Notice Regarding Section 602 of the Veterans Health Care Act of 1992; New Drug Pricing

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Public Health Service

Notice Regarding Section 602 of the Veterans Health Care Act of

1992; New Drug Pricing

AGENCY: Public Health Service, HHS.

ACTION: Final notice.

-----------------------------------------------------------------------

SUMMARY: Section 602 of Public Law 102-585, the ``Veterans Health Care

Act of 1992,'' enacted section 340B of the Public Health Service Act

(``PHS Act''), ``Limitation on Prices of Drugs Purchased by Covered

Entities.'' Section 340B provides that a manufacturer who sells covered

outpatient drugs to eligible entities must sign a pharmaceutical

pricing agreement with the Secretary of Health and Human Services in

which the manufacturer agrees to charge a price for covered outpatient

drugs that will not exceed an amount determined under a statutory

formula.

The purpose of this notice is to inform interested parties of final

guidelines regarding new drug pricing.

EFFECTIVE DATE: November 1, 1995.

FOR FURTHER INFORMATION CONTACT: Marsha Alvarez, R. Ph., Director, Drug

Pricing Program, Bureau of Primary Health Care, 4350 East-West Highway,

Bethesda, MD 20814, Phone (301) 594-4353, FAX (301) 594-4982.

SUPPLEMENTARY INFORMATION:

(A) Background

Proposed guidelines for new drug pricing were announced in the

Federal Register at 60 FR 27983 on May 26, 1995. A comment period of 30

days was established to allow interested parties to submit comments.

The Office of Drug Pricing received two letters with comments

concerning the mechanism for drug price calculation and retroactive

drug price adjustment. Further, a letter was received with general

comments commending the PHS for the development of an approach that

avoids unnecessary administrative costs for manufacturers while

assuring that covered entities receive the discount in a timely

fashion.

The following section presents a summary of all major comments,

grouped by subject, and a response to each comment. All comments were

considered in developing this final notice. Also, changes were made to

increase clarity and readability.

(B) Comments and Responses

Mechanism for Price Calculation

Comment: PHS does not calculate the ceiling price. Manufacturers

determine this price, while the Health Care Financing Administration

(``HCFA'') provides Average Manufacturer Price, (``AMP''), baseline

AMP, and Best Price, (``BP''), data to PHS for auditing purposes.

Response: We agree, in part. The notice has been changed to reflect

that HCFA would provide the data necessary to calculate the ceiling

price, if necessary for resolving disputes, collecting pricing data,

auditing a manufacturer, or other such program purposes.

Comment: AMP may be calculated using pricing data from a partial

quarter, while the calculation of the baseline AMP utilizes data from

the first full quarter after the day on which the drug was first sold.

Response: We agree. The notice has been changed accordingly.

Retroactive Pricing Adjustment

Comment: The Veterans Affairs new drug policy, implementing section

603 of the Veterans Health Care Act of 1992, does not require a

manufacturer to issue a retroactive rebate for the purchase of a new

drug for the first thirty days. A similar policy should be considered

for PHS policy implementing section 602 (section 340B of the PHS Act).

Response: No change. Section 340B of the PHS Act requires all

participating manufacturers to provide covered outpatient drugs at the

discounted price. The law was effective December 1, 1992; therefore,

any new covered outpatient drug must be discounted as of the date it is

introduced into the market. We have attempted to implement this

immediate discount mechanism by reasonably permitting manufacturers to

estimate ceiling prices during the initial months of sale.

Comment: A manufacturer's obligation to make retroactive payments

to covered entities should not be contingent upon the covered entity

submitting a request for the retroactive rebate, providing such

information, or taking any other action. The manufacturer must be

unilaterally responsible for paying the rebates.

Response: No change. The mechanism for retroactive pricing

adjustment was developed with the understanding most manufacturers sell

drugs through wholesalers and would have difficulty determining to

which entity the new drug was sold. Further, and more importantly,

there was an attempt to evenly split the administrative burden of the

process between the manufacturer and the entity. If an entity wishes a

pricing adjustment, the dollar amount in question, one would expect,

must be significant enough to balance the administrative burden

involved in documenting and developing the request. While this type of

requirement should decrease the numbers of smaller requests, still the

manufacturer must remit all documented pricing adjustments requested

which may result in a large number of checks or credits being cut by

manufacturers.

Comment: Establish a 30-day deadline by which the pricing

reconciliation must be paid.

Response: We agree. The notice has been changed to reflect a

requirement that all pricing adjustments be completed by the end of the

fourth quarter of sales (e.g., introduced on 1/15/95 and pricing

adjustments due by 12/30/95). This has moved the deadline back ninety

days from the proposed deadline.

(C) New Drug Pricing Revised Guidelines

Set forth below are the final guidelines for new drug pricing.

New Drug Pricing

Calculation of the current quarter PHS ceiling price for each

covered outpatient drug, as provided in section 340B(a)(1) of the PHS

Act, is based upon data supplied to the Medicaid Drug Rebate Program

(i.e., AMP, baseline AMP and BP). The manufacturer calculates pricing

information for all of its covered outpatient drugs and sends this

pricing data to HCFA within 30 days after the

[[Page 51489]]

end of the quarter. HCFA will provide PHS with the data necessary for

PHS to determine the ceiling price which will be used for resolving

disputes, studies involving pricing data, auditing manufacturers, or

other program purposes.

For calendar year 1995, the Medicaid rebate for single source and

innovator multiple source drugs is the greater of 15.2 percent of the

AMP or the AMP minus BP. In calendar year 1996, and thereafter, the

rebate percentage decreases to 15.1 percent. An additional rebate must

also be paid for single source and innovator multiple source drugs in

the amount by which the increase in the baseline AMP exceeds the

increase in the Consumer Price Index--Urban (CPI-U). The PHS ceiling

price is computed based on the combined basic and additional rebate

amounts calculated for the Medicaid program. For noninnovator multiple

source drugs, the rebate percentage is 11 percent of the AMP.

For PHS pricing purposes, the timeframe for reporting the pricing

data is a problem with respect to new drugs because there is a time lag

for new drug pricing information. For new drugs, manufacturers are

permitted to calculate the AMP using the pricing instituted in the

first quarter; however, the baseline AMP is not available until the end

of the first full quarter after the day on which the drug was first

sold. For example, if a new drug was first sold on January 15, the

quarterly AMP for the period 1/1 through 3/31 would be calculated using

sales from 1/15 through 3/31 while the quarterly baseline AMP for the

first full quarter would not be available. The baseline AMP must be

determined for a full quarter; therefore, pricing data for the period

4/1 through 6/30 would be utilized. Thus, for the first and second

quarter, the discount for the new drug would be a manufacturer's

estimate and later adjusted using only the basic rebate amount.

This time lag is not a problem for the State Medicaid agencies

because they bill manufacturers for a rebate after the covered

outpatient drugs are dispensed to Medicaid beneficiaries. However, to

comply with the requirements of section 340B of the PHS Act, the PHS

ceiling price must be determined before the covered outpatient drug is

sold to the covered entity.

Because there are no sales data for a new drug from which to

determine the PHS ceiling price, the Office of Drug Pricing is

proposing to utilize a ceiling price estimated by the manufacturer

until sufficient data is available to calculate the AMP and BP of the

new drug. Any adjustments necessary to reconcile differences between

the first and second quarter estimated ceiling price and the third

quarter ceiling price will be in the form of a retroactive charge back

or rebate.

Because the manufacturer calculates the PHS ceiling price using a

data lag, the manufacturer would estimate the new drug ceiling price

for three quarters. For example, a new single source drug that enters

the market in February (first quarter) will have an estimated PHS

ceiling price for that quarter. The manufacturer must submit AMP and BP

pricing data for sales within that quarter to HCFA within 30 days from

the end of the quarter (4/30). HCFA will use this pricing data to

calculate the basic rebate amount.

The manufacturer must estimate the ceiling price for the second

quarter (April 1-June 30). Sales during the quarter will constitute the

baseline AMP and BP. The manufacturer must submit baseline AMP and BP

for the second quarter to HCFA within 30 days from the end of the

second quarter (7/30). The additional rebate amount does not apply to

this quarter since there must be two full quarters of pricing data to

generate an additional rebate amount when a price increase exceeds the

increase the CPI-U.

Because manufacturers must transmit pricing to wholesalers two

weeks before the beginning of the quarter, the total rebate amount

(basic plus additional rebate) for the third quarter (July 1-September

30) will not be available at that time.

Manufacturers must submit pricing data to HCFA by 10/30. Thus, the

manufacturer must offer the third quarter discount using only the basic

rebate amount.

Beginning with the fourth quarter (October 1-December 31), the

manufacturer will have the necessary pricing data to calculate a total

rebate amount. All retroactive charge backs or rebate adjustments

necessary to reconcile the first, second, and third quarters estimated

ceiling price must be completed by the end of the fourth quarter, i.e.,

December 31.

Example: Drug Enters Market February 15.

----------------------------------------------------------------------------------------------------------------

Actual rebate amounts

Add'l rebate (if Pricing due available from HCFA

Calendar quarter Baseline AMP applicable) to HCFA -------------------------

Basic Add'l

----------------------------------------------------------------------------------------------------------------

1 (Jan-Mar)......................... ................ ................ 4/30 5/15 N/A

2 (April-June)...................... X............... 7/30 8/15 N/A

3 (July-Sept)....................... ................ X............... 10/30 11/15 11/15

4 (Oct-Dec)......................... ................ X............... 1/30 2/15 2/15

----------------------------------------------------------------------------------------------------------------

Dated: September 26, 1995.

Ciro V. Sumaya,

Administrator, Health Resources and Services Administration.

[FR Doc. 95-24349 Filed 9-29-95; 8:45 am]

BILLING CODE 4160-15-P