CMS proposes significant changes to Medicaid Drug Rebate Program

On May 23, 2023, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule entitled Misclassification of Drugs, Program Administration and Program Integrity Updates Under the Medicaid Drug Rebate Program (Proposed Rule). The title belies the significant nature of many of the Proposed Rule’s provisions, which include:

  1. A new drug price verification survey of manufacturers and wholesalers that would require the IRA-like disclosures of manufacturer cost and pricing data,
  2. The material modification of numerous Medicaid Drug Rebate Program (MDRP) requirements that could have significant implications for manufacturers, and
  3. Increased transparency between Medicaid managed care plans and pharmacy benefit managers (PBMs) as to prices PBMs pay pharmacies.

The Proposed Rule would also formally rescind portions of a 2020 final rule that had amended language in the best price and average manufacturer price (AMP) exclusions for various manufacturer-sponsored patient programs.

Comments are due 60 days after the date on which the Proposed Rule is published in the Federal Register, which is scheduled for May 26, such that comments are expected to be due by Tuesday, July 25. The Proposed Rule is available here, and CMS’s press release is available here, with fact sheets available here and here. A redline of the proposed changes to the regulatory text of the current regulations is available here.

Drug Price Verification Survey

CMS proposes to implement an annual Drug Price Verification Survey “to verify prices reported under [the MDRP] to assure that Medicaid payments and applicable rebates for [covered outpatient drugs (CODs)] can be made, and that Medicaid payments are economical and efficient, as well as sufficient, to provide access to care.” CMS purports to ground its proposal in section 1927(b)(3)(B) of the Social Security Act, which provides, in relevant part, that “[t]he Secretary may survey wholesalers and manufacturers that directly distribute their covered outpatient drugs, when necessary, to verify manufacturer prices and manufacturer's average sales prices (including wholesale acquisition cost) if required to make payment . . . .” CMS acknowledges that the current National Average Drug Acquisition Cost (NADAC) file includes community pharmacy invoice prices for CODs, and is one source of data that states may use in establishing reimbursement rates, but expresses concern that there is no similar survey for drugs "that are not traditionally dispensed through retail pharmacies, such as many physician-administered drugs and gene therapy drugs.” Details of CMS’s proposal include the following:

  • Authority. CMS “propos[es] to interpret th[e statutory] language broadly to provide authority to verify prices and charges from wholesalers and manufacturers that distribute their own drugs, including when the manufacturer distributes drugs directly to pharmacies and other providers.” CMS takes the position that such verification includes inquiries as to the bases of manufacturer prices, such that disclosures of manufacturer costs and other data specific to the surveyed drug (detailed below) can be mandated.

  • Coverage of and access to CODs. CMS states that the survey “is not intended to limit or deny access to any of the CODs included on the survey list, assess cost effectiveness of such drugs, or supplant findings from the applicable [Food and Drug Administration (FDA)] approval process.” As such, selection of a drug for a survey should not affect its coverage under the Medicaid program.

  • Selection process.

    • CMS intends to use objective measures related to Medicaid spending to identify single source CODs “with the highest [Medicaid] drug spending per claim, highest total Medicaid drug spending, highest 1 year price increase, or highest launch price,” as CMS may define such terms, as eligible for the survey. CMS would rely on publicly available data to develop the list of CODs to be selected.

    • Drugs subject to negotiation directly with CMS (i.e., under the Drug Price Negotiation Program or a demonstration project) and drugs for which the manufacturer has negotiated a supplemental rebate agreement with at least 50 percent of states “that when in combination with the Federal rebate results in a total (State and Federal) rebate that is greater than the average percentage of total national average Medicaid rebates (State and Federal) to total Medicaid drug spend as reflected in the most recent Medicaid Financial Management Report)” would be ineligible for selection.

    • If, after the above steps, more than 10 CODs remain on the list, CMS would consider narrowing the list based on “State Medicaid program input regarding manufacturer effort to lower drug price (including through mechanisms such as subscription models, value-based purchasing arrangements under the multiple best price approach, or other purchasing arrangements favorable to the Medicaid program)” or by determining which of the remaining CODs have the highest cost.

  • Survey requests. Once CMS finalizes its list of CODs, CMS would send survey requests to applicable manufacturers and/or wholesalers and would post the requests on a publicly accessible website.

  • Reported information. Manufacturers that receive a survey request would have to report a long list information, with some similarities to the information that must be reported by manufacturers whose drugs are selected for negotiation under the Medicare Drug Price Negotiation Program, including information on:

    • Pricing, charges, distribution, and utilization, including wholesale acquisition cost, “[c]alculated average price of the drug from the manufacturer to wholesalers and other direct purchasers for sales outside of the U.S.,” Medicare and Medicaid utilization data within the United States, publicly available prices used with respect to federal agencies other than CMS (such as the Department of Veterans Affairs, and costs of distribution;

    • Product and clinical information, including characteristics of the COD, clinical efficacy, effectiveness and outcomes, therapeutic benefits, and whether there are alternative therapies;

    • Cost of production, research, and marketing, including advertising costs and total revenue and net profit; and

    • Any other information as determined by CMS “to verify the price of charge of the covered outpatient drug . . . .”

  • Posting of nonproprietary information. CMS proposes that, “[t]o further verify the prices and charges submitted by the manufacturer for a covered outpatient drug, CMS may post publicly non-proprietary information provided by the manufacturer and wholesaler in response to the verification survey.” CMS may then may ask manufacturers to “address” such information in a public forum and seek public comment on the information posted.

  • Civil monetary penalties (CMPs). CMS proposes that “[a] manufacturer or wholesaler that refuses a request for information pursuant to the drug price verification survey within 90 calendar days of CMS’ request for such information, or knowingly provides false information, will be referred to the [Department of Health and Human Services (HHS) Office of the Inspector General (OIG)] for possible imposition of CMPs.” This proposal is rooted in a statutory provision that provides that “[CMS] may impose a civil monetary penalty in an amount not to exceed $100,000 on a wholesaler, manufacturer, or direct seller, if the wholesaler, manufacturer, or direct seller of a covered outpatient drug refuses a request for information about charges or prices by the Secretary in connection with a survey.”

Changes to the MDRP

CMS proposes a number of significant changes to MDRP definitions and program requirements, including, among other things:

  • Best price stacking. CMS proposes to revise 42 C.F.R. § 447.505, which governs the determination of best price, to require that “[c]umulative discounts, rebates or other arrangements must be stacked to generate a final price realized by the manufacturer for a covered outpatient drug, including discounts, rebates or other arrangements provided to different best price eligible entities” (emphasis added). CMS notes, as an example, that, “if a manufacturer provides a discount to a wholesaler, then a rebate to the provider who dispensed the drug unit, and then another rebate to the insurer who covered that drug unit, CMS has concluded that ‘best price’ must include (or ‘stack’) all the discounts and rebates associated with the final price, even if the entity did not buy the drug directly from the manufacturer.”

    In the preamble to the Proposed Rule, CMS referenced United States ex rel. Sheldon v. Allergan Sales, LLC., in which the United States Court of Appeals for the Fourth Circuit, sitting en banc, affirmed the district court’s ruling that the manufacturer relied on a reasonable interpretation of the Medicaid statute in not stacking across unaffiliated entities, and was therefore not liable under the False Claims Act for failing to stack discounts across unaffiliated entities. CMS acknowledged the Fourth Circuit’s ruling that “the drug manufacturer had not been ‘warned . . . by . . . authoritative guidance from CMS’ and that CMS had ‘failed to clarify’ the stacking issue.” CMS stated that it is proposing this change “to remove any potential doubt prospectively” regarding manufacturers’ obligations regarding stacking discounts in calculating best price. We note that this regulatory proposal represents a significant deviation from the common industry interpretation of the statutory “best price” definition as being focused on a unit price net of eligible discounts attributable to a single best price eligible entity.

  • COD definition. CMS is proposing to amend its interpretation of the statutory COD definition, and, specifically, its interpretation of the statutory limitation “that excludes from the definition of COD any drug, biological product, or insulin provided as part of or incident to and in the same setting as any one in a list of services, and for which payment may be made as part of that service instead of as a direct reimbursement for the drug.” CMS’s proposal would provide that “direct reimbursement for the drug includes when a claim for payment identifies the drug plus the itemized cost of the drug,” even where a single, bundled payment is made across the drug and associated items and services. This proposal could expand the current understanding of what qualifies as a COD.

  • Manufacturer definition.

    • CMS proposes to modify the definition of manufacturer to encompass “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.”

    • CMS also proposes that, “if any manufacturer with a signed rebate agreement in effect, acquires or purchases another labeler, acquires or purchases covered outpatient drugs from another labeler code, or forms a new subsidiary, they must ensure that a signed rebate agreement is in effect for these entities or covered outpatient drugs, consistent with the definition of manufacturer . . . within the first 30 days of the next full calendar quarter beginning at least 60 days after the acquisition, purchase, asset transfer, or formation of the subsidiary.”

    • Finally, CMS proposes that “each associated labeler code of a manufacturer is considered to be part of the single manufacturer, and if any of the associated labeler codes as defined in . . . the definition of manufacturer at § 447.502 do not have an [National Drug Rebate Agreement (NDRA) in effect, or are terminated, then all of the labeler codes will be subject to termination.”

    • While CMS has in sub-regulatory guidance previously noted that manufacturers should list all “associated” labeler codes in the MDRP, this proposal appears to be the first time CMS has expanded upon what that means, adopting a broad interpretation of that term.

  • Misclassifications of drugs.

    • CMS proposes to implement the Medicaid Services Investment and Accountability Act of 2019 (MSIAA), which established certain requirements with respect to misclassified drugs under the MDRP and associated CMPs. CMS proposes that a misclassification of a drug occurs when a manufacturer reports a drug category (single-source or “S” drug, innovator multiple source or “I” drugs, or non-innovator multiple source or “N” drugs) that is not supported by the statutory and regulatory definitions or pays rebates to states at a level that does not align with the applicable drug category.

    • CMS also proposes a process and timeline for notifying a manufacturer of a misclassification and a process for correcting a misclassification, with corrections to any misclassification to be made within 30 calendar days of the date of notification (which notice is to be made electronically in writing). Manufacturers must pay any unpaid rebate amounts due to state Medicaid agencies, and provide CMS with documentation of the same, within 60 calendar days of the date of notification.

    • Failure to correct a misclassification within 30 calendar days or pay additional rebates to states (and provide documentation to CMS) within 60 calendar days of a notice could result in CMS (1) correcting the misclassification itself, (2) suspending the misclassified drug from the MDRP and Federal Financial Participation (FFP), (3) assessing CMPs not to exceed “[t]he total number of units of each dosage form and strength of such misclassified drug paid for under any State Plan during such a rebate period” multiplied by 23.1 percent of average manufacturer price (AMP), and/or (4) imposing or facilitating any other penalties available by statute, including referral to the OIG or termination from the MDRP.

    • CMS would publish a report of misclassified drugs on its website.

    • CMS states that: “The only situation in which a drug that is produced or marketed under an NDA may be reported as a noninnovator drug is if a narrow exception was granted by CMS in accordance with the process established in the COD final rule.” With respect to narrow exception requests (through which a drug that would otherwise be classified as an S or I drug can be granted an exception by CMS and treated as an N drug), CMS specifies that drugs approved under an NDA would be required to be listed as an S or I drug unless a narrow exception request has been granted and that a grant of a narrow exception request would apply only “prospectively from the effective date of the COD final rule” (i.e., April 1, 2016). CMS also states that the Proposed Rule would enable the agency “to also pursue penalties against manufacturers that will not change their classification as a result of the denial of their narrow exception request, and would also allow us to impose penalties on manufacturers that pay a different amount in rebates to States than is supported by the product and pricing data that they are reporting . . . .”

  • Product-specific information. CMS is proposing to implement an amendment to the statute that requires manufacturers to report drug product information by defining such information “as information that includes, but is not limited to, [National Drug Code (NDC)] number, drug name, units per package size (UPPS), drug category (“S”, “I”, “N”), unit type (for example, TAB, CAP, ML, EA), drug type (prescription, over-the counter), base date AMP, therapeutic equivalent code (TEC), line extension drug indicator, 5i indicator and route of administration, if applicable, FDA approval date and application number or OTC monograph citation if applicable, market date, COD status, and any other information deemed necessary by the agency to perform accurate [unit rebate amount] calculations.

  • Suspension of NDRA for late reporting. CMS proposes a process for suspension (as opposed to termination) of a manufacturer’s Medicaid rebate agreement for failure to timely report drug pricing or drug product information. If a manufacturer fails to timely report such information, CMS would provide written notice to the manufacturer of the noncompliance and the manufacturer would have 90 days after such notice to provide all required information. If the manufacturers is still noncompliant after the 90-day period, CMS shall suspend the manufacturer’s Medicaid rebate agreement for all of the manufacturer’s CODs for at least 30 days. Continued suspension could result in termination from the MDRP for cause, inclusive of all associated labeler codes of the manufacturer as well. CMS states that “suspension of a manufacturer’s rebate agreement under this section applies for Medicaid purposes only, and does not affect manufacturer obligations and responsibilities under the 340B Drug Pricing Program or reimbursement under Medicare Part B during the period of the suspension.”

  • Manufacturer restatements following internal investigations. Manufacturers may make restatements of government pricing information outside of the 12-quarter restatement window only for certain reasons, including on account of an internal investigation. CMS proposes to define an internal investigation as “a manufacturer’s investigation of its AMP, best price, customary prompt pay discounts or nominal prices that have been previously certified in the [MDRP] that results in a finding made by the manufacturer of fraud, abuse, or violation of law or regulation. A manufacturer must make data available to CMS to support its finding.” This change may have particular implications for mergers and acquisitions. CMS explains its intent is, in part, to prevent manufacturer requests to revise MDRP data outside of the 12-quarter window with respect to “newly acquired products or lines of business previously certified by the prior manufacturers without making findings that the prior manufacturer violated any law.” Specifically, CMS states: “Manufacturers should not use the internal investigation exception to permit restatements to allow manufacturers to apply a different methodology or reasonable assumption to determine AMP and best price to its favor when the methodology originally applied was consistent with statute and regulation, and drug product and pricing information was properly reported and certified by the manufacturer at the time.”

  • Market date. CMS is “proposing to define market date based on the first sale of the drug, rather than the date the drug was first available for sale.” CMS proposes that “sold” means “the drug has been transferred (including in transit) to a purchasing entity” but expressly solicits comments to determine what qualifies as “sold” for the purposes of determining the market date, and acknowledges that they have “experienced manufacturers interpreting the term ‘sold’ differently across the industry.”

  • Definition of N drugs. CMS proposes to remove the phrase “was not originally marketed” from the definition of an N drug and replace it with “is not marketed.” This change would bring the structure of the definition in line with the structure of the statutory and regulatory definitions of an I drug, which were previously amended to replace “was originally marketed” with “is marketed.”

  • Rescinding provisions of the 2020 final rule related to PBM accumulator programs. CMS proposes to rescind the changes to the exclusions from AMP and best price finalized in a December 31, 2020 final rule, which required manufacturers to “ensure” that price concessions were, in fact, passed through to patients for such price concessions to be excluded from the AMP and best price calculations. CMS is proposing this change in light of a ruling by the United States District Court for the District of Columbia largely vacating these regulatory changes. We addressed the 2020 final rule in an alert here and the D.C. court decision in an alert here.

  • Codifying the removal of the AMP cap in regulation. CMS is proposing to amend its regulations to codify the statutory removal of the cap on AMP, which currently limits the Medicaid unit rebate amount to no more than 100 percent of AMP, but will cease to do so effective January 1, 2024.

  • Definition of vaccine. The Medicaid statute excludes vaccines from the COD definition. In the Proposed Rule, CMS notes that there is currently no applicable statutory or regulatory definition of a vaccine. CMS proposes to define “vaccine” “to mean a product that is administered prophylactically to induce active, antigen-specific immunity for the prevention of one or more specific infectious diseases and is included in a current or previous FDA published list of vaccines licensed for use in the United States.” Vaccines that are therapeutic in nature would not qualify and would be subject to MDRP reporting and rebate obligations.

Transparency between Medicaid managed care plans and PBMs

  • Medicaid-specific identifiers on enrollee pharmacy cards. CMS proposes to require Medicaid-specific Bank Identification Number, Processor Control Number, and group number identifiers to be used on Medicaid-enrollee pharmacy identification cards where a plan includes coverage of CODs to make it easier to distinguish Medicaid beneficiaries from other non-Medicaid managed care plan enrollees. CMS believes that these proposals would help ensure appropriate cost-sharing for Medicaid beneficiaries and help avoid 340B duplicate discounts.

  • Requiring PBMs to itemize costs for Medicaid managed care plans. CMS is proposing to require Medicaid managed care plans that cover CODs “to structure any contract with any subcontractor [(e.g., PBMs)] for the delivery or administration of the COD benefit [to] require the subcontractor to report separately the amounts related to the incurred claims,” including amounts related to “reimbursement for . . . CODs, payments for other patient services, and the dispensing or administering providers fees, and subcontractor administrative fees.” CMS believes this information would improve the calculation and reporting of the Medicaid Loss Ratio and would also require PBMs to report to plans on the spread between reimbursement paid to pharmacies and amounts charged to Medicaid managed care plans.

Additional proposals

  • Reporting and invoicing of rebates for physician-administered drugs. CMS is proposing to “require States to collect NDC information on all covered outpatient single and multiple source physician-administered drugs and to specify that States should be invoicing for rebates for all covered outpatient physician-administered drugs to receive FFP and secure manufacturer rebates.” The MDRP statute requires CMS to condition FFP on states collecting NDC data on certain CMS-specified physician-administered drugs, including single source drugs, and the twenty physician administered multiple source drugs that the Secretary determines have the highest dollar volume. This proposal, if implemented, would potentially increase significantly the prospective (and possibly retrospective) volume of rebate utilization invoiced for multiple source drugs that have not historically been included in CMS’s top 20 list.

  • Professional dispensing fees and drug ingredient costs. CMS is proposing that state Medicaid assessments of professional dispensing fees to pharmacy providers, which are paid in addition to reimbursement for pharmacy ingredient costs, “must be based on pharmacy cost data, and . . . cannot be solely determined or supported by a market-based review or by an assessment or comparison of what other payers may reimburse pharmacies for dispensing prescriptions.” In addition, if a state were to seek to change the amount by which it would reimburse pharmacy providers for drug ingredient costs, those changes not only “must be consistent with [actual acquisition costs], [but] States must support determinations or proposed changes . . . with adequate cost based data.” Such changes would be implemented through State Plan Amendments.

  • Request for comment on requiring a diagnosis on Medicaid prescriptions. CMS requests comment on the issues, benefits, and challenges of requiring a diagnosis code for the patient to be included on a Medicaid prescription. CMS notes that doing so could help determine whether the prescription is for a medically accepted indication, or qualifies as a COD, and could help states determine whether the prescription is eligible for enhanced federal matching funds, among other potential benefits.

  • Payment of claims for pediatric preventive services where there is third-party liability. The Proposed Rule would modify the requirement that state Medicaid agencies must first pay claims in full, and then seek recovery from a third party where the claim is for preventive pediatric services (including Early and Periodic Screening, Diagnostic, and Treatment services) to specify that such claims need be paid in full only if (1) the claim is not paid by the third party within 90 days after the provider submitted the claim, (2) doing so is cost-effective, and (3) doing so will not adversely affect access to services. CMS states that this proposed change would be a correction to the regulation to align with the Bipartisan Budget Act of 2018.


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As always, it is important that you carefully review the Proposed Rule in light of considerations that may be relevant to your organization and specific drugs. Please feel free to contact the Hogan Lovells Health Team if you have any questions or concerns.


Authored by Alice Valder Curran, Ken Choe, Melissa Bianchi, Tom Beimers, Kathleen Peterson, Samantha D. Marshall, Mahmud Brifkani, and Abdie Santiago


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