these standards.

Second, the final rule likewise makes clear that “patient assistance programs” can also be exempt from pricing calculations under similar standards, where (i) the program is focused on extending assistance to low-income individuals, (ii) the manufacturer establishes the amount of the subsidy; (iii) the entire amount of the free product or subsidy is made available to the patient; and (iv) the pharmacy collects only a bona fide service fee under the program.17 Curiously, the preamble to the rule suggests that CMS may assert a role in determining whether a card is designed to assist “low income” patients, but does not elaborate on that issue.18 However, the discussion also clarifies that copayment assistance programs and manufacturer drug discount cards may qualify as exempt patient assistance programs under these standards.19

6. Authorized Generics

The DRA requires that manufacturers’ pricing calculations take into account sales of “authorized generic” products, and, in the proposed rule, CMS proposed that a brand manufacturer take into account both its own sales and those of the authorized generic product to compute a “blended” AMP and to determine a single BP. The final rule modifies that position to require instead that the brand manufacturer must take into account the transfer price to the authorized generic manufacturer, but not any subsequent resale prices from the authorized generic manufacturer.

The final rule defines an authorized generic as “any drug sold, licensed, or marketed under an NDA . . .; and marketed, sold or distributed under a different labeler code, product code, trade name, trademark, or packaging (other than repackaging the listed drug for use in institutions) than the brand drug.”20

With respect to the AMP calculation, the regulation provides that “a manufacturer holding title to the original NDA of the authorized generic drug must include the sales of this drug in its AMP only when such drugs are being sold by the manufacturer holding title to the original NDA directly to a wholesaler.”21 While not completely clear, this standard suggests that, where the primary manufacturer sells a product to an authorized generic company that repackages the product under its own NDC, it is not selling the product to a wholesaler and thus its AMP may not be affected.22 With respect to BP, CMS revises its proposal to require that the primary manufacturer take into account its sales of the product to the authorized generic manufacturer. In determining this price, the primary manufacturer must take into account transfer prices (including in intercompany transactions), and license fees, royalties, and the like.23

B. AMP Calculation Issues

The final rule generally defines the AMP as the average price paid to the manufacturer by wholesalers for drugs distributed to the retail pharmacy class of trade, without regard to customary prompt pay discounts.24 CMS’s historic guidance concerning the AMP calculation has been wanting, particularly with respect to clarifying what entities are considered to be within the retail pharmacy class of trade. Further, the final rule reflects significant changes from the proposed rule with respect to AMP, most notably in the treatment of concessions offered to various third-party payor entities. The proposed rule had suggested that these concessions would be used to reduce the AMP, while the final rule took the opposite approach. As a result, while retail pharmacies remain concerned about the use of AMP as a reimbursement benchmark, the final rule establishes a calculation method that is likely to be somewhat better for retail pharmacy than that under the proposed rule.

1. General Calculation Approach

For purposes of determining AMP, a manufacturer begins by identifying gross direct sales to wholesalers and other retail pharmacy class of trade entities, deducting identifiable units and revenue associated with non-retail class of trade or other excluded purchases (e.g., products resold by wholesalers), and then deducting any further price concessions associated with retail pharmacy class of trade sales. The net AMP sales revenue is then divided by the net AMP sales units to identify the perunit rebate amount.

CMS clarifies that the AMP calculation starts by taking into account both direct sales to “wholesalers” (as that term has traditionally been understood) and direct sales to customers within the retail pharmacy class of trade.25 Further, for purposes of removing non-retail pharmacy class of trade sales from the calculation, a manufacturer must rely on “adequate documentation” of the resale to a nonretail entity, which may include chargeback data.26

2. Retail Class of Trade

CMS has provided much more explicit guidance with respect to what types of customers should be considered to be the “retail pharmacy class of trade” for purposes of the AMP calculation, and regardless of whether one agrees with all of CMS’s judgments in this area, the rule represents a significant improvement over prior agency guidance. CMS defines the retail pharmacy class of trade as generally including independent, chain, and mail order pharmacies, as well as other outlets that sell drugs to the “general public.”27 The regulation itself contains a lengthy list of specifically included and specifically excluded classes of trade for purposes of the AMP calculation.28 Perhaps the most significant area of change from the proposed rule is CMS’s determination that rebates to payor entities (e.g., PBMs, state Medicaid and pharmacy assistance programs, TRICARE, Medicare Part D) need not be taken into account in AMP because they do not generally adjust prices at the retail level. At Appendix B, we have included a table that summarizes CMS’s guidance with respect to the treatment of various classes of trade for purposes of the AMP calculation. CMS’s discussion of comments on these issues includes the following:

  • Repackagers, relabelers, and private labelers. Except as discussed below with regard to authorized generics, sales to wholesalers or distributors who relabel and repackage under the purchaser’s NDC are not included in AMP, while sales to other manufacturers (including private labelers) that do not relabel or repackage the drug are included in AMP. The regulation does not address simple contract manufacturing or contract packaging arrangements.
  • Nursing home pharmacies. Sales to nursing home pharmacies, including contract pharmacies providing drugs to residents of long-term care and assisted living facilities, are not to be taken into account in AMP calculations. This category does not include infusion centers and rehabilitation centers that provide services outside of a nursing home.
  • Hospice pharmacies. Sales to hospice pharmacies are not to be taken into account in AMP calculations.
  • Home health care pharmacies. Sales to home health care pharmacies are to be taken into account in AMP calculations.
  • Physician and outpatient clinic sales. Sales to physicians and outpatient clinics are to be taken into account in AMP calculations. We believe that this is the first instance in which CMS has explicitly addressed this issue.
  • Prison pharmacies. Sales to prison pharmacies are not to be taken into account in the AMP calculations.
  • Surgical centers and mental health clinics. Sales to surgical centers and mental health clinics are to be taken into account in AMP calculations.
  • Hospital sales. The final rule states that sales to hospitals may be presumed to be excluded from AMP, except where the manufacturer can document that the sales were solely for use in a hospital outpatient department. As a practical matter, because most manufacturers do not differentiate between hospital inpatient and outpatient sales in their contracts, most hospital sales will likely be excluded from the AMP calculations.
  • Mail order pharmacies. Sales to mail order pharmacies, including mail order pharmacies associated with health plans or pharmacy benefit managers (PBMs), are to be taken into account in AMP calculations.
  • Specialty pharmacies. Sales to specialty pharmacies are to be taken into account in AMP calculations.
  • Dialysis centers. Sales to dialysis centers are to be taken into account in AMP calculations.
  • Medicaid rebates and associated retail sales. CMS clarified that Medicaid rebates (including supplemental Medicaid rebates under CMS-approved agreements) should not be deducted from the AMP revenue, and underlying sales to retail pharmacies that are associated with Medicaid rebates should not be removed from the AMP calculation.
  • Rebates to Medicare Part D plans and qualified retiree prescription drug plans, and associated retail sales. Similarly, and in a significant reversal from the proposed rule, rebates paid to Medicare Part D prescription drug plans (PDPs) and qualified retiree prescription drug plans are not to be deducted from AMP revenue, and the underlying sales to retail pharmacies associated with those Medicare Part D rebates should not be removed from the AMP calculation. However, a sale to a PBM at a discounted price is included in the AMP calculation even if the product is dispensed to a Part D patient.
  • State Pharmacy Assistance Programs (SPAPs). Manufacturer rebates to SPAPs are not to be taken into account in AMP, and sales to retail pharmacies associated with those rebates are to remain in the AMP calculation.
  • SCHIP rebates and associated sales. Similarly, rebates to SCHIP programs are not to be taken into account in AMP, but underlying retail sales associated with SCHIP rebates are to be taken into account.
  • Federal government purchasers. The final rule clarifies that sales to federal government purchasers are excluded from the AMP calculation, and in particular that TRICARE rebates are not to be taken into account in AMP calculations. However, the underlying retail sales associated with those TRICARE rebates are to remain within the AMP calculation.
  • HMOs and MCOs. CMS clarified that direct sales to managed care organizations (e.g., staff model HMOs), as well as rebates to managed care organizations that do not take possession of drugs, are not to be taken into account for purposes of the AMP calculation.
  • Direct Patient Sales. CMS clarified that direct patient sales (e.g., under a consignment arrangement where title passes directly from the manufacturer to a patient) are to be taken into account in AMP calculations. CMS did not clarify, however, how such transactions should be valued (e.g., at the patient charge, with or without taking into account distribution fees paid to consignees, etc.).29
  • Veterinary Sales. Sales to veterinary purchasers and distributors are not to be taken into account in AMP calculations.
  • State, county, and municipal entities. The final rule provides that sales to state, county, and municipal entities are not to be taken into account in AMP calculations.
  • Pharmacy benefit managers (PBMs). Finally, and perhaps most significantly, CMS reversed its proposed rule approach regarding PBMs, and the final rule provides that rebates and price concessions to PBMs do not affect AMP calculations. However, price concessions to PBM-owned mail order pharmacies will affect the AMP calculation.30

3. Lagged Price Concessions

In addition to the fact that AMP must now be calculated on a monthly rather than a quarterly basis, another significant change to the AMP calculation concerns the treatment of lagged price concessions. The final rule defines lagged price concessions to include “any discount or rebate that is realized after the sale of the drug, but does not include prompt pay discounts.”31 When calculating AMP, the manufacturer must estimate the impact of lagged price concessions using a 12-month rolling average to estimate those discounts.32

C. BP Calculations

Under the final rule, CMS generally defines the BP as the lowest price available from the manufacturer to any entity in the United States in any pricing structure, unless the transaction or customer is specifically excluded by statute or regulation from the calculation.33 Again, the regulation contains a lengthy list of “included” and “excluded” sales for purposes of the BP determination.34 For the most part, CMS’s guidance under this standard is fairly straightforward, and largely tracks the statutory exceptions for various government-regulated purchases. For example, the agency clarified that:

  • Price concessions to qualified SPAPs are exempt from BP
  • Price concessions to Medicare Part D PAPs and MA-PDs, as well as prices negotiated by qualified retiree drug plans, are exempt from BP
  • Patient coupons and manufacturer patient assistance programs meeting the standards described above are exempt from BP

However, several other features warrant additional discussion.

1. PBMs

The proposed rule’s treatment of price concessions to PBMs is quite ambiguous and seems to send mixed signals. On the one hand, the “tone” of CMS’s discussion of comments suggests quite strongly that the agency intended that PBM concessions would not generally affect BP. For example, CMS stated “we believe that, as a general matter, PBM rebates, discounts, and price concessions obtained from manufacturers . . . should be excluded from both best price and AMP,” and “therefore, we do not believe that it is appropriate to include PBM rebates, discounts and prices in either AMP or best price . . . ”35 On the other hand, the text of the final rule provides that “best price excludes . . . PBM rebates, discounts, or other price concessions except their mail order pharmacy’s purchases or where such rebates, discounts, or other price concessions are designed to adjust prices at the retail or provider level” (emphasis added), but that “provider means a hospital, HMO, including an MCO or entity that treats or provides coverage or services to individuals for illnesses or injuries or provides services or items in the provision of health care.”36 To the extent that PBMs are administering benefits on behalf of HMOs or other health plans and manufacturer rebates ultimately adjust the price that PBMs are paid for doing so (or inure directly to the benefit of the plans), the regulation could suggest that PBM rebates are “designed to adjust prices” to those entities and thus would affect BP. There are, however, a number of possible approaches that manufacturers could take, and these issues are likely to play out sooner rather than later in the context of PBM price negotiations:

  • Manufacturers could interpret the rule broadly and therefore assume that, given the nature of PBMs’ clients, PBM rebates will generally “adjust prices” to those clients and therefore affect BP
  • Manufacturers could take a middle ground interpretation that the phrase “designed to adjust prices” connotes a more specific agreement between the manufacturer and the PBM with respect to the redistribution of rebates from the PBM to its customers
  • Manufacturers could interpret the language more aggressively and generally exempt PBM rebates from the BP determination entirely Given that the regulatory text is generally controlling over the discussion of comments, we recommend that manufacturers proceed with caution in this area and seek additional clarification from CMS on this issue.

2. “Stacking” of Wholesaler Prompt Pay Discounts and Chargebacks

One commenter suggested that prompt pay discounts to wholesalers should not be aggregated with wholesaler chargebacks when determining BP, insofar as the chargeback is merely a mechanism to effectuate a discounted sale pursuant to a contract with a downstream customer, and the prompt pay discount is attributable to the separate, wholesaler customer. CMS disagreed with this interpretation, but seemed to suggest that this was because both concessions are available to the downstream customer.37 While we disagree with this rationale (or at least insofar as it suggests that the prompt pay discount represents a manufacturer discount to the downstream customer), CMS has addressed the issue relatively clearly, and manufacturers may need to adjust their processes or seek additional clarification on this issue.

3. Nominal Price Exclusion

Historically, the Medicaid rebate statute contained a BP exclusion for prices that were “merely nominal in amount,” and CMS’s national rebate agreement defined nominal prices to be those prices that were less than 10 percent of the AMP. As part of the DRA, Congress narrowed the statutory exception to only apply to nominal prices offered to “covered entities” participating in the 340B program, intermediate care facilities for the mentally retarded, state owned or operated nursing facilities, or other safety net providers designated by the Secretary. The final rule tracks this exception, and CMS declines to designate any additional safety net providers (including family planning centers or student health centers that distribute oral contraceptives) eligible for the exception.38 Notably, although CMS also declines to craft additional specific limitations concerning the use of nominal pricing for “marketing” purposes, it indicates that it believes that practice to be inconsistent with the program.39


The final rule also implements a number of changes to the price reporting process.

A. Frequency of Reporting of Pricing Data and Quarterly AMP Calculation

First, the rule clarifies the frequency and content of manufacturers’ reporting obligations. Manufacturers now must report on a quarterly basis their products’ AMPs and BPs, the aggregate value of wholesaler prompt pay discounts, and the aggregate value of all sales that qualify for the nominal price exception from BP. On a monthly basis, the manufacturer must report a monthly AMP.40

With respect to the quarterly AMP submission, CMS has changed existing practice in that the quarterly AMP must now be calculated as the weighted average of the monthly AMPs. CMS does not specify the appropriate basis for weighting (e.g., dollars, units) or how the weighting should be calculated in the event that the AMP is negative. However, quarterly AMPs must be restated if monthly AMPs are restated.41

B. Restatement of Base AMPs

Because the final rule changes significant aspects of the calculation of AMP, manufacturers expressed concerns that implementation of new methodology could distort “additional rebate” amounts insofar as the current period AMP methodology might differ from that in the base period. The final rule permits, but does not require, manufacturers to submit revised base period AMPs, and further allows them to be selective with respect to which products.42 However, any revised base period AMPs must be submitted within the first four calendar quarters following publication of the rule.43

Manufacturers should carefully consider whether the submission of revised base period AMPs may be appropriate for some products. For example, while the removal of PBM rebates might serve to raise the AMP of a product, as a practical matter, such rebates may be relatively minimal during a product’s base period. Moreover, CMS stressed that, while manufacturers may make some reasonable assumptions in rebasing their AMPs, the rebased AMP must still be calculated using actual data and the manufacturer may not rely “solely” on estimates.

C. Certification Requirement

The final rule relaxes the requirements relating to the certification of pricing data. Pricing data may now be certified by the CEO, CFO, a person with equivalent authority, or a person with directly delegated authority from the CEO, CFO, or equivalent.44

V. Rebates on Physician-Administered Drugs

Historically, many states did not seek rebate claims for physician-administered drugs, in part because those products were not billed using NDC codes. The final rule implements the DRA rule that requires states to implement systems to process claims for certain physician-administered multiple source drugs using NDCs, and to seek rebates on other physician-administered drugs based on either J-codes or NDCs.45 In its discussion of comments on this issue, CMS declines to limit manufacturer rebate obligations on such products where the state Medicaid program paid only a portion of the claim as a secondary payor.46 Further, CMS continues to assert that “physician-administered drugs” may include drugs administered in outpatient hospital settings, where those drugs are separately billed to the Medicaid program.

VI. Upper Payment Limits

As noted, the final rule revises the method of computing upper limits for multiple source drugs consistent with the requirements of the DRA. CMS will now generally establish upper limits where two or more products are rated as therapeutically equivalent in the FDA’s “Orange Book” and there are two suppliers of the product. The upper limit will be established on a monthly basis, generally at 250% of the AMP (weighted at the 9-digit NDC level) of the least costly therapeutic equivalent.47 In response to retail pharmacies’ concerns about this methodology, CMS promulgated two exceptions. First, CMS will not use the AMP of a terminated drug. Second, CMS will disregard the least costly AMP of a product if it is less than 40 percent of the AMP of the next highest priced product (except where the only two products are the brand product and the first marketed generic). Nevertheless, the revised upper limits are likely to substantially reduce payments for certain generic products and may adversely affect pharmacy margins on generic products.