Medicaid Drug Rebate Program proposed rule on value-based pricing, line extension, PBM accumulators

On June 17, 2020, the Centers for Medicare & Medicaid Services (CMS) issued a Proposed Rule (link) that would materially modify current Medicaid Drug Rebate Program (MDRP) regulations. Comments are due no later than 5:00 p.m. Eastern Time on Monday, July 20, 2020.

Significant proposals include new provisions governing the treatment in Best Price (BP) of value-based purchasing arrangements (VBPs), definitions of the terms “line extension” and “new formulation,” and revisions to the exclusions from BP and Average Manufacturer Price (AMP) of manufacturer-sponsored patient benefit programs to address concerns about “accumulator programs.”

In addition, the Proposed Rule would adopt 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 Proposed Rule also would implement provisions under the Substance Use‑Disorder Prevention That Promotes Opioid Recovery and Treatment of Patients and Communities Act (SUPPORT Act).

We review select aspects of the Proposed Rule below.

Value-based purchasing arrangements

MDRP price reporting requirements have often been cited as discouraging the adoption of VBPs. The Proposed Rule addresses the topic in the following ways:

  • New definition of VBP: The Proposed Rule would define VBPs as arrangements that “align pricing and/or payments to an observed or expected therapeutic or clinical value in a population (that is, outcomes relative to costs),” including evidence-based measures which “substantially link the cost of a drug to existing evidence of effectiveness and potential value for specific uses” and outcomes-based measures which “substantially link payment for the drug to that of the drug’s actual performance in patient or a population, or a reduction in other medical expenses.” The definition does not address what it means to “substantially link” outcomes or performance to payment for the drug.

  • New interpretation of BP definition would permit reporting multiple BPs: Perhaps most significantly, CMS proposes to revise its long-standing interpretation that the BP definition refers to a single price point.

    • In the case of a VBP providing greater discounts on units that do not satisfy performance metrics, the current interpretation results in the single unit with the greatest discount setting BP for the drug as a whole, even if all other units perform successfully. The Proposed Rule would modify 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.”

    • By way of example, CMS states that “the manufacturer could offer varying rebates based on a patient’s response after the drug is administered,” which would result in a range of possible lowest prices in the quarter, with each patient outcome (and rebate) corresponding to one of those prices. The manufacturer would report these various BP figures, as opposed to just a single BP figure.

    • A different Medicaid rebate would then be calculated for each reported BP, and CMS appears to contemplate that state Medicaid programs would then receive the Medicaid rebate corresponding to the performance of each Medicaid unit.

  • Revision to “bundled sale” definition: The Proposed Rule would amend the bundled sale definition to provide that VBPs “may qualify as a bundled sale, if the arrangement contains a performance requirement such as an outcome(s) measurement metric.” CMS provides an example calculation showing how VBP discounts could be reallocated if part of a bundled sale.

  • AMP and BP restatements outside the three-year window: The current regulation provides a three-year window for manufacturers to restate AMP and BP, and allows manufacturers to request permission from CMS to restate for longer periods for enumerated reasons. The Proposed Rule would add a new reason, namely 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.” It would still be necessary to request permission from CMS for such restatements.

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. 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.

The Proposed Rule would for the first time offer more detailed definitions of the relevant terms:

  • Definition of “line extension”: The Proposed Rule would define “line extension” to mirror the statutory definition, to mean “for a drug, a new formulation of the drug,” not including “an abuse-deterrent formulation of the drug (as determined by the Secretary).”

  • Definition of “new formulation”:

    • The Proposed Rule would define “new formulation,” the operative term in the line extension definition, very broadly, to mean “for a drug, any change to the drug, provided that the new formulation contains at least one active ingredient in common with the initial brand name listed drug” (emphasis added). The focus on active ingredient as the link between the original drug and line extension is an important clarification.

    • Further broadening the definition, CMS adds that “[n]ew formulations (for the purpose of determining if a drug is a line extension) would not include abuse deterrent formulations but would include: extended release formulations; changes in dosage form, strength, route of administration, ingredients, pharmacodynamics, or pharmacokinetic properties; changes in indication accompanied by marketing as a separately identifiable drug (for example, a different NDC); and combination of drugs, such as a drug that is a combination of two or more drugs or a drug that is a combination of a drug and a device.” The breadth of this definition begs the question whether it falls within or exceeds the scope intended by Congress in 2010.

  • Modified definition of “oral solid dosage form”: The Proposed Rule would modify the definition of “oral solid dosage form” to mean “an orally administered dosage form that is not a liquid or gas at the time the drug enters the oral cavity.” CMS rejects the FDA’s more narrow definition of this same term, because the FDA definition “may not encompass the range of dosage forms that we believe should be considered for the application of the line extension provision.” CMS suggests its current construction, under which the alternative rebate formula applies only if both the line extension and the original drug are oral solid dosage forms, “may inappropriately limit the universe of line extension drugs in a manner which would allow a manufacturer to circumvent rebate liability when creating a line extension and to potentially avoid inflation-based additional rebates, in cases where such rebates should apply.”

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

The Medicaid regulation excludes from AMP and BP certain types of manufacturer-sponsored patient benefit programs, such as copay programs, if — among other requirements — the full value of the benefit of such a program is passed on to the patient. CMS describes how certain pharmacy benefit managers (PBMs) have “instructed health plans to not allow the manufacturer copay assistance to be applied towards a patient’s plan deductible.” CMS shows through a numerical example how such an “accumulator program” depletes the manufacturer copay assistance amounts that are available, then leaving the patient to pay the full plan deductible out of pocket to continue therapy.

CMS states that the result of PBM accumulator programs is that the full value of the benefit provided by the manufacturer is not passed on to the patient, and therefore proposes to revise the patient program exclusions “to provide expressly that the exclusions … apply only to the extent the manufacturer ensures the full value of the assistance or benefit is passed on to the consumer or patient.” (emphasis added) CMS believes “manufacturers have the ability” to do so by establishing “coverage criteria around their manufacturer assistance programs to ensure the benefit goes exclusively to the consumer or patient.”

Definition of “CMS-Authorized Supplemental Rebate Agreement”

The MDRP regulation excludes rebates paid under supplemental rebate agreements approved by CMS from AMP and BP. The Proposed Rule would create a new definition of the term “CMS-authorized supplemental rebate agreement” which would make clear that the exclusion applies only if supplemental rebates are “paid directly to the state” and are “used by the state to offset a state’s drug expenditures.” CMS suggests this definition is proposed in response to certain manufacturers excluding from AMP and BP rebates paid to Medicaid Managed Care Organizations (MCOs) under agreements between the manufacturer and the MCO, and not pursuant to a CMS-approved supplemental rebate agreement.

Conforming changes to align with statutory provisions

In addition to the foregoing new and revised regulatory provisions, the Proposed Rule would revise the MDRP regulations to conform to various statutory changes that occurred after the issuance of the current regulation in 2016, including with respect to drug category definitions, the “wholesaler” definition, and the addition of an inflationary rebate component to the Medicaid rebate formula for non-innovator multiple source drugs.

New drug utilization data requirements for state Medicaid programs

The Proposed Rule would impose additional requirements on state Medicaid programs with respect to data reporting to CMS, including a new certification obligation. One data point to be reported is the “[c]ost to the State to administer VBP (for example, systems changes, tracking outcomes, etc.).” The VBP referred to here is an arrangement between the state Medicaid program and the manufacturer, such as pursuant to a CMS-approved supplemental rebate agreement. CMS voices concerns as to the efficiency of states having to track patients, and is therefore seeking this information.

Implementing provisions under the SUPPORT Act

Apart from making the foregoing changes to the MDRP regulation, the Proposed Rule also would seek to combat opioid-related fraud, misuse, and abuse, 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. However, the Proposed Rule would implement 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, and 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.

In addition to implementing the SUPPORT Act, under the authority of section 1927 of the Social Security Act, the Proposed Rule would add 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 prescribing or dispensing. The Proposed Rule also seeks comments on proposals for future rulemaking, including requiring additional review for opioid prescribing, MAT, and naloxone prescribing.

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The Proposed Rule, if adopted, could have a significant impact on business arrangements, price reporting policies, and MDRP methodologies. At least a few of the proposed changes directly contradict prior CMS MDRP guidance and thus may necessitate changes in operations or assumptions. The short comment period makes it important for interested stakeholders to quickly review the Proposed Rule and to carefully consider its potential impact on business arrangements and MDRP requirements. Please contact the Hogan Lovells team if you have any questions regarding the Proposed Rule.


Authored by Alice Valder Curran, Christopher H. Schott, Beth L. Roberts, Ken Choe, Margaux J. Hall, Kathleen A. Peterson, Samantha D. Marshall, and James M. Deal


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