# Medicaid Program; Misclassification of Drugs, Program Administration and Program Integrity Updates Under the Medicaid Drug Rebate Program

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2023-10934

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** May 26, 2023
- **Citation:** 88 FR 34238

## Text

DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 433, 438, and 447
[CMS-2434-P]
RIN 0938-AU28
Medicaid Program; Misclassification of Drugs, Program Administration and Program Integrity Updates Under the Medicaid Drug Rebate Program

AGENCY:

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services (HHS).

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would seek to implement policies in the Medicaid Drug Rebate Program (MDRP) related to the new legislative requirements in the Medicaid Services Investment and Accountability Act of 2019 (MSIAA), which are needed to address drug misclassification, as well as drug pricing and product data misreporting by manufacturers. Additionally, we are proposing several other program integrity and program administration provisions or modifications in this proposed rule including revising and proposing key definitions used in the MDRP. This proposed rule also designates a time limitation on manufacturers initiating audits with States; clarifies and establishes requirements for State fee-for-service (FFS) pharmacy reimbursement; codifies conditions relating to States claiming FFP for physician-administered drugs (PADs); clarifies the requirement of accumulating price concessions when determining best price; designates drug price verification and transparency through data collection; and proposes two new contracting requirements between States and their Medicaid managed care plans. In addition, this rule includes a proposal unrelated to MDRP that would make revisions to the third-party liability regulation due to Bipartisan Budget Act (BBA) of 2018. Finally, we are proposing to rescind revisions made by the December 31, 2020 final rule “Medicaid Program; Establishing Minimum Standards in Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based Purchasing (VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug Rebate and Third Party Liability (TPL) Requirements” to the Determination of Best Price and Determination of Average Manufacturer Price (AMP) sections.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, by July 25, 2023.

ADDRESSES:

In commenting, please refer to file code CMS-2434-P.

Comments, including mass comment submissions, must be submitted in one of the following three ways (please choose only one of the ways listed):

1.
Electronically.
You may submit electronic comments on this regulation to
https://www.regulations.gov
. Follow the “Submit a comment” instructions.

2.
By regular mail.
You may mail written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2434-P, P.O. Box: 8016, Baltimore, MD 21244-8016.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3.
By express or overnight mail.
You may send written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2434-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

For information on viewing public comments, see the beginning of the
SUPPLEMENTARY INFORMATION
section.

FOR FURTHER INFORMATION CONTACT:

Ruth Blatt, (410) 786-1767, for issues related to the definitions of vaccine, noninnovator multiple-source drug, market date, and covered outpatient drug (COD).

Ginger Boscas, (410) 786-3098, for issues related to third party liability.

Michael Forman, (410) 786-2666, for issues related to physician-administered drugs.

Whitney Swears (410) 786-6543, for issues related to time limitation on audits, definition of vaccine, diagnosis on prescriptions, professional dispensing fees, definition of a manufacturer.

Christine Hinds, (410) 786-4578, for issues related to internal investigation, removal of manufacturer rebate cap, drug cost transparency in Medicaid managed care contracts, “stacking” when determining best price, and drug price verification through data collection.

Lisa Shochet, (410) 786-5445, for issues related to Beneficiary Identification Number and Processor Control Number (BIN/PCN) and drug misclassifications.

Terry Simananda, (410) 786-8144, for issues related to the Collection of Information and Regulatory Impact Analysis sections.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments:
All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following website as soon as possible after they have been received:
https://www.regulations.gov
. Follow the search instructions on that website to view public comments. CMS will not post on
Regulations.gov
public comments that make threats to individuals or institutions or suggest that the individual will take actions to harm the individual. CMS continues to encourage individuals not to submit duplicative comments. We will post acceptable comments from multiple unique commenters even if the content is identical or nearly identical to other comments.

I. Background

A. Introduction

Under the Medicaid program, States may provide coverage of prescribed drugs as an optional benefit under section 1905(a)(12) of the Social Security Act (the Act). Section 1903(a) of the Act provides for Federal Financial Participation (FFP) in State expenditures for these drugs. In the case of a State that provides for medical assistance for covered outpatient drugs (CODs), as provided under section 1902(a)(54) of the Act, the State must comply with the requirements of section 1927 of the Act. Section 1927 of the Act governs the Medicaid Drug Rebate Program (MDRP) and payment for CODs, which are defined in section 1927(k)(2) of the Act. In general, for payment to be made available for CODs under section 1903(a) of the Act, manufacturers must enter into a National Drug Rebate Agreement (NDRA) as set forth in section 1927(a) of the Act. See also section 1903(i)(10) of the Act. The rebates paid by manufacturers to States help to partially offset the Federal and State costs of most outpatient prescription drugs dispensed to Medicaid beneficiaries. The MDRP provides specific requirements for manufacturer rebate agreements, drug pricing submission and confidentiality requirements, the formulas for calculating rebate payments, drug utilization reviews (DUR), and requirements for States for CODs.

With limited exceptions, if a manufacturer wants payment to be

available under Medicaid for their CODs, the manufacturer must participate (have entered into and have in effect a rebate agreement) in the MDRP, and agree to pay rebates for CODs dispensed and paid for under the State Plan. The amount of the rebate is determined by a formula set forth in section 1927(c) of the Act. Generally, the formula to calculate the rebate that applies to a particular drug depends on whether the drug is classified as (1) a single source drug (S drug) or innovator multiple source drug (I drug) (commonly referred to as a brand-name drug), or (2) other drugs, which include noninnovator multiple source drugs (N drug), commonly referred to as generic drugs, among others.

Consistent with section 1927(b)(3)(A) of the Act, a manufacturer must report and certify certain drug product and drug pricing information for CODs to CMS not later than 30 days after the last day of each month and certain drug pricing information and drug product data 30 days after the last day of each quarter of a rebate period. For example, drug pricing information that manufacturers must submit and certify includes average manufacturer price (AMP) and best price data in addition to other information consistent with section 1927(b)(3)(A) of the Act each quarter. We use the reported data to calculate an accurate unit rebate amount (URA) for each covered outpatient drug to assist States with billing manufacturers for rebates. Drug product information that is reported includes the name of the drug, its National Drug Code (NDC), drug category, and drug type, among other items. However, manufacturers ultimately remain responsible for accurately calculating the URA for their drug products. Manufacturers pay rebates to States for each unit of the drug dispensed and paid for under the State Plan on the basis of the URA.

Thus, the failure of a manufacturer to submit and certify timely monthly and quarterly pricing and drug product data for a drug may impede the States' ability to invoice and collect appropriate rebate amounts. If a manufacturer fails to submit timely information, or misreports information, we may be unable to establish accurate URAs due to the misreporting or late reporting. While we provide URAs to the States each quarter to help facilitate billing manufacturers for rebates, it is ultimately the manufacturer's responsibility to assure that accurate rebates are paid to States for their CODs.

One specific element of drug product information that is required to be submitted by manufacturers includes drug category or drug classification information. Generally, drugs classified as single source or innovator multiple source pay higher rebates than those that are classified as an “other drug,” such as noninnovator multiple source drugs. In accordance with section 1927(c) of the Act and 42 CFR 447.509, the rebate calculation for a particular COD may also include an additional inflationary component to account for increases in the drug's Average Manufacturer's Price from the base date AMP quarter to the current calendar quarter's AMP. That is, this additional rebate is generally calculated based on the difference between the drug's current quarter AMP and its base date AMP adjusted to the current period by the Consumer Price Index for All Urban Consumers (CPI-U).

Prior to the enactment of the Medicaid Services Investment and Accountability Act of April 2019 (MSIAA) (Pub. L. 116-16; enacted April 18, 2019), section 1927(k)(7)(A)(iv) of the Act defined a single source drug as a covered outpatient drug which is produced or distributed under an original new drug application. Section 1927(k)(7)(A)(ii) of the Act similarly defined an innovator multiple source drug as a multiple source drug that was originally marketed under an original new drug application. A noninnovator multiple source drug was defined at section 1927(k)(7)(A)(iii) of the Act as a multiple source drug that is not an innovator multiple source drug.

Prior to the 2016 Medicaid Covered Outpatient Drug final rule with comment period (COD final rule) (81 FR 5170), the regulatory definitions of a single source and an innovator multiple source drug largely mirrored the statute and defined a drug as a single source or innovator multiple source drug based on whether it was produced, distributed, or marketed under an “original new drug application.” The statute did not expressly define “original NDA”. However, CMS' longstanding interpretation of the term was that an original new drug application (NDA) is an NDA approved under section 505(b)(1) or (2) of the Federal Food, Drug, and Cosmetic Act (FFDCA), as distinguished from one approved under an abbreviated NDA (ANDA) under section 505(j) of the FFDCA (Manufacturer's Release 113).

We codified new regulatory definitions of single source and innovator multiple source drugs in the COD final rule and added a narrow exception for “certain drugs [that] might be more appropriately treated as if they were approved under an ANDA and classified as a noninnovator multiple source drug” (81 FR 5191). The COD final rule also added a drug approved under a Biologics License Application (BLA) to the definition of single source drug (81 FR 5203).

In the COD final rule, we also introduced a process by which drug manufacturers could submit a request for a narrow exception to have us recognize individual drugs approved under an NDA as noninnovator multiple source drugs prospectively from the effective date of the COD final rule. Instructions to manufacturers regarding this process were included in Manufacturer Release #98, May 2, 2016 (
https://www.medicaid.gov/medicaid-chip-program-information/by-topics/prescription-drugs/downloads/rx-releases/mfr-releases/mfr-rel-098.pdf
). The COD final rule did not, however, excuse manufacturers from their obligation to correctly report drugs approved under an NDA as either single source or innovator multiple source drugs prior to the effective date of the COD final rule, which was April 1, 2016.

Yet, notwithstanding our interpretation of the statute, many manufacturers have disregarded our reasonable interpretation of the statute and have continued to misreport drugs marketed under an NDA as noninnovator multiple source drugs for periods prior to April 1, 2016 (Manufacturer Release #113-
https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf
).

B. Amendments Made by the Medicaid Services Investment and Accountability Act of 2019 (MSIAA) to Section 1927 of the Act Regarding MDRP Drug Classification Enforcement and Penalties

Section 6 of the MSIAA, titled “Preventing the Misclassification of Drugs Under the Medicaid Drug Rebate Program,” amended sections 1903 and 1927 of the Act to specify the definitions for multiple source drug, single source drug and innovator multiple source drug, and to provide the Secretary with additional compliance, oversight and enforcement authorities to ensure compliance with program requirements with respect to manufacturers' reporting of drug product and pricing information, which includes the appropriate classification of a drug. Drug classification refers to how a drug should be classified—as a single source, innovator multiple source, or noninnovator multiple source drug for the purposes of determining the correct rebates that a manufacturer owes

the States.
1

In general, a misclassification in the MDRP occurs when a manufacturer reports and certifies its covered outpatient drug under a drug category that is not supported by the statutory and regulatory definitions of S, I, or N. A drug that is misclassified is likely paying different rebates to States than those supported by statute and regulation.

1
Section 1927(c)(3) of the Act describes rebates for “other drugs” and section 1927(c)(3)(A) of the Act, more specifically describes rebates for covered outpatient drugs “other than single source drugs and innovator multiple source drugs.” The MDRP reporting system provides for all “other drugs” that are covered outpatient drugs to be classified in the system as N drugs, regardless of whether they expressly meet the definition of noninnovator multiple source drug. This reporting methodology has been in effect for the history of the program and interested parties have understood that a covered outpatient drug that was not an S or an I drug is reported in the system as an N drug. In a later section of this proposed rule, we are proposing changes to the regulatory definition of a N drug to more clearly align with the statutory definition of N drug. This is a technical change and is not intended to modify any reporting requirements.

We published guidance to manufacturers regarding compliance with drug pricing and drug product information reporting under this new law in Manufacturer Release #113 on June 5, 2020. See
https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf
. Here, although much of this law is self-implementing, we are proposing a series of regulatory amendments at §§ 447.509 and 447.510 to implement and codify the statutory changes in regulation. We propose that a misclassification of a drug under the MDRP has occurred or is occurring when a manufacturer reports and certifies to the agency a drug category or drug product information relating to that COD that is not supported by the statutory and regulatory definitions of S, I, or N. We also define a misclassification as a situation in which a manufacturer is correctly reporting its drug category or drug product information for a COD, but is paying a different rebate amount to the States than is supported by the classification.

The MSIAA also amended the Act to expressly require a manufacturer to report not later than 30 days after the last day of each month of a rebate period under the agreement, such drug product information as the Secretary shall require for each of the manufacturer's covered outpatient drugs. We are proposing a definition of “drug product information” for the purposes of the MDRP.

Similarly, the MSIAA amended the Act to specify that the reporting of false drug product information and data related to false drug product information would also be subject to possible civil monetary penalties (CMPs) by the HHS Office of the Inspector General (OIG), and to provide specific new authority to the Secretary to issue civil monetary penalties related to knowing misclassifications of drug product or misreported information. These new OIG authorities will not be the subject of this rulemaking.

Under the MSIAA, if a manufacturer fails to correct the misclassification of a drug in a timely manner after receiving notification from the agency that the drug is misclassified, in addition to the manufacturer having to pay past unpaid rebates to the States for the misclassified drug if applicable, the Secretary can take any or all of the following actions: (1) correct the misclassification, using drug product information provided by the manufacturer on behalf of the manufacturer; (2) suspend the misclassified drug, and the drug's status as a covered outpatient drug under the manufacturer's national rebate agreement, and exclude the misclassified drug from FFP (correlating amendments to section 1903 of the Act); and, (3) impose CMPs for each rebate period during which the drug is misclassified subject to certain limitations. The Act expressly provides that the imposition of such penalties may be in addition to other remedies, such as termination from the MDRP, or CMPs under Title XI.

The manufacturer has an affirmative legal obligation to correctly report all necessary drug product and pricing information to the agency on a timely basis as described in the statute and regulations. When issues or questions regarding a drug's classification arise, we generally rely upon various sources of information to be able to determine if a drug is misclassified in MDRP. In its oversight role, the agency will use information reported by manufacturers to us, in combination with publicly available information, to be able to make determinations of whether a drug is misclassified in the MDRP. The agency also uses manufacturer reported information, such as the COD status code, in combination with information available on the Food and Drug Administration's (FDA's) Comprehensive NDC Structured Product Labeling (SPL) Data Elements file (NSDE)
https://download.open.fda.gov/Comprehensive_NDC_SPL_Data_Elements_File.zip
, and information from FDA's drugs@fda web page
https://www.accessdata.fda.gov/scripts/cder/daf/
to be able to verify that the national drug codes (NDCs) reported to the MDRP by manufacturers are appropriately classified and reported.

Codifying these statutory amendments in our regulations provides an opportunity for the agency to give additional clarity to and guidance on the new legal authorities for ensuring oversight of, compliance with, and enforcement of the provisions of the MDRP, and ultimately, to ensure that Federal and State programs are receiving appropriate rebates and that CMS continues to be a stringent steward of the Medicaid program.

Table 1—History of the Changes in the Definition of Single Source Drug and Innovator Multiple Source Drug

Statute
Regulation

Prior to April 18, 2019 MSIIA enactment

Single Source drug
Section 1927(k)(7)(A)(iv) of the Act
A covered outpatient drug which is produced or distributed under an original new drug application approved by the Food and Drug Administration (FDA), including a drug product marketed by any cross-licensed producers or distributors operating under the new drug application

Innovator Multiple Source Drug
Section 1927(k)(7)(A)(ii) of the Act
A multiple source drug that was originally marketed under an original new drug application approved by the Food and Drug Administration

2007 Final Rule

§ 447.502
Single source drug
A covered outpatient drug that is produced or distributed under an original new drug application (NDA) approved by the FDA, including a drug product marketed by any cross-licensed producers or distributors operating under the NDA. It also includes a covered outpatient drug approved under a biological license application (BLA), product license approval (PLA), establishment license approval (ELA) or antibiotic drug approval (ADA) PLA, ELA, or ADA.

Innovator Multiple Source Drug
A multiple source drug that was originally marketed under an original NDA approved by the FDA, including an authorized generic drug. It includes a drug product marketed by any cross-licensed producers, labelers, or distributors operating under the NDA and a covered outpatient drug approved under a PLA, ELA, or ADA.

2016 Final Rule

The term “single source drug” means a covered outpatient drug that is produced or distributed under an original NDA approved by FDA and has an approved NDA number issued by FDA, including a drug product marketed by any cross licensed producers or distributors operating under the NDA. It also includes a covered outpatient drug approved under a BLA, PLA, ELA, or ADA. For purposes of this definition and the MDR program, an original NDA means an NDA, other than an ANDA, approved by the FDA for marketing, unless CMS determines that a narrow exception applies.

The term “innovator multiple source drug” means a multiple source drug that was originally marketed under an original NDA approved by FDA, including an authorized generic drug. It also includes a drug product marketed by any cross-licensed producers, labelers, or distributors operating under the NDA and a covered outpatient drug approved under a BLA, ELA, or ADA. For purposes of this definition and the Medicaid drug rebates (MDR) program, an original NDA means an NDA, other than an Abbreviated New Drug Application (ANDA), approved by the FDA for marketing, unless CMS determines that a narrow exception applies.

MSIAA enactment on April 18, 2019

Single Source drug
Section 1927(k)(7)(A)(iv) of the Act
The term “single source drug” means a covered outpatient drug, including a drug product approved for marketing as a non-prescription drug that is regarded as a covered outpatient drug under paragraph (4), which is produced or distributed under a new drug application approved by the Food and Drug Administration, including a drug product marketed by any cross-licensed producers or distributors operating under the new drug application unless the Secretary determines that a narrow exception applies (as described in 42 CFR 447.502 (or any successor regulation)). Such term also includes a covered outpatient drug that is a biological product licensed, produced, or distributed under a biologics license application approved by the Food and Drug Administration

Innovator Multiple Source Drug
Section 1927(k)(7)(A)(ii) of the Act
The term “innovator multiple source drug” means a multiple source drug that is marketed under a new drug application approved by the FDA, unless the Secretary determines that a narrow exception applies (as described in 42 CFR 447.502 (or any successor regulation))

2020 Final Rule

The term “single source drug” means a covered outpatient drug, including a drug product approved for marketing as a non-prescription drug that is regarded as a covered outpatient drug under section 1927(k)(4) of the Act, which is produced or distributed under a new drug application [
removing `original'
] approved by the FDA, including a drug product marketed by any cross-licensed producers or distributors operating under the new drug application unless the Secretary determines that a narrow exception applies (as described in this section), and includes a covered outpatient drug that is a biological product licensed, produced, or distributed under a biologics license application approved by the FDA.

The term “innovator multiple source drug” means a multiple source drug that is marketed [removing `was originally marketed'] under a new drug application [
removing `original'
] approved by the Food and Drug Administration, unless the Secretary determines that a narrow exception applies (as described in 42 CFR 447.502 (or any successor regulation)).

C. MDRP Program Administration Proposed Changes

We are focused on increasing efficiency and economy of directing overall operations, resources, and activities of MDRP to better facilitate the needs of Medicaid beneficiaries. In that regard, we are proposing a number of new regulatory policies and clarification of existing policies.

Specifically, consistent with our statutory authorities, we are proposing to define, specify or amend the definitions for COD, internal investigation (for restatement purposes outside the 3-year time window), manufacturer (for NDRA purposes), market date, noninnovator multiple source drug, drug product information, and vaccine for the purpose of MDRP. We are also proposing to specify that the rebate provisions for a drug other than a single source drug or an innovator multiple source drug apply to an array of drugs, including those that may not satisfy the definition of multiple source drug. As noted above, based on longstanding operational processes, such drugs are properly classified as N drugs in the MDP reporting system.

Next, we are also proposing new policies, including to add a time limitation on manufacturer ability to initiate audits with States, to further clarify and establish the requirements for FFS pharmacy reimbursement, and to clarify the required collection of all National Drug Codes (NDC) for single and multiple source physician-administered drugs to receive FFP and secure manufacturer rebates.

We also propose to revise Medicaid managed care standard contract requirements to adopt a requirement for inclusion of Beneficiary Identification Number and Processor Control Number (BIN/PCN) numbers on Medicaid prescription identification cards, as well as enhance drug cost transparency by adopting specific requirements relating to the third-party administration of the pharmacy benefit.

These proposed revisions are designed to improve CMS oversight, and State administration of Medicaid pharmacy benefits by promoting greater consistency and accuracy of reporting, strengthened data, and robust stewardship of State and Federal funds. These proposals would help to strengthen and preserve the foundation of the MDRP by ensuring proper payments so Federal expenditures are spent appropriately on delivering quality, necessary care, while also ensuring sufficient access to care for Medicaid beneficiaries.

1. Proposal To Modify the Definition of Covered Outpatient Drug

Sections 1927(k)(2) and (3) of the Act provide a definition of the term “covered outpatient drug” (COD) and a limiting definition, which excludes certain drugs, biological products, and insulin provided as part of, or as incident to and in the same setting as, enumerated services and settings. This exclusion is subject to a parenthetical, however, which limits the exclusion to when payment may be made as part of payment for the enumerated service or setting, and not as direct reimbursement for the drug. In the COD final rule, we finalized a regulatory definition of covered outpatient drug in § 447.502 that substantially mirrors the statutory definition, and consistent with section 1927(k)(3) of the Act, the regulatory language includes a limiting clause at § 447.502 (covered outpatient drug) 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 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.

Over the years we have received questions about when a payment is considered to be a direct reimbursement for a drug and whether identifying a

drug separately on a claim for payment may qualify as direct reimbursement for a drug, rendering the drug eligible for rebates under section 1927 of the Act, or in other words, making the limiting definition inapplicable. To provide greater clarity, we propose to amend the regulatory definition of the term covered outpatient drug at § 447.502 to clarify when a payment is considered direct reimbursement for the drug.

Additionally, we propose to more closely align the regulatory language to the statute by changing “. . . instead of as a direct reimbursement . . .” to “. . . and not as direct reimbursement . . .”

2. Proposed Definition of an Internal Investigation for Purposes of Pricing Metric Revisions

In accordance with section 1927(b)(3) of the Act, § 447.510 of the applicable regulations, and the terms of the NDRA, manufacturers are required to report certain pricing and drug product information to CMS on a timely basis or could incur penalties or other compliance and enforcement measures. As explained in the “Medicaid Program; Time Limitation on Price Recalculations and Recordkeeping Requirements Under the Drug Rebate Program” final rule (final time limitation rule) (68 FR 51912, August 29, 2003), in an effort to improve the administration and efficiency of the MDRP and assist States and manufacturers that would otherwise be required to retain drug utilization pricing data records indefinitely, we established the 12-quarter time frame for reporting revisions to AMP or best price information.

Despite the 12-quarter time frame, we continued to receive requests from manufacturers to make revisions to their pricing data that fall outside of the 12-quarter period. Consequently, in the COD final rule (81 FR 5278) we established § 447.510(b)(1), which provides that a manufacturer must report to CMS any revision to AMP, best price, customary prompt pay discounts or nominal prices (pricing data) for a period not to exceed 12 quarters from the quarter in which the data were due unless one of a number of enumerated exceptions applies. See § 447.510(b)(1)(i) through (vi).

Section 447.510(b)(1)(v) provides an exception to the 12-quarter price reporting rule if the change is to address specific rebate adjustments to States by manufacturers, as required by CMS or court order, or under an internal investigation, or an OIG or Department of Justice (DOJ) investigation. However, as part of that rule, we did not define the term internal investigation which has led to different interpretations of the nature of an internal investigation. Therefore, we propose to add a definition of internal investigation at § 447.502 and additional clarity around the 12-quarter rule at § 447.510.

3. Proposal To Modify the Definition of Manufacturer for National Drug Rebate Agreement (NDRA) Compliance Purposes

At times, we receive requests from manufacturers to allow them to exclude a particular labeler that they may own or have a business affiliation with from participation in the MDRP, even though the labeler markets products that meet the definition of covered outpatient drug. It is our view that the statute requires that all labelers of a manufacturer that market CODs be required to participate in the MDRP to meet the statutory requirement that FFP is only available for a manufacturer's drugs if they participate in the program. That is, all the labelers of the manufacturer have to be in the program, or none of the labelers can be in the program.

We are proposing to further refine the definition manufacturer at § 447.502 to codify the requirements under section 1927(a)(1) of the Act which specifies that a manufacturer has to have entered into and have in effect a rebate agreement with the Secretary in order for payment to be available for their CODs under Medicaid. We are also proposing to codify in regulation that all labelers (with their applicable codes) that are associated or affiliated with a manufacturer must have a rebate agreement in effect in order for the manufacturer to satisfy the statutory requirement that the manufacturer have a rebate agreement in effect with the Secretary.

Additionally, we are also proposing a new paragraph (h) in § 447.510 to further specify the responsibilities of a manufacturer with respect to rebate agreements when that manufacturer acquires or purchases another labeler, acquires or purchases covered outpatient drugs from another labeler, or forms a new subsidiary or associated entity to ensure that any of a manufacturer's labeler codes that market CODs are included in the MDRP. We also specify that termination of one of the manufacturer's labelers from the program results in all labelers of that manufacturer being terminated from the program whether initiated by the manufacturer or the government. If the manufacturer is terminated for noncompliance, they can come back into the program under certain conditions, including resolving all compliance issues. However, the one-quarter delay in program re-entry provided for in section 1927(b)(4)(C) of the Act still applies unless good cause is found.

4. Proposal To Establish a Definition of Market Date for a COD for the Purposes of Determining a Base Date AMP for a COD

Section 1927 of the Act governs the MDRP and payment for CODs which are defined in section 1927(k)(2) of the Act. Manufacturers that participate in the MDRP are required to pay rebates for CODs that are dispensed and paid for under the State Medicaid plan. See section 1927(b)(1)(A) of the Act.

The rebates due by manufacturers are calculated based on statutory formulas described in section 1927(c) of the Act and consist of a basic rebate and, in some cases, an additional rebate that is applicable when an increase in the AMP, with respect to each dosage form and strength of a drug, exceeds the rate of inflation. One of the factors in the calculation of the additional rebate is the base date AMP of the drug, a value that is determined based on the market date of the drug. Manufacturers are required to report the market date of each dosage form and strength of a COD for all of its CODs.

We have received numerous inquiries regarding the determination of market date for reporting to MDRP, and some manufacturers have reported incorrect market dates for their CODs. Because the term market date has not been previously defined in regulation and it is a critical factor in the determination of base date AMP, and ultimately, the calculation of applicable rebates, we are proposing to define the term market date at § 447.502 for the purpose of the MDRP.

5. Proposal To Modify the Definition of Noninnovator Multiple Source Drug

As discussed previously in this proposed rule, section 6(c) of the MSIAA included a number of amendments to statutory definitions in section 1927 of the Act. Generally, those statutory amendments were discussed in the “Medicaid Program; Establishing Minimum Standards in Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based Purchasing (VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug Rebate and Third Party Liability (TPL) Requirements” final rule published in the December 31, 2020
Federal Register
(the December 31, 2020 final rule) (see 85 FR 87000, 87032), where the regulatory definitions of multiple source drug, innovator multiple source (I) drug, and single source drug were amended

consistent with the MSIAA. One of the amendments to the regulatory definitions was to remove the phrase “was originally marketed” from the definition of an I drug and replace it with “is marketed.”

The change in the statutory and regulatory definitions of an I drug should have prompted us to also change the regulatory definition of noninnovator multiple source (N) drug, however we neglected to do so in the December 31, 2020 final rule. We are now proposing to amend the definition of an N drug at § 447.502 to maintain the clear distinction between an I drug and an N drug.

6. Proposal To Define Vaccine for the Purposes of the MDRP Only

Section 1927(k)(2)(B) of the Act specifically excludes vaccines from the definition of COD for purposes of the MDRP. This exclusion is codified in paragraph (1)(iv) of the regulatory definition of COD at § 447.502. Section 1927 of the Act, specifically, does not define vaccine. Nor is there a definition of vaccine in Title XI, XVIII, XIX, or XXI of the Act (applicable to Medicare, Medicaid, and Children's Health Insurance Program (CHIP)), that speaks to the specific kinds of biological products that qualify as vaccines, in terms of their actions in the human body and how and when they are used.
2

Moreover, we are not aware that any authorizing statutes for any other Department of Health and Human Services agencies include such a statutory definition of the term “vaccine.”

2
While section 1928(h) of the Act defines “pediatric vaccine” and “qualified pediatric vaccine,” those definitions do not speak to the actions of a vaccine in the human body and how and when it is used, and therefore do not help CMS determine when a product should count as a vaccine (as opposed to a drug) for purposes of the Medicaid Drug Rebate Program.

To date, we have not established a regulatory definition of the term vaccine as used in section 1927(k)(2)(B) of the Act for the specific purposes of the MDRP. However, given therapeutic advances that have occurred since 1990, when the original rebate statute was enacted, we believe that a regulatory definition is necessary to identify which products are considered vaccines for the purposes of the MDRP and thus, appropriately excluded from the definition of COD. We are therefore proposing a definition of vaccine at § 447.502 for the purpose of identifying products that do not satisfy the definition of COD and are therefore not subject to possible required coverage under the prescribed drugs benefit consistent with section 1927 of the Act, and applicable rebate liability under the MDRP. The regulatory definition of vaccine that is proposed to be added to § 447.502 would be established solely for the purposes of the MDRP, and be applicable only to that program. It would not apply under any title XIX statutory provisions other than section 1927(k)(2), or to separate CHIPs operating pursuant to 42 CFR 457.70(a)(1) and (d), or for purposes of the Vaccines for Children Program. Nor would it apply to any other programs within CMS or any other agencies within the Department of Health and Human Services, (for example, FDA, Centers for Disease Control and Prevention (CDC), or Health Resources and Services Administration (HRSA)). We note that these proposed changes would only specify which products are vaccines and are therefore excluded from the definition of a covered outpatient drug and are not subject to Medicaid drug rebates. This proposed policy would not apply with regard to any applicable Federal or State requirements to cover vaccines for Medicaid beneficiaries, as applicable.

7. Proposal To Accumulate Price Concessions and Discounts (“Stacking”) When Determining Best Price

Section 1927(c)(1)(C) of the Act defines the term “best price” to mean with respect to a single source drug or innovator multiple source drug of a manufacturer (including the lowest price available to any entity for any such drug of a manufacturer that is sold under a new drug application approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act), the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States, subject to certain exceptions and special rules.

The implementing regulations for the determination of best price are found at § 447.505, and we propose to revise § 447.505(d)(3) to add language to make clearer that the manufacturer must adjust the best price for a drug for a rebate period if cumulative discounts, rebates, or other arrangements to best price eligible entities subsequently adjust the prices available from the manufacturer, and that those discounts, rebates, or other arrangements must be stacked for a single transaction to determine a final price realized by the manufacturer for a drug. In other words, we are proposing to make clearer that manufacturers have to stack all applicable discounts that they offer on a single sale of a covered outpatient drug, including discounts or rebates provided to more than one best price eligible entity.

8. Proposal To Establish a Time Limitation for Audits Over Utilization Data With States: 12-Quarter Rebate Dispute Time Limitation

Currently, there is no time limit for a manufacturer to initiate an audit or resolve previously disputed State utilization data with respect to rebates owed, and section 1927 of the Act does not impose a specific timeframe on a manufacturer's audit authority. As a result, any dispute of State invoices arising from audits, reviews, or hearings of State information on State utilization data is not limited to current quarter rebate invoices, but may also be initiated for prior quarterly rebate invoices that have been previously paid in full. We are proposing to limit the time period for manufacturers to initiate disputes, hearing requests and audits of State-invoiced utilization data to 12 quarters from the last day of the quarter from the date of State invoice to the manufacturer. We propose to include a new paragraph (j), titled “Manufacturer audits of State-provided information,” at § 447.510, to limit the time a manufacturer has to initiate a dispute, hearing request or audit of State-invoiced utilization data with a State, to ensure more efficient administration of the Medicaid Drug Rebate Programs.

9. Proposal Regarding Drug Price Verification and Transparency Through Data Collection

Since the beginning of the MDRP in 1991, the Secretary has had the authority, under section 1927(b)(3)(B) of the Act, to survey wholesalers and manufacturers that directly distribute their covered outpatient drugs, when necessary, to verify manufacturer prices that are reported under section 1927(b)(3)(A) of the Act, if required to make a payment. The prices that are subject to this survey include a manufacturer's AMP, best price, Average Sales Price (ASP), and in certain cases, Wholesale Acquisition Cost (WAC) for a drug. (Note that in 2003, Congress amended section 1927(b)(3)(B) of the Act in the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 (Pub. L. 108-173, enacted December 8, 2003), to expand the original survey authority to include manufacturer's average sales prices (including wholesale acquisition cost or WAC).) These prices that are reported to the agency under section 1927(b)(3)(A) of the Act are used by various CMS programs, such as

Medicare Part B and State Medicaid agencies, to pay for drugs for beneficiaries, as well as calculate rebates paid by manufacturers to States under MDRP. Thus, there is a direct connection between the prices reported to us and the payments made by Medicaid.

The types of drugs paid for by Medicaid, manufacturers' pricing structures for these drugs, as well as the methods used by manufacturers to distribute these drugs, have evolved since the enactment of the MDRP, as well as the enactment of the MMA. New highly individualized gene and cell therapy drug treatments have resulted in manufacturer launch prices that have increased dramatically, impacting the manufacturers' prices reported to CMS. In addition, manufacturers and health plans now own pharmacy benefit managers (PBMs), and manufacturers are more frequently limiting the distribution of drugs through specialty pharmacies, some of which are owned by the PBMs themselves.

All of these factors impact how manufacturers set drug pricing, and, given that these prices are used to set payment rates, it affects the payments that State Medicaid programs make for these drugs. For example, State Medicaid programs use the ASP values reported by manufacturers to make payment for many physician-administered drugs. A product's WAC has generally tracked its acquisition cost to providers for brand name drugs, and this WAC value is used by payers to reimburse them for the drug cost component of providing the drug. AMP is used to calculate Federal Upper Limits (FULs) for multiple source drugs.

While the model of distribution from manufacturer to wholesaler to provider still exists, and the predominant provider of pharmacy services remains the community-based pharmacy, there are other arrangements emerging for the production and distribution of specialty and high-cost gene therapy drugs, and pricing structures for these drugs that were not necessarily existing in the market when the MDRP was enacted.

Section 1902(a)(30)(A) of the Act requires that Medicaid payments be consistent with economy, efficiency, and quality of care to enlist enough providers so that care and services are available under the plan to Medicaid beneficiaries at least to the extent that such care and services are available to the general population in the geographic area. It is important that the Medicaid program understand the production and distribution method for these drugs, as well as the impact on prices and charges, to assure beneficiary access to these medications. Therefore, using the authority at section 1927(b)(3)(B) of the Act, which grants the Secretary the ability to survey wholesalers and manufacturers to obtain information about manufacturer's prices for a drug reported to us under section 1927(b)(3)(A) of the Act, we are proposing rules to describe those situations when it is necessary for surveys to be sent to manufacturers and wholesalers to verify prices and charges, and the information that would be requested, to verify prices or charges such that payments can be made.

10. Proposal To Clarify and Establish Requirements for FFS Pharmacy Reimbursement

In the COD final rule, we finalized regulations to move FFS pharmacy reimbursement to an actual acquisition cost-based reimbursement, under which pharmacists would be paid for the ingredient costs of the drug that was dispensed, and a professional dispensing fee (PDF) that reflected their costs of dispensing. Since that time, almost every State has made the appropriate transition, and the updated pharmacy reimbursement methodology is accurately reflected in approved amendments to their State Plans. Nonetheless, we are proposing to revise § 447.518, “State plan requirements, findings, and assurances,” in paragraph (d)(1) to ensure that pharmacy providers are reimbursed adequately for both their pharmacy ingredient costs and professional dispensing services costs consistent with the applicable statutory and regulatory requirements.

This regulation currently indicates that States are required to provide adequate data to support any proposed changes to either component of the reimbursement methodology (ingredient cost or PDF), such as a State or national survey of retail pharmacy providers or other reliable data other than a survey. We are proposing to provide clarity regarding adequate data so that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available at least to the extent that such care and services are available to the general population in the geographic area, by expressly providing in regulation that the research and data must be based on costs and be sufficient to establish the adequacy of the pharmacy reimbursement methodology under the State Plan. In addition, we are proposing to state in regulatory text that other data, such as reimbursements that pharmacies accept from third parties, are not cost-based data, and therefore, cannot be used by States to justify PDFs.

11. Proposals Implementing Section 1927(a)(7) of the Act and Federal Financial Participation (FFP): Conditions Relating to Physician-Administered Drugs

Generally, physician-administered drugs may satisfy the definition of a covered outpatient drugs (COD) under section 1927(k)(2) of the Act, subject to the limiting definition at section 1927(k)(3) of the Act. Prior to the Deficit Reduction Act (DRA) of 2005 (Pub. L. 109-171, enacted February 8, 2006), States did not collect rebates on all physician-administered drugs when they were not identified by NDC number, because the NDC number is necessary for States to invoice manufacturers for rebates.

Section 6002 of the DRA added sections 1903(i)(10)(C) and 1927(a)(7) to the Act to require the States to collect and submit certain utilization data on certain physician-administered drugs in order for FFP to be available for these drugs, and for States to secure rebates. More specifically, in accordance with section 1927(a)(7) of the Act, titled “Requirement For Submission Of Utilization Data For Certain Physician-Administered Drugs”, States are required to provide for the collection and submission of utilization data and coding (such as J-codes
3

and NDC numbers) for a covered outpatient drug that is a single source or a multiple source drug that is a top 20 high dollar volume physician-administered drug on a published list (based on highest dollar volume dispensed under Medicaid identified by the Secretary) that the Secretary may specify in order for payment to be available under section 1903 of the Act and for States to secure applicable Medicaid rebates.
4

This list may be modified year to year to reflect changes in such volume.

3
J codes are a subset of the Healthcare Common Procedure Coding System (HCPCS) Level II code set used to primarily identify injectable drugs.

4

https://www.govinfo.gov/content/pkg/CFR-2007-title42-vol4/pdf/CFR-2007-title42-vol4-sec447-520.pdf
.

Regulations at § 447.520 were established to implement these statutory provisions in the final rule entitled “Medicaid Program; Prescription Drugs” (72 FR 39142, 39162) (hereinafter referred to as the July 17, 2007 final rule), specifying the conditions for FFP for physician-administered drugs.
5

5
Ibid.

We are proposing to amend § 447.520 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.

12. Proposal Related to Suspension of a Manufacturer's Drug Rebate Agreement

We are proposing regulatory changes to further implement section 1927(b)(3)(C)(i) of the Act, which provides authority to suspend a rebate agreement for a manufacturer's failure to timely report drug pricing or drug product information to the agency, required under section 1927(b)(3)(A) of the Act, and when there is a continued failure to report after a 90-calendar day deadline for reporting of information is imposed by the agency. Specifically, the new § 447.510(i) proposes that a manufacturer who has failed to report timely information to the agency under § 447.510(a) and (d), would be imposed a 90-calendar day deadline determined by the agency, and communicated to electronically and in writing by the agency to report such information, or the manufacturer would have its rebate agreement suspended.

This section further proposes that failure to report such information to the agency after the end of the imposed 90-calendar day period would result in suspension of the rebate agreement, and that such agreement shall not be reinstated until such information is reported in full and certified, but not for a period of suspension of less than 30 calendar days. This suspension would apply to all of the manufacturer's labelers that have a rebate agreement with the Secretary, consistent with the proposed regulatory definition of “manufacturer.”

This rule also proposes that continued suspension of the rebate agreement could result in termination for cause. During the period of time of the suspension, FFP would not be available to the States for a manufacturer's CODs. The States would be given 30 calendar days' notice before such a suspension is implemented. This would allow States to notify prescribers and beneficiaries that a specific COD or specific CODs may be unavailable for a period of time, and to allow the beneficiary to switch to a different medication, if necessary. We are proposing that the suspension would only be applicable to the manufacturer's Medicaid program participation, and would not affect manufacturer participation in Medicare Part B or the 340B Drug Pricing Program during the time the rebate agreement is suspended. However, if continued suspension results in termination, such termination could affect Medicare Part B and 340B Drug Pricing Program participation.

13. Proposals Related to Managed Care Plan Standard Contract Requirements

a. Requirement of BIN/PCN Inclusion on Medicaid Managed Care Pharmacy Identification Cards

Patients enrolled in health care plans, including in Medicaid managed care plans such as Medicaid managed care organizations (MCOs), prepaid inpatient health plans (PIHPs), or prepaid ambulatory health plans (PAHPs), generally use identification cards at the pharmacy so they can obtain prescription drug benefits, as well as allow pharmacies to process and bill claims in real time. Health plans use two codes on the card to identify a patient's prescription health insurance and benefits—the National Council for Prescription Drug Programs (NCPDP) Processing Bank Identification Number (BIN) and Processor Control Number (PCN). This information, along with a group number, can specify that a beneficiary is part of a specific patient insurance group, such as being a Medicaid managed care beneficiary.

However, it is often difficult to determine from a Medicaid managed care beneficiary's health insurance card if he or she is covered under a Medicaid managed care plan or under non-Medicaid coverage, such as an employer-sponsored group health plan or individual market insurance, offered by the same organization or entity that offers the Medicaid managed care plan. This is due to the fact that Medicaid-specific BIN, PCN, and group numbers are not always placed on Medicaid managed care plan identification cards. However, if Medicaid-specific BIN/PCN and group information were included on the card, the pharmacy could enter this information into its claims processing system which would identify that the beneficiary is enrolled in a Medicaid managed care plan. We believe it is important that unique BIN/PCN/group numbers are established for Medicaid managed care plans for several program needs, including facilitating the appropriate identification of cost sharing and ensuring claims are billed and paid for appropriately.

Use of Medicaid-specific BIN/PCN/group numbers can help States and their managed care plans identify claims for drugs paid for under the 340B Drug Pricing Program (340B Program) and avoid invoicing for rebates on 340B drugs. Section 340B(a)(5)(A) of the Public Health Service Act (the PHS Act) prohibits duplicate discounts for drugs purchased under the Medicaid drug rebate program. Section 1927(a)(5)(C) of the Act requires the establishment of a mechanism to ensure against duplicate discounts or rebates and section 1927(j)(1) of the Act provides that covered outpatient drugs are not subject the requirements of section 1927 of the Act if they are dispensed by health maintenance organizations (HMOs), including MCOs that contract under section 1903(m) of the Act, and are subject to discounts under section 340B(a)(5)(A) of the PHS Act. Certain eligible entities and hospitals are permitted to purchase drugs under the 340B Drug Pricing Program and dispense these drugs to Medicaid beneficiaries. Identifying claims where the dispensed drug has been discounted under the 340B program is necessary to avoid duplicating that discount in the MDRP.

Duplicate discounts occur when a State erroneously bills a manufacturer for a Medicaid drug program rebate involving a drug that was purchased under the 340B Drug Pricing Program. That occurs because the claim was not identified as a 340B claim before it was sent to the State. If the identification card included a unique Medicaid BIN/PCN/group number, and the State permits the use of 340B drugs at contract pharmacies for individuals enrolled in Medicaid managed care, then it would allow for the inclusion of a modifier at the point of dispensing that would identify the claim as ineligible for a Medicaid rebate. This would assist States with identifying 340B drug claims that should not be invoiced for Medicaid drug rebates.

Section 1902(a)(4) of the Act allows the Secretary to specify “methods of administration” that are “found by the Secretary to be necessary for . . . proper and efficient operation.” We believe that having States require their MCOs, PIHPs, or PAHPs that provide CODs to Medicaid beneficiaries to add unique identifiers onto the identification cards would make the Medicaid drug program run more efficiently, help avoid duplicate discounts, and improve the level of pharmacy services provided to Medicaid beneficiaries.

Therefore, under the authority of section 1902(a)(4) of the Act, as well as to ensure effective implementation of and compliance with sections 1927(a)(5)(C) and 1927(j)(1) of the Act, we are proposing to amend 42 CFR 438.3(s) to require MCOs, PIHPs, and PAHPs that provide coverage of CODs to assign and exclusively use unique Medicaid BIN, PCN, and group number identifiers for all Medicaid managed

care beneficiary identification cards for pharmacy benefits.

b. Drug Cost Transparency in Medicaid Managed Care Contracts

Medicaid managed care plans often contract with a subcontractor PBM to operate the pharmacy benefit provided to Medicaid beneficiaries. In order for a Medicaid managed care plan to appropriately calculate and report its Medical Loss Ratio (MLR) under § 438.8, the plan must know from the subcontractor certain information relating to how much of the payments made to the Medicaid managed care plan by the State was used to pay for health care services and other specific categories outlined in § 438.8. To correctly report the MLR, a Medicaid managed care plan must distinguish between expenses that are for covered benefits (such as healthcare services and drug costs) and administrative expenses, such as fees paid to its PBM for PBM services (for example, claims adjudication, processing prior authorization requests, etc.).

Therefore, we are proposing that MCOs, PIHPs, and PAHPs that provide coverage of CODs structure any contract with any subcontractor to require the subcontractor report the amounts related to the incurred claims described in § 438.8(e)(2), such as reimbursement for the covered outpatient drug, payments for other patient services, and the fees paid to providers or pharmacies for dispensing or administer a covered outpatient drug, separately from any administrative costs, fees, and expenses of the subcontractor.

14. Proposal To Rescind Revisions Made by the December 31, 2020 Final Rule to Determination of Best Price (§ 447.505) and Determination of Average Manufacturer Price (AMP) (§ 447.504) Consistent With Court Order

On May 17, 2022, the United States District Court for the District of Columbia vacated and set aside the “accumulator adjustment rule of 2020” in response to a complaint filed against the Secretary regarding the best-price accumulator provisions within the December 31, 2020 final rule “Medicaid Program; Establishing Minimum Standards in Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based Purchasing (VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug Rebate and Third Party Liability (TPL) Requirements.” See
Pharm. Rsch. & Mfrs. of Am.
v.
Becerra,
1:21-cv-01395-CJN (D.D.C. May 17, 2022). This final rule had revised the conditions for excluding patient assistance from AMP at § 447.504(c)(25) through (29) and (e)(13) through (17), and best price at § 447.505(c)(8) through (12), to add language (effective January 1, 2023) that would require manufacturers to “ensure” the full value of the assistance provided by patient assistance programs is passed on to the consumer and that the pharmacy, agent, or other AMP or best price eligible entity does not receive any price concession. While the district court's order focused on the changes to the patient-assistance program exclusions from best-price determinations, to which it referred as the “accumulator adjustment rule of 2020,” for consistency, we propose to withdraw the changes to both the AMP and best-price sections made by the December 31, 2020 final rule.

As a result, the regulations would maintain the language that has been in place since 2016.

15. Proposals Related to Amendments Made by the American Rescue Act of 2021—Removal of Manufacturer Rebate Cap (100 Percent AMP)

Section 9816 of the American Rescue Plan Act of 2021 (Pub. L. 117-2, enacted March 11, 2021) sunsets the limit on maximum rebate amounts for single source and innovator multiple source drugs by amending section 1927(c)(2)(D) of Act by adding “and before January 1, 2024,” after “December 31, 2009”. In accordance with section 1927(c)(3)(C)(i) of the Act and the special rules for application of provision in section 1927(c)(3)(C)(ii)(IV) and (V) of the Act, this sunset provision also applies to the limit on maximum rebate amounts for CODs other than single source or innovator multiple source drugs. Therefore, to conform § 447.509 with section 1927(c)(2)(D) of Act, as amended by the American Rescue Plan Act of 2021, and sections 1927(c)(3)(C)(i), (ii)(IV), and (ii)(V) of the Act, we are proposing to make conforming changes to § 447.509 to reflect the removal of the maximum rebate amounts for rebate periods beginning on or after January 1, 2024.

16. Request for Information—Comments on Issues Relating to Requiring a Diagnosis on Medicaid Prescriptions as a Condition for Claims Payment

Under the MDRP, a COD is generally defined as a prescribed drug that is FDA approved and used for a medically accepted indication. While the statute limits the definition of a COD to those products used for “medically accepted indications,” without a diagnosis on a prescription drug claims, it is difficult to determine whether a drug is being used for a medically accepted indication, and if it therefore satisfies the definition of a COD, and is rebate eligible. We are soliciting comments on the possibility and potential impact of proposing a requirement that a patient's diagnosis be included on a prescription as a condition of receiving Medicaid FFP for that prescription. We are soliciting comment on the patient care, clinical, and operational impact of requiring that a patient's diagnosis be included on a prescription as a condition of a State receiving FFP for that prescription. We are particularly interested in understanding any operational implications, privacy related concerns, the burden associated, and how to negate any foreseeable impact on beneficiaries and providers, including what steps would be needed by States to successfully implement a Medicaid requirement for diagnosis on prescriptions. This is a request for information only.

17. Background on Coordination of Benefits/Third Party Liability Regulation Due to Bipartisan Budget Act of 2018 (BBA 2018)

Medicaid is generally the payer of last resort, which means that other available resources—known as third party liability, or TPL—must be used before Medicaid pays for services received by a Medicaid-eligible individual. Title XIX of the Act requires State Medicaid programs to identify and seek payment from liable third parties, before billing Medicaid. Section 53102 of the Bipartisan Budget Act of 2018 (BBA 2018) (Pub. L. 115-123, enacted February 9, 2018) amended the TPL provision at section 1902(a)(25) of the Act.

Specifically, section 1902(a)(25)(A) of the Act requires that States take all reasonable measures to ascertain the legal liability of third parties to pay for care and services available under the plan. That provision further specifies that a third party is any individual, entity, or program that is or may be liable to pay all or part of the expenditures for medical assistance furnished under a State Plan. Section 1902(a)(25)(A)(i) of the Act specifies that the State Plan must provide for the collection of sufficient information to enable the State to pursue claims against third parties. Examples of liable third parties include: Private insurance companies through employment-related or privately purchased health insurance; casualty coverage resulting from an accidental injury; payment received directly from an individual who has voluntarily accepted or been assigned legal responsibility for the health care of one or more Medicaid recipients;

fraternal groups, unions, or State workers' compensation commissions; and medical support provided by a parent under a court or administrative order.

To update the regulation for the recent statutory changes, a final rule was published on December 31, 2020, which went into effect on March 1, 2021, to include changes as authorized under the BBA 2018. We are submitting a correction due to an omission in the regulation text to require a State to make payments without regard to TPL for pediatric preventive services unless the State has made a determination related to cost-effectiveness and access to care that warrants cost avoidance for up to 90 days.

II. Provisions of the Proposed Regulations

A. Payment of Claims (42 CFR 433.139)

In 1980, under the authority in section 1902(a)(25)(A) of the Act, we issued regulations at part 433, subpart D, establishing requirements for State Medicaid agencies to support the coordination of benefits (COB) effort by identifying third party liability.

Section 433.139(b)(3)(i) and (b)(3)(ii)(B) detail the exception to standard COB cost avoidance by allowing pay and chase for certain types of care, as well as the timeframe allowed prior to Medicaid paying claims for certain types of care. Specifically, we proposed to revise § 433.139(b)(3)(i) by adding—“that requires a State to make payments without regard to third party liability for pediatric preventive services unless the State has made a determination related to cost-effectiveness and access to care that warrants cost avoidance for up to 90 days.” We propose to revise § 433.139(b)(3)(i) and (b)(3)(ii)(B) by adding “within” prior to the waiting periods Medicaid has to pay claims for preventive pediatric and medical child support claims. We also propose to revise § 433.139(b)(3)(ii)(B) by removing “from” and replacing it with “after;” and by removing “has not received payment from the liable third party” and adding the following language at the end of the sentence “provider of such services has initially submitted a claim to such third party for payment for such services, except that the State may make such payment within 30 days after such date if the State determines doing so is cost-effective and necessary to ensure access to care.” These revisions in language would permit States to pay claims sooner than the specified waiting periods, when appropriate.

B. Standard Medicaid Managed Care Contract Requirements (§ 438.3(s))

1. BIN/PCN on Medicaid Managed Care Cards

We propose to amend § 438.3(s) to add a new paragraph (s)(7) to require States that contract with MCOs, PIHPs, or PAHPs that provide coverage of CODs, to require those managed care plans to assign and exclusively use unique Medicaid-specific BIN, PCN, and group number identifiers for all Medicaid managed care beneficiary identification cards for pharmacy benefits. We propose that the managed care contracts, and thus MCOs, PIHPs and PAHPs, must comply with this new requirement no later than the next rating period for Medicaid managed care contracts, following the effective date of the final rule adopting this new regulatory provision. We believe that the delay between the effective date of the final rule and the start of the next rating period would provide both States and the affected Medicaid managed care plans with adequate time to prepare both the necessary contract terms, and finish the necessary administrative processes for creating and issuing beneficiary identification cards with these newly required Medicaid-specific BIN, PCN, and group number identifiers.

This proposal is under our authority in section 1902(a)(4) of the Act to specify “methods of administration” that are “found by the Secretary to be necessary for . . . proper and efficient operation.” Having States require their MCOs, PIHPs, or PAHPs that provide CODs to Medicaid beneficiaries to add these types of unique identifiers to the identification cards would make the Medicaid drug program run more efficiently, and improve the level of pharmacy services provided to Medicaid beneficiaries. With the inclusion of Medicaid-specific BIN/PCN and group numbers on the pharmacy identification cards issued to the enrollees of MCOs, PHIPs and PAHPs, pharmacies would be able to identify patients as Medicaid beneficiaries, and better provide pharmacy services. This would be helpful to all parties to ensure that Medicaid benefits are provided correctly, including the confirmation of accurate cost sharing amounts, along with assisting that claims are billed and paid for appropriately.

This proposed change would also help to reduce the incidence of 340B duplicate discounts. Section 340B(a)(5)(A) of the PHS Act prohibits duplicate discounts; that is, manufacturers are not required to both provide a 340B discounted price and pay the State a rebate under the Medicaid drug rebate program for the same drug. Section 1927(a)(5)(C) of the Act requires the establishment of a mechanism to ensure against duplicate discounts or rebates, and section 1927(j)(1) of the Act also provides that CODs are not subject to, among other requirements of section 1927 of the Act, MDRP rebates if: (1) they are dispensed by health maintenance organizations, including MCOs that contract under section 1903(m) of the Act, and are subject to 340B discounts and (2) the drugs are subject to 340B discounts. Therefore, CODs covered by MCOs, PIHPs, and PAHPs are within the scope of this provision designed to prevent duplicate discounts. The existing regulation at § 438.3(s)(3) already reflects the position that CODs covered by MCOs, PIHPs, and PAHPs must be identified to prevent duplicate discounts under both section 1927 of the Act and section 340B of the PHS Act. The identification of a Medicaid beneficiary at the point of dispensing can result in the pharmacy placing a code on the prescription, such as the NCPDP “20” submission clarification code, so that the claim will be excluded from the Medicaid rebate pool.

Medicare Part D has supported the inclusion of BIN/PCN numbers for pharmacy cards. That is, 42 CFR 423.120(c)(4) requires that Part D sponsors assign and exclusively use a unique Part D BIN or RxBIN and Part D processor control number (RxPCN) combination in its Medicare line of business. The use of the BIN/PCN ensures that a pharmacy claim can be accurately billed by the pharmacy. Medicare made the BIN/PCN unique to Part D so that a Part D sponsor clearly identifies the Medicare enrollee as part of a particular Part D plan and the pharmacy knows that Medicare statute and rules may apply, such as not allowing certain manufacturer coupons, which plan benefits apply, appeals rights, etc.

In the absence of Medicaid-specific BIN, PCN, and group numbers to identify beneficiaries as being Medicaid participants, it is difficult for pharmacies and other providers, such as physicians and hospitals that administer drugs to Medicaid beneficiaries, to determine whether the beneficiary is enrolled in a Medicaid managed care plan, since a group number alone is not sufficient for Medicaid identification. Adding unique identifiers would make the beneficiary's Medicaid managed care status distinguishable from the other lines of business offered by the same organization or entity that contracts with the State to offer an

MCO, PIHP or PAHP for Medicaid beneficiaries.

Accordingly, we propose to amend the regulatory language in § 438.3(s) to add paragraph (s)(7) to mandate that Medicaid managed care contracts require that Medicaid MCO, PIHPs, or PAHPs that provide coverage of CODs must assign and exclusively use unique Medicaid BIN, PCN, and group number identifiers for all Medicaid managed care beneficiary identification cards for pharmacy benefits. We propose that Medicaid managed care contract must include this new requirement (which would require compliance by MCOs, PIHPs, and PAHPs) no later than the next rating period for Medicaid managed care contracts, following the effective date of the final rule adopting this new provision. We are soliciting comments on the implementation time frame and other possible operational issues of requiring unique Medicaid BIN, PCN, and group numbers to be on Medicaid managed care beneficiary identification cards.

2. Drug Cost Transparency in Medicaid Managed Care Contracts

We propose that the contracts between States and MCOs, PIHPs, or PAHPs that provide coverage of CODs require those plans to structure contracts with any subcontractor for the delivery or administration of CODs, in a manner that ensures drug cost spending transparency by requiring the subcontractor to report separately certain expenses and costs. These subcontractors may include PBMs.

Most Medicaid beneficiaries receive either all or part of their health care benefits, including CODs, through Medicaid managed care plans. Because of the specialized nature of the COD benefit, many Medicaid managed care plans (that is, the MCOs, PIHPs, or PAHPs) may contract with, or have their own PBMs to administer the COD benefit.

PBMs are the middlemen of the relationship between the managed care plans and the health care (medical and pharmacy) providers that provide CODs. That is, they have contracts with both the managed care plans to administer the pharmacy benefit, as well as with the health care providers that administer or provide the drugs to patients that are enrolled in the managed care plan. Among other tasks in the marketplace, a PBM may be responsible for developing a drug formulary, collecting manufacturer rebates on behalf of the managed care plan, performing drug utilization review (DUR), adjudicating claims, and contracting with retail community pharmacies and other health care providers to develop a network of pharmacy providers that can dispense drugs to managed care enrolled patients.

The PBM also negotiates reimbursement rates on behalf of the various health plans, including managed care plans with which it contracts, and pays the pharmacy and other health care providers for the drugs that are dispensed or administered. In most cases, the pharmacy reimbursement rates are specified in the contract between the PBM and the pharmacy providers, and these include reimbursement rates for brand name and generic prescription drugs, as well as the dispensing fees paid to dispense or administer the prescription drug to the beneficiary. There are also administrative fees paid to the PBM by the managed care plans for its administration and operation of the pharmacy benefit.

PBMs' methods of reimbursing health care providers for prescription drugs may differ from those used to determine the charges to managed care plans for the dispensed prescription. That is, a PBM's set of reimbursement benchmarks can be used in one relationship, and another set of reimbursement benchmarks in another, making it difficult for health plans or Medicaid managed care plans to know how much they are paying for the actual cost of the drug compared to the fees for administering the benefit. For this reason, under Part D, CMS requires that the price the PBM pays to the pharmacy for the cost of the drug is passed through to the plan, and any “spread” that the PBM keeps is an administrative cost that must be reported to the plan.

Medicaid-contracted PBMs (that is, PBMs contracted with or on behalf of Medicaid managed care plans) often reimburse health care providers using methods similar to those used in the commercial and Medicare Part D markets, which are heavily dependent on drug pricing benchmarks provided by manufacturers, and published by commercial publishers of drug pricing data (that is Average Wholesale Price (AWP) or Wholesale Acquisition Cost (WAC)). The PBMs may also use a Maximum Allowable Cost (MAC) benchmark for generic drugs, which is a PBM proprietary benchmark that reimburses pharmacy providers for generics.

For PBMs' payment to contracted health care providers, reimbursement might be based on a discount off AWP, a markup on WAC, or the Maximum Allowable Cost (MAC) for generics, plus any contractually defined professional dispensing fee (PDF), which determines the total reimbursement for each COD. In contrast, the PBM might charge the managed care plans for dispensing that same COD based upon a different fixed percentage discount from AWP, or a higher percentage of WAC, either on a per-claim or aggregate spend basis. That is, a PBM's benchmarks, markups, or discount percentages may differ for the same COD. The result is that there is little to no transparency to the managed care plan as to how much the plan actually pays for the COD administered or dispensed to the patient, and how much is paid to the PBM for fees related to the administration of the COD benefit. The cost charged to the managed care plan for the COD by the PBM often includes both the amount that the PBM reimbursed the medical or pharmacy provider for the COD as well as the PBM's administrative fees for operating the benefit program.

The margin between the amount charged to a managed care plan for a COD, and the amount paid by a PBM to a pharmacy provider is referred to as the “spread” or “spread pricing.” This margin or “spread” may only be known by the PBM, unless a State Medicaid program or managed care plan (or other prime contractor in other contexts) specifically requires disclosure of the charge and payment data that are used to make these calculations. This information deficit results in a lack of accountability and transparency to the Medicaid program, which we believe is contrary to proper and efficient operation of the State Medicaid program and potentially creates conflicts of interest in connection with payment for CODs.

Section 1902(a)(4)(A) of the Act requires that the State Plan for medical assistance comply with methods of administration that are found by the Secretary to be necessary for the proper and efficient operation of the State Plan. Greater transparency and accountability by Medicaid managed care plans (and their subcontractors) to the States for how Medicaid benefits are paid compared to how administrative fees or services are paid are necessary for efficient and proper operation of Medicaid programs. Moreover, this lack of transparency makes it more difficult for Medicaid managed care plans to assure that the plan's MLR calculation is limited to the true medical costs associated with the provision of CODs.

Medicaid managed care regulations at § 438.8 require States, through their contracts with managed care plans, to require each managed care plan to calculate and report an annual MLR starting on or after July 2017, consistent with the requirements of the regulation

detailing the calculation, including which expenses are in the numerator and the denominator. We issued a Center for Medicaid & CHIP Services (CMCS) Informational Bulletin on May 15, 2019, for Medicaid Managed Care plans, titled “Medicaid Loss Ratio (MLR) Requirements Related to Third Party Vendors” (“2019 CIB”) (see
https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/cib051519.pdf
), regarding calculation of the MLR when a managed care plan uses subcontractors for plan activities.

MLR calculations are used to develop capitation rates paid to Medicaid managed care plans, thus their accuracy is critical in assuring that Medicaid payments are reasonable, appropriate and necessary for health care services when using a Medicaid managed care plan. Managed care capitation rates must (1) be developed such that the plan would reasonably achieve an 85 percent MLR (§ 438.4(b)(9)) and (2) are developed using past MLR information for the plan (§ 438.5(b)(5)). In addition to other standards outlined in §§ 438.4 through 438.7, these requirements for capitation rates related to the MLR are key to ensuring that Medicaid managed care capitation rates are actuarially sound. In addition, Medicaid managed care plans may need to pay remittances (that is, refund part of the capitation payments) to States should they not achieve the specific MLR target. Thus, the accuracy of MLR calculation is important to conserving Medicaid funds.

This 2019 CIB provided additional guidance regarding the calculation of the MLR when third party vendors, such as PBMs, are involved. The purpose was to assist States in ensuring that revenues, expenditures and amounts are appropriately identified and classified for the MLRs submitted by managed care plans, especially when a subcontractor is used. The 2019 CIB uses PBM spread pricing as a specific example. Several States have already implemented prohibitions or other restrictions on the PBM practice of spread pricing. Although there is not currently a Federal prohibition on using spread pricing in Medicaid, as noted, we issued the 2019 CIB regarding the impact of the lack of transparency between costs for administrative functions versus actual Medicaid services on the managed care plan's MLR calculation. The 2019 CIB is clear that when the subcontractor, in this case the PBM, is performing administrative functions, such as eligibility and coverage verification, claims processing, utilization review, or network development, the expenditures and profits on these functions are a non-claims administrative expense as described in § 438.8(e)(2)(v)(A), and should not be counted as an incurred claim for the purposes of MLR calculations.

In addition, the Medicaid managed care regulation at § 438.230(c)(1) requires, through contractual requirements in the managed care contract between the managed care plan and the State, certain agreements to be in subcontracts, including that subcontractors agree to perform the delegated activities and reporting responsibilities in compliance with the managed care plan's contract obligations. Moreover, the reporting standards at § 438.8(k)(3) specify that managed care plans must require any third-party vendor providing claims adjudication activities to provide all underlying data associated with MLR calculation and reporting. The 2019 CIB explains how these regulatory obligations mean that all subcontractors that administer claims for the managed care plan must report the incurred claims, expenditures for activities that improve health care quality, and information about mandatory deductions or exclusions from incurred claims (overpayment recoveries, rebates, other non-claims costs, etc.) to the managed care plan.

The requirements and definitions in § 438.8 for these categories of costs and expenditures must be applied to the required reporting. The reporting from the subcontractor must have sufficient detail to allow a managed care plan to accurately incorporate the expenditures associated with the subcontractor's activities into the managed care plan's overall MLR calculation. The level of detail must meet the requirements in § 438.8(k)(3) and the level of detail that is required may vary based on what is necessary to accurately calculate an overall MLR or to comply with any additional reporting requirements imposed by the State in its contract with the managed care plan.

Medicaid managed care plans are generally paid by States using single monthly capitation payments that for the plan's coverage of the health care services covered under the Medicaid managed care contract, including CODs. If the managed care plan contracts with a PBM, there are different options for the managed care plan to pay the PBM for the administrative services provided by the PBM. Payment for administrative services is made in addition to the amount the managed care plan would reimburse the PBM for the actual COD and dispensing fee costs. In general, managed care plans have paid PBMs for administrative services in one of two ways, or a mix of these approaches—either through a flat administrative fee per prescription, or, as described above, by including it in the overall COD payment (that is through “spread pricing”).

When payments to the PBM for the administration services are included in the managed care plans' total COD payment without a clear delineation of which amount is for administrative services, it obscures how much of that total payment is actually paid to the provider for the prescription and what is paid for administrative services furnished by the PBM. In other words, it is difficult for the managed care plan to determine the proportion of the payment to the PBM that is attributable to the administrative service costs provided by the PBM.

Furthermore, incorrectly attributing administrative service costs as medical expenditures, may increase the MLR numerator, and thus increase the per-member-per-month (PMPM) revenue a managed care entity can receive while appearing to meet MLR requirements. Given this lack of transparency, the “spread”, which has been the basis for generating significant PBM profit, obscures from Medicaid and the managed care plans the actual cost of the CODs dispensed to plan enrollees. This makes it difficult for managed care plans and State Medicaid agencies to determine whether the amount that the PBM is charging to administer the benefit is a reasonable expense to be borne by a Medicaid program. Moreover, it makes it difficult for plans to ensure that their MLR calculations appropriately classify and account for expenditures.

We provide a representative example of how spread pricing occurs in the context of Medicaid prescription drug coverage provided by a managed care plan. Specifically, in Table 2, we illustrate how a PBM might leverage a 5 percent difference in the AWP value between the amount charged to the plan and the amount paid to the pharmacy for a commonly-dispensed generic drug product, to ultimately capture 30.76 percent of the dollars spent by the managed care plan for the prescription.

Table 2—Example of Spread Pricing

Drug Product
NDC 1234567890, Drug 300 MG CAPSULE, 60 capsules in prescription.

Published AWP
$1.33 per capsule.

PBM Reimbursement to pharmacy (MAC)
((AWP−90%) * 60) + $1 dispensing fee = $8.98.

Amount PBM billed to Managed care plan
((AWP−85%) * 60) + $1 dispensing fee = $12.97.

PBM spread =
($12.97−$8.98) = $3.99.

PBM spread percentage =
($3.99/$12.97) = 30.76% of total cost to managed care plan.

Table 2 shows that, while the pharmacy only received $8.98 in reimbursement from the PBM for the prescription, PBM charged the managed care plan $12.97, or about 31 percent more for the same prescription. Depending on the specifics of the contract that the PBM has with the managed care plan, some of this margin or spread might be used to pay the PBM for managing or administering the pharmacy benefit but in some cases, this spread may be in addition to administrative fees paid by the plan to the PBM. For example, there may already be included in the contract a specific fee that the Medicaid MCO is paying for the administration of the COD benefit. These fees would be in addition to the amounts being paid as part of the “spread pricing.”

However, unless the managed care plan knows the amounts that the pharmacy providers are being paid by the PBM, the managed care plan is unable to assess the full scope of payments to the PBM for administrative services furnished by the PBM. As a result, the plan may not know whether the PBM is being appropriately compensated for administering the COD benefit.

While the per-prescription dollar amounts above may not appear substantial, the overall impact to a Medicaid managed care pharmacy program may be significant given generic claims represent greater than 90 percent of total pharmacy claims. For example, an analysis of Ohio's Medicaid managed care program by the Ohio Auditor of State revealed $208.4 million of spread within their managed care plan's PBM transactions for generic drug claims between April 1, 2017, and March 31, 2018.
6

For the time period analyzed, this amount of PBM spread represented 31.4 percent of total generic drug expenditures within the State's Medicaid managed care program.

6
David Yost, Ohio's Medicaid Managed Care Pharmacy Services Auditor of the State Report (2018), available at
https://tinyurl.com/mbn75c
.

CMS has determined that 11 States
7

have enacted relevant legislation related to the practice of spread pricing. Four of these States (Arkansas, Delaware, Michigan, and Oklahoma) have complete State-wide prohibitions on the practice of spread pricing for any PBM operating within the State, regardless of the payer. Five States (Kentucky, Louisiana, New York, Pennsylvania, and Virginia) prohibit the practice of spread pricing by PBMs or MCOs in Medicaid, explicitly. One State (Pennsylvania) further requires that all Medicaid MCOs include a spread pricing prohibition clause in all contracts with PBMs. Only 2 of the 11 States with spread pricing laws (Alabama and Montana) merely require disclosure of certain spread pricing information (that is, annual report of aggregate rebate information and whether the PBM engages in spread pricing). Spread pricing can increase Medicaid pharmacy program costs, reduce efficient operation of the Medicaid program, and reduce the transparency of State Medicaid expenditures within managed care programs. This makes it more difficult for managed care plans and States to discern which participants of the pharmacy supply chain retain the bulk of the COD reimbursement.

7

https://nashp.org/comparison-of-state-pharmacy-benefit-managers-laws/
.

For these reasons, we are proposing to amend § 438.3(s) to require Medicaid MCOs, PIHPs, and PAHPs that provide coverage of CODs to structure any contract with any subcontractor for the delivery or administration of the COD benefit require the subcontractor to report separately the amounts related to the incurred claims described in § 438.8(e)(2), such as reimbursement for the CODs, payments for other patient services, and the dispensing or administering providers fees, and subcontractor administrative fees. The proposal would ensure that MLRs reported by MCOs, PIHPs, and PAHPs that use subcontractors in the delivery of COD coverage would be more accurate and transparent. The separate payment requirements would help States and managed care plans better understand whether they are appropriately and efficiently paying for the delivery of CODs, a significant part of which is funded by the Federal Government. We note that this proposal does not change the applicability of the 2019 CIB to PBM subcontractors or to other subcontracting arrangements used by a Medicaid managed care plan; the 2019 CIB remains CMS' position on how §§ 438.8 and 438.230 apply. This proposal would create additional requirements for MCOs, PIHPs and PAHPs that help ensure that the objectives and responsibilities outlined in the 2019 CIB are met.

The proposal requires MCOs, PIHPs, and PAHPs that cover CODs to require their subcontractors to report their costs in a way that aligns more fully with the specific categories specified in § 438.8(e)(2) regarding the MLR numerator. Fully aligning the subcontractor's reports and billing (invoices) with how the MLR regulation categorizes and treats specific costs and expenditures would make clearer for the MCOs, PIHPs, and PAHPs how its payments to a subcontractor are used that would be subject to proposed § 438.3(s)(8), and allow those managed care plans to incorporate the subcontractor's costs into the MLR reporting and calculation. However, having the subcontractor's (in particular a PBM's) expenditures and costs reported in the categories that we are proposing might not be representative of how the industry works, might require systems changes and impose burden that we have not taken into account, or might result in unintended consequences. Therefore, we are specifically soliciting comment on this point and on other alternatives for how MCOs, PIHPs, and PAHPs should require information from their subcontractors and how they should structure payment or billing arrangements to achieve the policy goals we have outlined.

We believe this new transparency requirement would assist States and Medicaid managed care plans in complying with § 438.8 and related guidance because subcontractor PBMs would be required to appropriately identify certain costs, so that the managed care plan can appropriately calculate its MLR. In particular with COD spending, the managed care plan would have to separately identify prescription drug and dispensing or administration fee claim costs when calculating the MLR, in contrast to

administrative costs. As a result, any payments for costs over and above the cost of the prescription and dispensing fee would be separately identifiable by the managed care plan and cannot be used to inappropriately inflate the MLR which may result in managed care plan capitation rates that are not actuarially sound.

C. MDRP Administrative and Program Integrity Changes

1. Proposed Definitions (§ 447.502)

a. Proposal To Modify the Definition of Covered Outpatient Drug (§ 447.502)

Sections 1927(k)(2) and (3) of the Act provide a definition of the term “covered outpatient drug” (COD) and a limiting definition, which excludes certain drugs, biological products, and insulin provided as part of, or as incident to and in the same setting as, enumerated services and settings from the definition of COD. This exclusion is subject to a parenthetical, however, which limits the exclusion to when payment may be made as part of payment for the enumerated service or setting, and not as direct reimbursement for the drug.

In the COD final rule, we finalized a regulatory definition of COD in § 447.502 that substantially mirrors the statutory definition. Consistent with section 1927(k)(3) of the Act, the regulatory definition includes a limiting definition in paragraph (2) of the definition of covered outpatient drug at § 447.502 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.

Over the years we have received questions about when a payment is considered to be a direct reimbursement for a drug and whether identifying a drug separately on a claim for payment may qualify as direct reimbursement for a drug, rendering the drug eligible for rebates under section 1927 of the Act as a COD, or in other words, garnering the limiting definition exclusion inapplicable. If a drug and its cost can be separately identified on a claim for payment it can be considered subject to direct reimbursement. That is, if the payment to the provider includes any reimbursement for the drug and the drug is separately identified, then the reimbursement for the drug is a direct reimbursement. Additionally, if the payment to the provider is solely for the drug (and no other services), and the drug is separately identified, it is also a direct reimbursement. Therefore, direct reimbursement may be reimbursement for a drug alone, or reimbursement for a drug plus the service, in one inclusive payment, if the drug plus the itemized cost of the drug are separately identified on the claim. In other words, the payment for the drug is not required to be a separate payment in order for such payment to be considered direct reimbursement.

To provide greater clarity on this point and the application of the limiting definition, we propose to amend the regulatory definition of the term covered outpatient drug at § 447.502 to add that direct reimbursement for the drug includes when a claim for payment identifies the drug plus the itemized cost of the drug. Specifically, we propose to add to the regulatory definition of covered outpatient drug at § 447.502 that the direct reimbursement for a drug may include both reimbursement for a drug alone, or reimbursement for a drug plus the service, in one inclusive payment, if the drug and the itemized cost of the drug are separately identified on the claim.

Additionally, the limiting definition in section 1927(k)(3) of the Act includes the following parenthetical: “. . . (and for which payment may be made under this subchapter as part of payment for [certain services] and not as direct reimbursement for the drug).” The term covered outpatient drug is defined in § 447.502 and includes this limiting definition parenthetical at paragraph (2): “. . . (and for which payment may be made as part of that service instead of as a direct reimbursement for the drug).”

There is no meaningful distinction between the statutory and regulatory language for purposes of the MDRP, and thus, we are proposing to make a technical change by modifying the regulatory language so that it more closely mirrors the statutory language. We propose to add “payment for” after “and for which payment may be made as part of” and to delete “instead of as a” in the limiting definition of covered outpatient drug and replace it with “and not as”.

The proposed definition would then read, in significant part, as “. . . (and for which payment may be made as part of payment for that service and not as direct reimbursement for the drug).”

b. Proposal To Define Drug Product Information (§ 447.502)

Section 6(a)(1)(A)(iv) of MSIIA amended section 1927(b)(3) of the Act by adding the words “and drug product” to the title of section (b)(3), and adding section (b)(3)(A)(v), to require a manufacturer to report drug product information that the Secretary shall require for each of the manufacturer's CODs no later than 30 days after the last day of each month of a rebate period. Section 1927(b)(3)(A) of the Act describes the manufacturer drug product and pricing information that is required to be reported to the agency by statute, and with respect to the pricing information, specifically provides for the reporting of such information, such as AMP and best price. To support the implementation of this new statutory requirement to report drug product information, we propose to define drug product information at § 447.502.

We currently require manufacturers to submit drug product information when the covered outpatient drug is entered into the MDP system, although there is no regulatory definition of drug product information. When initially reporting drug product data upon the execution of an NDRA, manufacturers have 30 days after the date on which they enter into an NDRA to report drug product data for their existing CODs under section 1927(b)(3)(A) of the Act. After the execution of an NDRA, manufacturers have 30 days from the end of each rebate period to report drug product data for new CODs under section 1927(b)(3)(A)(v) of the Act.

We propose to define “drug product information” in § 447.502 as information that includes, but is not limited to, 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 URA calculations.

As previously discussed in this proposed rule, the drug category for an NDC should be single source or innovator for the entire history of the NDC if it was always produced, distributed, or marketed under an NDA, unless a narrow exception applies, or single source if marketed under a BLA. If a narrow exception has been granted by CMS, the drug category for that NDC should historically be reported as single source or innovator, and can be changed to noninnovator, effective April 1, 2016. We use the FDA “applications.txt” file to verify the type of application associated with an application number. The file may be accessed using the link to the Drugs@FDA download file found

on the FDA web page at
https://www.fda.gov/drugs/drug-approvals-and-databases/drugsfda-data-files
.

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. See 81 FR 5191. Definitions for these drug categories can be found at section 1927(k)(7) of the Act and at § 447.502.

Manufacturers should evaluate all of their NDCs for compliance with drug product information reporting, and if they determine corrections are required, they should contact the agency for assistance. In Manufacturer Release No. 113, we address a manufacturer's responsibility to ensure that all of their CODs are correctly classified and reported in the Drug Data Reporting system (DDR) for the history of the NDC, including such NDCs that may no longer be active:
https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf
.

As part of a manufacturer's evaluation of their NDCs for compliance with accurate drug product information reporting, they should ensure that each NDC is reported with an accurate market date. In this proposed rule, we are proposing to add a definition for “market date” for the purposes of the MDRP. Please see proposed § 447.502 for that proposed definition and elsewhere in this preamble for an explanation of how market date is used to determine the quarter that establishes each drug's base date AMP.

Generally, a manufacturer cannot make the drug product information corrections in the CMS system without our intervention. To request corrections, a manufacturer should contact CMS using instructions that are available on
Medicaid.gov
(
https://www.medicaid.gov/medicaid/prescription-drugs/medicaid-drug-rebate-program/medicaid-drug-rebate-program-change-request/index.html
) to correct drug product and pricing information. If we identify a misclassified or misreported NDC as part of the review of the information submitted by the manufacturer to support these drug pricing or product information changes, and notify the manufacturer, the link to the instructions for correcting the data would generally be included as part of that notification.

For most drug product information changes, as outlined above, we would make the requested changes on behalf of the manufacturer in the CMS system, and those changes would subsequently be available for manufacturer certification. However, in some situations where monthly and/or quarterly pricing data must be updated as a result of the drug product information change, if necessary, we would notify the manufacturer that certain pricing data fields have been “unlocked” in the CMS system to allow the manufacturer to enter or correct required pricing information if applicable.

Regardless of whether we make a data change on behalf of a manufacturer or whether the manufacturer enters required data directly in the CMS system, manufacturers would be required to certify the information in accordance with § 447.510. If we make a data change at the request of a manufacturer, the manufacturer is not relieved of its responsibility to ensure the accuracy of such data, nor should it be inferred that we have approved a variance from the requirements of the statute.

Until certification is complete, the changes in the CMS system are not considered final and would not be used in any quarterly rebate calculations or transmitted to the States as part of the quarterly rebate files; however, the manufacturer is still responsible for correct URA calculations and rebate payments. If drug product information changes are left uncertified, the previously certified values would remain in effect; therefore, corrections made in the CMS system that remain uncertified would result in the drug continuing to be considered misclassified or misreported. We would consider this to be late reporting of product data for which a manufacturer's rebate agreement may be suspended from the MDRP under section 1927(b)(3)(C)(i) of the Act, and eventually terminated as authorized under section 1927(b)(4)(B) of the Act.

c. Proposal To Define Internal Investigation for Purposes of Pricing Metric Revisions (§§ 447.502 and 447.510)

In accordance with section 1927(b)(3) of the Act, § 447.510 of the implementing regulations, and the terms of the NDRA, manufacturers are required to report certain pricing and drug product information to CMS on a timely basis or else they could incur penalties or be subject to other compliance and enforcement measures. As explained in the final time limitation rule, in an effort to improve the administration and efficiency of the MDRP and assist States and manufacturers that would otherwise be required to retain drug utilization pricing data records indefinitely, we established the 12-quarter time frame for reporting revisions to AMP or best price information. Notwithstanding the 12-quarter time frame for reporting revisions, we continued to receive requests outside of the 12-quarter period from manufacturers to revise pricing data. These types of manufacturer requests, which could span multiple years prior to the 12-quarter timeframe, and could sometimes result in substantial recoupment of Medicaid rebates already paid to States, impede the economic and efficient operation of the Medicaid program.

Consequently, in the COD final rule (81 FR 5278) we finalized § 447.510(b)(1), which provides that a manufacturer must report to CMS any revision to AMP, best price, customary prompt pay discounts or nominal prices (pricing data) for a period not to exceed 12 quarters from the quarter in which the data were due unless one of a number of enumerated exceptions applies. See § 447.510(b)(1)(i) through (vi). Of note, § 447.510(b)(1)(v) provides an exception to the 12-quarter price reporting rule if the change is to address specific rebate adjustments to States by manufacturers, as required by CMS or court order, or under an internal investigation, or an OIG or Department of Justice (DOJ) investigation.

In a response to comment in the preamble of the COD final rule, which added § 447.510(b)(1)(v), we indicated that internal investigation is intended to mean a manufacturer's internal investigation, and we further explained that in the event that a manufacturer discovers any discrepancy with its reported product and pricing data to the MDRP that are outside of the applicable timeframes, the manufacturer should determine if the change satisfies one of the enumerated exceptions. (81 FR 5280)

However, we did not further define or give any greater explanation for the applicability of the exception to the 12-quarter rule, particularly in instances when manufacturers perform an internal investigation of the prices (AMP and best price) reported and certified in the Medicaid Drug Product systems by another manufacturer. Given the absence of a definition of internal investigation or specificity as to when this exception applies, some manufacturers have broadly interpreted the internal investigation exception to the 12-quarter rule.

Some manufacturers have requested revisions to AMP and best price outside of the 12-quarter rule based upon an internal investigation related to newly acquired products or lines of business

previously certified by the prior manufacturers without making findings that the prior manufacturer violated any law. For example, some requests from manufacturers to revise AMP or best price for drug product and drug pricing information previously reported and certified from another manufacturer were based on internal reviews that did not result in proof that the prior manufacturer misapplied the laws or regulations, or acted in a fraudulent or illegal manner.

In cases when a manufacturer requests an exception to the 12-quarter rule due to an internal investigation, we propose to specify that the manufacturer must make a finding that indicates a violation of statute or regulation made by the prior manufacturer before we consider such a request. For example, a request to restate or revise pricing outside of the 12-quarter time frame by a manufacturer to previously reported and certified data of a prior manufacturer based upon a mere disagreement with the prior manufacturer's government pricing calculations and assumptions would not be considered a valid reason to revise a prior manufacturer's pricing outside of the 12-quarter time frame. The manufacturer must make findings that include actual data as evidence that the prior manufacturer violated statute or regulation.

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. To ensure clarity on when the internal investigation exception may be appropriately applied, we are proposing to define internal investigation at § 447.502 to mean a manufacturer's investigation of its AMP, best price, customary prompt pay discounts or nominal prices that have been previously certified in 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. We are also proposing to amend § 447.510(b)(1)(v) to reference the proposed definition of internal investigation at § 447.502.

d. Proposal To Revise Definition of Manufacturer for NDRA Compliance (§ 447.502)

When Congress passed the drug rebate provisions in 1990, they established a framework for coverage and payment of covered outpatient drugs under Medicaid, and prescribed drugs, generally. Often referenced as the “grand bargain” between the States, the Federal Government, and manufacturers, the MDRP made clear that if manufacturers paid rebates for the covered outpatient drugs dispensed and paid for under the State Plan, States would be required to cover their covered outpatient drugs, subject to limited permissible restrictions and exclusions. These policies would help increase Medicaid beneficiaries' access to medications, while assisting States in striving to deliver an economic and efficient Medicaid program. A key piece of the coverage and payment framework the MDRP established is captured in section 1927(a)(1) of the Act, which provides that in order for payment to be available under section 1903(a) or under part B of title XVIII for covered outpatient drugs of a manufacturer, the manufacturer must have entered into and have in effect a rebate agreement with the Secretary as described in section 1927(b) of the Act.

With an effectuated rebate agreement in place, manufacturers participating in the MDRP are required to provide periodic rebates for CODs dispensed and paid for under the State Plan, and also provide certain drug price and drug product information on a monthly and/or quarterly basis to the agency. While entering into a rebate agreement is voluntary, a manufacturer that does not enter into such an agreement forgoes payment and coverage, for their covered outpatient drugs under Medicaid. It also affects coverage under the 340B Drug Pricing Program and may affect Medicare Part B reimbursement.

To implement the important requirement set forth at section 1927(a)(1) of the Act, and in an effort to prevent selective reporting of NDCs, the agency has required manufacturers to ensure that all their associated labeler codes with CODs enter into a rebate agreement to comply with the terms of the NDRA. This requirement has been included in the NDRA since the inception of the program. (See section II., Manufacturer's Responsibilities, subsection (a) of the previous NDRA, and section II., Manufacturer's Responsibilities, subsection (b) of the updated NDRA.) We also reiterated this point most recently in the preamble to the updated NDRA, 83 FR 12770 (Mar. 23, 2018). In that final notice, we explained that manufacturers are required to report all CODs under their labeler code(s) to the MDRP, and may not be selective in reporting their national drug codes (NDCs) to the program.

We continue to maintain that this requirement applies to all the manufacturer's labeler codes, including newly acquired labeler codes, newly formed subsidiaries, and labeler codes previously omitted from the original rebate agreement. 83 FR 12771; see also Manufacturer Releases #13 and #48. Thus, once we review a request for a rebate agreement and the manufacturer confirms, among other things, that all of a manufacturer's CODs are listed, a rebate agreement will be issued. Manufacturers are then responsible for paying a rebate on those CODs that were dispensed and/or paid for, as applicable, under the State Plan. These rebates are paid by manufacturers on a quarterly basis to States, and are shared between the States and the Federal Government to partially offset the overall cost of prescription drugs under the Medicaid program.

The term “manufacturer” was first defined in statute in 1990, when section 1927 of the Act was established, and was interpreted in regulation in 2007 at § 447.502. Section 1927(k)(5) of the Act defines the term “manufacturer” as any entity which is engaged in: (1) the production, preparation, propagation, compounding, conversion, or processing of prescription drug products, either directly or indirectly by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis; or (2) in the packaging, repackaging, labeling, relabeling, or distribution of prescription drug products.

The regulations at § 447.502 define “manufacturer” to mean any entity that holds the NDC for a covered outpatient drug or biological product and meets the following criteria:

• Is engaged in the production, preparation, propagation, compounding, conversion, or processing of covered outpatient drug products, either directly or indirectly by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis; or

• Is engaged in the packaging, repackaging, labeling, relabeling, or distribution of covered outpatient drug products and is not a wholesale distributor of drugs or a retail pharmacy licensed under State law.

• For authorized generic products, the term “manufacturer” will also include the original holder of the NDA.

• For drugs subject to private labeling arrangements, the term “manufacturer” will also include the entity under whose own label or trade name the product will be distributed.

The labeler code is a unique 5-digit number within the NDC,
8

assigned by the FDA, and one manufacturer may be assigned multiple labeler codes by FDA. A manufacturer can obtain a different labeler code for each manufacturing establishment or company under the same ownership since the labeler code identifies a company marketing a drug product.
9

Some drug companies that have several divisions have more than one labeler code, and a single manufacturer may be marketing its drugs across or under multiple labeler codes. Furthermore, a manufacturer may own, operate, or be associated or affiliated with several labeler code subsidiaries, each of which makes CODs.

8
See 21 CFR 207.33.

9
Electronic Drug Registration and Listing Instructions | FDA.

Consistent with the statute and regulation, our current policy is that each of these associated labeler codes would have to have an effectuated rebate agreement in order for the single manufacturer to be considered to be in compliance with the requirement under section 1927(a)(1) of the Act that a manufacturer have a rebate agreement in effect, and this has been noted in related guidance.
10

We treat each associated labeler code as part of the single manufacturer, and if any of the labeler codes of a manufacturer do not have an NDRA in effect, no FFP would be available for any of the CODs of the labeler codes of the manufacturer, and all of the labelers would be subject to potential termination from the MDRP.

10
Manufacturer Release 013 (October 6, 1994), Manufacturer Release 048 (November 15, 2000) and 83 FR 12770, 12771 (Mar. 23, 2018).

We also explained in the final notice for the updated NDRA that manufacturers that wish to terminate an NDRA that have active CODs must request termination for all associated labeler codes, and provide a reason for the request (for example, all CODs under the labeler code are terminated), or if the request for termination is only for certain labeler codes, provide justification for such request (83 FR 12770, 12771). In that same final notice, we indicated that for purposes of ensuring beneficiary access to single source drugs and/or drugs that are not otherwise available in the MDRP, we may choose to grant an exception to issuing or reinstating an NDRA for certain labeler codes of a manufacturer prior to issuing an NDRA for all of the labeler codes of the manufacturer, or terminating certain labeler codes as mentioned above (83 FR 12771).

The requirement that manufacturers that enter into a rebate agreement cannot exclude any covered outpatient drug from their listings applies to all CODs associated with any of the manufacturer's labeler codes that market CODs, including newly-purchased labeler codes, and newly-formed subsidiaries. This means a manufacturer has to be “all in” for all its drugs, or “all out”. Otherwise, there is a possibility that a manufacturer would create separate labeler codes for some of its drugs, and enter into a rebate agreement for some of its labeler codes, and not others. Permitting a manufacturer to do so would allow them the benefit of receiving FFP for some of their CODs, while potentially avoiding the financial obligation to pay rebates for other drugs that would otherwise qualify as CODs and be subject to rebates. If a product meets the definition of a covered outpatient drug, but the manufacturer of such drug does not have a rebate agreement in effect, that drug is not eligible for FFP and may not be claimed on the CMS-64 form, even though the drug may meet the definition of a prescribed

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2023-10934. Public record. Not legal advice.