On January 21 2016 the Centres for Medicare and Medicaid Services (CMS) released an advance-print copy of the long-awaited final rule on the Medicaid Drug Rebate Programme. The final rule implements various statutory amendments, revises the calculation of average manufacturer price, changes the determination of best price and addresses other issues relating to Medicaid price reporting and reimbursement. It also discusses the definition of a 'covered outpatient drug' and other issues with implications for both Medicaid and the 340B drug pricing programme.

The final rule takes effect on April 1 2016. It contains a comment period for certain provisions – specifically, comments on the definition and identification of line extension drugs are due 60 days after publication on the Federal Register. Although the final rule does not adopt a number of proposed provisions that had caused concern for pharmaceutical manufacturers, some elements of the final rule appear ambiguous and some appear to be in tension with the underlying statutes.


Covered outpatient drug

The final rule states that radiopharmaceuticals are covered outpatient drugs "if they are approved under section 505 of the [Federal Food, Drug and Cosmetic Act] unless the limiting definition [of covered outpatient drug] in section 1927(k)(3) of the [Social Security] Act applies". It also addresses the application of the statutory limiting definition of Section 1927(k)(3) of the Social Security Act for purposes of all covered outpatient drugs.

Retail community pharmacy

The CMS has retracted its proposal to include specialty pharmacies, home infusion pharmacies and home health providers in the definition of 'retail community pharmacy' automatically. The final rule states that such classes of trade may qualify as retail community pharmacies to the extent that they satisfy the definition of that term, but the CMS has agreed with commenters to eliminate their automatic treatment as retail community pharmacies. The CMS has also declined to adopt its proposal to include entities that "conduct business as wholesalers or retail community pharmacies" in the definition of 'retail community pharmacy'.


As previously proposed, the term 'manufacturer' means "any entity that holds the [National Drug Code (NDC)] for a covered outpatient drug or biological product" and meets certain other criteria.

Calculation of average manufacturer price

Presumed inclusion

 Responding to manufacturer concerns about a 'build-up' approach to average manufacturer price reporting, the final rule expressly states that the presumed inclusion approach is "reasonable" and consistent with pharmaceutical practices. The CMS "will not require manufacturers to use a buildup methodology" to calculate average manufacturer price.

Line extensions

The CMS has declined to finalise its proposed regulatory definition of 'line extension drug'; instead, it seeks additional comments, as it "may" address the definition and identification of line extensions in future rulemaking.

In the absence of a final regulatory definition, the final rule directs manufacturers to rely on the statutory definition of 'line extension' in the Medicaid Drug Rebate Programme Statute and to use reasonable assumptions where appropriate.

However, the final rule does address two provisions relating to line extensions:

  • A drug by one manufacturer will not be treated as the line extension of a drug by a different manufacturer unless a corporate relationship exists between the entities; and
  • No alternative unit rebate amount is calculated for a drug qualifying as a line extension where the initial brand-name drug is terminated from the Medicaid Drug Rebate Programme. Terminations are effective as of the first month after the last lot expiration.

5i drugs

The CMS has been persuaded by comments challenging its proposed 90% threshold for determining when a drug is not generally dispensed through a retail community pharmacy. Instead, it has adopted a 70% threshold that is based on units at the NDC-9 level (not dollars). In determining whether the 70% threshold is met, the CMS will permit, but not require, manufacturers to use a smoothing methodology.

The CMS will require manufacturers to determine whether the 'not generally dispensed' standard is assessed on a monthly basis and to calculate quarterly average manufacturer price by applying a weighted average to the three months in a quarter.

The CMS has finalised its proposal to include in 5i average manufacturer price sales to, and other transactions with, all entities included in retail community pharmacy average manufacturer price, as well as physicians, pharmacy benefit managers, health maintenance organisations, insurers, hospitals, clinics and outpatient facilities, mail order pharmacies, long-term care providers, hospices, manufacturers and any other entities that do not conduct business as a wholesaler or retail community pharmacy.

The final rule makes no exception to the 5i average manufacturer price criteria for oral drugs not dispensed through retail community pharmacies. It directs manufacturers to calculate average manufacturer price for such drugs based on those eligible sales to retail community pharmacies, and states that manufacturers may make reasonable assumptions consistent with the requirements and intent of the statute and regulations.

Revisiting errors

As previously proposed, manufacturers may submit requests to revise pricing data (average manufacturer price, best price, customary prompt pay discount or nominal price) calculations outside of the 12-quarter filing deadline, if the revision request meets certain criteria.

The CMS has revised its proposed exception to the provision prohibiting any average manufacturer price revision request that exceeds 12 quarters. The change must be intended to address specific rebate adjustments to states by manufacturers or be required by the CMS, a court order, an internal investigation or an Office of Inspector General or Department of Justice investigation.

The CMS has not finalised its proposal to permit manufacturers to submit a recalculation request outside of the 12-quarter time limit based on good cause. However, it may consider this option in future rulemaking.

Additional policies affecting average manufacturer price and best price

Bona fide service fees

The CMS has retracted its proposal to amend the regulatory definition of 'bona fide service fees'. The final rule affirms its historic position not to provide additional guidance to manufacturers in determining fair market value under the bona fide service fees test. Manufacturers may use "any documentation" to support their fair market value determinations and such documentation should be contemporaneous with the manufacturer's agreement to pay the fee.

Federal upper limits

Consistent with the final rule, the CMS issued a notification on January 22 stating that it plans to publish draft federal upper limits for multiple-source drugs, taking into account the new methodology set forth in the final rule. The CMS plans to finalise the federal upper limits in late March, after comments are received; the federal upper limits will become effective on April 1, the date on which the final rule takes effect. Federal upper limits will be updated monthly thereafter. The CMS will also release a revised methodology and data elements guide that explains the federal upper limit calculation.

Authorised generics

The final rule maintains the same definition of 'authorised generic drug' and defines a 'primary manufacturer' as a manufacturer that holds the new drug application of the authorised generic drug. It also defines a 'secondary manufacturer of an authorised generic drug' as a manufacturer that is authorised by the primary manufacturer to sell the drug, but does not hold the new drug application.

As previously proposed, sales of an authorised generic drug must be included in the primary manufacturer's computation of average manufacturer price under specified circumstances. Specifically, this treatment is permitted when:

  • the drug is sold directly to a wholesaler, for drugs distributed to retail community pharmacies; or
  • the drug is sold or licensed to a secondary manufacturer, if the secondary manufacturer is acting as a wholesaler.

However, sales to secondary manufacturers that re-label or repackage the drug and sell the drug to wholesalers should not be included in the primary manufacturer's average manufacturer price.

As previously proposed, a primary manufacturer must include the best price of an authorised generic drug in its determination of best price by considering prices to any manufacturer, wholesaler, retailer, provider, health maintenance organisation, non-profit entity or governmental entity in the United States.

As previously proposed, the secondary manufacturer must calculate average manufacturer price and determine best price for its authorised generic national drug codes and provide a rebate based on sales of its authorised generic national drug codes.

Bundled sales

In response to comments, the CMS has revised its proposed definition of 'bundled sale' to remove the 'but not limited to' language in order to clarify that only concessions subject to the bundle should be considered in allocating concessions within a bundle.

When a manufacturer offers discounts on multiple products under a single contract (eg, to minimise the administrative burden of developing several single contracts which offer separate discounts on the multiple products), no bundled sales arrangement exists as long as various conditions are met. Specifically, this treatment applies where:

  • a discount or price concession is established independently for each product within the contract;
  • the purchase price under the contract is not contingent on any other product in the contract or performance requirement (eg, the achievement of market share or inclusion or tier placement on a formulary); and
  • the discount provided for any product under the contract is no greater than if the product had been purchased outside of the contract.


The final rule includes the US territories in the definitions of 'states' and 'United States'; this change will be effective one year after the effective date of the final rule.

Requirements for states and 340B entities

Actual acquisition cost

As previously proposed, actual acquisition cost is the basis by which states should determine their ingredient cost reimbursement.

340B best price exclusion

In response to comments, the CMS did not finalise its proposal to require sales to 340B covered entities to be made under the 340B programme in order to qualify for the best price exclusion for sales to 340B covered entities. Instead, the final rule confirms that "any prices charged to a [340B] covered entity... shall be excluded from best price", and that manufacturers are not required to oversee 340B covered entity compliance or enforce Health Resources and Services Administration requirements as a condition of excluding 340B prices from best price.

Other 340B-related policies

As previously proposed, a state plan must now describe the state Medicaid agency's payment methodology for drugs dispensed by 340B covered entities and contract pharmacies. The state Medicaid agency's payment policy must accord with the finalised definition of 'actual acquisition cost'. The final rule also addresses comments regarding duplicate discounts, including with respect to drugs paid for by Medicaid managed care organisations and dispensed by 340B providers.

Effective date


At various points throughout the final rule, the CMS notes that while the statutory requirements may be effective earlier (eg, the effective date of the statutory line extensions provision was January 1 2010), "the provisions in this final rule will be implemented on a prospective basis". The final rule takes effect on April 1 2016 and the final rule states that "there should be no retroactive adjustments to rebates based upon the provisions finalized in this final rule".

For further information on this topic, please contact Meena Datta at Sidley Austin LLP's Chicago office by telephone (+1 312 853 7000) or email ( Alternatively, contact Stephanie P HalesWilliam Sarraille or James Stansel at Sidley Austin's Washington DC office by telephone (+1 202 736 8000) or email ( or The Sidley Austin website can be accessed at

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.