# 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%3A2024-21254

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** September 26, 2024
- **Citation:** 89 FR 79020

## Text

DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 433, 438, and 447
[CMS-2434-F]
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:

Final rule.

SUMMARY:

This final rule implements 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 address drug misclassification, as well as drug pricing and product data misreporting by manufacturers. Additionally, we are finalizing several other proposed program integrity and program administration provisions or modifications in this final rule, including revising and finalizing key definitions used in the MDRP. This rule also finalizes a provision not directly related to MDRP that makes revisions to the third-party liability regulation due to amendments made by the Bipartisan Budget Act (BBA) of 2018. We also are finalizing our proposal 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” (“the 2020 final rule”) to the Determination of Best Price and Determination of Average Manufacturer Price (AMP) sections.

DATES:

These regulations are effective on November 19, 2024.

Applicability Dates:
In the
Supplementary Information
section of this final rule, we provide a table (Table 1), which lists key changes in this final rule that have an applicability date other than the effective date of this final rule.

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

FOR FURTHER INFORMATION CONTACT:

Omar Alemi, 720-853-2724,
omar.alemi@cms.hhs.gov,
for issues related to the definition of covered outpatient drug (COD) and removal of manufacturer rebate cap.

Ruth Blatt, 410-786-1767,
ruth.blatt@cms.hhs.gov,
for issues related to the definitions of noninnovator multiple-source drug, market date, and COD.

Ginger Boscas, 410-786-3098,
ginger.boscas@cms.hhs.gov,
for issues related to third-party liability.

Michael Forman, 410-786-2666,
michael.forman@cms.hhs.gov,
for issues related to physician-administered drugs.

Charlotte Hammond, 410-786-1092,
charlotte.hammond@cms.hhs.gov,
for issues related to diagnosis on prescriptions and professional dispensing fees.

Mickey Morgan, 443-745-3950,
mickey.morgan1@cms.hhs.gov,
for issues related to drug cost transparency in Medicaid managed care contracts and accounting for accumulated price concessions from 'stacking' when determining best price.

Lisa Shochet, 410-786-5445,
lisa.shochet@cms.hhs.gov,
for issues related to Bank Identification Number and Processor Control Number (BIN/PCN).

Terry Simananda, 410-786-8144,
terry.simananda@cms.hhs.gov,
for issues related to internal investigation, Collection of Information, and Regulatory Impact Analysis sections.

Whitney Swears, 410-786-6543,
whitney.swears@cms.hhs.gov,
for issues related to time limitation on audits and the definition of manufacturer.

Cathy Traugott, 720-853-2785,
catherine.traugott@cms.hhs.gov,
for issues related to drug misclassifications, definition of vaccine, and a drug price verification process through data collection survey.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

Under the Medicaid program, section 1902(a)(54) of the Social Security Act (the Act) provides States with the option of providing coverage of prescribed drugs as described in section 1905(a)(12) of the Act, and to date, all States have elected to do so. Section 1903(a) of the Act provides for Federal Financial Participation (FFP) in State expenditures for these covered outpatient drugs (CODs). Coverage of CODs under the option provided by section 1902(a)(54) of the Act 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 conditioning FFP in medical assistance for drugs covered under section 1902(a)(54) on the manufacturer of the drug having an NDRA. 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 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. Generally, pursuant to section 1927 of the Act, drugs classified as single source drugs or innovator multiple source drugs pay higher rebates than those that are classified as an “other drug,” such as noninnovator multiple source drugs.

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 product and drug pricing information 30 days after the last day of each quarter of a rebate period. If a manufacturer fails to submit timely information, or misreports information, we may be unable to establish accurate Unit Rebate Amounts (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 ensure accurate rebates are paid to States for their CODs.

Prior to the enactment of the Medicaid Services Investment and Accountability Act of 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 (NDA). 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 NDA. 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. MSIAA made several revisions to these definitions, including adding a provision to ratify CMS' existing policy to permit certain exceptions from the definitions if a narrow exception applies, as described in § 447.502 or any successor regulation.

This narrow exception process in § 447.502 was created in the 2016 final rule entitled “Medicaid Program; Covered Outpatient Drugs”
1

(2016 COD final rule), under which drug manufacturers could submit a request for a narrow exception to allow individual drugs approved under an NDA to be treated as if they were approved under an abbreviated new drug application (ANDA) and classified as noninnovator multiple source drugs prospectively from the effective date of the 2016 COD final rule. Instructions to manufacturers regarding this process were included in Manufacturer Release #98, May 2, 2016.
2

The 2016 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 2016 COD final rule, which was April 1, 2016. This narrow exception process was codified into statute in MSIAA when the Congress removed the word “original” from the definitions of single source drug and innovator multiple source drug, thereby confirming CMS' pre 2016 interpretation.

1

https://www.govinfo.gov/content/pkg/FR-2016-02-01/pdf/2016-01274.pdf.

2

https://www.medicaid.gov/medicaid-chip-program-information/by-topics/prescription-drugs/downloads/rx-releases/mfr-releases/mfr-rel-098.pdf.

We published the proposed rule (88 FR 34238-34296) on May 26, 2023, and provided a 60-day comment period. A total of 128 comments were received. We are now publishing the final rule. We are clarifying and emphasizing our intent that if any provision of this final rule is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further action, it shall be severable from other parts of this final rule, and from rules and regulations currently in effect, and not affect the remainder thereof or the application of the provision to other persons not similarly situated or to other, dissimilar circumstances. Through this rule, we adopt provisions that are intended to and will operate independently of each other, even if each serves the same general purpose or policy goal. Where a provision is necessarily dependent on another, the context generally makes that clear.

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 MSIAA, titled “Preventing the Misclassification of Drugs Under the Medicaid Drug Rebate Program,” amended sections 1903 and 1927 of the Act to (1) specify the definitions for single source drug, innovator multiple source drug, and noninnovator multiple source drug, and (2) 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 drug, innovator multiple source drug, or noninnovator multiple source drug—for the purposes of determining the correct rebates that each manufacturer owes the States.

Although much of this law is self-implementing, we proposed a series of regulatory amendments at §§ 447.509 and 447.510 to implement and codify the statutory changes in regulation. We proposed that 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 drug. We also defined 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.

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 proposed a definition of “drug product information” for the purposes of the MDRP.

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

Under 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, including correcting the misclassification, suspending the misclassified drug from the MDRP, imposing CMPs, or ultimately terminating the manufacturer's participation in the MDRP.

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 taxpayer monies.

C. MDRP Program Administration Proposed Changes

In order to increase efficiency and economy of directing overall MDRP operations, resources, and activities to better facilitate the needs of Medicaid beneficiaries, we proposed a number of new regulatory policies and clarifications of existing policies. Specifically, consistent with our statutory authorities, we proposed to define, specify, or amend the definitions for COD, internal investigation (for restatement purposes outside of a 3-year time window), manufacturer (for National Drug Rebate Agreement (NDRA) purposes), market date, noninnovator multiple source drug, drug product information, and vaccine for the purposes of the MDRP. We also proposed 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 noninnovator multiple source drug.

In addition, we proposed new policies, including to add a time

limitation on manufacturers' 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 (NDCs) for single and multiple source physician-administered drugs to receive FFP and secure manufacturer rebates.

We also proposed to revise Medicaid managed care standard contract requirements to adopt a requirement for the inclusion of Bank Identification Number and Processor Control Number (BIN/PCN) numbers on Medicaid enrollee identification cards for pharmacy benefits, as well as enhance drug cost transparency by adopting specific requirements relating to the third-party administration of the pharmacy benefit. We provide additional background later in this rule.

1. Proposal To Modify the Definition of Covered Outpatient Drug

In the 2016 COD final rule (81 FR 5278), we finalized a regulatory definition of covered outpatient drug in § 447.502 that substantially mirrors the statutory definition and is consistent with section 1927(k)(3) of the Act. The definition includes a limiting definition which exempts from the COD definition, and thus from rebates, any drug, biological product, or insulin provided as part of, or as incident to and in the same setting as, (and for which payment may be made under this title as part of payment for the following and not as direct reimbursement for the drug) certain health care setting or situations described in section 1927(k)(3). However, we never clarified what the term “direct reimbursement” means for the purposes of defining those situations under which a State could bill a manufacturer for a rebate for a COD when the COD is part of an inclusive payment for the COD and related services. In regulation, we proposed to define the term direct reimbursement at § 447.502 so that States know those situations in which the limiting definition would not apply such that a State could bill for a rebate. CMS received several thoughtful comments on this issue, and based on these comments, we realized the proposed language did not adequately clarify the policy. Thus, we are further refining the definition to more clearly delineate the situations in which the limiting definition would not apply.

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 else they could incur penalties or other compliance and enforcement measures. In the 2016 COD final rule, 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 enumerated exceptions apply. See § 447.510(b)(1)(i) through (vi).

The existing regulation at § 447.510(b)(1)(v) provides an exception to the 12-quarter price reporting rule if the change is being made 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, up to this point, we have not defined the term internal investigation, which has led to different interpretations of the nature of an internal investigation. Therefore, we proposed to add a definition of internal investigation at § 447.502 and additional clarity around the 12-quarter price reporting rule at § 447.510. Based on comments we received, we are finalizing as proposed except we are adding the term “possible” to “fraud, abuse or violation of law or regulation”.

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

We proposed to further refine the definition of manufacturer to clarify that a manufacturer includes all other manufacturers that are associated or affiliated with that manufacturer. This was intended to clarify that once a manufacturer has entered into a rebate agreement with CMS, all entities (with their applicable labeler 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.

We appreciate the thoughtful comments received on this issue, and we determined not to finalize the proposed policy at this time. We are continuing to review the input provided by commenters, which may inform future rulemaking on this topic.

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

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. A key factor in the calculation of the additional rebate is the base date AMP
3

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 their CODs. The term market date has not been previously defined in regulation for purposes of the MDRP, and CMS has received numerous questions regarding the determination of market date. Accordingly, we proposed to define the term market date at § 447.502 for the purpose of the MDRP and are finalizing as proposed.

3
The terms “base date AMP,” “baseline AMP,” and “base AMP” are used interchangeably within this document.

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

As discussed previously in the proposed rule, section 6(c) of MSIAA included a number of amendments to statutory definitions in section 1927 of the Act. One of the amendments to the statutory definitions was to remove the phrase “was originally marketed” from the definition of an I drug and replace it with “is marketed.” We also made conforming changes to the regulatory definition of an I drug in the 2020 final rule.

These amendments should have prompted a corresponding change to the regulatory definition of noninnovator multiple source (N) drug in the 2020 final rule to align with the statutory and regulatory change to the definition of an I drug, however we neglected to include the change. Therefore, we proposed to amend the definition of an N drug at § 447.502 to maintain the clear distinction between an I drug and an N drug and are finalizing as proposed.

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 does not define vaccine.

We proposed 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. We noted that the regulatory definition of vaccine is intended to be established solely for the purposes of the MDRP and is intended to be applicable only to that program and Medicaid expansion CHIP programs (that is, CHIP programs operating pursuant to 42 CFR 457.70(a)(2) and (c)). It is not intended to 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 (VFC) Program. Nor is it intended to apply to any other programs within CMS or any other agencies within HHS (for example, the Food and Drug Administration (FDA), Centers for Disease Control and Prevention (CDC), or Health Resources and Services Administration (HRSA)). Rather, we stated that the proposed changes would only specify which products are vaccines and are therefore excluded from the definition of a COD under the MDRP and thus are not subject to section 1927, including to MDRP rebate liability; the proposed changes would not apply to any applicable Federal or State requirements to cover vaccines for Medicaid beneficiaries, as applicable. We appreciate the thoughtful comments we received on this issue. At this time, we are not finalizing the proposed regulatory definition. We are continuing to review the input provided by commenters, which may inform future rulemaking on this topic.

7. Proposal To Account for Stacking When Determining Best Price

We proposed 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. CMS received a number of thoughtful comments on this issue, and we have determined not to finalize the proposed regulation changes at this time. We are continuing to review the input provided by commenters. We intend to collect information through a separate Paperwork Reduction Act (PRA) request to collect additional information related to manufacturers' stacking methodologies, which may inform future rulemaking on this topic.

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. We proposed to limit the time period during which manufacturers may initiate disputes, hearing requests, and audits of State-invoiced utilization units to 12 quarters from the last day of the quarter from the date of State invoice to the manufacturer. Upon reviewing comments, we believe referencing the invoice postmark date instead of the date of the State invoice offers the same clarity for both States and Manufacturers on the timeline initiation and would align with previous DP policy. Therefore, we are finalizing as proposed, with the exception of referencing “postmark date” instead of “the date of the State invoice”.

9. Proposal Regarding Drug Price Verification Through Data Collection

Section 1927(b)(3)(B) of the Act authorizes the Secretary to “survey wholesalers and manufacturers that directly distribute their [CODs], when necessary, to verify manufacturer prices” reported under section 1927(b)(3)(A) of the Act. Under this authority, we proposed rules to describe those situations when it would be considered “necessary” for such surveys to be sent to manufacturers and wholesalers, and the information that would be requested to use in order to verify the reported prices at issue.

We appreciate the thoughtful comments we received on this issue, and we determined not to finalize the proposed policy at this time. We are continuing to review the input provided by commenters, which may inform future rulemaking on this topic.

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

In the 2016 COD final rule, we finalized at § 447.518 moving 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. We proposed to revise § 447.518, “State plan requirements, findings, and assurances,” in paragraph (d)(1) to clarify State requirements regarding pharmacy ingredient costs and professional dispensing fees to be consistent with the applicable statutory and regulatory requirements, specifying in particular that any dispensing fee surveys must be based on actual pharmacy dispensing costs data and not market research data. We are finalizing as proposed.

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

In accordance with section 1927(a)(7) of the Act, for payment to be available under section 1903 of the Act, and for States to secure applicable Medicaid rebates, States are to provide for the collection and submission of utilization data and coding (such as J-codes
4

and NDC numbers) for a COD that is a physician-administered single source drug as determined by the Secretary, or that is a multiple source drug that is determined by the Secretary to be a top 20 high dollar volume PAD dispensed under Medicaid (as identified on a published list).
5

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 2007 final rule), specifying the conditions for FFP for PADs.
6

4
J codes are a subset of the Healthcare Common Procedure Coding System (HCPCS) Level II code set used to primarily identify injectable drugs.

5

https://www.medicaid.gov/medicaid/prescription-drugs/state-prescription-drug-resources/physician-administered-drugs-pad/index.html.

6

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

We proposed to amend § 447.520 to require States to collect NDC information on all covered outpatient single and multiple source PADs and to specify that States must invoice for rebates for all covered outpatient PADs to receive FFP and secure manufacturer rebates. We are finalizing as proposed but have added a discussion of our statutory authority for extending this requirement by regulation beyond the top 20 multiple source drugs already required by statute.

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

We proposed 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, when there is a continued failure to report after a 90-calendar day deadline is imposed by the agency. Specifically, we proposed in § 447.510(i) that a manufacturer must report information required under § 447.510(a) and (d), and the failure to report such information to the agency after the end of an imposed 90-calendar day period would result in suspension of the manufacturer's rebate agreement, and that such agreement would not be reinstated until such information was reported in full and certified, but not for a period of suspension of less than 30 calendar days. We are finalizing as proposed.

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 enrollee 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 identifier, can specify that a patient is covered by a specific insurance group, such as being a Medicaid managed care enrollee.

Without the BIN, PCN, and group number identifiers, it is often difficult to determine from a Medicaid managed care enrollee's identification 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.

While the use of Medicaid-specific BIN, PCN, and group number identifiers does not assist in identifying claims for drugs purchased under the 340B Drug Pricing Program (340B Program), it may help States and their managed care plans avoid invoicing for rebates on 340B drugs by identifying which plans are covered under Medicaid. Section 340B(a)(5)(A) of the Public Health Service Act (the PHS Act) prohibits duplicate discounts for drugs purchased under the MDRP. Identifying claims where the dispensed drug has been discounted under the 340B Program is necessary to avoid duplicating that discount in the MDRP.

Therefore, under the authority of section 1902(a)(4) of the Act, to ensure effective implementation of and compliance with sections 1927(a)(5)(C) and 1927(j)(1) of the Act, we proposed to amend § 438.3(s) to require States to require (via standard contract requirements) 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 enrollee identification cards for pharmacy benefits. Based on comments received, we are changing the requirement to be a unique BIN/PCN combination with a group number identifier, as well as the effective date.

b. Drug Cost Transparency in Medicaid Managed Care Contracts

Medicaid managed care plans often contract with a subcontractor Pharmacy Benefit Manager (PBM) to operate the pharmacy benefit provided to Medicaid beneficiaries. 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 were 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 incurred claims for health care services and drug costs) and administrative expenses, such as fees paid to its PBM for PBM services (for example, claims adjudication and processing prior authorization requests).

Therefore, we proposed that MCOs, PIHPs, and PAHPs that provide coverage of CODs require any subcontractor to report the amounts related to the incurred claims described in § 438.8(e)(2) separately from any administrative costs, fees, and expenses of the subcontractor. Based on comments received, we are finalizing as proposed, with a few clarifying changes. We are adding “MCO, PIHP or PAHP” in a few places to be consistent with other paragraphs in 42 CFR 438.3(s) and are adding a subsection to include an effective date, which will be the first rating period for contracts beginning on or after 1 year following the effective date of the rule.

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 accumulator provisions within the 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.” 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, for consistency, we proposed to withdraw the changes related to patient assistance to both the AMP and best price sections made by the 2020 final rule so that the regulations would revert back to the language that has been in place since 2016. We are finalizing this provision as proposed.

15. Proposals Related to Amendments Made by the American Rescue Plan Act of 2021—Removal of the 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 the Act to add “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 the 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 the 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 proposed to make conforming changes to § 447.509 to reflect the removal of the limit on maximum rebate amounts for rebate periods beginning on or after January 1, 2024. We are finalizing this provision as proposed.

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

We solicited comments 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 were particularly interested in understanding any operational implications, privacy related concerns, associated burden, and approaches 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.

We appreciate the thoughtful comments we received on this issue, and we determined we are not moving forward with any proposed regulations regarding this topic at this time.

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 certain 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.

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 submitted 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.

D. Applicability and Compliance Timeframes

Generally, we are finalizing that this rule, including the proposals being finalized herein, will be effective 60 days after publication of this final rule, with the exception of two provisions in the Standard Medicaid Managed Care Contract Requirements section. We are including Table 1 with these provisions and relevant timing information and dates. We encourage all interested parties to confirm the applicability dates indicated in this final rule for any changes from the proposed.

Table 1—Applicability Dates

Regulation text
Applicability date

§ 438.3(s)(7)
First rating period for contracts with MCOs, PIHPs, and PAHPs beginning on or after 1 year following November 19, 2024.

§ 438.3(s)(8)
First rating period for contracts with MCOs, PIHPs, and PAHPs beginning on or after 1 year following November 19, 2024.

II. Summary of Proposed Provisions, Analysis of and Responses to Public Comments, and Provisions of the Final Rule

The proposed rule to implement regulatory 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 address drug misclassification, as well as drug pricing and product data misreporting by manufacturers, was published on May 26, 2023 (88 FR 34238). As discussed in the proposed rule, we also made proposals to enhance program integrity and improve program administration for the MDRP. The proposals included a time limitation on manufacturers initiating audits with States, clarifications and requirements for State fee-for-service (FFS) pharmacy reimbursement, and the establishment of conditions relating to States claiming Federal Financial Participation (FFP) for physician-administered drugs (PADs). Other proposals included two new requirements for contracts between States and their Medicaid managed care plans in connection with coverage of covered outpatient drugs (CODs). In addition, the rule included a proposal not directly related to the MDRP that would modify the third-party liability regulation based on the Bipartisan Budget Act of 2018 (BBA of 2018). Finally, the proposed rule solicited comments related to the issues, benefits, and challenges of requiring the inclusion of diagnoses on Medicaid prescriptions.

We received 128 comments from drug manufacturers, membership organizations, law firms, pharmacy benefit managers (PBMs), State Medicaid agencies, advocacy groups, not-for-profit organizations, consulting firms, health care providers, employers, health insurers, health care associations, and individuals. The comments ranged from general support or opposition to the proposed provisions to very specific questions or comments regarding the proposed changes.

We also received public comments on this regulation that were out of scope for this rulemaking, and, therefore, are not being addressed in this rule. The following summarizes comments about the proposed rule in general or about specific issues that are not addressed in this final rule.

Comment:
Several commenters submitted comments that were outside of the scope of the proposed rule. Examples of out-of-scope comments include but are not limited to whether Medicaid accepts JW/JZ modifiers when billing radiopharmaceuticals at free-

standing radiology offices, the amount charged for a specific drug per month, and comments on CMS' “Medicare Part D Drug Inflation Rebates Paid by Manufacturers: Initial Memorandum, Implementation of Section 1860D-14B of Social Security Act, and Solicitation of Comments,” that CMS issued on February 9, 2023.

Response:
We appreciate commenters' interest in these topics. However, because these comments are outside of the scope of the proposed rule, we are not addressing them in this final rule.

Comment:
A commenter stated that Federal agencies must align their rules and proposals to ensure compatibility. The commenter believes there are a variety of currently proposed, pending, or expected rules from CMS and the Office of the National Coordinator for Health Information Technology (ONC) that are not completely independent from each other; they noted, in some cases, there may be components of different rules that contradict each other, and in other cases, they may be written in ways that unnecessarily increase the burden on one or more parties subject to the rule. Specifically, the commenter mentioned CMS discusses requiring NDC codes for medications in this rule, but the recent ONC Health Data, Technology, and Interoperability: Certification Program Updates, Algorithm Transparency, and Information Sharing (HTI-1) Proposed Rule discusses the possibility of deprecating support for NDC codes in its certification programs in favor of always requiring use of RxNorm for medications. Concerns were raised that the rules were not coordinated so that their requirements are compatible and executable without placing additional burden on individuals or organizations that need to implement more than one rule.

Response:
We appreciate the request for Federal agencies to align their rules to ensure compatibility. We are addressing only those proposals that were part of the proposed rule (88 FR 34238 through 34296). See also the discussion in section II.L., Federal Financial Participation (FFP): Conditions Relating to Physician Administered Drugs related to the HTI-1 final policy and CMS and ONC collaboration.

Comment:
A commenter requested CMS postpone finalizing the proposals in the proposed rule. The commenter encouraged CMS to actively seek additional feedback from interested parties, including individuals and advocacy organizations who represent those most affected by Medicaid coverage challenges.

Response:
Through the rulemaking process, the proposed rule was published, and the public was provided the opportunity to comment on the proposed rule's provisions. We have reviewed and addressed public comments and will proceed with finalizing the rule as noted herein.

A. Payment of Claims (42 CFR 433.139)

In the proposed rule, we included regulatory revisions that would make technical changes to the process for making payment of Medicaid claims. As background, we noted that in 1980, under the authority in section 1902(a)(25)(A) of the Act, we issued regulations at part 433, subpart D, that established requirements for State Medicaid agencies to support the coordination of benefits (COB) effort by identifying third party liability. We pointed out that § 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.

To better align our regulations with statute, 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 also proposed 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. Additionally, we proposed 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.

We received two public comments on this proposal. The following is a summary of the comments we received and our response.

Comment:
The commenters stated that they were in support of our proposed regulation changes.

Response:
We appreciate the support on this section.

After consideration of public comments on these provisions, we are finalizing as proposed.

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

1. BIN/PCN on Medicaid Managed Care Enrollee Identification Cards

In the proposed rule, we included a provision 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 enrollee identification cards for pharmacy benefits. Although not required to issue enrollee identification cards, it is a standard business practice for the MCOs, PIHPs, and PAHPs to routinely issue such cards for pharmacy benefits for Medicaid enrollees. We proposed that the States' managed care contracts with MCOs, PIHPs, and PAHPs must comply with this new requirement no later than the beginning of the State's next rating period for Medicaid managed care contracts following the effective date of the final rule adopting this new regulatory provision. A rating period is defined in § 438.2 as a period of 12 months selected by the State for which the actuarially sound capitation rates are developed and documented in the rate certification submitted to CMS, and typically begins with a calendar year or a State's fiscal year. We indicated 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 enrollee identification cards with these newly required Medicaid-specific BIN, PCN, and group number identifiers.

This proposal was made 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 enrollees to add these types of unique identifiers to the enrollee identification cards would make the Medicaid drug program run more efficiently and improve the level of pharmacy services provided to Medicaid enrollees. With the inclusion of Medicaid-specific BIN, PCN, and group number identifiers on the enrollee

identification cards issued to the enrollees of MCOs, PIHPs, and PAHPs, pharmacies would be able to identify patients as Medicaid enrollees, and better provide pharmacy services. This would be helpful to all parties to ensure that Medicaid benefits are provided correctly, including confirming any accurate cost sharing amounts, along with helping to ensure that claims are billed and paid for appropriately.

This proposed change may help to reduce the incidence of 340B Program duplicate discounts by identifying Medicaid managed care plans. 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.

Accordingly, we proposed to amend the regulatory language in § 438.3(s) to add paragraph (s)(7) to mandate that Medicaid managed care contracts require that Medicaid MCOs, PIHPs, and PAHPs that provide coverage of CODs assign and exclusively use unique Medicaid BIN, PCN, and group number identifiers for all Medicaid managed care enrollee identification cards for pharmacy benefits. We proposed that Medicaid managed care contracts 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 received public comments on these proposals. The following is a summary of the comments we received and our responses.

Comment:
Many commenters supported the use of unique Medicaid-specific BIN, PCN, and group number identifiers for managed care enrollees to ensure proper enrollee identification, application of benefits, and claims and billing processes, which would aid in reducing uncertainty and ambiguity with Medicaid prescribed drug claims. Commenters believe that this will help pharmacies identify patients as Medicaid managed care enrollees and support administration of appropriate Medicaid benefits. Some commenters also noted that many States report that they either already require unique BIN, PCN, and group identifier numbers or believe that this would be feasible to implement.

Response:
We appreciate the support and agree that unique BIN, PCN, and group number identifiers on Medicaid managed care pharmacy identification cards will be helpful in supporting the administration of the Medicaid program.

Comment:
Several commenters supported adding the requirement that Medicaid managed care enrollee identification cards contain BIN and PCN numbers but suggested that the requirement should be for a BIN and PCN group combination, instead of requiring unique identifiers separately. These commenters recommended that CMS clarify that the requirement would be met by the inclusion of a unique combination of BIN, PCN, and group number identifiers on Medicaid enrollee identification cards to identify a patient as a Medicaid enrollee with coverage through a specific Medicaid managed care plan contract. Other commenters suggested that requiring unique BIN and PCN combinations for managed care Medicaid enrollees would be more effective.

Response:
We agree that separate, unique BIN and PCN numbers would not be as effective as having a unique Medicaid-specific BIN and PCN combination, along with a group number identifier, to be issued for Medicaid managed care identification purposes. We understand that without having a unique BIN and PCN combination requirement, there could potentially be thousands of separate, individual new BINs and PCNs. Therefore, as we noted in the response to the previous comment, we are finalizing this requirement and are adding the term “combination” in this final rule so that a unique BIN and PCN combination, along with a group number identifier, will be assigned for Medicaid managed care enrollees' identification cards.

Comment:
Several commenters suggested that a list of unique Medicaid-specific BIN and PCNs with effective dates be publicly published and updated in a timely manner. One commenter requested that CMS publish the list by surveying States for unique BIN and PCN numbers used for Medicaid managed care enrollees and publishing a list of all such BIN and PCN numbers, similar to how HHS publishes lists of BIN and PCN numbers used to identify Medicare Part D beneficiaries. Additionally, one commenter suggested that Medicare and Medicaid standardize the process by which the BIN and PCN numbers are published, along with the publication of an up-to-date list of the unique BIN and PCN numbers.

Other commenters suggested that the States publish the lists on their websites, since they currently cannot be found in a centralized location. One of these commenters believes that the creation of a publicly published list of numbers would aid States' monitoring and oversight efforts for this plan requirement. This commenter also recommended CMS provide guidance on pharmacy point of sale (POS) operations to aid associated State monitoring and oversight.

Another commenter recommended that the BIN and PCN numbers be published on a list in machine readable form, mirroring how CMS publishes BIN and PCN numbers for Medicare Part D beneficiaries via various CMS web pages, such as the page entitled “Part D Information for Pharmaceutical Manufacturers.”
7

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https://www.cms.gov/medicare/coverage/prescription-drug-coverage/part-d-information-pharmaceutical-manufacturers.

Response:
We appreciate the recommendations from the commenters concerning the publication of a list with unique BIN and PCN identification numbers; however, we decline to adopt these suggestions. Because States have the option of publishing a listing of their MCOs, PIHPs, and PAHPs with the related BIN and PCN combinations, along with the group number identifiers in any format on their websites, CMS defers to States to determine if they believe this would improve operations to include this information in one centralized location.

Comment:
One commenter requested clarification on whether this requirement for unique BIN, PCN, and group number identifies is applicable to Title XXI CHIP, State-funded programs in addition to Title XIX Medicaid.

Response:
This regulation applies to Medicaid and CHIP managed care programs subject to the requirements in 42 CFR part 438 in Title XIX (Medicaid). This regulation does not apply to the separate CHIP programs operating pursuant to 42 CFR 457 in Title XXI (State Children's Health Insurance Program). States may also choose at their option to consider a similar standard for State-funded programs.

Comment:
Several commenters recommended changes to the applicability date for the requirement to include unique BIN, PCN, and group number identifiers on Medicaid managed care enrollee identification cards for pharmacy benefits. These commenters expressed concern with the proposed applicability date as they did not believe it was feasible to implement this requirement by the next rating period for Medicaid managed care contracts following the effective date of the final rule. Commenters indicated additional time was needed for necessary operational changes including

information system development, configuration and testing as well as the creation of new enrollee identification cards and associated distribution to enrollees. Commenters varied in the recommended delay with timeframes with recommendations ranging from 12 to 18 months.

One commenter recommended that the applicability date be accelerated to implement the inclusion of BIN, PCN, and group number identifiers before the next contract rating period for managed care plans as the commenter believes this could prevent 340B duplicate discounts.

A few commenters were in support of unique BIN, PCN, and group number identifiers for each enrollee on Medicaid managed care enrollee identification cards but suggested that this requirement apply prospectively only to new Medicaid managed care plan contracts entered into or renewed after the effective date, as requiring mid-term contractual amendments would be disruptive and burdensome. They requested additional time sufficient for systems development, configuration, testing, PBM support, and card development. A commenter stated that many State Medicaid programs enter into multi-year contracts with managed care plans that may still be in effect by the time this rule is finalized.

Another commenter requested that as CMS finalizes an applicability date for this provision that it considers the need to update industry specifications that go through substantive, formal approval processes prior to a formal adoption by a standards-setting authority. The commenter suggested using existing standards and processes, when possible, for consistency between Medicare Advantage and Medicaid in the way these numbers are presented, if possible.

Response:
We appreciate the issues raised concerning the timeframe for including Medicaid-specific BIN and PCN combinations, along with group number identifiers on enrollee identification cards for Medicaid managed care enrollees. We agree that additional time may be needed for all MCOs, PIHPs, or PAHPs to implement these requirements.

Therefore, we are finalizing the applicability date for this provision to be the first rating period for contracts with managed care plans beginning on or after 1 year following the effective date of this final rule.

Comment:
A few commenters stated that the BIN definition, format, and field used in pharmacy claims transactions would be changing as of the next version of the Telecommunication Standards named under HIPAA. One commenter noted that CMS recently proposed to update the NCPDP Telecommunication Standard in a proposed rule. The commenter stated that the proposal has not yet been finalized but is expected soon and will most likely require health plans to distribute new member enrollee identification cards during the implementation period. The commenter recommended that CMS should consider any unintended administrative impacts that could occur due to the timing of rule implementation and the resulting need to reissue enrollee identification cards.

Response:
We appreciate the information that was shared regarding the upcoming changes to the Telecommunication Standards. As stated previously, we are extending the applicability date in this final rule for this provision to be the first rating period for contracts with managed care plans beginning on or after 1 year following the effective date of this final rule. We believe this additional time will allow States and managed care plans additional time to undertake the operational activities associated with this requirement, including any changes to the Telecommunication standards.

Comment:
Multiple commenters supported the unique BIN, PCN, and group number identifier requirements and suggested additional policies to be developed to eliminate 340B Program duplicate discounts. Commenters believe that this provision will not fully address the risk of 340B duplicate discounts in Medicaid managed care and urged CMS to consider additional policies designed to avoid Medicaid and 340B Program duplicate discounts, including, but not limited to, a “carve out” approach, wherein drugs purchased under the 340B Program may not be furnished to Medicaid enrollees, a claim-level identification approach, and requiring the usage of 340B Program claims modifiers. Another commenter believes that if 340B covered entities disclosed to insurers when drugs administered to their enrollees (or prescriptions filled in contracted pharmacies) were purchased via the 340B Program, this would assist with the prohibition on duplicate discounts. Other commenters suggested that CMS should not allow providers to submit Medicaid claims until after completing a 340B eligibility screening and requiring States to provide detailed claim-level utilization data to manufacturers. One commenter recommended that comparable identifiers be used for medical benefit products.

A few commenters suggested requiring pharmacies to enter BIN, PCN, and group number identifiers at the point of sale, so that having the identification of a Medicaid managed care enrollee can signal to the pharmacy to append the NCPDP “20” submission clarification code so that the claim can be excluded from States' invoices to manufacturers for Medicaid rebates. Other commenters stated that there are challenges with requiring a point-of-sale modifier for contract pharmacies. Other commenters noted that 340B determination of a prescription drug claim is not always known at the point of sale. They stated that 340B determination is often made retrospectively based on several factors, such as the replenishment model and batch reporting to a clearinghouse.

Multiple commenters stated that they oppose pharmacies being required to identify 340B claims either prospectively or retroactively, but support an alternative solution where third-party administrators provide 340B data to CMS. They also stated that there remains no requirement for pharmacies to implement a system to flag a claim as Medicaid.

Several commenters recommended clarity on the dispute resolution process to determine if the State or the covered entity is responsible for remedying a duplicate discount in a particular situation. Commenters suggested that CMS issue guidance to States to establish a transparent and consistent dispute resolution process to resolve issues regarding duplicate Medicaid/340B discounts between manufacturers and State Medicaid agencies. Commenters also stated that Medicaid managed care plans contracting with States, to help assure accountability on duplicate discounts, should be required to share data with manufacturers to permit identification of claims for which the drug was purchased under the 340B Program.

Other commenters encouraged CMS to work with the Health Resources and Services Administration (HRSA) to ensure that Medicaid managed care plan utilization is added to the Medicaid Exclusion File (MEF) as a way to establish a mechanism to track and avoid duplicate discounts on Medicaid managed care plan utilization. A few commenters suggested that it would be more appropriate for HRSA to require that “340B patients” receive enrollee identification cards for their 340B prescription drug benefits with this type of plan identifier information through their 340B covered entities.

Response:
We believe that the new requirement for the inclusion of a

unique Medicaid-specific BIN and PCN combination, along with a group number identifier, may help States and their managed care plans avoid invoicing for rebates on 340B drugs by identifying which plans are covered under Medicaid. While we appreciate the comments received for additional ways to improve the operations of the 340B Program, these suggestions are outside of the scope of this final rule.

Comment:
A few commenters expressed opposition to the exclusive use of unique Medicaid-specific identifiers on enrollee identification cards. Reasonings include that the addition of exclusive BIN and PCN numbers is insufficient policy action to reduce or eliminate 340B duplicate discounts and that the action is unduly burdensome and unlikely to have a meaningful impact on 340B duplicate discounts. One commenter requested that CMS allow for continued use of the existing identification numbers.

Another commenter stated that the inclusion of identifiers on enrollee identification cards could make it easier to engage in discriminatory reimbursement for 340B covered entity providers. They stated that such discriminatory reimbursement could have a negative effect on certain 340B covered entities. Other commenters requested that CMS not implicate pharmacies in the process of identifying and reconciling 340B claims.

One commenter was opposed to this BIN, PCN and group number identifier requirement since they believe the main purpose was to help States and managed care plans identify claims for drugs paid for under the 340B Program to help avoid duplicating discounts or rebates via the MDRP. For their managed care delivery system in which Medicaid managed care enrollees primarily access care from plans and contracted providers that do not participate in 340B, the commenter stated that there would be a significant operational burden to deploy new enrollee identification cards with BIN, PCN, and group number identifiers without a corresponding benefit.

Another commenter also stated that creating a unique BIN and PCN for each managed care plan would be unduly burdensome. They recommended amending this proposal such that this requirement would only apply to unique group number identifiers, and not BIN and PCN, on Medicaid managed care enrollee identification cards for pharmacy benefits. Other commenters recommended that Medicaid be consistent with the policy requiring Medicare Part D plan to use unique BIN and PCN combination identifiers, and not include group number identifiers, to identify enrollees.

Response:
We appreciate the concerns raised by the commenters but believe that mandating that States require their MCOs, PIHPs, and PAHPs that provide CODs to Medicaid enrollees to include a unique Medicaid-specific BIN and PCN combination, and group number identifiers, on the enrollee identification cards would make the Medicaid drug program run more efficiently, help avoid 340B duplicate discounts, and improve the level of pharmacy services provided to Medicaid beneficiaries.

Pharmacies' identification of patients as Medicaid enrollees based on the inclusion of Medicaid-specific BIN, PCN, and group number identifiers on the enrollee identification cards must not be used in any way to discriminate in the provision of healthcare services, and such alleged behavior may be referred to HHS' Office for Civil Rights or other authorities.

After considering the comments raised by the commenters, we are finalizing § 438.3(s) with some changes to the proposed regulatory text. We will modify § 438.3(s)(7) by: adding “combination,” so that a unique BIN and PCN combination, and group number identifiers, will be assigned and used on enrollee identification cards; removing the comma after “(BIN)” and replacing it with “and” for grammatical correctness; and replacing “beneficiary” with “enrollee” to accurately acknowledge that enrollee identification cards are provided to a Medicaid beneficiary enrolled in a managed care plan in a given managed care program. Furthermore, we are revising the applicability date for this provision to be the first rating period for contracts with MCOs, PIHPs, and PAHPs beginning on or after 1 year following the effective date of the final rule. To accomplish this, we are removing the proposed applicability date from § 438.3(s)(7) and establishing § 438.3(w) with this applicability date.

2. Drug Cost Transparency in Medicaid Managed Care Contracts

In the proposed rule, we included a provision that would require that the contracts between States and MCOs, PIHPs, and PAHPs that provide coverage of CODs require these managed care plans to structure contracts with any subcontractor, which may include 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. As part of our proposal, we noted that these subcontractors may include PBMs.

As stated in the preamble of the proposed rule, PBMs are intermediaries in the relationship between the managed care plans and the health care (medical and pharmacy) providers that provide CODs. That is, PBMs have contracts with both the managed care plans to administer the pharmacy benefit, as well as with the health care providers that administer or dispense 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 providers that can dispense or administer drugs to managed care enrolled patients.

PBMs also may negotiate pharmacy reimbursement rates on behalf of the various health plans, including Medicaid managed care plans with which it contracts, to pay the pharmacy and other health care providers for the CODs 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 pharmacy reimbursement rates for brand name and generic prescription drugs, as well as the dispensing fees paid to dispense or administer the prescription drug. In addition, there are also administrative fees paid to the PBM by the managed care plans for its administration and operation of the pharmacy benefit.

The margin between the amount charged by the PBM to a managed care plan for a COD and the amount paid by the PBM to a pharmacy provider is referred to as the “spread,” and this construct is referred to as “spread pricing.” A detailed description and example of how spread pricing works and how it may affect Medicaid spending for prescription drugs was included in the proposed rule at 88 FR 34250 thru 34251. The amount of this margin or “spread” may only be known by the PBM, unless a State Medicaid program or managed care plan specifically requires the 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 managed care plans, and thus 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. 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.

We further noted in the preamble to the proposed rule that 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 are paid, are both necessary for efficient and proper operation of Medicaid programs. Moreover, this lack of transparency makes it more difficult for States and Medicaid-managed care plans to ensure that the plan's Medical Loss Ratio (MLR) calculation is limited to the true medical costs associated with the provision of CODs. We noted that MLR calculations are used as part of capitation rate development. Capitation rates are paid to Medicaid managed care plans; thus, their accuracy is critical in assuring that Medicaid payments are reasonable and appropriate. We further noted that 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, requirements related to accurate MLRs are key to ensuring that Medicaid managed care capitation rates are actuarially sound. In addition, Medicaid managed care plans may need to pay remittances to States should they not achieve a specific MLR target when a remittance is required by a State. Thus, the accuracy of MLR calculation is important to conserving Medicaid funds.

We also pointed out that CMS issued a Center for Medicaid & CHIP Services (CMCS) Informational Bulletin on May 15, 2019, for States and 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
), specifying MLR data collection requirements when a managed care plan uses subcontractors for plan activities. The 2019 CIB provided additional guidance, including an example regarding the MLR data collection requirements when third party vendors, such as PBMs, are involved. However, while the 2019 CIB uses PBM spread pricing as a specific example, there was nothing currently in Federal regulation that specifically detailed contract requirements that (non-claim) administrative costs, fees, or expenses of a managed care plan's subcontractor should not be counted as incurred claims for purposes of the managed care plan's MLR calculation.

In addition, the preamble to the proposed rule discussed that the Medicaid managed care regulation at § 438.230(c)(1) requires that certain agreements are to be included in subcontracts, including that subcontractors agree to perform the delegated activities and reporting responsibilities in compliance with the managed care plan's contract obligations, and that 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 explained how these regulatory obligations require 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 and that the requirements and definitions in § 438.8 for these categories of costs and expenditures must be applied to the required reporting.

For these reasons, we proposed to amend § 438.3(s) to require 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 to require the subcontractor to report separately the amounts related to: (i) The incurred claims described in § 438.8(e)(2) such as reimbursement for the covered outpatient drug, payments for other patients services, and the fees paid to providers or pharmacies for dispensing or administering a covered outpatient drug; and (ii) Administrative costs, fees and expenses of the subcontractor. We noted that this proposal will 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.

We received public comments on these proposals. The following is a summary of the comments we received and our responses.

Comment:
Many commenters supported the requirement that managed care plans separately report the amounts for incurred claims for CODs and not include administrative costs in the MLR numerator, and by doing so, this new requirement would provide transparency to help identify PBM spread pricing practices that potentially lead to pharmacies being underpaid for their services. Other commenters, while supporting the proposal, questioned why spread pricing is not entirely prohibited.

Response:
We appreciate commenters' support regarding the regulation as proposed. We note that CMS does not have the authority under Federal Medicaid statute to prohibit a PBM's practice of spread pricing. However, we believe this regulation, once final, will provide greater transparency to State Medicaid agencies and managed care plans regarding how the PBMs are spending the payments that are made to them by the Medicaid managed care plan to administer the Medicaid prescription drug benefit. We believe this information will help to inform the State's decision-making relating to the administration of the prescription drug benefit. It will also help the Medicaid managed care plans have more accurate data to calculate their MLRs, as well as ensure that States can accurately develop capitation rates. Finally, it will help States and managed care plans ensure that PBMs are being appropriately compensated for their services by requiring that the subcontractors report separately incurred claims for CODs and administrative fees, costs, and expenses in sufficient detail and the level of detail must be no less than the reporting requirements in 42 CFR 438.8(k).

Comment:
With respect to CMS' proposal to separate the amounts related to incurred claims (for example, COD reimbursement and dispensing fees) from a PBM's administrative fees, commenters urged CMS to also consider downstream impacts in the supply chain. The commenters indicated that to support robust pharmacy market competition and lower health care costs for beneficiaries, CMS must ensure that pharmacies and other health care providers' proprietary information, such as the pharmacy reimbursement (dollar amount) is not disclosed and cannot be traced back to an individual pharmacy. The commenters also indicated that they understand the difficulty in balancing both promoting market

competition and striving for greater transparency in the marketplace; however, these commenters noted this balance could be achieved with transparent accountability measures and comprehensive PBM reform.

Response:
We continue to believe this requirement will not deter market competition because it does not require public disclosure of provider-specific proprietary information. Instead, § 438.3(s)(8) will require that the managed care plans contract with the subcontractor will require the subcontractor report separately incurred claims and administrative costs, fees and expenses of the subcontractor necessary for the managed care plan's reporting of the MLR consistent with the requirements at § 438.8(e)(2). The reporting must be in 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. As provided in the 2019 CIB, the level of detail must be no less than the reporting requirements in 42 CFR 438.8(k), but may need to be more if 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. We note that there is nothing in the regulation that prevents the subcontractor from negotiating terms limiting the identification of provider-specific expenditures in the contract with the managed care plan, as long as those terms are consistent with the requirements of this final rule and other Federal contract requirements in regulation at 42 CFR part 438.

Comment:
Many commenters requested that CMS implement Federal requirements on PBMs' arrangements with pharmacies rather than just focus on contracting requirements between the managed care plans and PBMs. The commenters encouraged CMS to consider issuing rulemaking that would enhance pharmacy network adequacy, ensure reasonable reimbursement for pharmacies, require certain payment models for managed care plans that cover CODs, and promote payment parity between PBM affiliated and non-affiliated pharmacies in Medicaid managed care. Other commenters suggested including data quality controls, alignment with other payer models, and limitations of reimbursements to non-PBM affiliates. Specifically, commenters requested that CMS revise § 438.3(s)(8) to:

• Require managed care plans eliminate spread pricing, such as by requiring the plans to utilize certain payment models with their PBM subcontractors which dictate how much the PBM is paid for their administrative activities and require specific payment models of how much providers and pharmacies are paid. The commenter also pointed to its support of current proposed Federal legislation (S. 1038, Drug Price Transparency in Medicaid Act of 2023/HR 3561, the PATIENT Act) that includes similar proposals that would ban spread pricing in Medicaid.

• Require that managed care plans' contracts with their subcontracted PBMs require reimbursement for all in-network pharmacies in the managed care program based on a transparent benchmark of National Average Drug Acquisition Cost (NADAC), or WAC when there is not a NADAC price, for a Medicaid COD with a commensurate dispensing fee comparable to the State's Medicaid survey-based fee-for-service PDF as a final payment, absent written proof of fraud. The commenter also suggested that CMS should require that the managed care plan only include these claim cost payments paid by the PBM to the pharmacy for the managed care plan's reported MLR to a State Medicaid program.

• Prohibit managed care plans and their subcontracted PBMs from reimbursing non-PBM affiliated pharmacies less than PBM-owned or PBM-affiliated pharmacies.

The commenters expressed their belief that by adding these provisions to the proposed regulations, CMS would take important steps to eliminate the managed care PBM practices that the commenter indicates have led to nearly $1 billion in Medicaid fraud settlements by 17 States against managed care plans for overbilling Medicaid programs for managed care prescription benefits.

Response:
We are aware of the settlements between PBMs and States, and the potential that such spread pricing arrangements will result in overbilling Medicaid. We believe that § 438.3(s)(8), which will require the subcontractor report to the managed care plan separately incurred claims (for example, covered outpatient drug reimbursement) from administrative costs, fees, and expenses for purposes of calculating the managed care plan's MLR, will likely impact the practice of PBM spread pricing. That is, greater transparency to the States of how prescription expenditures are being allocated by the PBMs contracted with the Medicaid managed care plans to provide pharmacy benefits may reduce the likelihood that the PBM will engage in spread pricing.

Furthermore, we are aware of actions taken by individual States at their option to end or limit impact of PBM spread pricing, including in Medicaid. However, as noted in the preamble, we do not believe we have Federal authority to prohibit spread pricing. Nonetheless, we believe that this final rule will provide greater transparency to State Medicaid agencies and Medicaid managed care plans to help inform the State's decision-making relating to the administration of the prescription drug benefit and improving accuracy of plans' MLR calculations.

With regards to pharmacy reimbursement, the adequacy of reimbursement by managed care plans or their subcontractors to their network or non-network pharmacies or providers is out of scope of this final rule. Furthermore, CMS does not have authority to impose on Medicaid managed care plans the State plan requirements at § 447.518, which require State Medicaid FFS payment methodologies for retail community pharmacies be in accordance with the definition of actual acquisition costs at § 447.502, including requiring the use of an Actual Acquisition Cost (AAC) benchmark in setting prescription drug reimbursement at the retail level. These regulations do not apply to Medicaid managed care plan payments to pharmacies or providers for CODs.

We note that if a State or CMS finds that a Medicaid managed care plan does not have a sufficient network of pharmacies or providers to ensure enrollee access to prescription drug benefits, the States and CMS can engage with the Medicaid managed care plans on whether the reimbursement to pharmacies and/or providers for prescription drugs is adequate to attract pharmacies/providers in their network and ensure Medicaid beneficiaries have access to the Medicaid prescription drug benefit. We remind States of their obligation to develop and enforce a quantitative network adequacy standard for pharmacies at § 438.68(b)(1)(vi).

Comment:
One commenter suggested that CMS urge PBMs to disclose and document their profit usage and accounting for when profit is used to augment beneficiaries' drug access. This same commenter questioned CMS' position on PBMs charging insurers higher than what they pay pharmacies, and recommended CMS investigate the efficacy of using PBMs for negotiating reduced drug prices.

Response:
We may consider the commenter's concerns in future policy development. Otherwise, the use of a PBM's profits and investigation of PBM practices are not a subject of this final rule.

Comment:
Several commenters expressed their belief that increasing the level and detail of reporting by PBMs is a good first step in increasing transparency; however, they noted more could be done to protect the intent and the efficacy of the 340B Program and its eligible covered entities by not allowing PBMs to use discriminatory practices, such as PBM payment cuts, that harm hospitals and community health centers that are 340B covered entities and possibly jeopardize patient access to 340B covered entities and contract pharmacies. The commenters indicated that this would allow the savings generated through the 340B Program to be passed along to the PBM to increase their profits. The commenters supported provisions addressing the contracting between PBMs and managed care plans but do not support any policies that will impact a pharmacy's reimbursement.

Response:
The efficacy of the 340B Program and any discriminatory practices of PBMs is out of scope of this final rule. Furthermore, as stated earlier, the adequacy of reimbursement by a plan (via its PBM) to a managed care plan's network or non-network pharmacy, which could be a covered entity, is also not a subject of this final rule, nor is the effect of PBM practices on 340B entities and use of 340B savings.

Comment:
Several commenters supported the proposed changes, including the information subcontractors of managed care plans need to separately identify (separately identify incurred claims from administrative costs, fees, or expenses) and provide to managed care plans, but requested that CMS develop detailed guidance on the specific cost elements to be reported and a reporting template to ensure standardization and ease of adoption. They indicated that it would be helpful for CMS to indicate the specific parameters that would be included in this requirement to provide greater transparency into PBM and pharmacy services administrative organizations (PSAOs) and any other subcontractor that has incurred claims on behalf of the managed care plan associated with covered outpatient drug coverage.

Response:
We appreciate the commenters' request for more detailed guidance. We will evaluate if additional guidance is needed as part of implementation efforts for this requirement and will take these suggestions into consideration as part of that evaluation.

Comment:
One commenter indicated that its State currently requires its managed care plans to produce reports with claim level data on the payment made to the PBM by its managed care plans and the amount of payment the PBM has paid to the pharmacy. In addition to claim level data, the commenter indicated that this State requires its managed care plans to report on all payments, including administrative fees, to and from the PBM, managed care plan, and pharmacies at an aggregate level. The commenter believes additional Federal requirements would strengthen States' abilities to secure data around drug costs. Another commenter further pointed to the National Academy of State Health Policy (NASHP) website, in which NASHP analyzed PBM contracts in a subset of States and developed model contract language to address the lack of transparency and promote cost-saving incentives in typical PBM contracts.

Response:
We appreciate the commenter's support for finalizing § 438.3(s)(8). We do not intend to further revise the Federal requirements in § 438.3(s)(8) at this time. We encourage States to assess if they wish to impose additional reporting requirements on plans or their subcontractors to facilitate State priorities such as those on transparency and payment, or develop model contract language for plans to utilize with their subcontractors.

Comment:
One commenter suggested that CMS consider alignment with other payer models for drug cost data collection, such as the Prescription Drug Data Collection (RxDC) required by the Consolidated Appropriations Act of 2021. The commenter noted that alignment would facilitate the ability of managed care plans to provide cost transparency, minimize burden, and improve the ability of CMS to compare drug costs across delivery systems.

Response:
We appreciate the commenter's suggestion that we align Medicaid data collection efforts from payers with other data collection programs, such as the RxDC, especially for purposes of transparency. However, the data collection required under this provision is distinct from the RxDC program and serves to ensure a Medicaid managed care plan has the data it needs from its subcontractors to accurately calculate and report its MLR.

Comment:
A few commenters requested clarification regarding the applicability date for § 438.3(s)(8) and urged CMS to grant managed care plans and their subcontractors sufficient time, such as 6 months or more, to allow for necessary operational, system, and contracting changes.

Response:
The applicability date for § 438.3(s)(8) as finalized is no later than the State's first rating period for contracts with MCOs, PIHPs, and PAHPs beginning on or after 1 year from the effective date of this final rule. As part of this final rule, we have added § 438.3(w) to finalize this applicability date.

Comment:
One commenter requested that spread pricing information be made public where possible, stating it is vital to the public's interest to understand what the cost of PBMs are to Medicaid and enrollees.

Response:
We assume that the commenter is requesting that CMS and/or States publicly publish the information collected by the managed care plans from PBMs that distinguish the PBM's payment for the drug and the administration fee and how much the managed care plan paid the PBM for such services. This final rule does not modify the elements States are required to include in their MLR summary reports to CMS under § 438.74; therefore, CMS will not have routine access to PBM payment information that is provided by PBMs to managed care plans and cannot release it to the public. States may consider additional steps, such as what level of data they wish to compile from plans and their subcontractors, in addition to those required for reporting in accordance with § 438.74 and associated transparency on the State's public website.

Comment:
A few commenters acknowledged that, making PBMs break out their costs would give State Medicaid programs a better sense of whether spread pricing is occurring, but commenters suggested a more effective approach would be to prohibit spread pricing in Medicaid managed care. They noted that the Congress is currently considering numerous bills related to PBM practices and could include a prohibition of spread pricing in Medicaid managed care as part of those efforts.

Response:
We appreciate the support for this final rule. As noted previously, we do not have the authority to completely prohibit these PBM practices.

Comment:
One commenter requested clarification on the separate identification of a COD, if a COD is deemed to be eligible for a MDRP rebate. The commenter supported a requirement that if a Medicaid managed care plan contracts with any subcontractor for the delivery or administration of CODs, the managed care plan must require the subcontractor to separately identify CODs, even if the

CODs are reimbursed as a bundled payment.

Response:
As specified in § 438.3(s)(8), we are finalizing a requirement for Medicaid MCOs, PIHPs, and PAHPs that provide coverage of CODs to require any subcontractor for the delivery or administration of the COD benefit to report separately the amounts related to the incurred claims described in § 438.8(e)(2), such as reimbursement for the CODs, from the administrative costs, fees, and expenses of the subcontractor. The separate reporting requirement for the delivery or administration of the covered outpatient drug benefit under § 438.3(s)(8) is not limited to those instances when the COD benefit is paid separately as a claim; the separate reporting requirement applies regardless of the COD benefit reimbursement methodology (for example, bundled payment for a specific service).

After consideration of public comments on this provision, we are finalizing § 438.3(s) with some changes to the proposed regulatory text. While we discussed in the preamble of the proposed rule that this would apply to MCOs, PIHPs, and PAHPs, we did not include the phrase “MCO, PIHP, or PAHP” in the regulatory text. Thus, we will modify § 438.3(s)(8) by adding at the beginning of the paragraph the phrase “The MCO, PIHP, or PAHP” to conform with the other paragraphs in § 438.3(s), inserting “must” to replace “to” for additional clarity, and inserting “to the MCO, PIHP, or PAHP” for clarity on the entity that the subcontractor reports the required information to. We also are adding § 438.3(w) to include an applicability date for the requirements of paragraphs (s)(7) and (s)(8), which will be the first rating period for contracts with MCOs, PIHPs, or PAHPs beginning on or after 1 year following November 19, 2024.

C. MDRP Administrative and Program Integrity Changes

1. Definitions (§ 447.502)

a. Modification to the Definition of Covered Outpatient Drug (§ 447.502)

In the proposed rule, we proposed to modify the definition of a COD. We noted as background that 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 other words, a product that would otherwise qualify as a COD, is excluded from the definition if it is administered in certain settings and not directly reimbursed.

We also noted that in the 2016 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) 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 anyone 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.

We noted in the proposed rule that, 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. Such situations would render the drug eligible for rebates under section 1927 of the Act as a COD, or in other words, the limiting definition exclusion would be inapplicable in certain circumstances. We had proposed that, if a drug and its cost can be separately identified on a bundled claim for payment, and the identified amount attributable to the drug is made solely for the drug (and no other services), it can be considered direct reimbursement for the drug. Therefore, we indicated that 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 is separately identified on the claim. The payment for the drug is not required to be a distinct, separate payment for such payment to be considered direct reimbursement.

Specifically, we proposed to amend the regulatory definition of the term covered outpatient drug at § 447.502 to add that direct reimbursement for the drug includes situations in which a claim for an all-inclusive payment identifies the drug plus the itemized cost of the drug.

Additionally, to support our proposal, we noted that 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 definition of the term covered outpatient drug in § 447.502 includes similar limiting language in a 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).” We noted that there was no meaningful distinction between the statutory and regulatory parenthetical language for purposes of the MDRP, and thus, we proposed to make a technical change by modifying the regulatory language so that it more closely mirrors the statutory language. We proposed 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).”

We received public comments on these proposals. The following is a summary of the comments we received and our responses.

Comment:
We received several comments supporting the proposed definition of direct reimbursement with respect to the COD's limiting definition. Some comments provided general support for the proposed definition. One commenter stated that the definition will help ensure that Medicaid beneficiaries with a rare disease continue to have access to affordable outpatient drugs. Another commenter stated that the change will help ensure that States receive the MDRP rebates to which they are entitled, allowing providers to make treatment decisions based on the individual clinical circumstances of a patient. One commenter supported the definition and noted that current claims processing standards support the ability of a claim to contain the required information so that rebates may be billed. One commenter supported the definition and stated they believe that the modification to the definition reflects our current policy, and they requested clarification to confirm that understanding.

Response:
We appreciate the support for the modification of the definition of a direct reimbursement as it relates to the definition of a COD. The modification to the definition was not intended to be a departure from current practice or in conflict with the current regulation or statute. Rather, the modification was intended to address the fact that States are now using newer reimbursement methodologies where it is not entirely clear whether drugs

reimbursed through that new methodology are CODs. As discussed subsequently, we are also adding clarifying language to ensure that our intention is clear that the definition does not inadvertently include drugs that do in fact meet the statutory limiting definition of COD.

Comment:
We received several comments that are outside the scope of this rule. One commenter stated that the modified definition of COD would affect the covered entities that participate under the HRSA 340B Program because they use our definition of COD to determine if a drug is subject to 340B pricing. One commenter stated that CMS fails to convey how medical research and development will be protected with the proposed revisions. A few commenters noted that the modified definition of COD would increase the number of CODs subject to rebates which may make it difficult for manufacturers to continue to offer their drugs in Medicaid.

Response:
Because these 340B issues are outside the scope of this rule, we are not addressing them. We appreciate the commenters' concern regarding the modification of the definition of COD and the increased number of CODs subject to rebates. While we do not believe this clarification to the definition will result in a significant change in the number of CODs, it may increase the number of instances where a COD may qualify for rebates. With respect to impact on research and development, this proposal will clarify for States when a drug is a COD and thus subject to rebates in some instances, and thus may result in States collecting rebates in circumstances where they are not currently collecting any rebates. As a result, States may take these clarifications into account when determining coverage and reimbursement policies for particular drugs. The impact of these clarifications may result in States having a net reduction in cost for these drugs, which may increase access to these drugs, and in turn, support manufacturers' research and development efforts. CMS does not believe that the clarification of the definition of a COD in this rule indicates that scientific drug development is not valued or that the definition will disincentivize the scientific development. The United States pharmaceutical market is the largest in the world, with a strong record of fostering innovation, and Federal health care programs are large payers for medications in the United States, supporting incentives for manufacturers to continue to develop innovative medicines and make drugs available in the Medicaid program.

Comment:
We received many comments stating that our proposed clarification of the term “direct reimbursement” conflicts with the language of the statute. Commenters also stated that the proposed revision would represent a significant and impermissible change to the meaning of the limiting language in the COD definition and stated that it would render language in the statute unnecessary. Commenters pointed to legislative history, assertions made by HHS in litigation that “a drug is not a covered outpatient drug if it is provided, and paid for, as part of a bundled service,” language in the 2016 COD final rule, and responses in an FAQ published under the 2016 COD final rule to support their position that CMS historically considered that a drug was not a COD unless the drug was separately reimbursed. One commenter cited the following language from the 2016 COD final rule to support their position: “a drug which is billed as part of a bundled service with, and provided as part of or incident to and in the same setting as the services” [will only qualify as] a COD if “the State authorizes and provides a direct payment for the drug, consistent with the applicable State plan, separately from the service.”

Response:
Upon review of these comments, we are clarifying for States the situations in which they will be able to bill for a rebate for a COD that is directly reimbursed as part of a bundled or inclusive payment. Specifically, we are clarifying the term “direct reimbursement” as we agree that the proposed regulatory definition may not have clearly identified those situations that will qualify as direct reimbursement. In this final rule, we are adding language to the regulatory definition to indicate that direct reimbursement includes reimbursement for a drug that is part of an inclusive payment when the inclusive payment includes an amount attributable to the drug, the number of units of the drug that were dispensed or administered to the patient, and the amount paid that is attributable to the drug is based on a reimbursement methodology that is included in the applicable section of the State plan.

Comment:
Several commenters disagreed with CMS' assertion that the proposed modification to the definition of COD is a clarification of existing policy on the application of the limiting definition. They stated that rather than a clarification, they view the modification as a policy change with no presented rationale. Commenters also stated that CMS' proposal is a departure from the agency's longstanding policy that no Medicaid rebate liability attaches to units reimbursed via bundled payments. Commenters also stated that our definition marks a significant and unacknowledged departure from the agency's longstanding approach to manufacturer rebate liability. A commenter mentioned that a basic requirement of the Administrative Procedure Act is that an agency must acknowledge that “it is in fact changing its position” and provide good reasons for any change in policy. They stated that CMS failed even to acknowledge its changing position and was, therefore, acting in an arbitrary and capricious manner. A few other commenters referenced language in the preamble to the 2016 COD final rule, when CMS previously stated, “if the drug is provided as part of a bundled service and not separately reimbursed, then the drug does not qualify as a [covered outpatient drug], in accordance with section 1927(k)(3) of the Act and is not subject to rebates.”

Response:
Our intent in the proposed rule was to provide clarification regarding when a payment represents direct reimbursement for a drug. Essentially, we were clarifying that, as used in the quoted language, “not separately reimbursed” in the context of bundled rates means not separately identified or itemized, with an amount associated with payment for the drug. Based on the comments, we agree that our proposed modification to the definition could be further clarified. In the past we have stated that no rebate liability attaches to drugs that are paid for as part of bundled payments. As just noted, this was intended to address situations in which an amount paid for a COD is not identified or itemized. As noted in the preamble to the proposed rule, interested parties have requested that we define situations in which rebates can be billed for drugs that are part of inclusive payments if the quantity of drug dispensed or administered can be identified. As noted in the response to previous comments, we are modifying the definition of direct reimbursement in this final rule to make it clear that, for rebates to be billed, the inclusive payment must include an amount directly attributable to the drug, and the amount paid that is attributable to the drug is based on a reimbursement methodology that is included in the applicable section of the State plan.

Comment:
We received some comments indicating that the proposed change to the definition of COD would

nullify the distinction between direct reimbursement and reimbursement made as part of a bundled payment. Commenters stated that “direct reimbursement” cannot be construed to mean “separately identified” without there being a distinct payment for the drug. Commenters also indicated that CMS failed to acknowledge that where a drug has been paid for as part of an indivisible payment for the drug and its associated services, Medicaid, by definition, has not directly reimbursed for the drug, and there is no “direct” throughline between the reimbursement amount and the payment associated with any one of the bundled items or services. Some commenters also stated that the proposed change ignores what they consider to be a reasonable interpretation of direct reimbursement.

Response:
We agree that the proposed revision to the definition of COD regarding direct reimbursement did not adequately reflect that the amount of reimbursement for the drug should be tied to the State's approved reimbursement methodology for that drug. We have therefore added language to the definition in this final rule to indicate that in order for the payment for the drug to be treated as direct reimbursement, the payment methodology for the inclusive payment must identify an amount directly attributable to the drug, such that the amount paid is based on a reimbursement methodology that is included in the applicable section of the State plan.

Comment:
We received a few comments that because our modified definition of COD provides that drugs administered in an inpatient setting could be included in the definition of “covered outpatient drug,” we give no meaning to the word “outpatient” contained within the term.

Response:
The term “covered outpatient drug” is a statutory term of art. The limiting definition in section 1927(k)(3) states that the term COD does not include any drug provided as part of, or as incident to and in the same setting as “inpatient hospital services,” among others, and for which payment is not made as direct reimbursement for the drug. If the Congress had intended for the statutory term of “COD” to be limited to the outpatient setting only, the limiting definition would be superfluous as applied to being included in inpatient hospital services. Because statutory interpretation principles hold that an agency should not construe a statute in a manner that renders a provision to have no effect, we disagree that the term COD is limited to drugs dispensed or administered in an outpatient setting. Based on the plain text of 1927(k)(3), the term COD excludes a drug provided in the inpatient hospital setting only if the drug is provided as part of or as incident to and in the same setting as inpatient hospital services and for which payment is made as part of such services and not as direct reimbursement for the drug. We proposed to amend the regulatory definition of COD in a manner consistent with the statutory definition of this term of art to provide greater specificity as to when a drug provided in the inpatient setting is subject to the limiting definition and does not qualify as a COD.

Comment:
A commenter noted that the statute focuses on the manner of payment, not the manner in which the provider's costs are reflected on the claim, and that our proposed definition was only focusing on how the claim was submitted.

Response:
We agree that the definition should include language about the manner of payment, which we understand to mean how the claim is reimbursed, and not only based on the information submitted on the claim. We have therefore revised the proposed definition to include language about the manner of payment, including that the payment methodology for the inclusive payment must include an amount directly attributable to the drug, such that the amount paid is based on a reimbursement methodology that is included in the applicable section of the State plan.

Comment:
Several commenters noted that when payments for new and innovative therapies (cell and gene therapies, for example) are reimbursed in a payment that is bundled with a service (for example, under the Diagnosis-Related Group (DRG) system), the reimbursement is often insufficient for the drug and potentially results in lack of patient access to these new therapies. The commenters noted that conversely, some States are reimbursing the hospital separately for their acquisition cost of certain new and innovative drugs from their inpatient services associated with administering the drug, and such methods of direct reimbursement are adequately reimbursing providers/hospitals and encouraging patient access.

Response:
We note that section 1902(a)(30)(A) of the Act requires States to ensure 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 under the plan at least to the extent that such care and services are available to the general population in the geographic area.” The payment methodology for a COD must be identified in the State Plan and meet the foregoing standard. Some States already have approved methodologies outlined in their State plan that results in the ability for the State to collect rebates on some inpatient drugs. If a State plan does not address a distinct reimbursement methodology for a drug included in a bundled payment, then a SPA would need to be submitted and approved that includes such methodology in the appropriate section of the State plan.

Comment:
One commenter stated that manufacturers have launched certain products assuming there would be limited MDRP rebates given the products are included in a bundled payment arrangement and altering this will lead to significant operational challenges, unsustainable pricing expectations, potential drug shortages, and compromised utilization within Medicaid.

Response:
Again, we note that our intent for this clarification is to help manufacturers and States better understand how the term direct reimbursement for a drug will be applied with respect to the limiting language within the COD definition. Our review of comments alerted us to the fact that the proposed definition, as originally written, may be open to multiple interpretations. As a result, in response to such comments, we have modified the definition in this final rule to be clearer about when a payment is a direct reimbursement for a drug. Given the revisions, we do not believe that the challenges cited by the commenter will occur. We also note that there are States whose current Medicaid reimbursement policies account for carved out inpatient drugs for separate payment. These payment models have been intact for years and we do not have evidence that these payment models lead to significant operational challenges, unstable pricing expectations, drug shortages, or compromised Medicaid utilization. We also intend to provide additional guidance to States with respect to how the interpretation of direct reimbursement may be operationalized so that States can invoice for rebates for these CODs.

Comment:
A few commenters expressed their concerns regarding drug manufacturers' lack of access to claims level data for purposes of validating rebate invoices if CODs are merely identified or itemized and not separately reimbursed. One commenter stated that neither CMS nor States nor manufacturers have visibility into all payer claims to be able to ascertain how

bundled drugs and associated items and services are itemized. Manufacturers would have to obtain the billing document to verify the validity of rebate invoices. Another commenter stated that it was unclear that States would have the mechanism to collect such claims data for bundled drugs and present to manufacturers if requested.

Response:
Manufacturers are always able to work with States to verify a claim for a Medicaid rebate. States will need to determine how they instruct their providers and managed care plans to identify for rebate billing purposes those inclusive payment claims where direct reimbursement is being made for a COD. This will allow States to include the COD in the rebate billings, as well as identify for Medicaid managed care plans such claims that they will have to report to the States for rebate billings.

For States that choose to reimburse these drugs separately, the State will have the information submitted on the claim identifying the drug and the number of dispensed or administered units of the drug. For States that choose to use a bundled reimbursement model that separately identifies the drug and takes the cost of the drug into account in the reimbursement as outlined in the methodology in the State plan, those States will also have sufficient information to identify the drug and the number of dispensed or administered units of the drug. This claim information will allow the State to provide utilization information to the manufacturer in order for the manufacturer to verify that utilization. Collection of the data and how it may be presented to manufacturers may vary by State or manufacturer.

Comment:
Several commenters stated that finalizing the COD definition as proposed would subject some drugs (for example, cell and gene therapies to new rebate requirements and would undermine efforts to offer value-based payment models and innovative payment arrangements.

Response:
All CODs, including cell and gene therapy drugs that are CODs for which the manufacturer has a rebate agreement, are subject to basic minimum Medicaid rebate requirements, regardless of whether they are provided as part of a value-based purchasing arrangement. As noted previously, some States have already received approval for a State plan amendment to carve out drugs, such as cell and gene therapy drugs from inpatient hospital payment rates, and reimburse them separately, thus allowing them to collect rebates. Further, the Cell and Gene Therapy Access Model being tested by the CMS Innovation Center will require participating States to carve model cell & gene therapy drugs out of an inpatient payment bundle if the States want to participate in the Model so that the States may collect rebates on the drugs. With the clarification to the definition of direct reimbursement, as finalized in this rule, States may also bill for rebates for drugs that are provided as part of inclusive payments if they are itemized on the provider's bill, the number of units dispensed are identified, and the drug is paid according to the State's approved plan methodology for the drug. With these clarifications, we also believe that manufacturers and States may still pursue enhancements in patient access, equity, and health outcomes by executing VBP agreements and supplemental rebates for any COD per the State plan.

Comment:
A few commenters stated that the cost of a drug has not necessarily been included in the development of a bundled payment rate for the underlying service. One commenter stated that a DRG-based payment for a hospital inpatient stay does not provide reimbursement for any one item or service involved in the bundle. Instead, the commenter stated that bundled payment

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-21254. Public record. Not legal advice.