MDRP: CMS Final Rule on value-based purchasing, line extension definition, PBM accumulator programs

On December 21, 2020, the Centers for Medicare & Medicaid Services (CMS) issued a Final Rule (link) that materially modifies current Medicaid Drug Rebate Program (MDRP) regulations, largely finalizing the proposed rule dated June 17, 2020 (link). The Final Rule will be effective on March 1, 2021, 60 days after publication in the Federal Register, which is scheduled for December 31, 2020.  Effectiveness after January 20, 2021 (inauguration) means that the Final Rule will likely be subject to the “freeze” an incoming administration typically imposes on regulations that are not yet effective. Importantly, certain provisions of the Final Rule have delayed effective dates:

  • Permitting the reporting of multiple Best Price (BP) figures for value-based purchasing arrangements (VBPs)—January 1, 2022.
  • Definitions of “line extension” and “new formulation” and related provisions—January 1, 2022.
  • Revisions to the BP and Average Manufacturer Price (AMP) exclusions of manufacturer-sponsored patient benefit programs, particularly in connection with pharmacy benefit manager (PBM) “accumulator” programs—January 1, 2023.

In addition to these topics, the Final Rule also makes a number of “conforming” changes to align MDRP regulatory provisions with amendments to the Medicaid statute enacted subsequent to CMS’s last major MDRP rulemaking in 2016. The Final Rule further implements provisions under the Substance Use‑Disorder Prevention That Promotes Opioid Recovery and Treatment of Patients and Communities Act (SUPPORT Act).

We have prepared two blacklines: The first (online here) shows the Final Rule provisions marked against the proposed rule. The second (online here) shows how the Final Rule modifies existing regulations.

We review select aspects of the Final Rule below.

Value-based purchasing arrangements

CMS is finalizing proposals that would enable VBPs as follows:

  • New definition of VBP: The Final Rule defines VBPs as arrangements that “align pricing and/or payments to an observed or expected therapeutic or clinical value in a select population,” including evidence-based measures that “substantially link the cost of a covered outpatient drug to existing evidence of effectiveness and potential value for specific uses” and/or outcomes-based measures that “substantially link payment for the covered outpatient drug to that of the drug’s actual performance in a patient or a population, or a reduction in other medical expenses.” Although CMS had previously solicited comments on what it means to “substantially” link outcomes or performance to payment for the drug, CMS ultimately declined to define the concept, instead noting that “manufacturers may make reasonable assumptions and should document how its arrangement substantially links the payment/cost of the drug to the outcome in the arrangement and therefore qualifies as a VBP arrangement under this final rule.”

  • Reporting multiple BPs for VBPs: CMS is finalizing its proposal to revise its long-standing interpretation of the BP definition in order to accommodate reporting of “varying best price points” in addition to just a single price point, in cases where there is a VBP that is also made available to the states. This proposal is intended to avoid a circumstance in which a VBP that provides a significant discount on a unit of a drug that does not satisfy a performance metric sets a BP for the drug as a whole, even if all other units perform successfully.

    • Specifically, the Final Rule modifies the BP definition such that the “lowest price available from a manufacturer may include varying best price points for a single dosage form and strength as a result of a value based purchasing arrangement,” thereby permitting reporting of different BPs associated with different outcomes or evidence-based measures. A distinct Medicaid rebate amount will then be calculated for each reported BP, and, according to the preamble to the Final Rule, “states will receive Federal Medicaid rebates based on the outcome measure observed in the quarter it was measured.” Along with reporting the range of BP figures under a VBP, the manufacturer must continue to report “a single best price for the drug not affiliated with a VBP arrangement.” CMS intends to provide additional guidance on how to report BP under the Final Rule at a later date.

    • To be able to report a range of BP figures under a VBP, the manufacturer must offer the VBP arrangement to all state Medicaid programs. Each state Medicaid program can then elect whether to receive Medicaid rebates based on the “traditional” single BP, or whether to participate in the VBP. CMS makes clear that “[it is] not requiring states or payers [to] enter into VBP arrangements” and that doing so is entirely voluntary on the part of state Medicaid programs.

    • States that elect to participate in the VBP will continue to be entitled to the minimum Medicaid rebate on all units. CMS notes that, in practice, “a state may experience revisions to the initial Medicaid drug rebate paid to the state because of a failed outcome for a patient that occurs after the drug has been administered” such that “a prior period adjustment to a Medicaid Federal rebate that has already been paid to the state may be necessary.”

    • Manufacturers may elect to not report multiple BPs, but instead “follow existing rules” or “another approach…such as the bundled sales approach” (discussed below) in calculating and reporting BP.

    • CMS states in the preamble to the Final Rule that “the changes made by this final rule will not have a significant impact on best price, AMP or Medicaid drug rebates that would impact either Medicare Part B payment allowances or 340B pricing…because manufacturers will continue to be required to report a non-VBP best price when reporting multiple best prices generated from a VBP arrangement, and that non-VBP best price will be used to calculate the 340B ceiling price.” CMS further “would expect manufacturers to make adjustments to their 340B ceiling prices as they have done in the past consistent with any changes to the MDRP pricing metrics.”

    • These changes are to take effect January 1, 2022.

  • Revision to “bundled sale” definition: The Final Rule clarifies the bundled sale definition to provide that VBPs “may qualify as a bundled sale.” CMS provides an example calculation showing how VBP discounts can be reallocated if part of a bundled sale.

  • Enabling payments over time: CMS clarifies that payment-over-time arrangements can have a value-based component, or can consist of simple installment payments. CMS states that the full price of the drug, rather than just the initial installment payment, should be reflected in the AMP calculation, and that any subsequent installment payments that are forgiven pursuant to a value-based arrangement should be treated as lagged price concessions.

  • AMP and BP restatements outside the three-year window: The Final Rule permits restatements outside the three-year window when the change “is a result of a VBP arrangement…requiring the manufacturer to make changes outside of the 12-quarter rule, when the outcome must be evaluated outside of the 12-quarter period.” Contrary to the suggestions from multiple commenters, the manufacturer must request permission from CMS for such restatements.

Unless otherwise noted, changes in this section are to take effect 60 days after the Final Rule is published in the Federal Register (March 1, 2021).

Definitions of “line extension” and “new formulation”

The Affordable Care Act amended the Medicaid statute in 2010 to apply an “alternative rebate” formula to drugs that are line extensions of single source (S) drugs or innovator multiple source (I) drugs, which has the effect of applying the inflation penalty related to the original drug to the line extension. The statute, following further amendments, defines the term “line extension” as “a new formulation of the drug, such as an extended release formulation,” not including abuse-deterrent formulations.

In the Final Rule, CMS now for the first time provides more detailed regulatory definitions of the relevant terms “line extension” and “new formulation” and also revises the definition of the term “oral solid dosage form.” The final definitions are notable as they reverse CMS’s prior sub-regulatory guidance in several respects, some of which are described below. The Final Rule largely adopts the approach from the proposed rule, with some important modifications:

  • Definition of “line extension”: CMS finalized this definition as proposed to mean, “for a drug, a new formulation of the drug, but does not include an abuse-deterrent formulation of the drug (as determined by the Secretary).”

  • Definition of “new formulation”: CMS finalized this term, with some modification from the proposed rule, to mean, “for a drug, a change to the drug, including, but not limited to: an extended release formulation or other change in release mechanism, a change in dosage form, strength, route of administration, or ingredients.” CMS initially proposed to characterize a new formulation as “any change” to the drug, but finalized the definition to reference “a change.” CMS rejected the assertion from commenters that Congress intended to treat only drugs with “slight” changes as new formulations, explaining that Congress “ultimately included a more complex change (that is, an extended release formulation)” as the statute’s one example of a new formulation. As modified, however, the final definition nevertheless covers “a significantly smaller universe of drugs that will be subject to the alternative rebate calculation” as follows:

    • New strength. In a direct reversal of CMS’s prior guidance, a “new strength” is included in the definition of new formulation. CMS did not address the scenario where multiple strengths of a drug are approved by the Food and Drug Administration (FDA) at the same time, but some strengths are not immediately marketed. 

    • New route of administration. A change to the route of administration is included in the definition of new formulation.

    • New release mechanism. CMS abandoned its proposal to include changes in “pharmacodynamics or pharmacokinetics” in the definition of new formulation, and instead is including a change in “release mechanism,” which CMS explains in the preamble can include, but is not limited to, “a change from an immediate release formulation to a delayed release formulation, a change from an extended release formulation to an immediate release formulation, and a change from a non-coated tablet to an enteric coated tablet.”

    • New combination products. CMS chose not to include new combination products and drug device combinations, but clarified that, if an original drug is a combination of two or more drugs and the manufacturer of that combination drug markets a “new formulation” of the drug, then the new drug is a new formulation that must be identified as a line extension.

    • New indication. CMS chose not to include “changes in indication accompanied by marketing as a separately identifiable drug (for example, a different NDC)” unless otherwise covered by one of the changes that is included in the new formulation definition, as discussed above.

  • Identifying the original drug:

    • The proposed rule stated that a relationship existed between a line extension and an original drug when the line extension had “at least one active ingredient in common with the initial brand name listed drug.” As part of abandoning the proposal to treat new combination drugs as line extensions, the Final Rule no longer includes a reference to a common active ingredient. This once again leaves manufacturers to determine on what basis to identify the relationship between an original drug and a line extension. In a 2012 proposed regulation, CMS considered both active ingredient and active moiety in that regard.

    • CMS rejected suggestions from commenters that requested CMS to clarify that the original drug should be limited to the “truly original drug,” and instead requires that the manufacturer must consider “all strengths of potential initial drugs” each quarter, “regardless of the chronology of a drug’s approval, or date first marketed.” As CMS points out, that means that the original drug related to a line extension can vary from quarter to quarter, thereby requiring the manufacturer of the line extension to continuously evaluate which drug is the original drug.

  • Oral solid dosage form: In addition to finalizing the proposed definition, “an orally administered dosage form that is not a liquid or gas at the time the drug enters the oral cavity,” which departs from the long-standing FDA definition, CMS finalized the proposal that only the original drug, and not the line extension, must be an oral solid dosage form. This represents a material change from CMS’s prior sub-regulatory guidance, which had required that both the original and the line extension products be oral solid dosage forms.

  • “Corporate relationship”: The alternative rebate formula must be applied to the line extension only if the manufacturer of the line extension also manufactures “or has a corporate relationship with the manufacturer of” the original drug, but CMS does not define the term “corporate relationship” for this purpose.

  • Effective date: The above finalized definitions and the requirement that only the original drug be an oral solid dosage form are effective beginning January 1, 2022. CMS advises manufacturers to continue to make reasonable assumptions to determine whether a drug is a line extension until the effective date. CMS states that all products, not just those introduced on or after the effective date, will be subject to these requirements after the effective date.

Revisions to the BP and AMP exclusions of manufacturer-sponsored patient benefit programs

In response to so-called PBM “accumulator” programs, CMS is finalizing its proposal to amend the BP and AMP exclusions for manufacturer-sponsored patient benefit programs to require that the manufacturer “ensures” that program benefits are provided entirely to the patient as a condition to the respective exclusions applying. CMS is making this change to all patient programs exclusions, but explains the scope of the revision only with respect to copayment assistance programs.

Commenters had raised several concerns with CMS’s proposal, including the harmful impact of PBM accumulator programs on patients, legal arguments related to patients being ineligible for AMP and BP, the likelihood of discouraging manufacturers from continuing to provide copayment assistance and other patient benefit programs given the risk that these benefits could become relevant for the BP calculation, and the absence of data regarding how accumulator programs apply the copayment assistance (which are a prerequisite for the AMP and BP calculations). CMS disregarded all of these legal and practical concerns, characterizing its approach as benefitting patients. Acknowledging only that implementing these changes will be time-consuming, CMS set the effective date to January 1, 2023.

Narrow exception process and drug category definitions

In 2019, the Medicaid statute’s S and I drug definitions were amended in several respects, including to replace references to an “original” new drug application (NDA) with a reference to the narrow exception process that CMS established in a 2016 regulation, pursuant to which a drug approved under an NDA may be reported as a non-innovator multiple source (N) drug if CMS grants the narrow exception. The Final Rule now aligns the regulatory definitions to the amended statutory definitions.

In addition, in the Final Rule preamble, CMS made two additional observations:

  • First, CMS expressly rejects the recent ruling of STI Pharma, LLC v. Azar, -- F. Supp.3d --, 2020 WL 1332004 (D.D.C. Mar. 23, 2020), stating that STI Pharma was “wrongly decided,” and that, given the absence of a narrow exception process before 2016, “any drug approved under an NDA that is reported as a non-innovator multiple source drug for quarters prior to 2Q 2016 is improperly categorized and the drug manufacturer should request a drug-category change or risk enforcement action.” CMS previously expressed this view in Manufacturer Release 113 (as discussed in a recent HL client alert).

  • Second, CMS expressly declined to codify or even disclose the factors it uses to determine whether to grant a narrow exception, explaining that each request is evaluated individually and that CMS considers many factors.

Authorized generics

Effective October 1, 2019, the Medicaid statute was amended to provide that AMP for a brand name drug is exclusive of authorized generic (AG) sales and to remove references to manufacturers from the definition of “wholesaler.” CMS first addressed this change in Manufacturer Release Nos. 111 and 112 (as discussed in a recent HL client alert) and now in the Final Rule is aligning the regulation to the amended statute. CMS generally states that, “irrespective of the relationship between the manufacturer of the brand drug, and the manufacturer of the authorized generic, if the primary manufacturer ‘approves, allows, or otherwise permits’ the drug to be sold under the primary manufacturer’s NDA, then the AMP for the brand should be calculated separately from (not include) the sales of the authorized generic.”

CMS also made a “clarifying revision” to the existing regulatory definition of “secondary manufacturer” to remove the language “but does not hold the NDA,” noting that the Medicaid statute does not “distinguish among the different business or corporate relationships, if any, that might exist among the manufacturer of the brand name drug and the entity that that manufacturer approves, allows, or otherwise permits to sell such drug under the same NDA,” and “this is likely because in some cases, the primary and secondary manufacturers are one in the same.” As with the line extension provisions, CMS does not define “business or corporate relationships.”

CMS also explained that the agency does not agree with commenters that the Medicaid statute continues to support the blending of AG sales and brand sales when calculating AMP in certain situations. CMS adds that it has also interpreted the statute to apply beyond AG cases to other situations where the manufacturer approves, allows, or otherwise permits the drug to be sold under the manufacturer’s NDA, citing as an example its recent guidance on importation of drugs under Section 801 of the Federal Food, Drug, and Cosmetic Act (as discussed in a recent HL client alert). CMS does not address whether there might be any (non-AG) situations where it would view blending of AMP across NDC-9s as permissible.

Definition of “CMS-Authorized Supplemental Rebate Agreement”

CMS has finalized a definition of “CMS-authorized supplemental rebate agreement” to mean “an agreement that is approved through a state plan amendment…by CMS, which allows a state to enter into single and/or multi-state supplemental drug rebate arrangements that generate rebates that are at least as large as the rebates set forth in the Secretary's national rebate agreement with drug manufacturers.” The new definition also states that “[r]evenue from these rebates must be paid directly to the state and be used by the state to offset a state’s drug expenditures resulting in shared savings with the Federal government.” This definition is intended to clarify that rebates paid by manufacturers to Medicaid Managed Care Organizations are not a part of a state’s CMS-authorized supplemental rebate agreement and therefore cannot be excluded from BP and AMP on that basis.

New drug utilization data requirements for state Medicaid programs

Apart from making the foregoing changes to the MDRP regulation, the Final Rule also seeks to combat opioid-related fraud, misuse, and abuse, by adding minimum standards for state Medicaid Drug Utilization Review (DUR) programs. Currently, CMS regulations require states to assess drug use information against predetermined standards, but those regulations provide states with some flexibility to select standards that may best fit their patient populations.

The Final Rule implements section 1004 of the SUPPORT Act, which requires states to implement specific opioid-related DUR standards, including prospective safety edits for subsequent prescription fills for opioids, a claims review automated process that indicates when an individual enrolled under the state plan (or under a waiver of the state plan) is prescribed a subsequent fill of opioids in excess of any limitation that may be identified by the state, and a claims review automated process that monitors when an individual is concurrently prescribed opioids and benzodiazepines or antipsychotics. CMS finalized as proposed certain minimum standards for these DUR Programs under the SUPPORT Act and section 1927 of the Social Security Act at 42 C.F.R. §456.703(h)(1)(i) through (iv).

CMS further made a limited modification to its proposed provision regarding safety edits for morphine milligram equivalents (MMEs) to correct a technical error which would have inadvertently limited the applicability of the safety edit to opioids prescribed for chronic pain; the finalized provision applies the safety edits for MMEs to opioids prescribed “for treatment of pain.”

Finally, CMS finalized its proposal to exclude individuals receiving hospice or palliative care or treatment for cancer; individuals who are residents of long-term care facilities, intermediate care facilities for the intellectually disabled, or facilities that dispense frequently abused drugs through a contract with a single pharmacy; or other individuals that the state elects to exempt from the application of the minimum standards for DUR Programs.

In addition to implementing the SUPPORT Act, under the authority of section 1927 of the Social Security Act, the Final Rule adds minimum standards for DUR reviews related to medication assisted treatment (MAT) and identification of Medicaid beneficiaries who could be at high risk of opioid overdose for consideration of naloxone co-prescribing or co-dispensing. CMS finalized a modification to the proposed provision in order to include therapies that are not naloxone-based (e.g., “any FDA-approved opioid antagonist/reversal agent”). CMS further clarifies that thanks to amendments to the SUPPORT Act by the Continuing Appropriations Act of 2021 and other Extensions Acts, MAT drugs and biologicals are considered covered outpatient drugs for purposes of section 1927 and are covered by its rebate and DUR provisions accordingly.

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


Authored by Alice Valder Curran, Christopher H. Schott, Beth Halpern, Ken Choe, Kathleen A. Peterson, Samantha D. Marshall, and James M. Deal

Alice Valder Curran
Washington, D.C.
Beth Halpern
Washington, D.C.
Ken Choe
Washington, D.C.
Kathleen Peterson
Washington, D.C.
Samantha Marshall
Senior Associate
Washington, D.C.


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