Medicaid Program; Payment for Covered Outpatient Drugs Under Drug Rebate Agreements With Manufacturers

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 441 and 447

[MB-046-P]

RIN 0938-AF42

Medicaid Program; Payment for Covered Outpatient Drugs Under Drug

Rebate Agreements With Manufacturers

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would specify requirements for State

Medicaid agencies and conditions under which Federal payments would be

made under Medicaid for covered outpatient prescription drugs. The rule

would also specify the conditions for approval and renewal of rebate

agreements with drug manufacturers participating in the Medicaid

program.

The proposed rule would interpret sections 1902(a)(54),

1903(i)(10), and 1927 of the Social Security Act, as added by section

4401 of the Omnibus Budget Reconciliation Act of 1990, and amended by

section 13602 of the Omnibus Budget Reconciliation Act of 1993, and

section 601(b) of the Veterans Health Care Act of 1992. We consider

this rule necessary to adequately implement the provisions of section

1927 of the Act.

DATES: Written comments will be considered if we receive them at the

appropriate address, as provided in the ``Addresses'' section below, no

later than 5:00 p.m. on November 20, 1995.

ADDRESSES: Mail written comments (an original and 3 copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: MB-046-P, P.O. Box 7518,

Baltimore, MD 21207-0518.

If you prefer, you may deliver your written comments (an original

and 3 copies) to one of the following addresses: Room 309-G, Hubert H.

Humphrey Building, 200 Independence Avenue, SW., Washington, D.C., or

C5-09-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.

Due to staffing and resource limitations, we cannot accept comments

by facsimile (FAX) transmission. In commenting, please refer to file

code MB-046-P. Written comments received timely will be available for

public inspection as they are received, beginning approximately 3 weeks

after publication of this document, in room 309-G of the Department's

offices at 200 Independence Ave., SW., Washington, D.C., on Monday

through Friday of each week from 8:30 a.m. to 5:00 p.m. (telephone:

(202) 690-7890).

If you wish to submit comments on the information collection

requirements contained in this rule, you may submit written comments

to: Office of Information and Regulatory Affairs, Attention: Laura

Oliven, Office of Management and Budget, Room 3002, New Executive

Office Building, Washington, D.C. 20503.

FOR FURTHER INFORMATION CONTACT: Estelle Chisholm, (410) 786-3286.

SUPPLEMENTARY INFORMATION:

I. Background

A. Overview of the Drug Rebate Provisions

Under section 1927 of the Social Security Act (the Act),

manufacturers that have entered into a national rebate agreement must

provide each State Medicaid program with rebate period payments (or

other periodic rebate payments, as determined by the Secretary). The

rebate must be calculated in accordance with sections 1927(b) and (c)

of the Act, using manufacturing pricing data and State drug utilization

information as outlined in the statute.

The requirements concerning rebate agreements apply to drugs

dispensed and paid for under Medicaid on or after January 1, 1991. For

manufacturers who entered into rebate agreements before March 1, 1991,

section 1927(a)(1) of the Act provided for Federal financial

participation (FFP) retroactively calculated as if the agreement had

been entered into on January 1, 1991. For agreements that are entered

into on or after March 1, 1991, Medicaid coverage and FFP begin, as

specified in section 1927(a)(1), the first day of the rebate period

that begins more than 60 days after the date the agreement is entered

into. We are interpreting the term ``entered into'' to mean the date

the agreement is postmarked by the U.S. Postal Service or other common

mail carrier. We will not consider the date stamped by a postage meter

to be a postmark.

Although the statute provides specific deadlines for manufacturers

to sign rebate agreements, section 1927(a)(3) of the Act provides, in

part, for payment of drugs not covered under rebate agreements if the

Secretary determines that in the first calendar quarter of 1991 there

were extenuating circumstances. Therefore, in light of the deadlines

imposed by the statute for signing the agreement, and in accordance

with the extenuating circumstances clause in section 1927(a)(3) of the

Act, HCFA extended through April 30, 1991, the deadline for

manufacturers to enter into Medicaid rebate agreements that are

retroactive to January 1, 1991. Therefore, rebate agreements entered

into on or after May 1, 1991, are effective on the first day of the

calendar quarter that begins more than 60 days after the date the

agreement is entered into.

The statute does not specify whether the drug provisions are

applicable in areas other than the 50 States and the District of

Columbia. However, in the

[[Page 48443]]

legislative history, the Congress specifically noted that the drug

rebate provisions ``[r]equire drug manufacturers to comply with the

rebate requirements in all States and the District of Columbia.'' (H.

R. Conf. Rep. 964, 101st Cong., 2d Sess. 822 (1990).) Therefore, in

accordance with our understanding of Congressional intent, we are

applying the drug rebate requirements only to the 50 States and the

District of Columbia.

Section 1115 of the Act contains provisions for State demonstration

projects that are likely to assist in promoting the objectives of

certain Federal programs, including the Medicaid program. Specifically,

under the authority of section 1115(a)(1), the Secretary may waive

compliance with the requirements of section 1902 of the Act for any

State that is operating an experimental, pilot or demonstration

project. Under section 1115(a)(2), the Secretary may also make payments

notwithstanding restrictions under section 1903. In accordance with

these provisions, a State operating under a section 1115(a)

demonstration project waiver may have the requirements of section

1902(a)(54) of the Act, concerning compliance with applicable

requirements of section 1927, waived. In addition to the extent that

section 1927 requirements act as conditions under section 1903 for

Federal matching funds to such a State, these conditions may be

excused.

We note that section 1115(a) does not provide authority to waive or

excuse requirements applicable to States other than the waiver State.

Thus, there is no authority to waive inclusion of manufacturer sales

within a waiver State from the calculation of best price or average

manufacturer price applicable to other States.

Section 1927(j) of the Act specifies that the provisions of the

drug rebate program do not apply to covered outpatient drugs dispensed

by (1) health maintenance organizations (HMOs), including those

organizations that contract to provide services to Medicaid recipients

under section 1903(m) of the Act; and (2) hospitals that dispense

covered outpatient drugs using drug formulary systems and bill the

Medicaid program no more than the hospitals' purchasing costs for these

drugs as determined under the State plan. Even though HMOs and certain

hospitals are exempt from the requirements of the rebate program,

section 1927(j) specifically states that its provisions should not be

construed as providing that the amounts paid by these organizations

should be excluded from the best price calculations. (Section V.B.2.a.

of this preamble contains a discussion on best price.)

On February 15, 1991, we made available to drug manufacturers a

national rebate agreement developed in response to section 1927 of the

Act. Prior to that date, we held extensive discussions with

representatives from States and drug manufacturers. These parties

reviewed and commented on the proposed language of the national rebate

agreement. We also provided information to the public regarding the

national drug rebate agreement through a notice with comment period in

the Federal Register on February 21, 1991 (56 FR 7049). The February

1991 notice reprinted the text of the national drug rebate agreement.

We received a number of timely public comments in response to this

notice.

A detailed discussion of the public comments and the Department's

responses appear under section X. of this preamble. We have given these

public comments full consideration and have incorporated certain

provisions in this proposed rule based on that consideration. We are

not amending the national rebate agreement at this time. We will amend

the national rebate agreement in the future, as necessary, to conform

the agreement with the regulations and to take into consideration

public comments received on the February 21, 1991, notice that are not

addressed in this rule and public comments that we receive on this

proposed rule.

This proposed rule would interpret in regulations the amendments

made by section 4401 of the Omnibus Budget Reconciliation Act of 1990

(OBRA '90), Public Law 101-508, enacted on November 5, 1990; section

601(b)(1) of the Veterans Health Care Act of 1992 (VHCA), Public Law

102-585, enacted on November 4, 1992; and section 13602 of the Omnibus

Budget Reconciliation Act of 1993 (OBRA '93), Public Law 103-66,

enacted on August 10, 1993, as discussed below.

B. Changes Made by the Omnibus Budget Reconciliation Act of 1990

Under the Medicaid program, States may provide coverage of

prescription drugs as an optional service under section 1905(a)(12) of

the Act. Section 1903(a) of the Act provides for FFP in State

expenditures for these drugs.

Section 4401 of OBRA '90 added a Medicaid State plan requirement

under section 1902(a)(54) of the Act to provide that: (1) if a State

elects to cover outpatient prescription drugs, the State plan must

provide that any formulary or similar restriction, except as provided

in section 1927(d) of the Act, shall permit coverage of covered

outpatient drugs of any manufacturer that enters into and complies with

a rebate agreement under section 1927 of the Act, if the drugs are

prescribed for a medically accepted indication; and (2) the State must

comply with certain reporting and other coverage requirements specified

in section 1927 of the Act.

Section 4401 of OBRA '90 also redesignated the existing section

1927 of the Act as section 1928 and added a new section 1927. New

section 1927 provides that for payment to be made under section 1903 of

the Act for covered outpatient drugs, the manufacturer must enter into

and have in effect a rebate agreement with the Secretary of the

Department of Health and Human Services (HHS) on behalf of the States

(except that the Secretary may authorize a State to enter directly into

agreements with manufacturers). (Section I.D. of this preamble contains

a description of changes to sections 1902(a)(54) and 1927 made by

section 13602 of the OBRA '93.)

Section 1927 of the Act specifies the requirements for the rebate

agreements with manufacturers of covered outpatient drugs, the terms

and length of the agreement, the requirements for States to provide

State Medicaid drug utilization information to HCFA and the

manufacturers, the requirements for manufacturers to provide pricing

information to HCFA, the formulas to be used to determine the amount of

the drug rebate, and the limitations on coverage of drugs. Section 1927

of the Act also contains provisions on termination procedures for

agreements, and the imposition of civil money penalties on

manufacturers that fail to comply with the requirements concerning

pricing data submissions.

Section 4401 of OBRA '90 also amended section 1903(i) of the Act by

adding a new paragraph (10) to provide for the denial of FFP in

expenditures for covered outpatient drugs of a manufacturer dispensed

in any State if, except as specified in section 1927(a) of the Act

(whereby the Secretary may authorize a State to enter directly into

agreements with a manufacturer), the manufacturer does not comply with

the rebate requirements specified in section 1927; and, effective

January 1, 1993, if the State does not provide for drug use review in

accordance with section 1927(g) of the Act. (Section I.D. of this

preamble contains a description of changes to section 1903(i)(10) made

by section 13602 of OBRA '93.)

[[Page 48444]]

C. Changes Made by the Veterans Health Care Act of 1992

The VHCA amended section 1927 of the Social Security Act in several

areas. This proposed regulation reflects the self-implementing

amendments required under VHCA.

One major change required by VHCA affects the conditions that

manufacturers must meet so that payment can be made under Medicaid for

a manufacturer's covered outpatient drugs. Section 601(b)(1) of VHCA

amended section 1927(a)(1) of the Act to provide that a manufacturer

must meet the requirements of section 1927(a)(5) (with respect to drugs

purchased by a covered entity on or after December 1, 1992) and section

1927(a)(6) of the Act (with respect to drugs purchased by the

Department of Veterans Affairs (DVA) and certain other Federal

agencies).

A manufacturer meets the requirements of section 1927(a)(5)(A) of

the Act if it has entered into an agreement with the Secretary that

meets the requirements of section 340B of the Public Health Service

(PHS) Act with respect to covered outpatient drugs purchased by a

covered entity on or after December 1, 1992. The term ``covered

entity'' means an entity described in section 340B(a) of the PHS Act.

In general, VHCA amended section 1927 of the Act to require that drug

manufacturers enter into pharmaceutical pricing agreements with the PHS

and offer discounts on covered outpatient drugs to PHS covered entities

that are at least as great as the rebates (both basic and additional

rebates) received by State Medicaid agencies.

A manufacturer meets the requirements of section 1927(a)(6) of the

Act if it complies with the provisions of section 8126 of title 38 of

the United States Code, including the requirement of entering into a

master agreement with the Secretary of the DVA under such section. In

general, effective January 1, 1993, a manufacturer must enter into a

pharmaceutical pricing agreement (master agreement) with the DVA for

all single source drugs, innovator multiple source drugs, biologicals,

and insulin. Generally, beginning January 1, 1993, the prices that

manufacturers charge Federal agencies listed in the master agreement

may not exceed the annual Federal ceiling prices specified for such

drugs.

In accordance with these amendments to section 1927(a) of the Act,

a manufacturer must enter into a pharmaceutical pricing agreement with

the PHS and, if necessary, the DVA in order for a manufacturer's drugs

to be paid for under Medicaid. Manufacturers that do not enter into and

comply with these agreements are subject to termination of the Medicaid

national rebate agreement.

Section 1927(b)(4)(B)(ii) of the Act specifies that a manufacturer

may terminate its rebate agreement for any reason. Section 601(b)(4) of

VHCA amended section 1927(b)(4)(B) of the Act to provide that any such

termination not be effective until the rebate period beginning at least

60 days after the date the manufacturer provided notice to the

Secretary. Section 601(b)(4) of VHCA also added section

1927(b)(4)(B)(iv) of the Act, which provided that, in the case of a

termination of a manufacturer, the Secretary will provide notice of the

termination to the State not less than 30 days before the effective

date of the termination.

D. Changes made by the Omnibus Budget Reconciliation Act of 1993

Section 13602 of OBRA '93 modified the Medicaid drug rebate program

by amending sections 1902(a)(54), 1903(i)(10), and 1927 of the Act.

This section of the preamble contains a discussion of the

amendments to the sections of the Act and how they differ from the

original language under OBRA '90. Where applicable, effective dates are

noted in the discussion.

Sections 13602(d)(1) and (2) of OBRA '93 specify two different

effective dates of the OBRA '93 amendments. Section 13602(d)(1)

provides that, except for changes made to sections 1902(a)(54) and

1927(d) of the Act, the OBRA '93 amendments are effective as if

included in the enactment of OBRA '90. Under section 13602(d)(2) of

OBRA '93, amendments to sections 1902(a)(54) and 1927(d) of the Act are

effective with rebate periods (calendar quarters) beginning on or after

October 1, 1993, without regard to whether or not regulations to carry

out these amendments have been published by that date.

1. Payment for Covered Outpatient Drugs

Section 13602(b) of OBRA '93 amended section 1903(i)(10) of the Act

to provide that FFP for covered outpatient drugs will be denied (l)

unless there is a rebate agreement in effect under section 1927 for

covered outpatient drugs or unless the drug is rated 1-A by the Food

and Drug Administration, and (2) with respect to any amount expended

for innovator multiple source drugs dispensed on or after July 1, 1991,

if, under applicable State law, a less expensive multiple source drug

could have been dispensed, but only to the extent that such amount

exceeds the upper payment limit for such multiple source drug.

OBRA '93 amended section 1903(i)(10) of the Act to remove from this

section the requirement for States to provide for drug use review as a

condition to receive FFP. (A drug use review is still required under

section 1927(g).) Former section 1927(e) of the Act, with respect to

multiple source drugs, has also been added to section 1903(i)(10) and

modified. This section now requires only that any amount above the

upper payment limit be disallowed for an innovator multiple source drug

if, under applicable State law, a less expensive multiple source drug

could have been dispensed. As is the case with our current policy, this

provision only applies to drugs subject to the Federal upper limits

payment.

2. Formulary Provisions and Permissible Restrictions

Section 13602(c) of OBRA '93 amended section 1902(a)(54) of the Act

to delete the reference that prohibits a State from maintaining a

restrictive formulary. Section 1927(d)(1)(B)(iv) provides that a State

may exclude a covered outpatient drug if the State has excluded

coverage from its formulary in accordance with section 1927(d)(4).

Section 13602(a)(1) of OBRA '93 added section 1927(d)(4) which provides

that States may establish a formulary if the formulary meets the

requirements specified in that section, as discussed below. States may

continue to exclude or restrict drugs or classes of drugs specified in

section 1927(d)(2). Previously, any State formulary or similar

restriction must have permitted coverage, for all medically accepted

indications, of a participating manufacturer's drugs except for those

drugs or classes of drugs specified in the list of permissible

restrictions in section 1927(d)(2).

a. Formulary Requirements. Section 13602(a)(1) of OBRA '93 added

section 1927(d)(4) which provides that States may establish a formulary

if it meets certain requirements, effective October 1, 1993. The

formulary must:

(i) Be developed by an appropriate Governor-appointed committee

consisting of physicians, pharmacists, and other appropriate

individuals, or, at State option, the State drug use review board;

(ii) Except as specified in item (iii), include covered outpatient

drugs, other than those drugs excluded from coverage or restricted

under section 1927(d)(2), of manufacturers which have entered into and

comply with the Medicaid drug rebate agreement;

[[Page 48445]]

(iii) Exclude only those drugs (with respect to the treatment of a

specific disease or condition for an identified population) where the

drug's labeling or its medically acceptable indication (based on

appropriate compendia) does not have a significant, clinically

meaningful therapeutic advantage, in terms of safety, effectiveness, or

clinical outcome, over other drugs included in the formulary;

(iv) Have available to the public, a written explanation of the

reasons for excluding drugs under item (iii); and

(v) Permit coverage of drugs that are excluded under item (iii)

from the State's drug formulary (other than those drugs excluded from

coverage in accordance with section 1927(d)(2)) and subject them to

prior authorization consistent with the requirements in section

1927(d)(5).

This proposed rule does not address any further requirements that a

formulary must meet. If we determine later that additional requirements

should be imposed on States with regard to formularies, we will address

them in a separate notice of proposed rulemaking.

b. List of Drugs Subject to Restriction. Section 1927(d)(1)(B) of

the Act permits States to exclude or restrict drugs contained in the

list of permissible restrictions in section 1927(d)(2) of the Act.

Prior to OBRA '93, section 1927(d)(2) contained a paragraph (I) which

meant that States could exclude or restrict drugs described in section

107(c)(3) of the Drug Amendments of 1962 (``DESI'' drugs) and those

identical, similar, or related drugs (IRS drugs). OBRA '93 amended

section 1927(d)(2) to eliminate paragraph (I). However, the removal of

coverage restrictions from section 1927(d)(1)(B) does not mean that

coverage is necessarily required in light of existing funding

restrictions under section 1903(i)(5) and restrictions in the

definition of a covered outpatient drug.

Thus, effective with rebate periods beginning on or after October

1, 1993, States cannot exclude or restrict these DESI/IRS drugs. This

includes DESI/IRS drugs approved prior to 1962 that have not yet been

approved under or subject to the DESI review process. If these drugs

otherwise meet the criteria of a covered outpatient drug and are not

subject to funding restrictions under section 1903 (i)(5) of the Act,

States must provide coverage of these drugs and manufacturers must pay

rebates on these drugs if they are dispensed and paid for by the State.

3. Terms of the Rebate Agreement

a. Periodic Rebates. Section 13602(a)(2)(A) of OBRA '93 amended

sections 1927(b)(1)(A) and (b)(2)(A) of the Act and made technical

changes to the original language under OBRA '90 as follows:

The period of time used to calculate rebates was

previously referenced as ``calendar quarter.'' OBRA '93 changed this

term of reference to ``rebate period.'' However, this change does not

alter the quarterly rebate period as previously established.

OBRA '93 clarified the language in section 1927(b)(1)(A).

This clarification supports the policy in the national rebate agreement

that manufacturers will be responsible for rebates calculated for drugs

dispensed after December 31, 1990 for which payment was made under the

State Medicaid plan during a rebate period. Since the beginning of the

Medicaid rebate program, Medicaid utilization data and rebates have

been based on the date the State paid for the drug and not the date it

was dispensed.

b. State Provision of Information. Section 13602(a)(2)(A)(ii) of

OBRA '93 amended section 1927(b)(2)(A) of the Act to specify that

States must report information to each manufacturer on the total number

of units of each dosage form and strength and package size of each

covered outpatient drug dispensed and paid for by the State. This

change clarifies the language in section 1927(b)(2)(A), and supports

the standard reporting format established by the Secretary and approved

by the Office of Management and Budget that States must report drug

utilization data to manufacturers using an 11-digit National Drug Code

(NDC) number for each drug. Previously, section 1927(b)(2)(A) of the

Act did not specify that States must report information on the package

size, which represents the last two digits of the 11-digit NDC code.

4. Amount of Rebate

a. Revisions to Definition of Best Price. Section 13602(a)(1) of

OBRA '93 amended section 1927(c)(1)(C) of the Act to ratify our

interpretation that the definition of ``best price'' includes those

prices available to providers and health maintenance organizations

(HMOs). This interpretation of the definition of best price has been in

effect since OBRA '90. Manufacturers must include in their best price

calculation, for a single source or innovator multiple source drug, the

lowest price available from the manufacturers during the rebate period

to any wholesaler, retailer, provider, health maintenance organization,

nonprofit entity, or governmental entity within the United States

except for those entities specifically excluded by statute.

Section 13602(a)(1) of OBRA '93 also amended section 1927 of the

Act to clarify the term ``free good'' to specify which free goods must

be included in the best price calculation. Section 1927(c)(1)(C)(ii)(I)

of the Act specifies that best price must include free goods that are

contingent on any purchase requirement. Thus, only those free goods

that are not contingent on any purchase requirements may be excluded

from best price.

5. Additional Rebate for Single Source and Innovator Multiple Source

Drugs

Section 13602(a)(1) of OBRA '93 amended section 1927(c)(2) of the

Act regarding how additional rebates for single source and innovator

multiple source drugs are calculated if the increase in the average

manufacturer price (AMP) of the drug exceeds the increase in the

Consumer Price Index-Urban (CPI-U). OBRA '93 deleted the requirement

that effective January 1, 1994, additional rebates would be calculated

using a weighted average manufacturer price (WAMP). Amended section

1927(c)(2) provides that additional rebates for single source and

innovator multiple source drugs will continue to be calculated on a

drug-by-drug basis, that is, the method in effect since January 1,

1991.

The additional rebate calculation utilizes the drug's ``base date

AMP'' (the AMP of the drug when it was first marketed) and the ``base

CPI-U'' (the CPI-U in effect when the drug was first marketed). Section

1927(c)(2) of the Act further clarifies ``base date AMP'' and ``base

CPI-U'' for the calculation of the additional rebates as follows:

a. For Drugs Approved on or Before October 1, 1990. Base Date AMP--

For drugs approved by the FDA on or before October 1, 1990, the base

date AMP means the AMP for the calendar quarter beginning July 1, 1990.

This base date AMP remains the same as the definition in the national

rebate agreement. Consequently, the base date AMP remains the AMP

reported for the July - September 1990 calendar quarter. OBRA '93

clarified our interpretations of section 1927(c)(2)(A)(ii) of the Act

previously contained in language in the rebate agreement and in

operating instructions provided to manufacturers, and, thus, there is

no change in methodology. Therefore, the base date AMP is the AMP for

the calendar quarter beginning July 1, 1990, without regard to whether

or not the drug has been sold or transferred to an entity,

[[Page 48446]]

including a division or subsidiary of the manufacturer, after the first

day of such calendar quarter.

Base CPI-U--The base CPI-U used for calculating the additional

rebate amounts for drugs approved by the FDA before October 1, 1990 is

also unchanged, that is, the base CPI-U in effect for September 1990.

b. For Drugs Approved After October 1, 1990. Base Date AMP--OBRA

'93 changed the criteria for determining base date AMP for drugs

approved by the FDA after October 1, 1990. However, as discussed in

section VI.C. of this preamble, for rebate periods beginning on or

after January 1, 1991 through September 30, 1993, the original policy

in effect under OBRA '90 and explained in paragraph 5.a. of this

section will continue to be used. That is, the base date AMP will

continue to be the AMP for the first day of the first full month in

which the drug was first marketed.

In accordance with the amended language of section 1927(c)(2)(B) of

the Act, effective for rebate periods beginning on or after October 1,

1993 (as discussed in section VI.C. of this preamble), the AMP in

effect for the first full rebate period after the day on which the drug

was first marketed is the base date AMP and will be used to calculate

the additional rebate.

Thus, for drugs approved by the FDA after October 1, 1990, but

before October 1, 1993, there is the potential for the same drug to

have different base date AMPs, that is, one AMP for the January 1, 1991

through September 30, 1993 period and one AMP for the period beginning

October 1, 1993.

OBRA '93 amended section 1927(c)(2)(A)(ii) of the Act to clarify

that the base date AMP in effect for both of these periods is to be

determined without regard to whether or not the drugs have been sold or

transferred to an entity, including a division or subsidiary of the

manufacturer, after the first day of such rebate period. Thus, a

manufacturer's base date AMP (whether for drugs approved by FDA prior

to or after October 1, 1990) is drug-specific and should follow the

drug regardless of which manufacturer has current legal title.

Base CIP-U--OBRA '93 also amended the criteria for determining the

base CIP-U for drugs approved by the FDA after October 1, 1990. In

accordance with the amended language of section 1927(c)(2)(A)(ii),

effective for rebate periods beginning on or after October 1, 1993, the

CIP-U for the month prior to the month of the first full rebate period

on which the drug was first marketed is used to calculate the

additional rebate as the base CIP-U.

In accordance with section 1927(c)(2)(A)(ii)(II) of the Act, the

base CIP-U is the CPI in effect for the month prior to the month of the

first full rebate period after the day on which the drug was first

marketed. This change will be effective for rebate periods beginning on

or after October 1, 1993.

For rebate periods beginning January 1, 1991 through September 30,

1993, the original policy in effect under OBRA '90 will be used. That

is, the base CIP-U continues to be the CIP-U for the month before the

month in which the drug was first marketed.

6. Requirements of the Prior Authorization Program

Except with respect to new drugs, OBRA '93 did not modify existing

requirements on a State's ability to establish and maintain a program

to subject drugs to prior authorization. The statute clarified in

section 1927(d)(4) of the Act that a prior authorization program

established by a State under section 1927(d)(5) is not a formulary

subject to the requirements of section 1927(d)(4) (A) through (E).

7. Treatment of New Drugs

OBRA '93 eliminated all special coverage requirements for new drugs

by deleting the former section 1927(d)(6) and deleting a reference to

new drugs in sections 1902(a)(54), 1927(d)(1)(A) and 1927(d)(3) of the

Act. Former section 1927(d)(6) provided that States could not exclude

from coverage, subject to prior authorization, or otherwise restrict

any new biological or drug approved by the FDA for 6 months after FDA

approval.

Effective for rebate periods on or after October 1, 1993, States

may exclude or restrict from coverage or prior authorize any new drugs

approved by the FDA. New drugs approved by the FDA prior to October 1,

1993 will only receive the unrestricted coverage specified in former

section 1927(d)(6) of the Act through September 30, 1993. Beginning

October 1, 1993 the unrestricted coverage no longer applies to these

new drugs.

8. Treatment of Pharmacy Reimbursement

a. Treatment of Pharmacy Reimbursement Limits. Section 13602(a)(1)

of OBRA '93 redesignated section 1927(f) of the Act as section 1927(e),

``Treatment of Pharmacy Reimbursement Limits''. This section continues

to specify that for the moratorium period of January 1, 1991 through

December 31, 1994, a State cannot reduce its reimbursement limits or

dispensing fees for certain covered outpatient drugs below the limits

in effect as of January 1, 1991. For this provision to apply, States

must have been in compliance with Federal regulations at 42 CFR 447.331

through 447.334.

OBRA '93 amended section 1927(e)(2) of the Act to clarify that if a

State is not in compliance with the regulations at 42 CFR 447.331

through 447.334, the moratorium provisions do not apply to the State

until it is in compliance with these regulations.

b. Effect on State Maximum Allowable Cost Limitations. Section

13602(a)(1) of OBRA '93 also added section 1927(e)(3) to clarify that

the moratorium provisions do not affect State Maximum Allowable Cost

(MAC) limitations in effect prior to or after the moratorium period.

That is, as allowed under OBRA '90, States may continue to operate

their MAC programs in effect prior to January 1, 1991, in accordance

with the terms of that program, for example, adjusting limits and

adding drugs within the requirements of the MAC.

9. Average Manufacturer Price

Section 13602(a)(2)(B)(i)(II) of OBRA '93 amended section

1927(k)(1) of the Act to clarify that the AMP for a rebate period is

the average price paid to the manufacturer for the drug in the United

States by wholesalers for drugs distributed to the retail pharmacy

class of trade after deducting customary prompt pay discounts. The

policy that AMP will be calculated after deducting customary prompt pay

discounts is reflected in the national rebate agreement.

10. Limiting Definition of Covered Outpatient Drug

Section 13602(a)(2)(B)(ii) of OBRA '93 amended section 1927(k)(3)

to clarify the limiting definition of what is not included in the

definition of a covered outpatient drug. In addition to the criteria

originally defined in section 1927(k)(3), a covered outpatient drug

does not include the following two items:

Any drug or product for which a NDC number is not required

by the FDA. This category includes whole blood and blood components

separated by physical or mechanical means.

Any drug, biological, or insulin provided as part of, or

as incident to and in the same setting as, services in an intermediate

care facility for the mentally retarded (ICF/MR) (and for which payment

is made as part of the service and not as direct reimbursement for the

drug.)

[[Page 48447]]

11. Medically Accepted Indication

Section 13602(a)(2)(B)(iii) of OBRA '93 amended section 1927(k)(6)

to further define the term ``medically accepted indication.'' OBRA '93

deleted the reference to the use of peer-reviewed medical literature

and specified that the medical indication must be on the label or be

supported by one or more citations included or approved for inclusion

in any of the compendia described in section 1927(g)(1)(B)(i).

OBRA '93 amended section 1927(k)(6) to specify that the term

``medically accepted indication'' means any use for a covered

outpatient drug which is approved under the Federal Food, Drug and

Cosmetic Act or the use which is supported by one or more citations or

approved for inclusion in any of the specified compendia. Those

compendia have not changed and are the American Hospital Formulary

Service-Drug Information, the American Medical Association Drug

Evaluations, and the United States Pharmacopeia-Drug Information.

E. Organization of Remainder of Preamble

The following sections of the preamble explain the actual

provisions of the regulations being issued at this time without a

description of the history of the statute. In the remainder of the

preamble, unless otherwise indicated, references to the statute should

be read as the provisions as amended by both the VHCA and OBRA '93. The

preamble is structured into six main sections which discuss all related

drug covered rebate issues and policies: rebate agreements, drugs

covered under the rebate agreement, limitations on drug coverage,

reporting requirements, computation of drug rebates, and payment

limitations for covered drugs. The balance of the preamble deals with

other required regulatory sections, such as responses to comments and

an impact analysis. The accompanying regulation text follows section

XV. of the preamble.

II. Rebate Agreements

In general, section 1927(a)(1) of the Act provides that, in order

for payment to be available under section 1903(a) of the Act for

covered outpatient drugs of a manufacturer, the manufacturer must (1)

have entered into and have in effect a national rebate agreement with

the Secretary on behalf of the States; and (2) also enter into a

pharmaceutical pricing agreement with PHS and, if necessary, with DVA

(as discussed in Section I.B. of this preamble) for payment to be made

under Medicaid for a manufacturer's covered outpatient drugs. The

requirements for the rebate agreements are specified in section 1927(b)

of the Act.

Section 1927(a)(1) also provides that the Secretary may authorize

States to enter directly into separate agreements with manufacturers.

For purposes of this rule, we are referring to separate agreements as

either ``existing,'' that is, agreements that were entered into on or

before the date of enactment of OBRA '90 (November 5, 1990); or

``new,'' that is, agreements that were entered into after the date of

enactment of OBRA '90.

The Secretary's authority to approve separate State agreements is

consistent with the statute and HCFA's understanding of Congressional

intent to decrease program costs and maximize Medicaid savings. Section

1927(a)(1) of the Act gives the Secretary broad authority to authorize

separate State agreements. There are no provisions in section 1927 that

circumscribe the Secretary's authority to establish criteria for

approving separate State agreements.

Thus, in accordance with the authority under section 1927(a)(1) of

the Act, we would not approve a new agreement unless the manufacturer

has entered into the national rebate agreement and the new agreement

provides rebates at least as large as those required by the national

agreement. (42 CFR 447.510) We believe these requirements are necessary

to effectuate section 1927 of the Act and to uphold Congressional

intent.

We would require that a manufacturer enter into the national rebate

agreement as a condition of entering into a new State agreement, in

order to ensure that Medicaid recipients in all 50 States and the

District of Columbia have access to that manufacturer's drugs. In

passing various provisions of section 1927, the Congress made it clear

that Medicaid recipients be assured access to all medically necessary

covered outpatient drugs. (H.R. Rept. No. 881, 101st Cong., 2d Sess.

96-98 (1990)). Without requiring that manufacturers enter into the

national agreement, recipients could be denied access if a manufacturer

only entered into separate agreements with several large States with a

lucrative market for that manufacturer's drugs. Thus, access could be

denied in other States.

We would require that a new State agreement provide rebates at

least as large as those required by the national agreement because

there would be little or no benefit to the Secretary in terms of

savings to approve a new State agreement that provides less savings.

Approving a new agreement that provides less savings would be contrary

to the general understanding of Congressional intent to decrease

program costs and maximize Medicaid savings.

The conditions that all existing agreements and new agreements

between a State Medicaid agency and a manufacturer must meet in order

to comply with the requirements in section 1927 of the Act are

described below. The statute defines the entities considered

manufacturers to which section 1927 applies. Section 1927(k)(5) of the

Act defines the term ``manufacturer'' to mean any entity that is

engaged in--

The production, preparation, propagation, compounding,

conversion, or processing of prescription drug products, either

directly or indirectly by extraction from substances of natural origin,

or independently by means of chemical synthesis, or by a combination of

extraction and chemical synthesis; or

The packaging, repackaging, labeling, relabeling, or

distribution of prescription drug products.

Under the statutory definition, the term ``manufacturer'' does not

include a wholesale distributor of drugs or a retail pharmacy licensed

under State law. For the reasons set forth below, we would clarify and

interpret this statutory definition to require that the entity must

possess legal title to the National Drug Code (NDC) number for a

covered outpatient drug, insulin, or biological product. The NDC is a

national, readily available numbering system maintained by the Food and

Drug Administration (FDA) that identifies each drug by manufacturer,

product, and package size. We believe this clarification is necessary

to permit a practical means of identifying the manufacturer of the drug

to determine which manufacturer is responsible for paying the rebate

due under the statute to the State. This approach prevents duplicative

manufacturer responsibilities for the drug.

In addition, we would further clarify and interpret the term to

specify that if a corporation meets the statutory definition of

manufacturer and possesses legal title to the NDC number, we would

consider the term to include--

Any corporation that owns at least 80 percent of the total

combined voting power of all classes of stock or 80 percent of the

total value of shares in all classes of stock in such entity (that is,

a parent corporation);

Any other corporation in which a parent corporation of the

entity owns at least 80 percent of the total combined voting power of

all classes of stock or 80 percent of the total value of shares

[[Page 48448]]

of all classes of stock in the other corporation (that is, a brother-

sister corporation); and

Any other corporation in which the entity owns at least 80

percent of the total combined voting power of all classes of stock or

80 percent of the total value of shares of all classes of stock in the

other corporation (that is, a subsidiary corporation).

We would establish this definition of ``manufacturer'' because we

believe that the statutory definition requires clarification to

implement the provisions of OBRA '90 consistent with Congressional

intent. As noted previously, section 1927(k)(5) of the Act defines a

manufacturer, in part, as ``any entity'' engaged in the production,

packaging or distribution of prescription drug products. We believe

that when defining a manufacturer, the term ``entity'' should be

interpreted to include any parent, brother-sister, or subsidiary

corporation. Such an interpretation, in our opinion, comports with the

Congress' desire to maximize recipient access to medically necessary

drugs, while at the same time providing a more favorable drug

purchasing arrangement for State Medicaid programs. (H. R. Conf. Rept.

No. 964, 101st Cong., 2d Sess. 822, 832 (1990); H. R. Rept. No. 881,

101st Cong., 2d Sess. 996 (1990).)

The Congress, in passing the drug rebate provisions, made it clear

that States that elect to cover prescription drugs must, except for

certain restriction/exclusions allowed under the statute, for the most

part, cover the drugs of a manufacturer that enters into and complies

with a drug rebate agreement. In return for such coverage, a

manufacturer would be responsible for providing a rebate to the State

that would give the Medicaid program the benefit of those discounts

that other large public and private purchasers receive. (Id.) We

believe that it would be directly contrary to such intent for us to

define manufacturer in a fashion that would permit a manufacturer (by

forming a subsidiary corporation) to exclude some of its drugs from the

drug rebate program.

A. Existing Agreements

Section 1927(a)(4) of the Act sets forth the conditions that an

existing agreement must meet to be in compliance with the provisions of

section 1927. Under section 1927(a)(4), existing agreements that were

in effect between a manufacturer and a State Medicaid agency on

November 5, 1990, will be considered to be in compliance with section

1927 of the Act until the end of the initial period specified in the

agreement if (1) the State agrees to report any rebates paid under the

agreement to HCFA; and (2) the agreement provides for a minimum

aggregate 10-percent rebate of the State's total expenditures under the

State plan for all of that manufacturer's drugs paid for by Medicaid in

the rebate period. During the initial agreement period, manufacturers

may calculate rebates in accordance with that existing agreement as

long as these two requirements are met. (Because no manufacturer had

existing agreements in all 50 States and the District of Columbia, and

in light of the requirements of sections 1927(a) and 1903(i)(10) of the

Act, we required all drug manufacturers with approvable existing

agreements with State Medicaid agencies as of November 5, 1990, to

enter into and comply with the national agreement to cover those States

where manufacturers did not have existing agreements.)

As stated above, section 1927(a)(4) of the Act requires that

existing individual State agreements provide for a minimum aggregate

rebate of 10 percent of the State's total expenditures under the State

plan for coverage of the manufacturer's drugs. However, given other

provisions of the statute and the legislative history of OBRA '90, we

do not believe that the Congress intended that the minimum aggregate

rebate be calculated using State expenditures. Other provisions in

section 1927 of the Act calculate rebates using manufacturer prices,

and there is no evidence in the legislative history that the Congress

intended existing rebates to be calculated using a different formula.

In fact, the Conference Report specifies that manufacturer sales, not

State expenditures, be used to calculate the minimum aggregate rebate.

(H. R. Conf. Rept. No. 964, 101st Cong., 2d Sess. 822 (AMP), 832

(manufacturer sales) (1990).)

The House Conference Report, in discussing the House bill,

specifically states that existing rebate agreements must be considered

in compliance with the statute if the State can establish that ``the

agreement can reasonably be expected to provide rebates at least as

large as the rebates under this bill [which uses manufacturer

prices].'' (H. R. Conf. Rept. 964, 101st Cong., 2d Sess. 822 (1990);

Id. at 822 (Senate Amendment).) Similarly, the Conference agreement

establishes a similar standard and specifies an aggregate rebate test

using manufacturer pricing data. The Conference agreement provides that

existing agreements should be considered in compliance with the statute

if ``the amount of the rebate under the [existing] contract totals at

least 10 percent of the manufacturer's sales to Medicaid in the

State.'' (Id. at 832.) Therefore, to read the statute in its proper

context, and to give effect to our understanding of Congressional

intent, we have decided to use manufacturer prices to calculate the

minimum aggregate rebate.

Furthermore, as noted previously, using State total expenditures

conflicts with other rebate provisions that use manufacturer prices

(referred to as average manufacturer prices (AMPs) and best prices) to

calculate rebates. (Section V.B.2.a. of this preamble contains the

definition of AMP.) A State's total expenditures include, among other

items, wholesaler and retailer markup and dispensing fees. These

additional charges are not included in the rebate calculations that

base rebates on the AMP. Thus, using other than AMP as a percentage of

a rebate test would result in an inequitable treatment of manufacturers

participating in the rebate program. In light of the legislative

history, we believe that the Congress intended that a similar formula

based on manufacturer pricing data be used to calculate minimum

aggregate rebates under section 1927(a)(4) of the Act.

Therefore, we have concluded that the 10-percent rebate test

applies to the manufacturer's AMP (which represents the manufacturer's

sale of the drug) and not other State components of drug expenditures.

Accordingly, we would specify in our regulations at

Sec. 447.510(b)(1)(i) that, to calculate a State's total quarterly

expenditures for a manufacturer's drugs for purposes of determining

whether the minimum aggregate 10-percent rebate requirement for

existing rebate agreements is met, the State must receive a minimum

rebate of 10 percent of the AMP for the manufacturer's drugs. Actual

rebates on specific drugs may be less than 10 percent as long as the

aggregate rebate from that manufacturer for all of its covered

outpatient drugs in that separate agreement meets the minimum 10-

percent rebate.

An existing agreement must have provided for the minimum aggregate

rebate as of November 5, 1990. If this minimum rebate condition was

met, we believe it would be consistent with section 1927(a)(4) of the

Act to permit States to modify an existing agreement to provide for a

greater rebate. Therefore, under these regulations, States would be

permitted to modify existing agreements if the State and the

manufacturer are in agreement with all modifications and the terms of

the agreement allow such modifications. Existing agreements would also

be amended to add other drugs of the

[[Page 48449]]

manufacturer if the agreement continues to meet a minimum aggregate

rebate of 10 percent of AMP. However, we do not believe it would be

consistent with the statute or our understanding of Congressional

intent to permit modifications to increase the length of the initial

term since section 1927(a)(4) of the Act specifically references the

initial agreement period.

In cases where an existing agreement did not have a stated

percentage of rebate, we have required the State to submit to the HCFA

regional office (RO) a written assurance from the manufacturer that the

minimum 10-percent rebate, as calculated above, was met as of November

5, 1990. We would require in Sec. 447.510(b)(2) that the rebates under

an existing agreement also continue to meet the 10-percent threshold in

order for payment to be made available under section 1903(a) of the Act

for the manufacturer's covered outpatient drugs throughout the initial

period specified in the agreement. We would monitor the savings

figures, and, if this threshold is not met, we would consider the

existing agreement as no longer in compliance with section 1927(a) of

the Act. In this case, HCFA would notify the State that the

manufacturer's drugs are subject to the rebate terms of the national

drug rebate agreement.

The requirements for renewal of existing rebate agreements between

States and manufacturers at the end of the initial period specified in

the agreement are generally specified in section 1927(a)(4) of the Act.

Under this section, a State/manufacturer agreement is renewable after

the initial period specified in the agreement if the State establishes

to HCFA's satisfaction that the agreement provides for rebates that are

at least as large as the rebates required under the national rebate

agreement, and the State agrees to report to HCFA any rebates received

under the agreement. We would not approve the renewal of an existing

agreement unless the manufacturer has entered into the national rebate

agreement. As is the case for existing agreements in the initial

period, the State is responsible for submitting to the HCFA RO, along

with the agreement, a written assurance from the manufacturer that the

agreement submitted for renewal meets the minimum rebate requirements

described above.

If the actual rebates fail to be at least as large as those rebates

required under the national agreement for the renewal period, the

renewed agreement would not be considered to be in compliance with

section 1927(a) of the Act. In this case, HCFA would notify the State

that the manufacturer's drugs are subject to the rebate terms of the

national agreement.

B. New Agreements

New rebate agreements are those individual rebate agreements

between a manufacturer and a State that are entered into on or after

November 6, 1990, and specifically authorized by HCFA. Section

1927(a)(1) of the Act provides that the manufacturer may enter into a

rebate agreement with the Secretary on behalf of a State, or the

Secretary may authorize a State to enter directly into a rebate

agreement with a manufacturer, thus providing an alternative to the

national rebate agreement.

In accordance with section 1927 of the Act, HCFA would authorize

State Medicaid agencies to enter directly into new agreements with drug

manufacturers. However, we would apply the requirements in section

1927(a)(4) to these new State manufacturer agreements, that is, the

agreements must provide rebates at least as large as those required

under the national rebate agreement, and the State must agree to report

any rebates under the agreement to HCFA. Therefore, we would require in

Sec. 447.510(c)(4) that the State include with its agreement

authorization request to HCFA a written assurance from the manufacturer

that the agreement provides rebates that equal or exceed the rebate

amounts specified in the national agreement.

We believe this additional verification of the rebate amounts

specified in the new agreement would be necessary since these contracts

can differ in form and content in each State. A written assurance from

the manufacturer would be evidence that both parties certify that the

rebate amounts under the new agreement meet or exceed the rebate

amounts in the national agreement.

We would not authorize individual State agreements that provide for

rebates less than those required under the national agreement. In our

opinion, such agreements are contrary to our understanding of

Congressional intent to maximize program savings while expanding access

to covered outpatient drugs. Thus, since there is little or no

additional benefit for either the States or HCFA to authorize these

types of individual agreements, which would increase Medicaid drug

costs without offsetting national rebate savings, we would not approve

such agreements.

C. Length of Agreements

We would specify in Sec. 447.512(a) that the initial period of an

existing State/manufacturer agreement and a new State/manufacturer

agreement is the period specified in the agreement, and that the

national rebate agreement is effective for an initial period of at

least 1 year. While we would not require a 1-year timeframe for the

initial period in a new State/manufacturer agreement, we recommend its

use to avoid administrative delays from HCFA reviewing new agreements

with shorter timeframes. More frequent reviews add to unnecessary

administrative costs and burdens for all parties involved.

Under this section we also would specify that the national

agreement will be automatically renewed for successive periods of at

least 1 year unless (1) HCFA terminates the agreement under the

conditions specified in section 1927(b)(4)(B)(i) of the Act; or (2) the

manufacturer terminates the agreement for any reason as permitted under

section 1927(b)(4)(B)(ii) of the Act.

D. Termination of Agreements

1. Termination by HCFA

In accordance with section 1927(b)(4)(B)(i) of the Act, a rebate

agreement may be terminated by the Secretary if the manufacturer

violates the requirements of the agreement or for ``other good cause

shown.'' HCFA has been delegated the Secretary's authority under

section 1927(b)(4)(B) to provide for termination of a rebate agreement.

We would interpret ``other good cause shown'' to be any violations of

the provisions of the national rebate agreement, section 1927 or the

related regulations, or the persistent failure to provide timely

information on pricing and other required information or to pay timely

rebates. HCFA would send a written notice of the decision to terminate

the agreement to the manufacturer. HCFA would also notify State

agencies of the termination. The termination would not be effective

earlier than 60 days after the date a notice of the termination is sent

to the manufacturer (Sec. 447.514(b)). If a manufacturer is

dissatisfied with a termination decision made by HCFA, the manufacturer

may request a hearing (as specified in section II.D.5. of this

preamble). However, a request for a hearing would not delay the

effective date of the termination.

2. Termination by the Manufacturer

In accordance with section 1927(b)(4)(B)(ii) of the Act, the

manufacturer may terminate its rebate agreement for any reason. Section

601(b)(4) of VHCA amended section 1927(b)(4)(B) of the Act to provide

that any such termination not be effective until the rebate period

beginning at least

[[Page 48450]]

60 days after the date the manufacturer provides notice to the

Secretary. A termination notice from a manufacturer is considered a

request to end its participation in the national rebate agreement with

the understanding that there is a delay before reinstatement (as

discussed in section II.D.4. of this preamble).

We would provide in Sec. 447.514(c)(1) that a manufacturer that

wishes to terminate an agreement must provide to HCFA a written notice

of intent to terminate at least 60 days before the beginning of the

rebate period in which the termination will occur. We would specify

that the effective date of a requested termination will be the first

day of the first rebate period beginning at least 60 days after the

manufacturer gives written notice requesting termination, or a later

date if specified by the manufacturer. We would specify in

Sec. 447.514(c)(3) that the date of notice will be considered to be the

postmark date of the U.S. Postal Service or common mail carrier.

If the manufacturer fails to terminate the agreement at least 60

days before the renewal date, the automatic renewal provisions of

section 1927(b)(4)(A) would be effective and the agreement would not

terminate until the rebate period following the renewal. For example,

if a manufacturer intended to terminate the rebate agreement effective

January 1, 1994, HCFA must have received the written notice on or

before November 1, 1993. Otherwise, if HCFA received the notice on

November 15, 1993, the termination date would be April 1, 1994 (the

first day of the first rebate period beginning at least 60 days after

receipt of the notice).

Any termination would not affect rebates due under the agreement

before the effective date of the termination.

3. Nonrenewal of Rebate Agreement

To effectuate sections 1927(b)(4)(A) and (b)(4)(B)(ii) of the Act,

we would require in Sec. 447.514(c)(2)(i) that a manufacturer give

written notice of its decision not to renew the rebate agreement

(nonrenewal notice) at least 60 days before the end of the current

agreement period. (We would consider the date a manufacturer gives

written notice of its decision not to renew to be the date of the

postmark of the U.S. Postal Service or common mail carrier

(Sec. 447.514(c)(3)).) If HCFA receives a manufacturer's nonrenewal

notice at least 60 days before the end of the agreement period, the

nonrenewal would be effective on the ending date of the agreement

period. This 60-day period would give HCFA the time needed to notify

States that the manufacturer's drugs are no longer eligible for FFP

under Medicaid.

If the manufacturer fails to meet this 60-day advance notice

requirement, the agreement would be automatically renewed for another

1-year term. In this case, HCFA would deem the nonrenewal notice a

termination notice because the manufacturer missed the nonrenewal

deadline. Therefore, in accordance with the regulations at

Sec. 447.514(c)(2)(ii)(B), HCFA would terminate the rebate agreement

effective the second calendar quarter of the renewed agreement period.

4. Reinstatements

Section 1927(b)(4)(C) of the Act provides that, if a rebate

agreement is terminated, another agreement with the manufacturer (or a

successor manufacturer) may not be entered into until a period of 1

calendar quarter has elapsed from the date of the termination, unless

the Secretary finds good cause for an earlier reinstatement of the

agreement. We would incorporate this provision in Sec. 447.514(d) of

our regulations. For example, if HCFA received a written notice on

October 1, 1993, to terminate an agreement, the rebate agreement would

be terminated on January 1, 1994, and a manufacturer could not enter

into another agreement until April 1, 1994, unless HCFA finds good

cause to do otherwise. An example of good cause might be if a

manufacturer's drug is medically necessary to a significant number of

Medicaid recipients and there is no therapeutic substitute available.

5. Opportunity for Appeal

Section 1927(b)(4)(B) of the Act provides that the Secretary must

provide a manufacturer with a hearing concerning a termination of a

rebate agreement if the manufacturer requests one. In accordance with

this section of the Act, we would provide in Sec. 447.514(b)(4) that,

if a manufacturer is dissatisfied with a termination of a rebate

agreement by HCFA, the manufacturer may appeal the termination under

the administrative procedures specified in the contract provision in

the rebate agreement. We believe the appeal procedures specified in the

national rebate agreement afford manufacturers the due process rights

to which they are entitled under section 1927 of the Act, since the

process provides a written notification process, the right to appeal

the termination and, if applicable, a hearing before a HCFA official or

other party.

Section 1927(b)(4)(B)(i) of the Act also requires that the hearing

not delay the effective date of the termination. Accordingly, we would

provide in Sec. 447.514(b)(4) that, while manufacturers have the right

to an administrative hearing, such a hearing would not delay the

effective date of the termination.

6. Notice to States

Section 601(b)(4) of VHCA added section 1927(b)(4)(B)(iv) of the

Act, which provides that in the case of a termination of a

manufacturer, the Secretary will provide notice of the termination to

the States not less than 30 days before the effective date of the

termination. In accordance with this section of the Act, we would

provide in Sec. 447.514(f) that HCFA will notify States of any

termination from the drug rebate program at least 30 days prior to the

effective date of the termination.

III. Drugs Covered Under the Rebate Agreement

A. Rebated and Non-Rebated Drugs

Sections 1927(k)(2) and (k)(4) of the Act specify the covered

outpatient drugs that are subject to rebate agreements. Covered

outpatient drugs are defined as (1) those drugs that may be covered as

prescribed drugs under Medicaid under section 1905(a)(12) of the Act,

are dispensed only upon prescription (except over-the-counter drugs),

and that meet certain requirements specified in sections

1927(k)(2)(A)(i) through (iii) of the Act; (2) a biological product

other than a vaccine that may be dispensed only upon prescription, is

licensed under section 351 of the Public Health Service Act, and is

produced at an establishment licensed under section 351 to produce such

products; (3) insulin certified under section 506 of the Federal Food,

Drug, and Cosmetic Act; and (4) ``over-the-counter'' drugs that are

prescribed by a physician or other person authorized to prescribe under

State law, if the State provides for coverage of these drugs as

prescribed drugs under its approved State plan. We would add this

definition to Sec. 447.516(a) of our regulations.

We would require in Sec. 447.516(b) that a manufacturer submit as

part of its rebate agreement a listing of all of its drugs that fall

within the definition of covered outpatient drugs in sections

1927(k)(2) through (k)(4) of the Act. We also would require use of

National Drug Code (NDC) numbers to identify the drugs.

We would interpret ``covered outpatient drug,'' as defined in

section 1927(k)(2) of the Act, to include all covered outpatient drugs

for which that manufacturer holds legal title to the NDC number. The

statutory definition

[[Page 48451]]

encompasses all FDA-approved prescription drugs and biologicals except

for vaccines or drugs that fall within the limiting definition in

section 1927(k)(3) of the Act (Secs. 447.504 and 447.516(b)(2)).

Manufacturers that have entered into the national rebate agreement have

agreed to submit a listing of all covered outpatient drugs, not a

partial listing. Therefore, in accordance with the statute and the

provisions of the national rebate agreement, manufacturers that enter

into a rebate agreement could not exclude any covered outpatient drug

specified in section 1927(k) of the Act from its listing of covered

outpatient drugs.

Even though States may choose to exclude or restrict certain drugs

under section 1927(d) of the Act (as discussed in section IV.B of this

preamble), the drugs may be covered in other States or covered by that

State at a later date. Therefore, a manufacturer would be required to

list by NDC number all of its covered outpatient drugs, regardless of

whether its drugs are dispensed or covered by Medicaid programs in all

States. In addition, HCFA would not allow a manufacturer to withhold

its covered outpatient drugs from being subject to the rebate

provisions, regardless of whether the drugs are sold by the

manufacturer's subsidiaries or parent company, as discussed in section

I.A. of this preamble.

In Sec. 447.522(a), we would provide for an exclusion from the

definition of covered outpatient drugs consistent with section

1927(k)(3) of the Act. Section 1927(k)(3) of the Act, as amended by

section 13602(a)(2)(B)(ii) of OBRA '93, provides certain exclusions

from the definition of covered outpatient drugs. This section specifies

that covered outpatient drugs do not include ``any drug, biological

product, or insulin provided as part of, or as incident to and in the

same setting as, any of the following (and for which payment may be

made under [Medicaid] as part of payment for the following and not as

direct reimbursement for the drug): Inpatient hospital services;

hospice services; dental services (except that drugs for which the

State plan authorizes direct reimbursement to the dispensing dentist

are covered outpatient drugs); physicians' services; outpatient

hospital services; nursing facility services and services provided by

an intermediate care facility for the mentally retarded; other

laboratory and x-ray services; and renal dialysis'' (Sec. 447.522(a)).

The term ``covered outpatient drug'' also would not include any

such drug, biological product, or insulin for which an NDC number is

not required by the FDA that is used for an indication that is not

``medically accepted'' (Sec. 447.522(b)). A medically accepted

indication is defined under section 1927(k)(6) of the Act, as amended

by section 13602(a)(2)(B)(iii) of OBRA '93, as any use for a covered

outpatient drug that is approved under the Federal Food, Drug and

Cosmetic Act, or the use of which is supported by one or more citations

included or approved for inclusion in any of the following compendia:

The American Hospital Formulary Service-Drug Information, the American

Medical Association Drug Evaluations, and the United States

Pharmacopeia-Drug Information. We would incorporate this definition in

Sec. 447.504 of our regulations.

There are additional drugs and biologicals that do not fall within

the definition of covered outpatient drugs set forth in section 1927(k)

of the Act. These drugs are not subject to rebates, although Medicaid

coverage may be provided under section 1905(a)(12) of the Act at State

option, and FFP is available. Generally, these additional drugs and

biologicals that do not fall within the section 1927(k) definition are

discussed below and would be specified in Sec. 447.522(c) through (g)

of the regulations. We do not consider this a definitive list due to

the vast nature of drugs and biologicals regulated by the FDA and the

unique situations that exist for particular products. Drugs that fall

outside of the scope of section 1927 of the Act would not be considered

covered outpatient drugs and, therefore, would not be subject to

rebate.

Any drug, biological product, or insulin for which an NDC

number is not required by the FDA would not meet the definition of a

covered outpatient drug in section 1927(k) and, therefore, would not be

subject to a rebate as a condition of FFP. This would include whole

blood (collected from a single human donor) and blood components (which

are the result of physical or mechanical separation either as part of

the collection process or subsequent to the collection of whole blood).

Medical items and supplies, such as syringes (except

insulin-filled syringes), urine and blood glucose testing strips and

devices, lancets, and inhalers (except pre-filled inhalers) do not meet

the definition of covered outpatient drugs in sections 1927(k)(2)

through (k)(4) of the Act and, therefore, would not be subject to a

rebate as a condition of FFP.

Certain nutritional products that are regulated as drugs

would be covered under the rebate program. Parenteral products that are

administered intravenously are approved as drugs by the FDA under

section 505 of the Federal Food, Drug, and Cosmetic Act. These

parenteral products that are approved as drugs, are administered

intravenously, and meet the definition of a covered outpatient drug in

accordance with section 1927(k) of the Act would be subject to a rebate

as a condition of FFP. Parenteral products that are not administered

intravenously are regulated as ``foods'' by the FDA and would not meet

the definition of a covered outpatient drug.

Enteral nutrition products that are not approved by FDA as

a drug under sections 505, 506, or 507 of the Federal Food, Drug, and

Cosmetic Act would not be considered covered outpatient drugs under

section 1927(k)(2)(4) of the Act, and would not be subject to rebate.

HCFA has permitted States the option to cover enteral nutrition

products that are not approved as a drug by the FDA, under Medicaid

benefit categories other than prescription drugs. These categories

include outpatient hospital services, home health services, clinic

services, and rural health clinic services. The nutrient products may

be covered in these settings as a medical supply. These supplies would

not be considered covered outpatient drugs and, therefore, would not be

subject to rebate.

States have the option to cover under their Medicaid

program investigational new drugs (IND) (for example, Treatment IND

drugs, Parallel Track, and Group C cancer drugs). (State Medicaid

programs often use the term ``experimental'' when referring to these

types of drugs.) Since section 1927 of the Act made no changes to a

State's previous ability to cover these drugs, FFP continues to be

available for these drugs. However, because they do not meet the

definition of covered outpatient drugs in sections 1927(k)(2) through

(4) of the Act, they would not be covered under the drug rebate program

or subject to a rebate.

B. Definitions of Drug Categories

As defined in section 1927(k)(7)(A)(iv) of the Act, ``single source

drug'' means a covered outpatient drug that is produced or distributed

under an original new drug application (NDA) approved by the FDA,

including a drug product marketed by any cross-licensed producers or

distributors operating under the NDA. (Section III.C.3. of this

preamble contains the definition of original new drug application.)

Section 1927(k)(7)(A)(i) of the Act defines ``multiple source drug'' as

a covered outpatient drug for which there are two or more drug products

that are--

[[Page 48452]]

Rated as therapeutically equivalent by the FDA under its

most recent publication ofApproved Drug Products with Therapeutic

Equivalence Evaluations;

Are pharmaceutically equivalent and bioequivalent as

determined by the FDA; and

Are sold or marketed in the State during a calendar

quarter.

Drugs are pharmaceutically equivalent if the products contain

identical amounts of the same active drug ingredient in the same dosage

form and meet compendial or other applicable standards of strength,

quality, purity, and identity.

Drugs are bioequivalent if they do not present a known or potential

bioequivalence problem, or if they do present such a problem, they are

shown to meet an appropriate standard of bioequivalence. (This

condition does not apply if FDA changes by regulation the requirement

that in order for drug products to be rated as therapeutically

equivalent, they must be pharmaceutically equivalent and

bioequivalent.)

Sections 1927(k)(7)(A)(ii) and (iii) of the Act define ``innovator

multiple source drug'' as a multiple source drug that was originally

marketed under an original NDA approved by the FDA and ``noninnovator

multiple source drug'' as a multiple source drug that is not an

innovator multiple source drug. To clarify the statutory definition, we

would further define multiple source drugs to distinguish the

differences between an innovator multiple source drug and a

noninnovator multiple source drug.

In accordance with our understanding of Congressional intent, we

would define an ``innovator multiple source drug'' as a multiple source

drug from 1938 to present that was originally marketed under an

original NDA approved by the FDA. We would define a ``noninnovator

multiple source drug'' as a multiple source drug that was marketed

under an abbreviated NDA or any marketed, unapproved pre-1938 drug

product for which the FDA has not made a final determination about its

legal status. This would include (1) all products approved under an

abbreviated NDA (authorized under the Drug Price Competition and Patent

Term Restoration Act of 1984, Public Law 98-417), paper NDA under the

FDA's former ``Paper NDA'' policy (54 FR 28873), or an application

under section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act;

and (2) any marketed, unapproved pre-1938 drug product that has not

been evaluated under the new drug provisions of the Federal Food, Drug

and Cosmetic Act. (Sec. 447.504)

C. Treatment of New Drugs

1. Elimination of New Drug Coverage Under OBRA '93

OBRA '93 eliminated all special requirements for new drugs by

deleting the former section 1927(d)(6) of the Act. That section

provided that a State may not exclude, subject to prior authorization,

or otherwise restrict from coverage under the rebate program any new

drug or biological approved by the FDA after the date of enactment of

OBRA '90 (November 5, 1990) for a period of 6 months after the date of

FDA approval. OBRA '93 also deleted the references to new drugs in

section 1927(d)(1)(A) and (d)(3) of the Act.

Section 13602(d)(2) of OBRA '93 provided that amendments to section

1927(d) of the Act are effective with rebate periods beginning on or

after October 1, 1993. That is, effective October 1, 1993, States may

exclude or restrict from coverage or prior authorize any new drugs

approved by the FDA. In accordance with section 13602(d)(2), new drugs

approved by the FDA prior to October 1, 1993 may only receive the

unrestricted coverage specified in former section 1927(d)(6) of the Act

through the rebate period ending September 30, 1993. Beginning October

1, 1993 the unrestricted coverage no longer applies to these new drugs.

2. New Drug Coverage Provision in Effect for January 1, 1991-September

30, 1993

(Note: The discussions of sections 1927(d) (1), (3), and (7)

throughout this section III.C.2. of the preamble pertain to any

amendments made by OBRA '93.)

Prior to OBRA '93, section 1927(d)(6) of the Act provided that a

State may not exclude, subject to prior authorization, or otherwise

restrict from coverage under the rebate program any new drug or

biological approved by the FDA after the date of enactment of OBRA '90

(November 5, 1990) for a period of 6 months after the date of FDA

approval. Except as authorized in section 1927(d)(1) and (2) of the Act

for the period of January 1, 1991-September 30, 1993, States must have

covered these drugs with no restrictions for 6 months from the date of

FDA approval, regardless of when the manufacturer began to market the

drugs. We would incorporate these provisions in Sec. 447.520(a) of our

regulations. For purposes of these provisions, we did not consider a

delay in the marketing of a new drug following FDA approval a cause for

extending the 6-month period.

The mandatory coverage provisions of section 1927(d)(6) of the Act

did not encompass those drugs that a State may exclude under sections

1927(d)(1) and (d)(2) of the Act. Sections 1927(d)(1) and (d)(2)

provide that a State may exclude or otherwise restrict coverage of a

covered outpatient drug if the drug is used to treat, for example,

anorexia, weight gain, hair loss, or cough or cold symptoms. Section

1927(d)(2), when read in conjunction with sections 1927(d)(1) and

1927(k)(2) of the Act, circumscribes those covered outpatient drugs

that must be covered by States under their State plan. In other words,

the mandatory coverage provisions of section 1927(d)(6) did not affect

those drugs that a State may exclude or otherwise restrict under

sections 1927(d)(1) or (d)(2).

In addition, we would provide under Sec. 447.520(c) of the

regulations that coverage of new drugs between January 1, 1991 and

September 30, 1993 for the first 6 months after approval by the FDA

would not be available for manufacturers that did not have agreements

in existence with HCFA for this 6-month time period, since section

1927(a) of the Act provides FFP only for covered outpatient drugs of

manufacturers with rebate agreements. However, if the new drug is rated

as 1-A, section 1927(a)(3) of the Act authorizes payment, at State

option, for certain 1-A drugs not covered under a rebate agreement.

(Section III.D.1 of this preamble contains a discussion of 1-A drugs.)

Before the enactment of OBRA '93, sections 1927(d)(1) and (d)(6) of

the Act provided that a State may not subject a new drug to prior

authorization during the 6-month period after FDA approval. If the

State chose to cover a new drug or class of drugs that was listed in

section 1927(d)(2) of the Act, it could not prior authorize a new drug

within that category during the 6-month period. After the 6-month

period, a drug that was considered a new drug could be subject to the

prior authorization provisions of section 1927(d)(1) at State option.

We would incorporate these provisions in Sec. 447.520(b) of our

regulations.

Before the enactment of OBRA '93, section 1927(d)(3) of the Act

prohibited new drugs from being added to the list of drugs subject to

restriction in section 1927(d)(2) during the 6-month period specified

in section 1927(d)(6). After the 6-month period, new drugs could be

added to the list, as discussed in section IV.B.2. of this preamble.

Before the enactment of OBRA '93, section 1927(d)(7) of the Act

permitted a State to impose limitations on all

[[Page 48453]]

drugs in a therapeutic class, on the minimum or maximum quantities per

prescription, or on the number of refills, provided such limitations

are necessary to discourage waste. We believe that to effectuate

Congressional intent, sections 1927(d)(6) and 1927(d)(7) of the Act

must have been read in concert to discourage waste in the use of new

drugs during the 6-month period after FDA approval. Section 1927(d)(7),

in our opinion, permitted States to impose limitations on all drugs,

including new drugs, in a therapeutic class, on the minimum or maximum

quantities per prescription, or on the number of refills, provided such

limitations were necessary to discourage waste.

We believe such an interpretation would be consistent with the

statutory provisions in both section 1927(d)(6) and section 1927(d)(7).

We believe the Congress mandated that States could not exclude from

coverage, subject to prior authorization, or otherwise restrict a new

drug for 6 months from FDA approval to ensure that medically necessary

new drugs were made available to the general population. The

limitations for waste in section 1927(d)(7) of the Act did nothing to

discourage the proper prescribing, dispensing, and use of a new drug.

They simply ensure that, for Medicaid recipients, the minimum supply of

the drug is sufficient to be medically effective and economical and

that the maximum supply of the drug discourages waste in the event the

drug cannot be used (for example, because of allergic reactions, side

effects, drug interaction, or other reasons of medical necessity). The

foregoing would give effect to the provisions in both section

1927(d)(6) and section 1927(d)(7) and, thus, would uphold the intent of

the Congress as set forth in the statute. (See section IV.C. of the

preamble for a discussion of a State's attorney authority to impose

limitations as amended by OBRA '93.)

3. Definition of Original New Drug Application (NDA)

Sections 1927(k)(7)(A)(ii) and (iv) of the Act reference the term

``original NDA'' in the definitions of ``innovator multiple source

drug'' and ``single source drug.'' Under the national rebate agreement,

a drug marketed under an original NDA, in addition to other criteria,

may be classified as either a single source or an innovator multiple

source drug. Neither the statute nor the rebate agreement, however,

define the term ``original NDA.'' This term is also not defined in the

Federal Food, Drug, and Cosmetic Act.

Because the statute does not provide specific guidance on this

term, we would interpret it to comport with our understanding of the

intent of the Congress. We would define in regulations at Sec. 447.504

the term ``original NDA'' as an FDA-approved drug or biological

application that received one or more forms of patent protection,

patent extension under title II of Public Law 98-417, the Drug Price

Competition and Patent Term Restoration Act, or marketing exclusivity

rights granted by the FDA. This definition would include an NDA, an

amended NDA, an antibiotic drug application (ADA), an amended ADA, a

product license application (PLA), and an amended PLA.

Based on the statute, which requires larger rebates for single

source and innovator multiple source drugs, we believe the term

``original NDA'' was included in sections 1927(k)(7)(A)(ii) and (iv) of

the Act for the purposes of extracting larger rebates from those

products that received some form of patent or marketing protection for

a specific period of time. This form of protection could have been

achieved through either some type of patent on the drug or some type of

marketing exclusivity rights granted by the FDA.

Patent protection is generally granted for 17 years. Exclusivity

rights generally run for a period of 3 to 7 years and are granted by

the FDA for such innovations as new medical indications, new dosage

strengths, new dosage forms, new regimens, or new routes of

administration. Exclusivity rights can extend beyond the life of the

patent and protect the manufacturer from competition in one or more

specific market areas. Thus, the innovators of drug products with

market protection often benefitted from a lack of competition and

increased profits for a specific period of time. Therefore, innovators

with market protection are required to pay larger rebates than

noninnovators that produce generic drugs with no market protection. We

believe the term ``original NDA,'' as proposed above, produces this

effect.

The rebate classification system has raised questions among

manufacturers regarding how to classify certain products. We believe

some drugs that appear to meet the rebate agreement's definition of

innovator multiple source drug are actually noninnovator multiple

source drugs. The FDA may consider a previously approved drug product

to be a new drug and require an NDA before marketing. However, in

accordance with our understanding of these provisions, this drug may

actually be a noninnovator. For example, under 21 CFR 310.509, the FDA

does not generally recognize any parenteral drug product packaged in a

plastic immediate container as safe and effective. Therefore, this type

of drug product is considered a new drug within the meaning of section

201(p) of the Federal Food, Drug, and Cosmetic Act and requires an

approved NDA as a condition for marketing. In this case, if no patent

protection or marketing exclusivity rights were granted by the FDA for

the covered outpatient drug of that manufacturer, we would consider it

to be a noninnovator multiple source drug.

D. Covered Drugs of Manufacturers Without Rebate Agreements

1. Coverage of 1-A Rated Drugs

Prior to 1992, the FDA maintained a rating system under which drugs

were rated based on various factors. Under that system, the FDA rating

``1-A'' signified the chemical type (1) and the therapeutic potential

(A). The FDA, in its 1991 publication Offices of Drug Evaluation

Statistical Report, defined the rating 1-A as follows:

The chemical type ``1'' identifies the drug as a new

molecular entity, that is, a drug for which the active moiety has not

been previously marketed in the United States for use in a drug

product, either as a single ingredient or as part of a combination

product, or as part of a mixture of stereoisomers. The term ``new

molecular entity'' is equivalent to ``new chemical entity''.

The therapeutic potential type ``A'' is defined as a drug

with important therapeutic gain. The drug may provide effective therapy

or diagnosis for a disease not adequately treated or diagnosed by any

marketed drug, or provide improved treatment of a disease through

improved effectiveness or safety (including decreased abuse potential).

A 1-A drug may also be labeled ``1-A/AA''. The 1-A/AA designation

means it is a 1-A drug that is generally being developed for AIDS and

AIDS-related opportunistic infections and that the FDA has placed the

drug on a fast track and will monitor it through the drug review

process.

Section 1927(a)(3)(A) of the Act authorizes FFP for single source

or innovator multiple source drugs rated by the FDA as 1-A that are

furnished by manufacturers without rebate agreements if certain

conditions are met. Under this section, Medicaid payments may be made

if: (1) The State has determined that the availability of the drug is

essential to the health of recipients under the approved State plan;

and (2) the physician has obtained

[[Page 48454]]

approval for use of the drug before it is dispensed in accordance with

a prior authorization program, or the Secretary has approved the

State's determination regarding drug necessity to obviate the need for

prior authorization (Sec. 447.518(b)). Necessity would be judged based

on alternative therapies available and the probable outcome if a

specific drug is not dispensed.

Even though section 1927(a)(3) of the Act authorizes HCFA to

provide FFP for 1-A rated drugs under certain circumstances, States

retain the option under sections 1902(a) and 1905 of the Act to choose

which 1-A drugs they will cover under their approved State Medicaid

plans.

The FDA recently changed its therapeutic classification system in

which drugs were rated as either A, B, or C. As indicated in the FDA's

Staff Manual Guide, Center for Drug Evaluation and Research, this

three-tiered system has been replaced by a mutually exclusive two-

tiered system in which the potential therapeutic classification of a

drug product is either a Type P (Priority review, therapeutic gain) or

a Type S (Standard review, substantially equivalent drug product). Type

P is assigned to drugs that appear to represent a therapeutic gain over

already marketed or approved drugs (formerly rated A or B). Type S is

assigned to drug products that appear to have therapeutic qualities

similar to drugs already approved or marketed (formerly rated C).

The Type P and S therapeutic classification system is effective for

all NDAs approved on or after January 1, 1992. The classifications for

NDAs approved prior to January 1, 1992, will remain unchanged, that is,

these drugs will retain their A, B, or C therapeutic classification and

1-A drugs would continue to be covered by States as specified in this

regulation. For purposes of section 1927(a)(3)(A) of the Act, we are

inviting public comments on possible methods to identify 1-P-rated

drugs that we could include as 1-A-drugs under this provision using the

FDA's former classification system.

2. Coverage of Drugs During the First Rebate Period of 1991

Section 1927(a)(3)(B) of the Act provides for Medicaid payment for

drugs not covered under rebate agreements if the Secretary determined

that in the first rebate period of 1991 there were extenuating

circumstances. On March 8, 1991, HCFA notified all State Medicaid

Directors of its determination that extenuating circumstances did exist

and that, for the first rebate period of 1991, outpatient prescribed

drugs of manufacturers without rebate agreements were covered under

Medicaid if they were included in the approved State Medicaid plan.

States were not formally notified until March 15, 1991, of

manufacturers participating in the rebate program. There was no

practical way States could retroactively discontinue drug coverage on

January 1, 1991, for drugs of nonparticipating manufacturers. However,

as of April 1, 1991, FFP is available only for those covered outpatient

drugs of manufacturers with rebate agreements.

Section 1927(a)(1) of the Act required that manufacturers enter

into a rebate agreement by March 1, 1991, for payment to be available

for their drugs under Medicaid for the January-March 1991 rebate

period. As discussed earlier, HCFA also extended through April 30,

1991, the deadline for manufacturers to enter into rebate agreements

that are retroactive to January 1, 1991.

IV. Limitations on Coverage of Drugs

Section 1927(d) of the Act, as amended by OBRA '93, permits States

to place certain limitations on drugs that are covered under a rebate

agreement. States may limit the coverage of drugs by: (1) Implementing

a prior authorization program that complies with the requirements in

section 1927(d) (5); (2) restricting or excluding from coverage drugs

listed in section 1927(d) (2); (3) restricting the quantities of

outpatient drugs per prescription and the number of refills under

section 1927(d) (6); and (4) excluding coverage of the drug from its

formulary in accordance with section 1927(d)(4). These limitations,

that are proposed in the regulations at Secs. 447.524 and 447.526, are

explained below.

A. Prior Authorization

Section 1902(a)(54) of the Act provides that in the case of a State

plan that provides medical assistance for covered outpatient drugs (as

defined in section 1927(k) of the Act), the State must comply with the

applicable requirements of section 1927 of the Act. Section

1927(d)(1)(A) provides that a State may subject any covered outpatient

drug to prior authorization; that is, require approval of the drug

before its dispensing for any medically accepted indication. The prior

authorization system must meet two conditions specified under section

1927(d)(5) of the Act.

For drugs dispensed on or after July 1, 1991 section 1927(d)(5) of

the Act permits a State to maintain a prior authorization program if

the State responds by telephone or other telecommunication device to

requests within 24 hours of a request for prior authorization. A State

must, except for those drugs listed in section 1927(d)(2) of the Act,

further provide for the dispensing of at least a 72-hour supply of the

drug in emergency situations.

The provisions in section 1927 of the Act make no other changes to

the State's ability to maintain or establish prior authorization

programs. Thus, as specified in section 1927(d)(1) of the Act, States

may subject to prior authorization any covered outpatient drug.

In passing these provisions, the Congress made it clear that

Medicaid recipients should be assured access to all medically necessary

covered outpatient drugs. (H. R. Rep. No. 881, 101st Cong., 2d Sess.

96-98 (1990).) Even though OBRA '93 added section 1927(d)(4) of the Act

to allow States to establish formularies which meet specific

requirements, section 1927(d)(4)(D) provides that the State plan must

permit coverage of a drug excluded from the formulary (other than any

drug excluded or restricted under section 1927(d)(2)) pursuant to a

prior authorization program. In accordance with our understanding of

Congressional intent, we believe that it is necessary to prevent States

from using a prior authorization program as a proxy for a closed

formulary beyond what the statute allows under the formulary provisions

of section 1927(d)(4). In addition, we believe it is necessary to

ensure that States respond to prior authorization requests within the

timeframes specified in the statute. We believe these requirements are

necessary to effectuate section 1927 of the Act and to uphold

Congressional intent.

Prior authorizing drugs as a proxy for a closed formulary, beyond

what the statute allows under the formulary provisions of section

1927(d)(4) without regard for medical necessity could result in

recipients being treated with alternate therapies that may not be in

their best interest. This could result in increased program costs if

other medical services, such as inpatient hospital services, are

necessary because a drug therapy is made less accessible under the

State Medicaid program. Thus, a recipient's access to medically needed

drugs could be unduly hampered if medical necessity is not used in a

prior authorization program.

Therefore, we are proposing requirements to ensure that States

utilize individuals with the appropriate level of medical expertise

when determining which drugs are prior authorized and when deciding if

the drug can be dispensed. Accordingly, we

[[Page 48455]]

believe it most appropriate that the level of expertise be reflected by

the ability to prescribe/dispense drugs. We believe individuals with

this knowledge would more likely be aware of negative consequences that

could result if a specific drug is prior authorized or not approved for

dispensing. Thus, the State Medicaid program and recipients would

benefit from such a prior authorization system that considers medical

necessity as its primary concern.

We note that this same level of expertise need not be present in

those individuals responding to the prior authorization requests, as

these persons would be acting in accordance with guidelines developed

by those persons who place the drugs on prior authorization. However,

as there may be requests for prior authorized drugs that do not fit

into present guidelines, access to those persons responsible for

putting drugs into a prior authorization program is needed.

Therefore, in accordance with section 1902(a)(54) of the Act, we

would specify in these regulations at Sec. 447.526(d) and (e) that:

State staff who place drugs in a prior authorization

system must be licensed to prescribe or dispense drugs in the State,

for example, physicians or pharmacists, since these persons would have

the medical knowledge necessary to determine criteria for prior

authorization.

State staff who respond to prior authorization requests

are not limited to persons licensed to prescribe or dispense drugs as

long as all decisions involving drugs subject to prior authorization

are made--

+ In consultation with these licensed professionals; or

+ Under guidelines promulgated by such individuals as long as

States provide access to licensed professionals in difficult or unusual

cases.

The State must establish a process to ensure recipients

access to medically necessary covered outpatient drugs. We would not

permit a State to use a prior authorization program as a means to deny

covered outpatient drugs when medical necessity is shown.

The State must provide annual written assurances to HCFA

that the State's prior authorization program does not prevent

recipients from gaining access to medically needed drugs.

Generally, we would allow States flexibility in implementing the

statutory provisions relating to a 24-hour turnaround time for prior

authorization requests and at least a 72-hour supply for emergency

situations. For example, States may continue to prescribe the format

for sending the request (for example, mail, telephone, or telefax).

States may also continue to staff this function only during normal

business hours, provided the requirement concerning a response to prior

authorization requests within 24 hours of a request can be met.

However, to ensure access to medically necessary drugs, we would

require States to structure their system so that, in emergency

situations, a State's response is given to the dispenser or physician

requesting the authorization before the emergency supply is exhausted.

In these emergency situations, we would require the State to provide a

mechanism so that a dispenser or physician can make a prior

authorization request 24 hours before the supply is exhausted and a

response returned by the State within that 24-hour period. We would

require the State to allow a dispenser to provide a sufficient

emergency supply (of at least 72 hours) until the prior authorization

response can be returned to the dispenser. For example, the supply of a

drug dispensed on Friday evening should not be exhausted before the

prior authorization is requested on Monday morning and a response

returned to the requester by the State on Tuesday morning (within 24

hours of a request).

We would allow States to develop a reasonable definition of

emergency situations, as long as the definition does not prevent

recipients from acquiring medically necessary covered outpatient drugs

within the parameters set forth below. We would require in

Sec. 447.526(c)(2)(i) that States specify in their State plans the

process that will be used to determine what constitutes an emergency

situation. Emergency situations may involve immediate and severe

adverse consequences or continuation of an immediate and severe adverse

consequence if a covered outpatient drug is not dispensed when a

prescription is submitted. We would not consider an emergency situation

to exist if (1) the lack of a drug supply does not pose an immediate

threat to the recipient, or (2) a drug must be prior authorized before

it can be dispensed if there is no immediate threat to the recipient.

B. Exclusion or Restriction of Drugs

1. Drugs Subject to Restriction

Section 1905(a)(12) of the Act and regulations at 42 CFR 440.120

define prescribed drugs that may be covered by a State under its

Medicaid program. Existing regulations under Sec. 441.25 contain

prohibitions on FFP for certain prescribed drugs. Except for covered

outpatient drugs defined in section 1927 of the Act, these rules are

not affected by the requirements for rebate agreements as a condition

of FFP. This proposed rule would implement, in part, the provisions of

section 1927(d)(2) of the Act, which specify the specific drugs or

classes of drugs that States may exclude or restrict from coverage.

As noted previously in this preamble, section 1927(d)(1)(B) of the

Act as amended by OBRA '93 specifies conditions under which a State may

exclude or restrict coverage of an outpatient drug under a drug rebate

agreement. A State may exclude or restrict a drug if--

The prescribed use of the drug is not for a medically

accepted indication;

The drug is contained in the list of drugs subject to

restriction under section 1927(d)(2) of the Act;

The drug is subject to restrictions in a separate or

existing agreement between a manufacturer and a State agency that has

been authorized by HCFA under sections 1927(a)(1) of the Act or in

effect in accordance with section 1927(a)(4) of the Act

(Sec. 447.524(b)); or

The State has excluded coverage of the drug from its

formulary established in accordance with the requirements for

formularies specified in section 1927(d)(4).

Section 1927(d)(2) limits a State's option to exclude or restrict

drugs from coverage under the rebate program to the following drugs,

classes of drugs, or their medical uses:

Agents when used for anorexia, weight loss or weight gain.

Agents when used to promote fertility.

Agents when used for cosmetic purposes or hair growth.

Agents when used for the symptomatic relief of cough or

colds.

Agents when used to promote smoking cessation.

Prescription vitamins and mineral products, except

prenatal vitamins and fluoride preparation.

Nonprescription drugs.

Covered outpatient drugs that the manufacturer seeks to

require as a condition of sale that associated tests or monitoring

services be purchased exclusively from the manufacturer or its

designee.

Barbiturates.

Benzodiazepines.

We would allow States flexibility in specifying the drugs and

medical uses that fall within these descriptions. We do not intend to

further identify or define these drugs at this time. We would allow

States to exclude or restrict drugs that fall within these

descriptions. However, when a drug that is primarily

[[Page 48456]]

formulated to treat a medically accepted indication not included on the

list set forth in section 1927(d)(2) of the Act is also prescribed for

a medical use included in section 1927(d)(2), that use of the drug for

the medically accepted indication outside of section 1927(d)(2) would

not be excludable. For example, a drug that is primarily formulated to

treat asthma or some condition other than coughs and colds should not

be excluded for the treatment of asthma. However, a State could prior

authorize the drug and exclude or restrict it if the drug is prescribed

for a cough or cold in an individual case.

We would require in Sec. 447.524(g) that a State amend its State

Medicaid plan to include a list of those drugs or classes of drugs or

medical uses under section 1927(d)(2) of the Act that the State is

excluding or restricting from coverage. We would also require a State

to describe in its plan limitations or conditions of coverage for these

drugs. However, we would not require the State to list those drugs for

which it requires prior authorization. We would require States to amend

their State plans in this manner to ensure that both HCFA and the

public are adequately informed of those drugs covered by various State

plans.

2. Updating the List of Drugs Subject to Restriction

a. Adding Drugs to the List. In accordance with section 1927(d)(3)

of the Act as amended by OBRA '93, the Secretary must periodically

update, by regulation, the list of drugs, classes of drugs, or their

medical uses subject to restriction under the rebate program if there

is evidence of clinical abuse or inappropriate use. Section 1927(d)(3)

provides that the Secretary must update the list on the basis of data

collected by the State Medicaid agencies' surveillance and utilization

review (SUR) programs. We would incorporate this provision in our

regulations at Sec. 447.524(d). As necessary, we will announce a

proposed updated list in the Federal Register and allow public comment

before the list is issued in final.

We request public comments with suggestions on how we should

administer a process to determine when a drug, class of drug, or its

medical use should be added to the list in section 1927(d)(2) of the

Act when the item is subject to clinical abuse or inappropriate use. At

a minimum, any suggestions made for the process must take into

consideration that we must use SUR data to substantiate any proposal to

add an item to the list. In accordance with section 1927(d)(3) of the

Act, a SUR report submitted as supporting documentation would need to

provide HCFA with the data necessary to make an objective analysis

regarding clinical abuse or inappropriate use of an item.

While we currently have reporting requirements for SUR data, we

would need to modify them to accommodate the additional information

needed to update the list of drugs subject to restriction. These

reporting requirements would be addressed in a separate document.

b. Deleting Drugs From the List. Section 1927(d)(3) of the Act

provides that the Secretary must ``update'' the list of drugs subject

to exclusion or restriction. In this proposed rule, we would interpret

this provision to mean that drugs subject to clinical abuse or

inappropriate use may be added to the list. However, we do not believe

that section 1927(d)(3) allows the Secretary to delete drugs from the

list. That list, set forth in section 1927(d)(2) of the Act, represents

drugs that, as noted in the Senate Report, are ``commonly subject to

exclusion or restriction by State Medicaid programs.'' (136 Cong. Rec.,

S15658, daily ed. October 18, 1990) The tenor of that report, as with

the statute, is that drugs may be added to the list, but that the

categories already on the list will remain subject to State

restriction.

An example to reinforce this point can be made with paragraph (H)

under section 1927(d)(2) of the Act. Paragraph (H) refers to ``covered

outpatient drugs that the manufacturer seeks to require as a condition

of sale that associated tests or monitoring services be purchased

exclusively from the manufacturer or its designee.'' If we were to

conclude that we have the authority to remove any drug from the list if

it were not subject to clinical abuse or inappropriate use (as noted in

section 1927(d)(3) of the Act), and data were available demonstrating

that a product was not subject to clinical abuse or inappropriate use,

we would have to remove the drug from the list (regardless of any

exclusive arrangement) and require all State Medicaid programs to cover

the drug. This result would clearly conflict with the statute and with

the legislative history. Accordingly, the drugs on the list would be

statutorily mandated and could only be deleted from the list by

amendments to the statute.

3. DESI and IRS Drugs

a. The DESI Program. Before enactment of the Federal Food, Drug,

and Cosmetic Act of 1938, drugs could be marketed in the United States

as long as a drug's label did not present false information regarding

the drug's strength and purity. The Federal Food, Drug, and Cosmetic

Act first established the requirement that a manufacturer has to prove

the safety of a drug before the manufacturer could market it in the

United States. In accordance with that statute, drugs marketed before

the passage of the Federal Food, Drug, and Cosmetic Act were

``grandfathered'' so that manufacturers, if they do not change the

representations on the drugs' labels, were allowed to continue to

market them unless evidence was developed to indicate that they were

not safe (referred to as pre-38 drugs). However, once a manufacturer

changed the representation on a pre-38 drug's label, that drug was

considered by the FDA to be a ``new drug'' and the manufacturer was

required to prove that the drug was safe for its intended use.

In 1962, the Federal Food, Drug, and Cosmetic Act was amended to

require that drugs sold in the United States be regulated more closely.

Under the provisions of the Drugs Amendments of 1962 (Public Law 87-

781), all new drugs must be shown by adequate studies to be both safe

and effective before they can be marketed. This legislation also

applied retroactively to all drugs approved as safe from 1938 to 1962

(referred to as pre-62 drugs). These pre-62 drugs were permitted to

remain on the market while evidence of their effectiveness was

reviewed. The program established under which the FDA would review the

effectiveness of drugs approved between 1938 and 1962 was named the

Drug Efficacy Study Implementation (DESI) program.

If the DESI review indicates a lack of substantial evidence of a

drug's effectiveness for all of its labeled indications, the FDA will

publish a Notice of Opportunity for a Hearing (NOOH) in the Federal

Register concerning its proposal to withdraw approval of the drug for

marketing. At that time, a manufacturer of that drug or identical,

related, or similar (IRS) drugs has the opportunity to request a

hearing and provide FDA with documentation of the effectiveness of the

drug product before a final determination is made. Drugs for which a

NOOH has been published are referred to as less than effective (LTE)

DESI drugs. The IRS drug counterpart of a LTE DESI drug is also

considered less than effective. (We note that the terms ``DESI drug''

and ``LTE DESI drug'' are not synonymous.)

If all the labeled indications of the product are found to lack

substantial evidence of effectiveness, a withdrawal notice is published

in the Federal Register withdrawing approval of the NDA for the

product. At that time, shipping this product and any IRS drug product

in interstate commerce after the

[[Page 48457]]

effective date of the withdrawal notice is unlawful.

If only some of the labeled indications of the product are found to

lack substantial evidence of effectiveness, the manufacturer must

delete those LTE indications from the drug's label. If a manufacturer

does not comply with this requirement, the manufacturer's NDA can be

withdrawn by the FDA. All manufacturers of IRS drug products must also

revise their labeling and submit an application to the FDA to obtain

approval for their product to be allowed to continue marketing their

drug.

In accordance with section 1903(i)(5) of the Act, FFP is not

available for LTE DESI/IRS drugs for which a NOOH is issued for all

labeled indications. Under the drug rebate program, a drug is not

considered a covered outpatient drug if a NOOH is issued for some or

all labeled indications.

At present, drugs subject to the DESI review process are in various

stages of review. The mandatory and optional State coverage

requirements and FFP restrictions on these drugs are discussed in

section IV.B.3.b. of this preamble. The term ``DESI/IRS drugs'' is used

when discussing coverage of a DESI drug and its IRS counterparts.

b. Coverage of DESI/IRS Drugs Under the Medicaid Program. This

section describes the general coverage, FFP requirements, and rebate

requirements for DESI/IRS drugs. Detailed instructions on how to

identify DESI drugs and the roles that HCFA, States, manufacturers, and

the FDA play in this process have been sent to the manufacturers and

States.

Non-DESI/IRS Drugs or DESI/IRS Drugs Determined Safe and

Effective. Non-DESI/IRS drugs (pre-38 drugs and post-62 drugs) and pre-

62 DESI/IRS drugs that have undergone the DESI review process and have

been determined by the FDA to be safe and effective for their labeled

uses under sections 505 and 507 of the Federal Food, Drug, and Cosmetic

Act meet the definition of a covered outpatient drug. Therefore, these

drugs of a participating manufacturer must be covered under the drug

rebate program and are, therefore, subject to a rebate and FFP.

DESI/IRS Drugs under Review (No NOOH Issued). DESI/IRS

(pre-62 drugs) of participating manufacturers which meet the definition

of a covered outpatient drug that are undergoing the DESI review

process but for which a NOOH has not been issued must be covered under

the rebate program. These drugs include:

+ Drugs described in section 107(c)(3) of the Drug Amendments of

1962 and for which the Secretary has determined there is a compelling

justification for its medical need, or is identical, similar, or

related to such a drug; and

+ Drugs for which the Secretary has not issued a NOOH under section

505(e) of the Federal Food, Drug, and Cosmetic Act to withdraw approval

of an application for such drug under such section because the

Secretary has determined that the drug is less than effective for some

or all conditions of use prescribed, recommended, or suggested in its

labeling.

In other words, a State must cover DESI/IRS drugs of a

participating manufacturer for which a NOOH has not been issued for

some or all of the drug's labeled indications. FFP is available and the

drugs are subject to a rebate. DESI/IRS drugs under this category do

not include drugs that have been found to be safe and effective under

the DESI review program.

Less Than Effective (LTE) DESI/IRS Drugs for Some

Indications. Section 1903(i)(5) of the Act does not prohibit FFP if a

DESI drug is effective for at least one indication. A drug would meet

this criterion if a NOOH has been issued for some, but not all,

indications. These DESI/IRS drugs may be covered at State option and

FFP is available.

For purposes of the rebate program, the definition of a covered

outpatient drug in section 1927(k)(2)(A)(iii) of the Act specifically

excludes those DESI/IRS drugs for which a NOOH has been issued because

the FDA has determined that the drugs are less than effective for some

or all of their prescribed recommended uses. However, when these drugs

have an FDA-approved, labeled indication for which a NOOH has not been

issued, the drug is considered a covered outpatient drug for that

indication (and other medically accepted indications). Therefore, these

drugs of participating manufacturers must be included in the drug

rebate program for their approved indications (and other medically

accepted indications) and are subject to a rebate and FFP.

Less Than Effective (LTE) DESI/IRS Drugs for All

Indications. Under section 1903(i)(5) of the Act, FFP is prohibited for

DESI drugs for which a NOOH has been issued for all conditions of use

prescribed, recommended, or suggested in its labeling. Therefore, if a

State chooses to cover these LTE DESI/IRS drugs, FFP is not available.

This prohibition was not changed by OBRA '90 and applies regardless of

whether the manufacturer is appealing the NOOH for some or all of the

drug's indications.

Less Than Effective DESI/IRS Drugs Withdrawn from the

Market. The FDA has determined this group of DESI/IRS drugs to be less

than effective and published a NOOH and subsequent withdrawal notice in

the Federal Register. Based on these findings, the manufacturer is

required to discontinue the distribution of these drug products.

However, because the FDA does not institute recalls of these drug

products to the retail level, these products may still be available in

pharmacies. In any event, under section 1903(i)(5), FFP is not

available for these DESI/IRS drugs.

c. Reporting DESI/IRS Drugs. The rebate agreement requires that the

manufacturer's list of covered outpatient drugs include the NDC numbers

for all drugs currently marketed by the manufacturer. Manufacturers are

also required to list the NDC number for a drug that it no longer

markets because the manufacturer will be responsible for providing a

rebate on the drug until the entire supply of the drug under an NDC has

expired, the drug has been taken off the market, or for other reasons,

the potential no longer exists that the covered outpatient drug may be

dispensed under the manufacturer's NDC number. To comply with these

requirements, manufacturers must include on their lists of covered

outpatient drugs all DESI/IRS drugs.

Even though some drugs are not subject to the rebate program,

manufacturers must report to HCFA the required information for all LTE

DESI/IRS drugs. A change from one DESI category to another DESI

category, as described in section IV.B.3.b. of this preamble, could

change a drug's coverage under Medicaid. For example, LTE DESI/IRS

drugs could be potentially covered at some point under the rebate

program if the FDA reverses its decision on a NOOH. HCFA must have the

baseline pricing data (for single source and innovator multiple source

drugs) from October 1, 1990, and for all drugs, the DESI drug

indicator, as well as other data, in the event they are covered at a

later date.

A manufacturer is responsible for knowing the status of DESI/IRS

drugs by reviewing DESI notices published in the Federal Register by

the FDA. (See 52 FR 1663 and 1668, January l5, 1987.) Manufacturers

must identify in their list of covered outpatient drugs which they

submit to HCFA those DESI/IRS drugs that they produce that are the

subject of a NOOH.

In accordance with section 1927(b)(3)(C)(ii) of the Act, any

manufacturer with an agreement under section 1927 that knowingly

provides false information is subject to a civil

[[Page 48458]]

money penalty in an amount not to exceed $100,000 for each item of

false information. This provision also applies to any manufacturer that

knowingly reports false information to HCFA regarding the status of a

DESI/IRS drug for coverage purposes. In addition to civil money

penalties, the manufacturer may also be subject to termination because

it is not in compliance with section 1927 of the Act, the national

rebate agreement, and regulations under Sec. 447.534 that specify

manufacturer reporting requirements.

C. Amount, Duration, and Scope of Services. Prior to the enactment

of OBRA '90, States could establish amount, duration, and scope

restrictions on Medicaid services, including prescription drugs. These

restrictions could be based on such criteria as medical necessity and

utilization control, or could be based on other factors so long as the

amount of the services provided was sufficient to ``reasonably achieve

its purpose'' (See section 1902(a)(10) of the Act and Sec. 440.230

(Sufficiency of amount, duration, and scope)). States could impose

prior authorization restrictions and also limit the number of

prescription drugs that they covered through a formulary.

Section 1927 of the Act curtails a State's authority to exclude

drugs from coverage and limited its authority to impose prior

authorization requirements under section 1927(d)(5). However, the

statute did not alter the State's authority to establish amount,

duration, and scope restrictions, and, in fact, specifically recognized

States' authority to impose additional restrictions on the quantities

per prescription and the number of refills. Specifically, section

1927(d)(6) of the Act allows a State to impose restrictions on minimum

and maximum quantities of outpatient drugs per prescription and on the

number of refills within a therapeutic class to discourage waste.

Section 1927(d)(6) also allows a State to impose these limitations and

address instances of fraud or abuse by individuals in any manner

authorized under the Act.

The legislative history of OBRA '90 indicates that this statutory

provision was designed to enhance, not limit or replace, a State's

authority to impose reasonable amount, duration, and scope

restrictions. The House Report, adopted by the Conference Committee,

states that ``States are not prevented from restricting the amount,

duration, and scope of coverage of covered outpatient drugs consistent

with the need to safeguard against unnecessary utilization.'' (H. R.

Conf. Rept. No. 964, 101st Cong., 2nd Sess., 825, 832 (1990)) This

statement supports the conclusion that the Congress did not intend to

circumscribe a State's authority to impose amount, duration, and scope

restrictions. Therefore, in regulations at Sec. 447.524(e), we would

specify that a State may continue to impose limitations on the minimum

and maximum quantities of drugs per outpatient prescription and the

number of prescriptions or dispensing fees allowed per month as it did

before the enactment of OBRA '90.

A State, in accordance with section 1927(d)(6) of the Act, may

impose coverage restrictions on package sizes of a drug when required

to prevent waste. We do not believe that, given the general goals of

the drug rebate provisions, Congress intended for States to pay for

more expensive package sizes when less costly alternatives exist. Thus,

we would permit States to impose coverage restrictions based on the

relative economy, or the high cost, of a specific package size. For

example, a State may exclude from coverage the unit dose packaging of a

particular drug based on its cost; however, such restrictions may be

imposed, given the formulary requirements of section 1927(d), only if

the manufacturer packages the drug in other sizes which the State

covers.

V. Reporting Requirements

Under section 1927(b)(2) of the Act as amended by OBRA '93, States

are responsible for providing to the manufacturer Medicaid utilization

data for a rebate period regarding the quantity of drugs that they have

dispensed after December 31, 1990 for which payment was made under

their State plan during a rebate period. Section 1927(b)(3) of the Act

requires a manufacturer to supply to HCFA, for each rebate period,

information concerning AMP and, as required, best price for its covered

outpatient drugs. Rebates are calculated for each rebate period on the

basis of this information, as explained in section VI. of this

preamble.

A. State Reporting Requirements

Under section 1927(b)(2)(A) of the Act, the State Medicaid agency

must provide to manufacturers with drug rebate agreements State drug

utilization data regarding the total number of ``units'' of each dosage

form, strength, and package size of the manufacturer's drug that were

dispensed after December 31, 1990 and paid for under the State plan

during a rebate period. In the regulations at Sec. 447.530(a)(2), we

would define ``unit'' as the lowest commonly identifiable amount of a

drug for example, tablet or capsule for solid dosage form, milliliter

for liquid forms, and gram for ointments or creams, as supplied to HCFA

in accordance with instructions in the rebate agreement. The use of

units with regard to State reporting requirements and rebate

calculations is discussed throughout sections V. and VI. of the

preamble.

To comply with the provisions of section 1927(b)(2)(A), we would

specify in our regulations at Sec. 447.530(b) that States provide

Medicaid drug utilization data based on claims paid by the State

Medicaid agency during a rebate period.

1. Pharmacy Coding, Oversight, and Audit

To comply with the provisions of section 1927(b)(2)(A) of the Act,

and to facilitate uniform reporting, we would require in

Sec. 447.530(a)(1) that States report their utilization data by the 11-

digit NDC number. We note that FDA's regulations at 21 CFR 207.35 refer

to the NDC number as a 10-character code. This code can show leading

zeros in any segment of the NDC number. However, for standardization

purposes in the drug rebate program, we are using a consistent 11-digit

code that reflects leading zeros and the maximum number of digits that

can appear in each segment of the NDC code.

We are recommending that, in order to implement these provisions in

the most efficient and cost-effective manner, State Medicaid agencies

identify for pharmacies certain information, as discussed below, that

will enable them to determine those drugs that are covered under a

State plan. The State should make available to pharmacies information

concerning the labeler codes of manufacturers with rebate agreements;

drugs under section 1927(d) of the Act that are excluded or restricted

from coverage and the limitations or conditions of coverage; and drugs

that are subject to prior authorization.

For purposes of this regulation, the term ``pharmacy'' applies to

any entity authorized by the State to dispense covered outpatient drugs

in that State. Thus, these requirements will be binding on all

dispensers of covered outpatient drugs to Medicaid recipients.

The State agency may establish its own policies to ensure accurate

pharmacy coding. However, we would require the agency to establish and

implement an oversight and auditing process to ensure proper pharmacy

coding and reporting practices. We would also require States to

establish and implement procedures for investigating allegations of

erroneous utilization data at the pharmacy level by participating

manufacturers or other

[[Page 48459]]

interested parties (Sec. 447.530(e) (2) and (3)). We would require

State agencies to establish procedures to comply with section

1927(b)(2)(B) of the Act, which gives manufacturers the authority to

audit State data. The agency would also be responsible for taking the

actions necessary to ensure accurate coding (Sec. 447.530(e)(4)).

We believe these requirements regarding accurate pharmacy coding

are necessary to effectuate OBRA '90 drug rebate provisions. Accurate

pharmacy coding is a fundamental and critical component of the Medicaid

drug rebate program under section 1927 of the Act. Without these

requirements, pharmacies may use incorrect NDC numbers when billing the

Medicaid State agencies, which could result in numerous problems.

Use of incorrect NDC numbers could have a detrimental effect that

would carry through the entire drug rebate process. First, pharmacies

could bill States for a brand name drug although a generic drug was

dispensed, resulting in overpayments to pharmacies, increased drug

costs, and erroneous utilization data. If pharmacies substitute the NDC

numbers of one manufacturer for another, even if the drugs cost the

same amount, the Medicaid utilization data would be flawed. Secondly,

flawed data would cause the States to invoice manufacturers for

erroneous rebates, resulting in over and under billing for rebates.

Thirdly, erroneous data may increase the likelihood that manufacturers

would dispute the data and withhold rebate payments to States. Thus,

inaccurate pharmacy coding would increase a State's dispute resolution

workload, delay rebate payments, and cause interest to accrue on unpaid

amounts. The dispute resolution process is an expensive, lengthy, and

resource-intensive process for all parties involved.

In addition to disputing the data, manufacturers may, in accordance

with section 1927(b)(2)(B) of the Act, audit the drug utilization data

provided (or required to be provided) by the State. A manufacturer

could also request a State to audit a pharmacy, which is also expensive

and resource intensive. Because of the magnitude of the problems and

costs inaccurate pharmacy coding can cause, we believe the requirements

discussed above are necessary to properly and efficiently effectuate

the drug rebate program requirements in OBRA '90.

Therefore, we would require in Sec. 447.530(e)(1) that the State

must inform pharmacies that they are required to use accurate NDC

numbers for the drugs dispensed in submitting their Medicaid claims and

that payment can be denied for a drug that has been inaccurately coded

by a pharmacy. States may consider inaccurate coding to be good cause

for terminating provider agreements subject to applicable Federal and

State laws. Also, under anti-fraud provisions, pharmacy claims with

incorrect NDC numbers may subject these pharmacies to criminal or civil

money penalties, as well as exclusion from the Medicare and Medicaid

programs.

States must implement the requirements of Sec. 447.530(e) within 60

days after publication of the final rule. We believe this timeframe is

adequate for establishing procedures to ensure accurate pharmacy coding

since we informed States of these requirements in mid-1991. We are

aware that many States have since established procedures to ensure

accurate pharmacy coding. States that do not ensure accurate pharmacy

coding may be considered to be out of compliance with section 1927 of

the Act and, therefore, subject to compliance proceedings. In addition

to effectuating OBRA '90 drug rebate provisions, we believe these

pharmacy coding requirements are essential to comply with section

1902(a)(30) of the Act. Section 1902(a)(30) generally provides that

methods and procedures relating to the utilization and payment of

services under the State plan safeguard against unnecessary utilization

and to ensure that payments are consistent with efficiency, economy and

quality of care.

In accordance with section 1927(b)(2)(B) of the Act, a manufacturer

may audit the drug utilization data provided (or required to be

provided) by the State. If the information indicates that utilization

was greater or less than the amount previously specified, adjustments

to the rebates must be made on the next quarterly report submitted by

the State. All corrections must be applied to the quarter for which

utilization data are adjusted. If the adjustments result in a

manufacturer owing an additional rebate amount, the manufacturer must

include that amount, plus interest, in the rebate payment for next

rebate period.

Since the statute permits manufacturers to audit drug utilization

data but does not authorize manufacturers to directly audit pharmacies,

we would require States to have procedures to investigate

manufacturers' allegations of erroneous utilization data produced at

the pharmacy level. If the State agrees to such a request, it may apply

a process that uses a sampling methodology to audit pharmacies in a

targeted area where erroneous data are believed to be occurring, or by

other means that will address the alleged problem. Given the large

volume of Medicaid drug claims, we believe a targeted sampling of

pharmacies and their claims is a reliable method to discover inaccurate

coding and billing practices, especially when targeted for specific

drugs. Doing otherwise could prove costly for States without providing

a significant amount of additional information. If erroneous data are

discovered, a State could expand the audit to determine the severity of

inaccurate billing practices.

An audit may be performed at any time throughout the dispute

resolution process. However, both parties must agree to the audit and

develop mutually agreeable audit procedures. (Section V.F. of this

preamble contains a discussion of dispute resolution.)

2. Format and Contents of Report

Section 1927(b)(2)(A) of the Act requires that the Secretary

establish a standard reporting format that States must use to report

drug utilization data to manufacturers and to HCFA. Using this standard

reporting format, States must identify drugs by manufacturer to ensure

that the proper rebates are paid. As indicated earlier, we selected the

NDC number that identifies each drug by manufacturer, product, and

package size as part of the standard reporting format to be used

throughout the rebate program.

We have issued, through the rebate agreement and a notice published

in the Federal Register on May 1, 1991 (56 FR 20006), the standard

reporting format for States to use in reporting for the rebate period

to HCFA and manufacturers. We have also issued subsequent letters to

State Medicaid Directors containing instructions to provide additional

guidance in using the reporting format. This standard reporting format

includes the following information:

State identification;

Rebate period and year for which data apply;

NDC number to identify labeler code, product code, and

package size code;

Total number of units paid for during the rebate period

for each NDC;

FDA registration name to provide a cross-check for the

product code;

Total amount of rebate that a State claims for each NDC;

Number of prescriptions reimbursed by NDC;

Rebate amount per unit and total reimbursement amount to

verify manufacturer's payment; and

[[Page 48460]]

A correction record flag to alert HCFA of a change or

correction from a previous report.

These data elements will be updated through separate instructions

as needed to further program objectives in this area. We would

incorporate in the regulations at Sec. 447.530(a) through (d) the basic

reporting requirements and timeframes. HCFA instructions will provide

guidelines for States to use when reporting utilization data.

3. Timeframe for State Reporting of Utilization Data

In accordance with section 1927(b)(2)(A) of the Act, we would

require in Sec. 447.530(c) that each State Medicaid agency report drug

utilization data to HCFA and the manufacturer no later than 60 days

after the end of each rebate period. The data for the first rebate

period (January-March 1991) were originally due to HCFA and the

manufacturer on May 30, 1991. However, since the Secretary had not

developed a standard reporting format, we extended the May 30, 1991,

deadline to July 30, 1991, for States to submit data to HCFA and the

manufacturer. This delay resulted, in part, from a lack of either

baseline and/or first rebate period data from many of the

manufacturers, including the majority that joined the rebate program

during the extension period to April 30, 1991. We believe the extension

alleviated the need for States to send to HCFA and manufacturers

multiple updates of corrected data, prevented disputes on partial data,

and allowed for smoother implementation of the drug rebate program.

States should mail the utilization data to manufacturers in a form

that will provide evidence of the date the data were received by the

manufacturers. Manufacturers must pay rebates for each rebate period or

provide a written notice of disputed utilization data by the 30th day

after receipt of State utilization data. Evidence of the date received

is important so that States can accurately determine when rebate

payments are due, when interest begins accruing on any unpaid balances,

and when the interest period begins for purposes of the dispute

resolution process. (Section V.F.4. of this preamble contains a

discussion of the interest provision.)

4. Effect of Timeliness of State Utilization Data on Payment of Rebates

Section 1927(b)(2)(A) of the Act provides that a State Medicaid

agency shall report rebate period information on the drugs dispensed

and paid for to each manufacturer not later than 60 days after the end

of each rebate period and in a form consistent with a standard

reporting format established by the Secretary. As noted previously in

section V.A. of this preamble, we would specify in regulations that

States provide Medicaid drug utilization data based on claims paid by

the State during a rebate period. However, we believe circumstances

could arise that prevent States from being able to generate Medicaid

utilization information in the standard reporting format to meet this

60-day deadline. While the statute requires States to meet this 60-day

requirement, we do not believe the statute relieves manufacturers from

the obligation of paying rebates if States cannot meet the requirement.

States do not have an incentive to submit late rebate claims to

manufacturers since they are losing revenue by doing so. While

processing late rebate claims may be an inconvenient administrative

task for manufacturers, manufacturers have the advantage, in this case,

by having access to these rebate funds which should have been paid to

the State had the State submitted the data within the specified

timeframe.

Thus, we realize that we must establish a maximum timeframe during

which the manufacturer is bound to pay rebates on all drugs sold to

Medicaid recipients. We would, therefore, establish a maximum time

limit of 1 year from the end of a rebate period for States to bill a

manufacturer for a rebate. However, if a State submits claims later

than the required 60-day period, the State can only bill the

manufacturer for the rebate amount that would have been due during the

rebate period in which the State paid the drug claim. Consequently, we

would specify in regulations at Sec. 447.530(c) that the manufacturer

is not required to pay a rebate on its drugs when a State does not

submit its rebate period utilization data to the manufacturer within 1

year after the rebate period ended.

We believe this 1-year timeframe meets the needs of both States and

manufacturers and is equitable because it parallels the maximum 1-year

timeframe for providers' and States' responsibilities. Other Medicaid

provisions allow a maximum timeframe of 1 year for pharmacies to submit

claims and up to 1 year for States to pay claims (42 CFR 447.45(d)). A

State would not lose rebates on those drugs for which it cannot compile

the data within 60 days, and a manufacturer would not be held liable

for rebates for an extensive period of time due to a State's failure to

report utilization data within 60 days. As a general matter, HCFA will

not find a State to be out of compliance if its utilization data are

submitted to the manufacturer within this 1-year timeframe.

We consider any time period longer than 1 year after the rebate

period ended to be extensive since this period could ultimately

translate into a manufacturer being responsible for rebates for more

than 3 years after the drug is dispensed. In accordance with

Sec. 447.45, pharmacies have up to 1 year to bill the State agency for

drugs dispensed to Medicaid recipients, and States could take as long

as 1 year to pay a drug claim. Thus, these two processing timeframes

and the 1-year cutoff total 3 years. This 3-year time period also

comports with general business principles. The Internal Revenue Service

generally requires that records be maintained for 3 years unless they

are involved in some type of action requiring their use. Manufacturers

may not be able to substantiate rebate claims for more than 3 years

after a drug is dispensed since they are not required to maintain

records for more than 3 years. Adding more disputes to the resolution

process for data where no records may exist is not, in our opinion, a

cost effective or efficient manner of operating the drug rebate

program. Thus, we believe this 1-year threshold for States to submit

utilization data to manufacturers is reasonable and consistent with the

drug rebate provisions of section 1927 of the Act and necessary to

effectuate the OBRA '90 drug rebate provisions.

States that lose rebates required under section 1927 of the Act for

failure to submit rebate period utilization data to manufacturers

within 1 year after the rebate period ended may be considered out of

compliance with section 1927. Therefore, HCFA could initiate a

compliance action against a State if it fails to collect rebates to

reduce the amount expended under their State plan for medical

assistance (Sec. 447.530(c)).

5. Data Edits on State Utilization Data

As discussed in section V.A.2. of this preamble, States are

required, under section 1927(b)(2)(A) of the Act, to submit drug

utilization data to manufacturers in a format established by HCFA.

Since the accuracy of the invoiced rebates is dependent upon the

reliability of the State utilization data, we would require States to

establish a system of edits to its Medicaid utilization information.

These edits must be performed before the State submits it utilization

data to the manufacturer. The data reports generated from these edits

will not be disclosed to the manufacturer but will be used to verify

the accuracy of the information disclosed. We believe this requirement

is necessary to effectuate

[[Page 48461]]

the OBRA '90 drug rebate provisions and to prevent unnecessary disputes

between States and manufacturers that delay the timely payment of

rebates.

The types of edits described in this section are intended to verify

the accuracy of the Medicaid utilization information by examining

whether:

The unit types claimed are appropriate for NDC number

claimed;

The units claimed match the amount paid by the State; and

The amount paid by the State is an amount allowable for

the NDC (for example, a brand name payment amount was not made for a

generic drug or the opposite).

We believe that, by verifying the accuracy of such items described

in this section before submitting the information to the manufacturer,

the State will identify inconsistencies, correct them, and reduce the

number of subsequent disputes. The State must submit the utilization

data to the manufacturer within the timeframes contained in

Sec. 447.530(c), as described in sections V.A.3. and V.A.4. of this

preamble, and only after the State has performed the types of edits

described in Sec. 447.530(f) and believes the data are accurate.

The requirement in Sec. 447.530(f) for State edits on Medicaid

utilization information would be effective 60 days following

publication of the final rule. That is, State data submitted to

manufacturers for that rebate period must have been verified through

the use of system edits.

6. Use of Rounding Indicator

We also would establish the requirement in Sec. 447.530(g) that

States must identify by NDC number those drugs for which the number of

units has been rounded by showing a rounding indicator for the number

of units dispensed. States must include this information in their

rebate period Medicaid utilization information submitted to the

manufacturers. We have determined that this requirement is necessary

since some pharmacies lack the ability to report decimal quantities in

the Medicaid utilization information and, thus, in accordance with

accepted industry standards, round up decimal quantities to the nearest

whole unit. This practice can result in manufacturers being sent

inflated utilization data or lead to disputes over the number of units

billed.

We believe this requirement is necessary to effectuate the OBRA '90

drug rebate provisions and to prevent unnecessary disputes between

States and manufacturers which delay the timely payment of rebates. We

would, therefore, require States to indicate in the appropriate data

field whether or not the number of units reported in the Medicaid

utilization information has been rounded. This indicator will alert the

manufacturer that a rounding adjustment factor has been applied to

appropriately deflate the State's utilization data.

The requirement in Sec. 447.530(g) for States to use the rounding

indicator would be effective 60 days following publication of the final

rule. That is, State data submitted to manufacturers for that rebate

period must include the rounding indicator field and the number of

units billed. We will provide separate instructions to the States and

manufacturers regarding the use of the rounding indicator.

7. Rebate Tolerance Limits for Invoicing

Many States have informed us that the costs of preparing an invoice

for drug rebates can often exceed the amount of a minimal rebate. For

instance, some States have spent $50 preparing an invoice for a $5

rebate. We believe that if administrative costs are more than the

rebates, the State should not expend its resources to collect a rebate

that reduces State savings. Thus, to effectuate the OBRA '90 drug

rebate provisions in the most efficient manner, we would establish a

rebate tolerance limit for States to use in determining whether it

should bill a manufacturer for a rebate when the administrative expense

exceeds the rebate savings.

Generally, if the rebate amount due per labeler code is less than

the administrative costs associated with preparing the invoice and

collecting the rebate, the State should not invoice the labeler for

that rebate amount. We have determined that a maximum tolerance of $50

per rebate period would be acceptable if State-supplied information

establishes this as the reasonable cost of preparing a labeler's

utilization data. In situations where the tolerance is applied, the

State need not invoice the manufacturer, although it is free to

establish its own tolerance below $50 and continue to submit

utilization data above that tolerance. (We note that, in either event,

the unit rebate amount must have been supplied by HCFA for all of that

manufacturer's drugs in that rebate period and the State applied that

unit rebate amount to its utilization data. If the manufacturer fails

to supply pricing information for a drug, the unit rebate amount would

be zero or missing from the HCFA pricing file. In this case, the

tolerance would not apply.) Further, the State would not be at risk of

loss of FFP on that portion of the uncollected rebates within the

tolerance limits.

The State should maintain supporting documentation that identifies

the instances when the tolerance levels were applied. We believe our

policy promotes efficiency by allowing States the authority to pursue

only those rebate amounts that exceed the States' administrative costs

associated with those rebate amounts. Our policy also alleviates

States' concern that they may be liable for the Federal share of those

rebates that are within the tolerance limits.

B. Reporting Requirements for Manufacturers

Section 1927(b)(3)(A) of the Act requires manufacturers to supply

drug pricing information to HCFA. In addition to pricing data, we would

require manufacturers to complete and submit to States Form HCFA-304,

the Medicaid Remittance Advice Report (RAR), within 30 days of

receiving State Medicaid utilization information. The RAR has been

approved by OMB prior to publication of this proposed regulation (OMB

approval No. 0983-0676). The basis and timeframes for meeting this

requirement, as well as what information is required on the RAR, are

discussed below.

1. Timeframes for Reporting

Under the terms of the statute and the national rebate agreement,

manufacturers must supply HCFA with a list of all covered outpatient

drugs, the applicable baseline AMP, and, for single source and

innovator multiple source drugs, best price within 30 calendar days of

entering into the national rebate agreement. Manufacturers must update

the list for each rebate period under the agreement to include AMP and,

as appropriate, best price of drugs (both terms are discussed more

fully below) and must report the update to HCFA no later than 30 days

after the last day of each rebate period. We would incorporate these

requirements in the regulations under Sec. 447.534 (a) and (b).

In accordance with the dispute resolution process described in

section V.F. of this preamble, and as set forth in regulations under

Sec. 447.536(b), we would require manufacturers to complete and submit

to States the RAR within 30 days of receiving a State's Medicaid

utilization information. We believe this requirement is necessary to

effectuate the drug rebate provisions in OBRA '90, and to aid in the

timely resolution of disputes and the timely payment of rebates.

2. Content of Reporting

a. Manufacturer Reporting Requirements to HCFA. Section

[[Page 48462]]

1927(b)(3)(A)(i) of the Act requires that the manufacturer's list of

covered outpatient drugs submitted under the rebate agreement must be

updated by the manufacturer on a rebate period basis to include the AMP

and, for single source drugs and innovator multiple source drugs, the

manufacturer's best price.

(1) Definition of Average Manufacturer Price (AMP). As stated

earlier, under section 1927(k)(1) of the Act, AMP means, with respect

to a rebate period, the average unit price paid to the manufacturer for

the drug in the States by wholesalers for drugs distributed to the

retail pharmacy class of trade after deducting customary prompt pay

discounts. We would incorporate the definition of AMP in

Sec. 447.534(c). Under this definition, sales that a manufacturer makes

to other than the retail class of trade must be excluded. Thus, sales

where the buyer relabels or repackages the drug with another NDC number

and sales through wholesalers where the manufacturer pays a chargeback

for sales to an excluded buyer, such as a hospital, would not be

considered sales to the retail class of trade.

We would also exclude from this definition direct sales to

hospitals, health maintenance organizations and to distributors where

the drug is relabeled under that distributor's NDC number because these

entities are not considered the retail pharmacy class of trade. We

would also exclude Federal Supply Schedule (FSS) prices from the

calculations of AMP since the statute does not include FSS and FSS does

not represent a retail level of trade.

We have interpreted AMP to include cash discounts and all other

price reductions and customary prompt pay discounts (other than rebates

under section 1927 of the Act) that reduce the actual price paid. This

definition comports with the statute and HCFA's understanding of

Congressional intent as set forth in the legislative history. (H.R.

Conf. Rept. No. 964, 101st Cong., 2nd Sess. 825 (1990).)

The manufacturer must calculate AMP as a weighted average price for

all of its package sizes for each covered outpatient drug sold during

that rebate period but only report a single AMP for the weighted

average. AMP must be calculated as net sales divided by number of units

sold, excluding goods or any other items given away that are not

contingent on any purchase requirements. For bundled sales, the

allocation of the discount is made proportionately to the dollar value

of the units of each drug sold under the bundled arrangement. In this

context, bundled sale refers to the packaging of drugs of different

product codes where the condition of rebate or discount is that more

than one drug is purchased, or where the resulting discount or rebate

is greater than that which would have been received had the drug

products been purchased separately. Because we are defining the AMP to

include cash discounts allowed and all other price reductions, we would

require in Sec. 447.534(c)(5) that the manufacturer adjust the AMP for

a rebate period if cumulative discounts or other arrangements

subsequently adjust the prices actually realized.

(2) Definition of Best Price. We have interpreted ``best price,''

as defined in section 1927(c)(1)(C) of the Act, to mean, with respect

to single source and innovator multiple source drugs, the lowest price

at which the manufacturer sells the covered outpatient drug to any

purchaser (as discussed later in this section of the preamble) in the

United States (excluding the Territories). We would further interpret

best price at Sec. 447.534(d) to mean the lowest price in any pricing

structure (including capitated payments) in the same rebate period for

which the AMP is computed.

The best price must include cash discounts, free goods that are

contingent on any purchase requirements, volume discounts, and rebates

other than rebates under section 1927 of the Act. Best price must be

determined on a unit basis without regard to special packaging,

labeling, or identifiers on the dosage form or product or package, and

will not take into account prices that are nominal in amount (that is,

less than 10 percent of AMP). Unlike AMP, the best price is the single

lowest price of the drug at the product code level during the rebate

period and is not a weighted average.

For bundled sales, the allocation of the discounts is made

proportionately to the dollar value of the units of each drug sold

under the bundled arrangement. We would require the manufacturer to

adjust the best price for a rebate period if cumulative discounts,

rebates, or other arrangements subsequently adjust the prices actually

realized. We believe this is consistent with our understanding of the

statute and the Congress' desire that the Medicaid program benefit from

the same discounts available to other bulk purchasers.

OBRA '93 amended section 1927(c)(1)(C) of the Act by adding to the

definition of ``best price'' providers and health maintenance

organizations (HMOs) as entities included in the best price

calculation. This reflects our existing policy in this area as the

result of OBRA '90. The best price reflects any price of a manufacturer

except those prices specifically exempted by the law. For purposes of

best price we interpret ``provider'' to mean a physician, hospital and

other health maintenance organizations or entities that treat

individuals for illnesses and injuries or provide services or items in

the provision of health care.

OBRA '93 amended section 1927(k)(3) to specify that any drug,

biological, or insulin excluded from the definition of covered

outpatient drug as a result of section 1927(k)(3) must be treated as a

covered outpatient drug for the purpose of determining the drug's best

price. That is, any prices offered to the entities listed in section

1927(k)(3) of the Act must be included in a manufacturer's best price

calculation even though drugs provided as part of these settings are

not considered covered outpatient drugs.

Because of legislative changes, best price varies over time

regarding the prices that are included and excluded from its

definition. To identify these variances, we have separated them into

the specific time periods.

(a) Best Price Definition Effective January 1, 1991-October 27,

1991 and July 1, 1992-September 30, 1992. For these periods, best price

includes prices to wholesalers, retailers, providers, HMOs, nonprofit

entities or governmental entities within the States (excluding depot

prices and single-award contract prices of any agency of the Federal

Government). ``Depot prices'' mean prices available to any depot of the

Federal Government for purchase of drugs from a manufacturer through

the depot system of procurement, irrespective of whether the drug

products physically flow through the depot. ``Depot'' means any Federal

warehousing facility and distribution arrangement whether: (1)

Government owned and operated; (2) government owned and privately

operated; or (3) privately owned and operated. The Department of

Defense's (DOD's) Electronic Commerce Initiative (ECI), which is an

electronic ordering system that ships drugs directly to Federal

Government medical facilities that were previously shipped through the

depot system, is included in this definition. ``Single-award contract

prices'' mean prices under a contract between the Federal Government

and a manufacturer resulting in a single supplier for a covered

outpatient drug within a class of drugs.

Given the definition of best price provided in section

1927(c)(1)(C) of the Act, it is our opinion that the FSS prices must be

included in the best price calculation for these periods, since FSS

[[Page 48463]]

prices are neither depot nor single award prices, which are the only

statutory exclusions relative to best price. Since prices for drugs and

biologicals that are either paid by the DVA or in contracts

administered by the DVA are listed in the FSS, these prices must also

be included in the best price calculation for these periods.

(b) Best Price Definition Effective October 28, 1991-June 30, 1992.

For this period, best price includes prices to wholesalers, retailers,

providers, HMOs, nonprofit entities, governmental entities within the

States (excluding depot prices and single-award contract prices of any

agency of the Federal Government). The Department of Veterans Affairs

Appropriations Act (Public Law 102-139), enacted on October 28, 1991,

provides that effective October 28, 1991, through either June 30, 1992,

or the date of enactment of other DVA drug price legislation, whichever

is earlier, prices for drugs and biologicals paid by the DVA, and drugs

and biologicals sold under contracts administered by that Department

that are listed in the FSS, shall not be considered in the Medicaid

drug rebate calculation. Therefore, for the period October 28, 1991,

through June 30, 1992, the definition of best price excludes FSS prices

for drugs and biologicals paid by the DVA and drugs and biologicals

sold under contracts administered by that Department that are listed in

the FSS. (Note: In accordance with this legislation, manufacturers must

reflect any sales of drugs or biologicals to the DVA or of drugs and

biologicals sold under contracts with that Department that are listed

in the FSS during the period of October 1, 1991, through October 27,

1991, in their best price for the fourth quarter of 1991 and again

beginning in the rebate period starting July 1, 1992.)

(c) Best Price Definition Effective October 1, 1992. Beginning

October 1, 1992, best price includes prices to wholesalers, retailers,

providers, HMOs, nonprofit entities or governmental entities within the

States (excluding depot prices and single award contract prices of any

agency of the Federal Government). The Veterans Health Care Act

broadened the exclusions from best price effective October 1, 1992.

Section 601(a) of VHCA amends section 1927(c)(1)(C) of the Act to

exclude from best price any prices charged on or after October 1, 1992,

to the Indian Health Service, the DVA, a State home receiving funds

under section 1741 of title 38 of the United States Code, the

Department of Defense, the Public Health Services, or a covered entity

described in section 1927(a)(5)(B) of the Act; any prices charged under

the FSS of the General Services Administration; or any prices used

under a State pharmaceutical assistance program. Best price excludes

depot prices and single-award contract prices of any agency of the

Federal Government.

(3) Requirements for the List of Covered Outpatient Drugs. We would

require that the manufacturer's list of covered outpatient drugs

include the NDC numbers for all drugs currently marketed by the

manufacturer and continue to list the NDC numbers for drugs that are no

longer marketed until such time as it is no longer possible for a State

Medicaid agency to properly make payment for the drug and report this

payment to the manufacturer. We would require that a manufacturer

continue to list an NDC number for a drug that it no longer markets

because the manufacturer will be responsible for providing a rebate on

the drug until the entire supply of the drug under an NDC has expired,

the drug has been taken off the market, or, for other reasons, there no

longer exists the potential that the drug may be dispensed under the

manufacturer's NDC number (for example, the FDA recalls the drug or

reverses its approval on an approved NDA). In addition, since the

manufacturer must pay the rebate on State utilization data for up to 1

year after the rebate period in which the data are submitted (as

discussed in section V.A.4. of this preamble), the manufacturer must

continue to report the data during this period. A rebate would be

calculated on drugs that are no longer marketed using the AMP and best

price from the last rebate period reported for those drugs

(Sec. 447.534(b)).

In accordance with the provisions of the rebate agreement and the

May 1, 1991, Federal Register notice (56 FR 20006), and to implement

the drug rebate provisions of OBRA '90, we would require the

manufacturer to supply the following information:

NDC number with labeler code, product code, and package

size code;

Period covered for rebates (rebate period and year);

Product FDA registration name;

Drug category of single source, innovator multiple source,

or noninnovator multiple source;

DESI drug indicator;

FDA therapeutic equivalence explanation code;

Unit type;

Units per package size;

Average manufacturer price (AMP);

Base date AMP;

Best price;

FDA approval date;

Date drug entered market;

Drug termination date;

Drug type (Rx/OTC indicator);

Rounding adjustment factor; and

Correction record flag.

The above information is needed to meet the requirements set out in

section 1927 of the Act. To calculate the rebate amounts required for

each manufacturer under section 1927(c) of the Act, we need specific

information to identify the manufacturers, drugs, prices, number of

units sold, and the time period covered. The drug category is used to

determine which rebate calculation to apply. The FDA approval date and

the date the drug entered the market are necessary to determine

baseline AMP for drugs approved by the FDA after October 1, 1990. The

drug termination date is necessary to avoid making payment for a drug

that is no longer

This text is long and has been trimmed here. Open the source document for the complete record.