Major Drug Pricing Updates to the Medicaid Drug Rebate Program (MDRP) Unveiled by CMS

On September 20, 2024, the Centers for Medicare & Medicaid Services (CMS) released the long-awaited final rule addressing several important drug pricing matters under the Medicaid Drug Rebate Program (MDRP) (Final Rule). The Final Rule’s provisions also have significant implications for the 340B Drug Pricing Program (340B program). CMS has finalized many aspects of the May 2023 proposed rule and has implemented significant changes to the MDRP’s drug misclassification, program administration, and integrity provisions, in many instances without directly addressing concerns raised in public comments.

Most significantly, CMS has finalized new definitions of “covered outpatient drug,” “internal investigations,” and “market date.” CMS also has finalized several provisions with 340B program implications without addressing the rampant problem of duplicate discounts with Medicaid rebates and 340B pricing. These aspects of the Final Rule and others may be subject to legal challenge. In a testament to industry advocacy and in light of the fall of Chevron deference, as discussed in a prior Sidley Update, CMS has, at least for now, also backed away from certain material proposals that likely may have led to litigation from industry stakeholders. The Final Rule is set to take effect on November 19, 2024.

In a positive development for pharmaceutical manufacturers, CMS did not finalize certain proposals that many stakeholders considered to be unlawful and controversial, including the so-called “high-cost” drug surveys, Best Price stacking requirements, and expansive proposed regulatory definition of “manufacturer.” However, other provisions of the proposed rule that were finalized may be subject to legal challenge. These include the finalized definitions of “covered outpatient drug” and “internal investigation,” as well as significant changes to the provisions related to the MDRP’s drug misclassification provisions, among others.

“Covered Outpatient Drug” (COD) Definition

The long-standing statutory definition of “covered outpatient drug” excludes “any drug, biological product, or insulin provided as part of, or as incident to and in the same setting as (and for which payment be made under this title as part of the payment for the following and not as direct reimbursement for the drug) certain health care setting or situations described in section 1927(k)(3).” This “limiting definition” places parameters on utilization that is eligible for Medicaid rebates and, in turn, also has implications for 340B pricing eligibility.

In the proposed rule, CMS proposed to define the term “direct reimbursement” for purposes of the limiting definition—purportedly to “clarify” that the definition of COD “includes situations in which a claim for an all-inclusive payment identifies the drug plus the itemized cost of the drug.” (The statute does not define the term “direct reimbursement” for purposes of the COD limiting definition.) In response to several comments opposing the proposed definition, CMS agreed that its proposed definition required further clarification. As finalized, CMS has defined the term “direct reimbursement” to state that “in order for the drug to satisfy the COD definition, the drug used must be identified, the charge for the drug must be itemized on the claim form, and the payment must be consistent with the reimbursement methodology for CODs in an approved State plan.” CMS states that these requirements may “apply to drugs that are always used in the bundled services and to drugs for which this is not the case.” This new definition could unlawfully increase the number of drugs subject to Medicaid rebates and result in State Medicaid program gamesmanship to obtain manufacturer rebates under the MDRP.

Stating that the 340B program is outside the scope of the Final Rule, CMS declined to respond to commenters’ concerns that the revised “COD” definition would affect the 340B program as the MDRP’s definition is used to determine if a drug is subject to 340B pricing.

“Internal Investigation” Definition

By regulation, CMS currently permits restatements to be made outside of the 12-quarter window only in certain circumstances, including based on “internal investigations.” In the proposed rule, CMS sought to narrow this exception by limiting “internal investigations” to only those that result in a finding by the manufacturer of fraud, abuse, or a violation of law or regulation. Many comments expressed that the proposed definition punishes “good faith attempts [by manufacturers] to comply with complex and consequential government reporting obligations.” In the preamble to the Final Rule, CMS agreed with commenters’ concern that the proposed definition could be construed “as an admission of legal fault.” Thus, in the Final Rule, CMS modified the proposed definition of “internal investigation” to add the word “possible.” As finalized, “internal investigation” means “a manufacturer’s investigation of its AMP, BP, customary prompt pay discounts, or nominal prices that have been previously certified in the [MDRP] that results in a finding made by the manufacturer of possible fraud, abuse, or a violation of law or regulation” (emphasis added). It is not clear, however, if this modification will adequately address the concerns that manufacturers raised with this “internal investigations” definition. Additionally, manufacturers must make data available to CMS to support restatements made outside of the 12-quarter window to reinforce a manufacturer’s finding of possible fraud, abuse or violation rather than to merely make changes following an internal review for program integrity and risk mitigation purposes.

CMS further emphasized that restatements outside the 12-quarter window would not be permitted if due to a change of ownership. For manufacturers “concerned with liability associated with the prices or pricing metrics used by the selling manufacturer,” CMS advised that “such concerns regarding legal liability because of the incorrect reported price information should be addressed as part of contract negotiations between the selling and buying manufacturer.” Based on this preamble language, buyers and investors may consider expanding current due diligence practices relating to government price reporting practices and seek stronger representations and warranties with respect to such reporting practices from sellers.

“Market Date” Definition

The Final Rule adopts a new definition of “market date” for purposes of AMP calculations as “the date on which the covered outpatient drug was first sold by any manufacturer” rather than the date the drug was first available for sale. The revised definition clarifies that manufacturers will not be required to report AMP information until they have actual pricing data based on sales data to report, reducing the need for manufacturers to use reasonable assumptions to calculate and report AMP. Many commenters expressed that there are multiple ways to identify when a drug is first sold, such as date of payment, date of invoice, or date of commercial agreements. Acknowledging the various methods, CMS declined to define the term “sold” as it applies to the definition of “market date” and stated that manufacturers may use reasonable assumptions as to the date a sale has occurred. Notably, in response to a comment that a sale only occurs if the purchaser is AMP-eligible, CMS emphasized that the first date of sale does not depend on what entity is making the purchase.

“High-Cost” Drug Surveys

CMS declined to finalize its proposal to develop a process to collect data from manufacturers and wholesalers regarding what the agency describes as “high-cost drugs” that are reimbursed under the MDRP, stating that it is “continuing to review the input provided by commenters, which may inform future rulemaking on this topic.” Industry stakeholders should continue to monitor for future rulemaking as such a proposal would represent the first price transparency measure of this nature adopted at the federal level, following a long list of states that have adopted similar price transparency laws and regulations in recent years.

CMS stated that the goal of the proposal is to provide states with additional tools to manage their drug spending (and presumably negotiate lower prices with manufacturers) in the wake of certain new treatment options, such as gene and cell therapies. In the meantime, CMS is experimenting with other approaches, such as the CMS Innovation Center’s Cell and Gene Therapy (CGT) Access Model, first announced in February 2023 (discussed here), that will advance outcomes-based agreements (OBAs) between manufacturers and state Medicaid programs focused on CGTs for the treatment of sickle cell disease.

Stacking of Cumulative Discounts to Different Entities

CMS had proposed modifying the definition of “Best Price” under 42 C.F.R. § 447.505(d)(3) to require “stacking,” meaning the aggregation of manufacturer price concessions available to separate entities across the pharmaceutical supply chain. The revised definition would have stated that “[c]umulative discounts, rebates, or other arrangements must be stacked to determine a final price realized by the manufacturer for a covered outpatient drug, including discounts, rebates, or other arrangements provided to different best price eligible entities.”

However, as CMS previewed in May 2024 and we reported on in a prior Sidley Update, CMS declined to finalize this proposal. Rather, CMS stated that it will “pursue the collection of additional information from manufacturers related to best price stacking methodologies to inform future rulemaking.” At this time, no such collection of information has been issued. Industry should continue to monitor CMS for any proposals or information collection efforts in this area while at the same time educating CMS on why stacking is inconsistent with law, outside CMS’s authority, and a misguided pursuit.

“Manufacturer” Definition

In response to industry comments and a likely recognition of significant weakness if the matter were challenged in court, CMS declined to finalize its proposed modification of the definition of “manufacturer” under the Medicaid National Drug Rebate Agreement. This proposal would have expanded the statutory definition to include all other manufacturers that are associated or affiliated with that manufacturer. CMS stated it will further consider commenters’ concerns to inform future rulemaking, including concerns that expanding the statutory definition is outside CMS’s authority. Industry should continue to monitor CMS for any proposals or information collection efforts in this area.

Additional Provisions

• Misclassification. Unsurprisingly, the Final Rule implements and codifies the changes made by the Medicaid Services Investment and Accountability Act of 2019 (MSIAA) to the statutory definitions of “single source drugs” (S drugs), “innovator multiple source drugs” (I drugs), and “noninnovator multiple source drugs” (N drugs). CMS amended 42 C.F.R. § 447.509 to (i) define a misclassification in the MDRP; (ii) require manufacturers to submit corrected information within 30 calendar days of notice of misclassification from CMS; (iii) require manufacturers to pay any unpaid rebates due to misclassification within 60 calendar days of notice from CMS; and (iv) provide CMS with authority to correct misclassifications on behalf of a manufacturer and impose additional penalties for drug misclassification, including suspension of the misclassified drug from the MDRP, termination of the manufacturer’s participation in the MDRP, and imposition of civil monetary penalties. CMS stated that it will take into consideration comments suggesting a dispute resolution process for misclassified drugs in future rulemaking.
• Suspension of a Manufacturer’s Drug Rebate Agreement. The Final Rule establishes a process to unilaterally suspend a manufacturer’s drug rebate agreement if the manufacturer fails to provide timely drug pricing or product information, such as AMP and BP, to the agency. Should the manufacturer not report required information within 90 calendar days after the deadline included in CMS’s written notice of non-compliance, CMS will suspend the rebate agreement until the required information is reported and certified, with a minimum suspension of 30 days. During this suspension, the manufacturer’s covered outpatient drugs are not eligible for Medicaid coverage or reimbursement or Medicaid federal financial participation. Notably, CMS takes the position that suspension of the Medicaid drug rebate agreement under this provision “does not affect the manufacturer obligations and responsibilities under the 340B Program or reimbursement under Medicare Part B during the period of the suspension.” CMS did not explicitly respond to comments that expressed due process concerns with the lack of a dispute process available prior to the automatic suspension of the rebate agreement.
• Time Limitation on Manufacturer Audit Requests. The Final Rule establishes a 12-quarter time limit for manufacturers to initiate disputes, hearing requests, and audits for state-invoiced units on any current rebates as well as on rebates that have been paid in full. The 12-quarter time clock begins on the last day of the quarter from the postmark date of the state invoice.
  
  Several commenters opposed the 12-quarter time limit because, for example, that there is not a similar time limit imposed on States for submitting invoices to manufacturers and that 340B duplicate discounts often take longer to identify; stakeholders therefore suggested exemptions to the audit time limit or the ability to toll the time to request necessary data from the state during certain 340B disputes. CMS dismissed these concerns and declined to create exemptions or a tolling provision.
  
  CMS states that the 12-quarter limit aligns with HRSA’s 340B program Administrative Dispute Resolution filing requirements and also points to CMS’s January 2020 guidance to states on Best Practices for Avoiding 340B Duplicate Discounts in Medicaid. CMS also asserts that “other proposals in this regulation will help with that process, such as the proposal to include BIN/PCN numbers on Medicaid managed care enrollee identification cards for pharmacy benefits” (see below). Additionally, CMS states that covered entities and their contract parties use third-party administrators that help identify 340B claims “well within the 12-quarter timeline.” However, CMS failed to address the obstacles faced by manufacturers to obtain such data from States and covered entities.
• Data and Drug Costs Transparency in Medicaid Managed Care Contracts to Address Spread Pricing.
  
  BIN and PCN Identifier Requirements. Under the Final Rule, States must now contractually require Medicaid managed care organizations (MCOs), prepaid inpatient health plans (PIHPs), and prepaid ambulatory health plans (PAHPs) that provide coverage of CODs to assign and exclusively use unique Medicaid BIN and PCN combinations with group number identifiers for all Medicaid managed care enrollee identification cards for pharmacy benefits, effective the first rating period for such contracts beginning on or after one year following November 19, 2024. CMS believes this requirement would “make the Medicaid drug program run more efficiently, help avoid 340B duplicate discounts, and improve the level of pharmacy services provided to Medicaid beneficiaries.”
  
  Many commenters provided alternative or revised proposals for the data requirements to increase accountability within the 340B program. For example, some commenters advocated for CMS to require Medicaid managed care plans contracting with states to share the data with manufacturers to help ensure accountability on 340B duplicate discounts, while others suggested that HRSA is better suited to require “340B patients” to receive enrolled identification cards for their 340B prescription drug benefits with unique identifiers through their 340B covered entities. CMS declined to implement these suggestions from commenters, stating that the 340B program is outside the scope of the Final Rule.
  
  Drug Cost Reporting. The Final Rule finalized that MCOs, PIHPs, and PAHPs must require any subcontractor (including PBMs) used in the delivery or administration of the covered outpatient drug benefit to report separately, starting the first rating period for such contracts beginning on or after one year following the Final Rule effective date, the amounts related to: (i) the incurred claims such as reimbursement for the COD, payments for other patient services, and the fees paid to providers or pharmacies for dispensing or administering a COD; and (ii) administrative costs, fees and expenses of the subcontractor. Acknowledging that it does not have authority to limit “spread pricing,” CMS noted that this will “provide greater transparency to State Medicaid agencies and managed care plans regarding how the PBMs are spending the payments that are made to them by the Medicaid managed care plan to administer the Medicaid prescription drug benefit.”
  
  
• Required Collection of NDC Information for All Covered Outpatient Physician-Administered Drugs. CMS finalized its proposal to require states to collect NDC information on all covered outpatient single- and multiple-source physician-administered drugs, noting its statutory authority for extending this requirement by regulation beyond the top 20 multiple source drugs already required by statute. Per this requirement, states must ensure that their managed care plans report drug utilization data so that states can invoice manufacturers for rebates for CODs consistent with the Deficit Reduction Act of 2005 and 42 C.F.R. § 438.3(s)(2) and (3).
• Rescission of Certain Revisions Made in 2020 Final Rule Based on Court Order. The Final Rule withdraws the AMP and BP provisions of the Accumulator Adjustment Final Rule (that would have required manufacturers to “ensure” that the benefits of certain assistance programs were provided entirely to patients, if the value of such programs were to be excluded from price reporting), consistent with a May 17, 2022 order from the U.S. District Court for the District of Columbia. In its order, the Court held that copay assistance amounts offered from a manufacturer to a patient but diverted by a commercial health plan through an accumulator program do “not qualify as a price made available from a manufacturer to a best-price-eligible purchaser,” as required by statute, and that CMS thus lacked the authority to adopt the Accumulator Adjustment Final Rule. A commenter “requested that CMS also rescind the portion of the 2021 Notice of Benefit and Payment Parameters final rule that enables plans to not count manufacturer cost-sharing assistance toward patients’ annual cost-sharing limits, thereby effectively enabling the use of PBM accumulator programs, which are harmful to patient”—but CMS stated that “this request is outside the scope of this final rule.”
• Elimination of Medicaid Rebate Cap. The American Rescue Plan Act of 2021 eliminated the Medicaid rebate cap for single-source and innovator multiple-source drugs so that rebates would no longer be capped at 100% of the AMP. The Final Rule finalized corresponding changes to the MDRP regulations to reflect the removal of the maximum rebate amounts for rebate periods beginning on or after January 1, 2024. CMS notes that “[a] commenter raised concerns that the proposed rule prompts questions about the 340B Program’s ‘penny pricing policy,’ potentially leading to negative ceiling prices, and how that aligns with the intention to penalize manufacturers for rapid price hikes.” CMS states that “the commenter requested that CMS work with HRSA to clarify the impact of this provision on HRSA’s ‘penny pricing policy.’” CMS asserts that “[t]his comment is outside the scope of this rule” but adds that “[t]hese comments have been shared with HRSA.”
• “Vaccine” Definition. CMS did not finalize its proposed definition of “vaccine” as the agency continues to review the input provided by commenters, which may inform future rulemaking on this topic. The MDRP statute excludes all “vaccines” from the definition of “COD.” In the proposed rule, CMS sought to define “vaccine” to clarify which products are not CODs and are therefore not subject to possible required coverage under the prescribed drugs benefit and applicable rebate liability under the MDRP. Industry should continue to monitor for any proposals in this area that might curb or eliminate Medicaid beneficiary access to vaccines or unlawfully seek Medicaid rebates from manufacturers.