DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid and State Operations 
 
July 6, 2007                  SMDL #07-007 
 
 
Dear State Medicaid Director: 
 
Today the final rule to implement the pharmacy provisions of the Deficit Reduction Act of 2005 
(DRA) was put on display at the Federal Register.  The provisions of this rule will take effect on 
October 1, 2007.  This letter highlights the key provisions of the final rule, the time table for its 
implementation, the actions that States will need to take, and the flexibilities that continue to be 
available to you.  The implementation timeline is enclosed.  The final rule is on our Web site at 
http://www.cms.hhs.gov/MedicaidGenInfo/Downloads/CMS2238FC.pdf.
 
The DRA changes the requirements for drug manufacturers that participate in the Medicaid Drug 
Rebate Program.  First, it clarifies what drug sales are to be included in average manufacturer 
price (AMP) and best price.  It also provides that customary prompt pay discounts extended to 
wholesalers be excluded from AMP and that the sale price of authorized generic drugs from the 
primary manufacturer to a secondary entity be included in the best price of the primary 
manufacturers drugs.  These changes will cause AMPs to differ from what they were in the past.  
Best prices of drugs may also be affected by the final rule.  This will affect the unit rebate 
amounts that we provide you for invoicing drug manufacturers for rebates.   
 
The DRA also requires drug manufacturers to report AMPs on a monthly basis.  The first 
monthly AMPs to be calculated under this rule will be for October 2007.  Those AMPs will be 
due from manufacturers by November 30, 2007.  The first quarterly AMPs under the new rules 
will be for the October 2007  December 2007 quarter.  Those AMPs will be due from 
manufacturers by January 30, 2008.   
 
The new monthly AMPs will be used to calculate the Federal upper limits (FULs) for drugs 
subject to that limit.  We expect to publish the first monthly FULs in late December and apply 
the aggregate cap on payments for drugs subject to a FUL beginning January 30, 2008.  
 
The DRA also requires that States obtain information on claims for certain physician-
administered drugs sufficient to bill drug manufacturers for rebates.  Specifically, for Federal 
financial participation to be available with respect to such physician-administered drugs 
beginning January 1, 2008, States must obtain National Drug Codes (NDCs) for claims for the 
top 20 multiple source drugs.  These drugs are posted on the Centers for Medicare & Medicaid 
Services Web site at: 
http://www.cms.hhs.gov/DeficitReductionAct/Downloads/Top20PhysicianAdministered.pdf. 
 
   
Page 2  State Medicaid Director  
 
Now that the final rule is effective October 1, 2007, we encourage States to begin to consider 
how to implement these changes.  Specifically, you should review your payment amounts for 
drugs subject to a FUL and determine how you will adjust them, as necessary, to assure that your 
spending for these drugs, in the aggregate, is at or below the FUL.   
 
You may also consider using the AMP or prices from the Retail Price Survey (which we will 
send to you in the near future) to revise your payment methodologies for drugs not subject to a 
FUL.  Because the AMPs are based on the average price paid to the manufacturer by wholesalers 
for drugs distributed to the retail pharmacy class of trade, we believe you will need to apply an 
appropriate mark-up of these amounts if you are going to use them to set payment rates.  Should 
you decide to change your drug payment methodology, you will need to submit to us a State plan 
amendment for our approval.  
 
As the acquisition cost of drugs to pharmacies becomes more transparent and better represents 
actual costs, we encourage you to also review your dispensing fees to ensure that they are 
reasonable and reflect the cost of dispensing drugs. 
 
The DRA provides that States may seek an extension of the January 1, 2008, deadline for 
collecting NDCs on claims for the top 20 multiple source physician-administered drugs.  
Because the DRA was enacted in February 2006, we believe that most States should be able to 
meet this deadline.  However, States that wish to apply for an extension should send me a letter 
explaining the reason for the extension request, the actions that have been taken to date to meet 
this requirement, and a specific plan and timeline for coming into compliance with this 
provision. 
 
We believe that the DRA provides States with an opportunity to establish more appropriate 
payment policies for prescription drugs.  At the same time, we share an interest in making sure 
that pharmacies receive sufficient payment to continue to serve Medicaid beneficiaries.  We look 
forward to working with you as you implement these new provisions of law.  
 
            Sincerely, 
 
/s/ 
 
            Dennis G. Smith 
            Director 
 
Enclosure  Page 3  State Medicaid Director  
 
cc: 
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators, 
Division of Medicaid and Childrens Health 
 
Martha Roherty 
Director, Health Policy Unit 
American Public Human Services Association 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Matt Salo 
Director of Health Legislation 
National Governors Association 
 
Debra Miller 
Director for Health Policy 
Council of State Governments 
 
Christie Raniszewski Herrera 
Director, Health and Human Services Task Force 
American Legislative Exchange Council 
 
Jacalyn Bryan Carden 
Director of Policy and Programs 
Association of State and Territorial Health Officials