CMS Publishes Grab Bag of Proposed Changes to the Medicaid Drug Rebate Program

June 2, 2023By Alan M. Kirschenbaum

Last Friday, May 26, CMS published in the Federal Register an assortment of proposals to change the regulations governing the Medicaid Drug Rebate Program.  Most are new or revised definitions and administrative changes, but several proposals represent new policies that should be of concern to drug manufacturers.  It is not our purpose to describe all of the nearly 20 changes proposed in this regulation, but the most noteworthy are described below, roughly in order of importance.

  1. Price Transparency Surveys

The MDRP statute requires manufacturers to submit only three prices: average manufacturer price (AMP), best price, and nominal prices.  Absent from the statute is any requirement to report information on manufacturer costs and price setting.  Nevertheless, riding on the wave of drug price transparency legislation in several states and similar legislative proposals in Congress, CMS is proposing to expand the MDRP into the realm of drug price transparency reporting.  For 10 high-cost single source covered outpatient drugs selected annually by CMS, manufacturers would be required to respond to a so-called “price verification survey” by providing not only clinical and utilization information about the drug, but also costs of production, distribution, research, and marketing; revenue and profit; and ex-U.S. pricing.  Non-proprietary information disclosed in the survey would be posted on a public web site.

To select drugs for the annual survey, CMS would identify single source covered outpatient drugs that have the highest (top 5th percentile) Medicaid drug spend per claim; the highest (top 0.5%) total Medicaid drug spend; the highest (top 1%) WAC increase over 12 months; or the highest (top 5th percentile) launch price where the annual treatment price exceeds $500,000.  From this list would be removed drugs of manufacturers that have participated in a program of price negotiation with CMS, and those that have negotiated supplemental rebates with at least half the states totaling a specified aggregate amount.  If the resulting list exceeded 10 covered outpatient drugs, CMS would narrow the list by eliminating drugs subject to manufacturer price reduction programs offered to states, such as value-based purchasing arrangements or subscription models, and/or by considering cost.  A manufacturer that refused to respond to a survey would be subject to civil monetary penalties.

As authority for this dramatic expansion of manufacturer reporting requirements under the MDRP, CMS cites its authority to survey “manufacturers that directly distribute their covered outpatient drugs, when necessary, to verify manufacturer prices and manufacturers’ average sales prices (including wholesale acquisition cost) ….”  42 U.S.C. § 1396r-8(b)(3)(B).  However, the survey is not limited to manufacturers that directly distribute their drugs and its purpose goes well beyond verifying prices.

  1. Best Price Stacking

We previously blogged about the 4th Circuit Court of Appeals decision in United States Ex Rel. Sheldon, v. Allergan Sales, which affirmed a lower court decision in a Federal False Claims case involving best price stacking.  “Stacking” refers to aggregating discounts provided by a manufacturer to different customers on the same unit of drug – for example a discount to a pharmacy and a rebate to a third-party payor – when determining best price.  In the Allergan case, the relator claimed that Allergan knowingly failed to stack discounts on the same drug unit to two different customers when determining best price.  The Maryland Federal District Court found for Allergan, holding that the government could not establish the requisite intent because Allergan had not been warned by authoritative guidance from CMS and CMS had failed to clarify the stacking issue.  Now CMS proposes to rectify this shortcoming, and short-circuit any similar lawsuits in the future, by unambiguously requiring the stacking of discounts on the same unit of drug to different best-price eligible entities – regardless of whether the entities are affiliated or not.

  1. “All In” Manufacturer Definition

CMS believes that the National Rebate Agreement (NRA) requires a “manufacturer” to report to Medicaid all of its covered outpatient drugs, under all of its labeler codes.  Some multi-affiliate manufacturers have withheld the drugs of a corporate affiliate from the MDRP on the ground that the affiliate is a different manufacturer with a different labeler code and does not have an NRA.  CMS proposes to eliminate this practice by reviving the substance of a 1995 proposed rule that was never finalized: CMS would add to the definition of “manufacturer” a requirement that “all associated entities of the manufacturer that sell prescription drugs, including but not limited to, owned, acquired,  affiliates, brother or sister corporations, operating subsidiaries, franchises, business segments, part of holding companies, divisions, or entities under common corporate ownership or control, must each maintain an effectuated rebate agreement.”  This includes newly acquired labeler codes and newly formed subsidiaries.  In CMS’s terms, manufacturers must be “all in” for all of its drugs or “all out.”  If a manufacturer terminates the NRA for one of its labeler codes, CMS will terminate all of the manufacturer’s NRAs for all labeler codes.

  1. Penalties for “Misclassification”

The Medicaid Services Investment and Accountability Act of 2019 added new penalties to the Medicaid rebate statute for knowingly misclassifying a covered outpatient drug.  See 42 U.S.C. § 1396r-8(b)(3)(C)(iii).  The CMS regulation (unlike the statute) would expansively define a “misclassification” to include, not only misclassifying the drug category (e.g., misclassifying a single source drug or innovator multiple source drug as a non-innovator multiple source drug), but also reporting other “drug product information . . . that is not supported by the statute and applicable regulations.”  The preamble provides an example of reporting an incorrect baseline AMP, which reduces the unit rebate amount.  Under this contrived definition, an error in reporting any of the numerous drug and pricing data fields in the Medicaid Drug Programs reporting system would potentially be considered a “misclassification” subject to the new penalties – even if it did not result in any financial harm to Medicaid.  The new penalties (over and above the payment of any underpaid rebates) include a civil monetary penalty of 23.1% of the AMP of the drug multiplied by the number of misclassified units paid for under Medicaid, and suspension of the drug from federal payment under Medicaid.

  1. Best Price Exemptions for Patient Savings Programs Restored

Under CMS regulations before December 2020, best price and AMP excluded patient savings programs in the form of manufacturer discount cards, coupons, copayment assistance, patient rebates, and free product vouchers, provided that the full value of the benefit provided is received by the consumer.  As we previously blogged, a final CMS regulation issued on New Year’s Eve 2020 added that the manufacturer must “ensure that” the full value is received by the patient, effectively requiring manufacturers to verify for each individual patient whether the patient’s health plan had an accumulator adjustment program, which would effectively prevent the patient from receiving the full value of the benefit.  PhRMA successfully challenged that amendment, and on May 17, 2022, the United States District Court for the District of Columbia ordered that the 2020 rule be vacated and set aside.  To implement the court order, CMS now proposes to eliminate the offending text and revert to the original exclusions.

  1. Suspension of NRA for late submissions

The MDRP statute imposes per-day penalties for late pricing submissions, and also provides for suspension of the manufacturer’s NRA if the submission is over 90 days late.  42 U.S.C. § 1396r-8(b)(3)(C)(i).  CMS proposes a suspension procedure under which CMS would provide written notice to the manufacturer of a failure to submit a timely report.  If the information were not reported within 90 calendar days after the notice, the manufacturer’s NRA would be suspended for all of its covered outpatient drugs after the 90-day period, and federal payment would be unavailable for the drugs.  The NRA could be reinstated when the information is ultimately reported, but not until at least 30 days after the date of suspension.  The preamble clarifies that a suspension of the NRA would not affect the manufacturer’s obligations under the 340B drug discount program or reimbursement under Medicare Part B.

  1. Internal Investigations

Under the MDRP, manufacturers must restate incorrect AMPs and best prices and may do so without CMS involvement going back three years from the current quarter.  Restatements of periods before the three-year window require CMS approval of a request, and one of the grounds for such a request is to address specific rebate adjustments as required “under an internal investigation.”  CMS now proposes to define an “internal investigation” as a manufacturer’s investigation of its AMP, best price, customary prompt pay discounts, or nominal prices previously certified to CMS that results in a finding of fraud, abuse, or a violation of law or regulation.  What is noteworthy about this proposed definition is that it adds a new requirement that “[a] manufacturer must make data available to CMS to support its finding.”  Presumably, the data referred to are the support for the recalculated values, which CMS heretofore has not required in the typical recalculation submission.  There is no limitation on the amount of detail CMS may require under this definition.

  1. Diagnosis in prescriptions

The statutory definition of a “covered outpatient drug” excludes a drug used for an indication that is not a “medically accepted indication,” which is in turn defined as an indication that is approved by FDA or that is favorably noted in specified drug compendia.  42 U.S.C. §§ 1396r-8(k)(3) and 1396r-8(g)(1)(B)(i).  This limitation is virtually unenforceable because prescriptions and Medicaid claims for drugs do not identify the patient’s diagnosis or condition.  For this reason, CMS requests information (but proposes no rule yet) on whether prescriptions should be required to identify the diagnosis.  The preamble notes that this information would help ensure that drugs are being used for approved or otherwise medically accepted indications.

  1. Definitions

Apart from the definitions of “manufacturer” and “internal investigation” discussed above, CMS proposes to add other definitions:

  • “Market Date”: Largely consistent with the definition in existing subregulatory guidance, this term would be defined as the date on which the drug was first sold by any manufacturer.
  • “Vaccine”: Because vaccines are excluded from the MDRP, CMS proposes to define them solely for purposes of the MDRP.  Vaccines would be defined as a product that is administered prophylactically to induce active, antigen-specific immunity for the prevention of one or more specific infectious diseases and that is licensed by FDA.  The preamble clarifies that the definition does not include a therapeutic vaccine.

*    *    *

Several of the changes described above – most notably the price transparency surveys, the best price stacking policy, the control group definition of “manufacturer”, and the expansive definition of a “misclassification” warranting penalties – represent substantial but questionable expansions of CMS authority under the Medicaid rebate statute.  These, at least, are deserving of comments, which are due by July 25, 2023.