Highlights of the Final CMS Medicaid Rebate Rule

July 16, 2007

On July 6, 2007, the Centers for Medicare & Medicaid Services (“CMS”) posted on its website a pre-publication copy of a final rule with a comment period to implement the Medicaid Rebate Program.  The regulation, which finalizes a proposal that was published in the Federal Register last December, will be published in the Federal Register on July 17th. It will become effective on October 1, 2007, which means that quarterly Average Manufacturer Price (“AMP”) and best price submissions for the fourth quarter of 2007 and monthly AMPs for October will be required to comply with the regulation.  Although the rule addresses many aspects of the Medicaid Rebate Program, CMS has solicited comments only on the AMP and Federal Upper Limit (“FUL”) provisions.  Comments are due by January 17, 2008.  Below are some highlights of the most notable provisions of the rule (with page references to the pre-publication copy of the final rule). 


  • Quarterly AMP is no longer calculated by dividing net AMP-eligible quarterly sales dollars by net AMP-eligible quarterly units.  Instead, it is the weighted average of the three monthly AMPs for the quarter.  CMS does not specify whether the weighting is to be done on the basis of sales dollars or units (page 357).

  • In a departure from the proposed rule, manufactures should report subsequent revisions to monthly AMPs.  This should be done up to 36 months after the reporting month, but should not be done if the revision is due solely to data on lagged price concessions.  (pages 382-383).   Although FULs will be established based on monthly AMPs, subsequent revisions of monthly AMPs will not affect FULs (pages 383, 462).  Quarterly AMP must be restated when there is a restatement of one of the monthly AMPs on which the quarterly AMP is based (page 375).

  • In calculating monthly AMP, manufacturers must use a 12-month rolling average to estimate lagged price concessions (e.g., chargebacks and rebates) (pages 388-89).  The 12-month rolling period should include the reporting month (page 390).

  • Addressing for the first time the issue of whether a lagged price concession should be accounted for on a “paid” or an “earned” basis, CMS states in the preamble that it will allow manufacturers the flexibility to count chargebacks based on their Generally Accepted Accounting Principles, as long as they use one method uniformly (page 384).  Presumably, the same flexibility is permitted for rebates.

  • “Retail pharmacy class of trade” is defined for the first time.  It is any outlet that purchases drugs from a manufacturer, wholesaler, or distributor, and subsequently sells or provides them to the general public.

  • The final rule clarifies the treatment of a number of customer categories and transactions for which guidance has been lacking in the past.  For example:

    1. Physicians, home health care providers, outpatient clinics, surgical centers (if they provide drugs to the public), direct sales to patients, and mail order pharmacies (including those owned by PBMs) are retail and included in AMP (pages 172-199).
    2. Sales to hospitals for inpatients continue to be non-retail.  Sales for use in the hospital outpatient pharmacy are retail if there is adequate documentation of such use; otherwise, they are excluded along with inpatient sales (page 179).
    3. Long-term care pharmacies and hospices are considered non-retail and sales to them are excluded from AMP (pages 172, 176).
    4. Sales of units that are reimbursed by third-party payors that do not take possession, and rebates to those payors, are treated uniformly under the rule: the sales are included in AMP, but the rebates are excluded.  This applies to sales reimbursed by, and rebates paid to, HMOs and other managed care organizations, as well government programs such as Medicaid (including Medicaid supplemental rebates), SCHIP, Part D plans (including Medicare-subsidized retiree plans), State Pharmaceutical Assistance Programs (“SPAPs”), and TriCare TRRx (pages 205-230).  The same applies to Pharmacy Benefit Managers (“PBMs”), in a departure from the proposed rule (page 152).  Sales to HMOs that take possession continue to be excluded from AMP.
    5. Manufacturers may optionally choose, on a product-by-product basis, to restate their base date AMPs to ignore prompt pay discounts and otherwise conform to the final AMP rule.  Manufacturers have through the third quarter of 2008 to do this.  The restatements must be based on actual sales data, not estimates, and will be effective only prospectively from the quarter in which they are submitted to CMS (not retroactive to the first quarter of 2007) (pages 393-98).

Best Price

Noteworthy changes from prior CMS policy or from the proposed rule include the following:

  • PBM rebates (except mail order) are excluded from best price, in a departure from the proposed rule (pages 325-26).

  • Direct sales to patients are included (page 327).

  • In order for sales to an SPAP to be excluded, the SPAP must be designated by CMS as meeting the requirements of Release 68.  The preamble gives the web address of CMS’s list of designated SPAPs (page 318).

Bona Fide Service Fees

Bona fide, fair market value services fees, including administrative fees to Group Purchasing Organizations and distribution fees, are excluded from AMP and best price, as long as there is no evidence that the fees are passed on by the entity to any pharmacy or other entity included in AMP.  The rule adopts the definition of bona fide service fees in the Average Sales Price regulation at 42 C.F.R. § 414.804.  Fair market value is not defined, but should be determined consistent with industry accepted methods (pages 231-39, 245, and 329). 

Bundled Sales

Unlike the current Rebate Agreement definition, the rule’s definition of a “bundled sale” explicitly includes a contingent arrangement involving drugs (of different package sizes) that share the same nine-digit National Drug Code (“NDC-9”), or drugs with different NDC-9s, or drugs and other products.  Also, a bundle exists where a discount is conditioned, not only on the purchase of another drug or product, but on the achievement of some other performance requirement for another drug, such as achievement of market share or placement on a formulary tier.  As currently, the total discount must be proportionally allocated among all the items in the bundle (pages 94-106).

Coupons, Vouchers, and Patient Assistance Programs

In a change from the proposal, patient coupons redeemed, not only directly to the manufacturer, but also through another entity such as a pharmacy, are excluded from AMP and best price as long as the entity receives no payment other than a bona fide service fee (pages 263-64, and 322).  Free drug vouchers not contingent on a sale are also excluded (pages 267-68), as are free drugs provided under a patient assistance program (pages 269-70, and 322-23).

Authorized Generics

In a departure from the proposed rule, the final rule does not require an NDA-holder (primary manufacturer) to include in its AMP or best price the sales from an authorized generic distributor (secondary manufacturer) to its customers.  This eliminates the need for data sharing.  However, the sales price from the primary manufacturer (adjusted upward by license or royalty fees) to the secondary manufacturer must be included in best price.  It appears that the latter sales are not required to be included in AMP, though there is ambiguity in the rule and the preamble on this point (pages 331-56).


Categories: Reimbursement