On July 6, 2016, the Centers for Medicare and Medicaid Services (CMS or the Agency) issued Frequently Asked Questions (FAQs) regarding the Covered Outpatient Drug Final Rule published on February 1, 2016 (final rule) and the State Medicaid Director Letter issued on February 11, 2016. CMS issued the FAQs just three weeks before labelers 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 the calculation of Average Manufacturer Price (AMP), the determination of 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. While numerous questions remain unanswered, the FAQs offer new guidance on select topics.

Calculating AMP

Authorized Generics (AG). The FAQs state that “[s]ection 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.” In an answer to a question in which a manufacturer markets both an AG drug and a branded drug under the same NDA, CMS also 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.”

Additionally, in response to a question involving the sale of an AG drug and a branded drug by two manufacturers owned by the same parent company, 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.” CMS did not discuss additional requirements or limitations in the context of this response.

Blending. CMS also addressed situations in which manufacturers have two different NDC-9s for the same drug—excluding an AG situation—and stated that the Agency does not require the manufacturer to blend both NDCs when calculating AMP, although there may be situations in which doing so is reasonable. CMS recommended that manufacturers retain written documentation of any reasonable assumptions made in calculating AMP.

Bona fide service fee (BFSF) four-part test. Regarding the exclusion of BFSFs from AMP, 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 Agency discussed the threshold for determining whether a pharmacy “primarily” delivers prescriptions through the mail and is therefore exempt from the retail community pharmacy (RCP) definition. CMS clarified that the Agency did not set a specific threshold for making this determination in order to allow flexibility in applying the rule as the pharmaceutical marketplace continues to evolve. CMS did note that if a “majority” of a pharmacy’s drugs are not dispensed through the mail, a manufacturer reasonably may conclude that the pharmacy is a RCP. Further, if a single entity owns both a RCP and a mail order pharmacy, a manufacturer may treat sales to both pharmacies separately for purposes of calculating AMP. CMS also reiterated prior guidance stating that, if a specialty pharmacy meets the RCP definition, sales to that pharmacy shall be included in AMP even in cases in which the number of eligible sales is low.

Non-5i drugs not available through RCPs. For drugs not available through RCPs that are also not considered 5i drugs (e.g., oral solid drugs only available through specialty pharmacies that primarily deliver through the mail), CMS reiterated its position that an AMP can “likely” be calculated for such drugs even if there are a low number of AMP eligible sales.

Other AMP topics. CMS also addressed specific reporting requirements, including negative monthly AMPs and the Affordable Care Act (ACA) Base Date AMP. CMS also stated that, due to the delay in the effective date for extending the definition of “United States”(U.S.) to U.S. territories until April 1, 2017, manufacturers should begin using sales data in their smoothing process beginning with sales that occur as of April 1, 2017.

Determining Best Price

“Lowest price available.” While CMS repeated a helpful question regarding whether the term “lowest price available” means lowest price offered or the lowest price achieved, the Agency’s answer failed to address the question. CMS merely stated that “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. CMS added that if a rebate to a Pharmaceutical Benefit Manager (PBM) that would otherwise be excluded from 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. CMS stated that its position in the final rule was that any prices provided by manufacturers to 340B covered entities are excluded from AMP and Best Price, including inpatient prices provided to children's hospitals, critical access hospitals, rural referral centers, sole community hospitals and freestanding cancer hospitals that qualify as 340B covered entities.

Impact of AGs. CMS stated that separate Best Prices should not be determined for cases in which two manufacturers of the same parent are selling an AG and brand drug under the same NDA simply because the two manufacturers use different NDCs for the same drug.
Nominal price sales. CMS also provided additional clarification on nominal price sales to entities that meet the requirements of 42 C.F.R. § 447.508(a).

Line Extensions

No further guidance was provided on the definition or identification of line extensions. However, CMS did address the question of whether line extension rebates apply retroactively. Specifically, in response to a question regarding whether 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 Agency stated that the statutory line extension provisions went into effect on January 1, 2010; that CMS does not plan to establish a special process; and that in CMS’ view manufacturers should ensure that all rebates for line extension drugs are calculated and paid as of January 1, 2010.

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 to calculate the alternative rebate, not the highest additional rebate ratio ever incurred on the product.

Federal Upper Limits (FULs)

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

CMS also stated that it will not publish a FUL price for products that do not have a corresponding National Average Drug Acquisition Cost (NADAC) and offered further information on how the Agency will determine whether a product is available on a nationwide basis, in response to a question that asked about the potential impact of shortages.

Actual Acquisition Cost (AAC)

Several FAQs provide guidance to the states on the implementation of the final rule’s requirement that states use the AAC reimbursement methodology. CMS stated that the AAC methodology requirements under the final rule apply in the aggregate, not at the individual claim level, and do not apply to physician-administered drugs. Moreover, CMS clarified that each state may establish rates that satisfy or are consistent with AAC, and that AAC can be based on a variety of data sources, including Federal Supply Schedule (FSS) prices and “other pricing benchmarks.”

CMS confirmed that if a state uses NADAC to reimburse for drugs that have a FUL calculated, the state will meet the aggregate test. However, if a state uses another AAC metric for drugs that have a FUL calculated, the state must demonstrate that the metric meets the aggregate test.

The FAQs also state that AAC methodology requirements do not apply to Medicaid managed care organizations, including those that participate in the 340B program.

340B and Indian Health Services (IHS) Reimbursement

CMS explained that states can calculate 340B ceiling prices in order to ensure that reimbursement is not greater than the 340B ceiling price plus a professional dispensing fee. CMS also addressed the use of encounter rates for IHS and Tribal providers. CMS noted that drugs included in the encounter rate are not eligible for the Medicaid Drug Rebate Program because the reimbursement qualifies as a bundled payment, which falls outside the definition of “covered outpatient drug.”

The FAQs are available at https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/FAQ070616.pdf.