5318 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 447 

[CMS–2345–P] 

RIN 0938–AQ41 

Medicaid Program; Covered Outpatient 

Drugs 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

revise requirements pertaining to 

Medicaid reimbursement for covered 

outpatient drugs to implement 

provisions of the Patient Protection and 

Affordable Care Act of 2010, as 

amended by the Health Care and 

Education Reconciliation Act of 2010 

(collectively known as the Affordable 

Care Act). This proposed rule would 

also revise other requirements related to 

covered outpatient drugs, including key 

aspects of Medicaid coverage, payment, 

and the drug rebate program. Therefore, 

we are proposing to amend 42 CFR part 

447, subpart I to implement specific 

provisions of the Affordable Care Act. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on April 2, 2012. 

ADDRESSES: In commenting, please refer 

to file code CMS–2345–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit 

electronic comments on this regulation 

to http://www.regulations.gov. Follow 

the instructions under the ‘‘More Search 

Options’’ tab. 

2. By regular mail. You may mail 

written comments to the following 

address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS– 

2345–P, P.O. Box 8016, Baltimore, 

MD 21244–8016. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments to the 

following address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS– 

2345–P, Mail Stop C4–26–05, 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments before the close 

of the comment period to either of the 

following addresses: 

a. For delivery in Washington, DC— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Room 445–G, Hubert 

H. Humphrey Building, 200 

Independence Avenue SW., 

Washington, DC 20201. 

(Because access to the interior of the 

Hubert H. Humphrey Building is not 

readily available to persons without 

Federal government identification, 

commenters must leave their comments 

in the CMS drop slots located in the 

main lobby of the building. A stamp-in 

clock is available for persons wishing to 

retain a proof of filing by stamping in 

and retaining an extra copy of the 

comments being filed. The comments 

delivered must also be stamped in to 

verify timeliness of submission.) 

b. For delivery in Baltimore, MD— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, 7500 Security 

Boulevard, Baltimore, MD 21244– 

1850. 

If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and if 

received after the comment period 

closes may not be considered. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by following 

the instructions at the end of the 

‘‘Collection of Information 

Requirements’’ section in this 

document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Angel Davis, (410) 786–4693, and 

Meagan Khau, (410) 786–1357, for 

issues related to rebates for line 

extensions. 

Lisa Ferrandi, (410) 786–5445, for issues 

related to the Collection of 

Information Requirements. 

Joseph Fine, (410) 786–2128, for issues 

related to the determination of Best 

Price, definition of covered outpatient 

drug and rebates for drugs dispensed 

by Medicaid managed care 

organizations. 

Christine Hinds, (410) 786–4578, 

Kimberly Howell, (410) 786–6762, 

Terry Simananda, (410) 786–8144, or 

Wendy Tuttle, (410) 786–8690, for 

issues related to the determination of 

Average Manufacturer Price (AMP). 

Meagan Khau, (410) 786–1357, for 

issues related to the offset of rebates. 

Madlyn Kruh, (410) 786–3239, for issues 

related to authorized generics, 

nominal price, investigational drugs, 

and the coverage of tobacco cessation 

drugs under the Medicaid State Plan. 

Bernadette Leeds, (410) 786–9463, for 

issues related to drug rebates. 

Gail Sexton, (410) 786–4583, for issues 

related to Federal upper limits. 

Marge Watchorn, (410) 786–4361, for 

issues related to the Regulatory 

Impact Analysis. 

Wendy Tuttle, (410) 786–8690, for all 

other inquiries. 

SUPPLEMENTARY INFORMATION: 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http:// 

www.regulations.gov. Follow the search 

instructions on that Web site to view 

public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 

8:30 a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–(800) 743–3951. 

I. Background 

A. Introduction 

Under the Medicaid program, States 

may provide coverage of outpatient 

drugs as an optional service under 

section 1905(a)(12) of the Social 

Security Act (the Act). Section 1903(a) 

of the Act provides for Federal financial 

participation (FFP) in State 

expenditures for these drugs. In general, 

in order for payment to be made 

available under section 1903 for covered 

outpatient drugs, manufacturers must 

enter into a Medicaid drug rebate 

agreement as set forth in section 1927(a) 


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Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5319 

of the Act. Section 1927 of the Act 

provides specific requirements for 

rebate agreements, drug pricing 

submission and confidentiality 

requirements, the formulas for 

calculating rebate payments, and 

requirements for States for covered 

outpatient drugs. 

This proposed rule would implement 

changes to section 1927 of the Act made 

by sections 2501, 2503, and 3301(d)(2) 

of the Patient Protection and Affordable 

Care Act of 2010 (Pub. L. 111–148, 

enacted on March 23, 2010), and 

sections 1101(c) and 1206 of the Health 

Care and Education Reconciliation Act 

of 2010 (HCERA) (Pub. L. 111–152, 

enacted on March 30, 2010), 

(collectively known as the Affordable 

Care Act). It would also implement 

changes to section 1927 of the Act as set 

forth in section 202 of Pub. L. 111–226, 

enacted on August 10, 2010 (referred to 

as the Education Jobs and Medicaid 

Funding Act). This proposed rule would 

implement other miscellaneous 

provisions pertaining to covered 

outpatient drugs. It would implement 

changes to section 1927 of the Act as set 

forth in section 221 of Division F, Title 

II, of the Omnibus Appropriations Act, 

2009, (Pub. L. 111–8, enacted on March 

11, 2009). It would also codify other 

requirements in section 1927 of the Act 

pertaining to the Medicaid drug rebate 

(MDR) program and revise certain 

regulatory provisions presently codified 

at 42 CFR part 447, subpart I and make 

other changes concerning rebate 

requirements. As discussed below, these 

proposed revisions are consistent with 

the Secretary’s authority set forth in 

section 1102 of the Act to publish 

regulations that are necessary to the 

efficient administration of the Medicaid 

program. 

B. Changes Made by the Affordable Care 

Act 

Section 2501(a) of the Affordable Care 

Act amended section 1927(c) of the Act 

by increasing the minimum rebate 

percentage for most single source and 

innovator multiple source drugs from 

15.1 percent of the average 

manufacturer price (AMP) to 23.1 

percent of AMP. Section 2501(a) of the 

Affordable Care Act also amended 

section 1927(c) of the Act by 

establishing a minimum rebate 

percentage of 17.1 percent of AMP for 

certain single source and innovator 

multiple source clotting factors and 

single source and innovator multiple 

source drugs approved by the Food and 

Drug Administration (FDA) exclusively 

for pediatric indications. Section 

2501(a) of the Affordable Care Act also 

added section 1927(b)(1)(C) to the Act to 

make changes to the non-Federal share 

of rebates by specifying that the 

amounts attributable to the increased 

rebate percentages be remitted to the 

Federal government. The amendments 

made by section 2501(a) of the 

Affordable Care Act were effective 

January 1, 2010. 

Section 2501(b) of the Affordable Care 

Act amended section 1927(c) of the Act 

by increasing the rebate percentage for 

noninnovator multiple source drugs 

from 11 percent of AMP to 13 percent 

of AMP, effective January 1, 2010. 

Section 2501(c) of the Affordable Care 

Act amended section 1903(m) of the Act 

by specifying new conditions for 

managed care organization (MCO) 

contracts, including that covered 

outpatient drugs dispensed to 

individuals eligible for medical 

assistance under Title XIX of the Act 

who are enrolled with a Medicaid MCO 

shall be subject to the same rebate 

required by the rebate agreement 

authorized under section 1927 of the 

Act. The Affordable Care Act also 

amended section 1903(m) of the Act to 

establish that MCO capitation rates shall 

be based on actual cost experience 

related to rebates and subject to Federal 

regulations at § 438.6 regarding actuarial 

soundness of capitation payments. The 

legislation also provided that MCOs are 

responsible for reporting to the State 

certain utilization data and such other 

data as the Secretary determines 

necessary for the State to access the 

rebates authorized by this provision. 

Section 2501(c) of the Affordable Care 

Act also made conforming amendments 

to section 1927(b) of the Act by 

requiring manufacturers that participate 

in the MDR program to provide rebates 

for drugs dispensed to individuals 

enrolled with a MCO, if the MCO is 

responsible for coverage of such drugs. 

It also amended section 1927(b) of the 

Act by requiring States to include 

information on drugs paid for by 

Medicaid MCOs under the State plan 

during the rebate period when 

requesting rebates from manufacturers. 

Finally, section 2501(c) modified 

section 1927(j)(1) of the Act to specify 

that covered outpatient drugs are not 

subject to the rebate requirements if 

such drugs are both subject to discounts 

under section 340B of the Public Health 

Service Act (PHSA) and dispensed by 

health maintenance organizations 

(HMOs), including Medicaid MCOs. The 

amendments made by section 2501(c) 

were effective March 23, 2010. 

Section 2501(d) of the Affordable Care 

Act, as revised by section 1206(a) of 

HCERA, added a new subparagraph (C) 

to section 1927(c)(2) of the Act, effective 

for drugs paid for by a State on or after 

January 1, 2010. This provision modifies 

the unit rebate amount (URA) 

calculation for a drug that is a line 

extension (new formulation) of a single 

source or innovator multiple source 

drug that is an oral solid dosage form. 

Section 2501(e) of the Affordable Care 

Act amended section 1927(c)(2) of the 

Act by adding a new subparagraph (D) 

and establishing a maximum on the 

total rebate amount for each single 

source or innovator multiple source 

drug at 100 percent of AMP, effective 

January 1, 2010. 

Section 2501(f) of the Affordable Care 

Act made conforming amendments to 

section 340B of the Public Health 

Service Act, which are not addressed in 

this proposed rule. 

Section 2503(a) of the Affordable Care 

Act amended section 1927(e) of the Act 

by revising the Federal upper 

reimbursement limit to be no less than 

175 percent of the weighted average 

(determined on the basis of utilization) 

of the most recently reported monthly 

AMPs for pharmaceutically and 

therapeutically equivalent multiple 

source drug products that are available 

for purchase by retail community 

pharmacies on a nationwide basis. 

Additionally, it specifies that the 

Secretary shall implement a smoothing 

process for AMP which shall be similar 

to the smoothing process used in 

determining the average sales price 

(ASP) of a drug or biological under 

Medicare Part B. It amended section 

1927(k) of the Act by revising the 

definition of AMP to mean the average 

price paid to the manufacturer for the 

drug in the United States by wholesalers 

for drugs distributed to retail 

community pharmacies and retail 

community pharmacies that purchase 

drugs directly from the manufacturer. 

It also amended the definition of 

multiple source drug to specify, in part, 

that a covered outpatient drug qualifies 

as a multiple source drug if at least one 

other therapeutically equivalent drug 

product is sold or marketed in the 

United States, as opposed to in a State, 

during the rebate period. It added to 

section 1927(k) of the Act definitions of 

retail community pharmacy and 

wholesaler for purposes of section 1927 

of the Act. 

Section 2503(b) of the Affordable Care 

Act amended section 1927(b) of the Act 

by establishing a requirement that 

manufacturers report, not later than 30 

days after the last day of each month of 

a rebate period under the agreement, on 

the manufacturer’s total number of units 

that are used to calculate the monthly 

AMP for each covered outpatient drug. 

It also amended the preexisting 

requirement that the Secretary disclose 


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5320 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

1http://oig.hhs.gov/oas/reports/region6/

60000023.htm; http://oig.hhs.gov/oas/reports/

region6/60100053.htm; http://oig.hhs.gov/oas/

reports/region6/60200041.htm. 

AMPs to instead require the Secretary to 

post, on a Web site accessible to the 

public, the weighted average of the most 

recently reported monthly AMPs and 

the average retail survey price 

determined for each multiple source 

drug in accordance with section 1927(f) 

of the Act. 

Section 2503(c) of the Affordable Care 

Act amended section 1927(f) of the Act 

by clarifying that the survey of retail 

prices described in such subsection 

applies to retail community pharmacies. 

Section 2503(d) of the Affordable Care 

Act specified that the amendments 

made by section 2503 of the Affordable 

Care Act were effective October 1, 2010. 

Section 2503(d) of the Affordable Care 

Act further specified that the 

amendments made by section 2503 shall 

take effect without regard to whether 

final regulations to carry out such 

amendments have been issued by 

October 1, 2010. 

Section 3301(d)(2) of the Affordable 

Care Act included a conforming 

amendment to the definition of ‘‘best 

price’’ under Medicaid at section 

1927(c)(1)(C) of the Act. This 

amendment provides that any discounts 

provided by manufacturers under the 

Medicare coverage gap discount 

program under section 1860D–14A of 

the Act are exempt from a 

manufacturer’s best price calculation, 

effective for drugs dispensed on or after 

July 1, 2010. 

Section 7101(a) of the Affordable Care 

Act expanded the drug discount 

program under section 340B of the 

Public Health Service Act (PHSA) to 

include certain children’s hospitals, 

freestanding cancer hospitals, critical 

access hospitals, rural referral centers 

and sole community hospitals. 

Section 204 of the Medicare and 

Medicaid Extenders Act of 2010 (Pub. L. 

111–309) revised section 340B of the 

PHSA by removing children’s hospitals 

from the orphan drug exclusion 

described in section 2302 of HCERA. 

Section 1101(c) of HCERA also 

includes a conforming amendment to 

the definition of AMP under Medicaid 

at section 1927(k) of the Act by 

providing that discounts provided by 

manufacturers under the Medicare 

coverage gap discount program under 

section 1860D–14A of the Act are 

excluded from a manufacturer’s 

determination of AMP, effective March 

30, 2010. 

C. Final Rule With Comment Period 

Published July 17, 2007 

On July 17, 2007, CMS published a 

final rule with comment period in the 

Federal Register (72 FR 39142). The 

purpose of the final rule with comment 

period was to finalize the provisions of 

the proposed rule CMS published in the 

Federal Register on December 22, 2006 

(71 FR 77174) and to allow for further 

public comment on the AMP and 

Federal upper limit (FUL) outlier 

sections of the final rule. We received a 

variety of comments from drug 

manufacturers, membership 

organizations, wholesalers, law firms, 

PBMs, consulting firms and pharmacists 

in support of, and raising concerns with, 

the AMP and FUL provisions. However, 

we note that these regulatory provisions 

were withdrawn through the final rule 

published in the November 15, 2010 

Federal Register (75 FR 69591). 

Accordingly, we will not be considering 

the comments received on the July 17, 

2007, rule in this rulemaking document. 

Further, because the Affordable Care 

Act made substantial changes to the 

AMP and FUL provisions in section 

1927 of the Act, we no longer expect to 

publish that final rule and we do not 

expect to address those comments in 

subsequent rulemaking. 

D. Other Changes Concerning the 

Medicaid Drug Rebate Program 

We are also proposing changes to 

address other program issues related to 

covered outpatient drugs, including key 

aspects of Medicaid payment and the 

MDR program, such as reimbursement 

to pharmacies for the ingredient cost of 

a drug, determination of AMP for 

authorized generic drugs, and the 

inclusion of territories in the MDR 

program. These changes are described in 

greater detail below under section II. 

Provisions of the Proposed Regulations. 

II. Provisions of the Proposed 

Regulations 

This proposed rule would revise 

regulations concerning the MDR 

program, set forth at section 1927 of the 

Act. It implements, consistent with our 

general rulemaking authority, sections 

2501, 2503, and 3301(d)(2) of the 

Affordable Care Act and sections 

1101(c) and 1206 of HCERA, which 

revise requirements concerning the 

rebate program and payments for 

prescription drugs under the Medicaid 

program. The specific provisions we 

propose are described in detail below. 

A. Basis and Purpose (§ 447.500) 

Section 2501(c) of the Affordable Care 

Act established new requirements for 

manufacturers that participate in the 

MDR program to pay rebates for drugs 

dispensed to individuals enrolled with 

a Medicaid MCO if the MCO is 

responsible for coverage of such drugs. 

We propose to add § 447.500(a)(4) 

which would specify sections 

1903(m)(2)(A)(xiii) and 1927(b) of the 

Act as the basis for rebates for covered 

outpatient drugs dispensed to 

individuals eligible for medical 

assistance who are enrolled in Medicaid 

MCOs. We propose to add 

§ 447.500(a)(5) which would add section 

1902(a)(30)(A) as an additional basis for 

calculating payments for covered 

outpatient drugs. 

B. Definitions (§ 447.502) 

1. Actual Acquisition Cost 

States generally reimburse pharmacies 

for covered outpatient drugs that are 

prescribed and dispensed to Medicaid 

beneficiaries based on a two-part 

formula, which addresses the ingredient 

cost of a drug and a reasonable 

dispensing fee. Each State has the 

flexibility to determine the amount it 

will reimburse for each component of 

the formula based on the agency’s best 

estimate of the price generally and 

currently paid by providers for a drug 

marketed or sold by a particular drug 

labeler and the cost associated with 

ensuring that possession of the 

appropriate covered outpatient drug is 

transferred to a Medicaid beneficiary. 

These reimbursement formulas are 

subject to review and approval by CMS 

through the State plan amendment 

(SPA) process. 

In general, States currently reimburse 

for the covered outpatient drug based, in 

part, on the estimated acquisition cost 

(EAC). The EAC, as currently defined in 

Federal regulations at § 447.502 is the 

agency’s best estimate of the price 

generally and currently paid by 

providers for a drug marketed or sold by 

a particular manufacturer or labeler in 

the package size of drug most frequently 

purchased by providers. We are 

proposing to both rename and revise 

this definition in this proposed rule. 

Section 1902(a)(30)(A) of the Act 

requires, in part, that States have 

methods and procedures to assure that 

payment for Medicaid care and services 

is consistent with efficiency, economy, 

and quality of care. In accordance with 

these provisions and in light of the OIG 

reports concerning published prices 

(OIG Audit reports—A–06–00–00023, 

A–06–01–00053, A–06–02–00041),1 we 

believe it is necessary for States to have 

a more accurate reference price to base 

reimbursement for prescription drugs. 

Therefore, we propose to replace the 

term, ‘‘estimated acquisition cost’’ with 

‘‘actual acquisition cost’’ (AAC). We 

believe that changing this definition for 


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the drug ingredient component of the 

reimbursement formula to AAC will be 

more reflective of actual prices paid, as 

opposed to estimates based on 

unreliable published compendia 

pricing. While we recognize that States 

may not be able to determine the actual 

price of each individual drug, payment 

based on an average of the actual 

acquisition costs from a number of 

representative pharmacies would still fit 

within this definition, as data used in 

the calculation of the average 

acquisition cost would be reflective of 

actual purchase prices for pharmacy 

providers. Within this framework, States 

can develop payment methodologies 

consistent with this regulatory 

definition for their Medicaid pharmacy 

reimbursement. Therefore, in § 447.502, 

we propose to define actual acquisition 

cost as the agency’s determination of the 

actual prices paid by pharmacy 

providers to acquire drug products 

marketed or sold by specific 

manufacturers. This issue and its 

possible effects on ingredient cost 

reimbursement is discussed further in 

both § 447.512 Drugs: Aggregate upper 

limits of payment and § 447.518 State 

plan requirements, findings, and 

assurances. 

2. Authorized Generic Drug 

The definition of ‘‘authorized generic 

drug’’, presently set forth in 

§ 447.506(a), applies to rebate 

calculations, as set forth in subpart I 

‘‘Payment for Drugs.’’ Therefore, we 

propose to remove the definition of 

‘‘Authorized generic drug’’ from 

§ 447.506 and move this definition to 

§ 447.502. We would continue to define 

the term ‘‘Authorized generics drugs’’ as 

any drug sold, licensed or marketed 

under an NDA approved by the FDA 

under section 505(c) of the Federal Food 

Drug and Cosmetic Act (FFDCA) that is 

marketed, sold or distributed under a 

different labeler code, product code, 

trade name, trademark, or packaging 

(other than repackaging the listed drug 

for use in institutions) than the listed 

brand drug. 

For purposes of the MDR Program, an 

authorized generic is any drug product 

marketed under the innovator or brand 

manufacturer’s New Drug Application 

(NDA) approved under section 505(c) of 

the FFDCA, but labeled with a different 

NDC than the innovator or brand 

product. Authorized generics are 

categorized as innovator multiple source 

drugs for the purpose of computing the 

drug rebate. 

3. Bona Fide Service Fee 

In the July 17, 2007 AMP final rule, 

we defined bona fide service fees as fees 

paid by a manufacturer to an entity that 

represent fair market value for a bona 

fide, itemized service actually 

performed on behalf of the manufacturer 

that the manufacturer would otherwise 

perform (or contract for) in the absence 

of the service arrangement and that are 

not passed on in whole or in part to a 

client or customer of an entity, whether 

or not the entity takes title to the drug. 

The Affordable Care Act specifies that 

the AMP shall exclude bona fide service 

fees paid by manufacturers to 

wholesalers or retail community 

pharmacies including, but not limited 

to, distribution service fees, inventory 

management fees, product stocking 

allowances, and fees associated with 

administrative service agreements and 

patient care programs (such as 

medication compliance programs and 

patient education programs). In 

§ 447.502, we propose to revise our 

current definition of bona fide service 

fees to include these fees paid by 

manufacturers to wholesalers or retail 

community pharmacies. 

4. Bundled Sales 

In the AMP final rule published on 

July 17, 2007, bundled sale was defined 

as an arrangement, regardless of 

physical packaging, under which the 

rebate, discount, or other price 

concession is conditioned upon the 

purchase of the same drug, drugs of 

different types (that is, at the nine-digit 

National Drug Code (NDC) level) or 

another product or some other 

performance requirement (for example, 

the achievement of market share, 

inclusion or tier placement on a 

formulary), or where the resulting 

discounts or other price concessions are 

greater than those which would have 

been available had the bundled drugs 

been purchased separately or outside 

the bundled arrangement. For bundled 

sales, the discounts are allocated 

proportionally to the total dollar value 

of the units of all drugs sold under the 

bundled arrangement. For bundled sales 

where multiple drugs are discounted, 

the aggregate value of all the discounts 

in the bundled arrangement must be 

proportionally allocated across all the 

drugs in the bundle. In response to 

manufacturer questions regarding 

whether a discount and resulting price 

for each product in a single customer 

contract that is independent and not 

contingent on the discount or pricing of 

any other product in the contract should 

be applied across all products; we stated 

previously that where a discount or 

price concession is established 

independently and not conditioned 

upon any other purchase or 

performance requirement (for example 

the achievement of market share, 

inclusion or tier placement on a 

formulary), or where the discount is not 

greater than if purchased outside of 

multi-product arrangement, there is no 

bundle within the meaning described in 

§ 447.502. Though this is not addressed 

in the Affordable Care Act, we continue 

to agree with our response to this issue 

and thus have decided to include it in 

this discussion in order to further clarify 

the bundled sale definition. Therefore, 

we propose to add the following 

clarifying statement to the definition of 

bundled sale: The discounts in a 

bundled sale, including but not limited 

to those discounts resulting from a 

contingent arrangement, are allocated 

proportionally to the total dollar value 

of the units of all drugs sold under the 

bundled arrangement. 

5. Clotting Factor 

The Affordable Care Act established a 

minimum rebate percentage of 17.1 

percent of AMP for a single source drug 

or an innovator multiple source drug 

that is a clotting factor for which a 

separate furnishing payment is 

authorized under section 1842(o)(5) of 

the Act and which is included on a list 

of such factors specified and updated 

regularly by the Secretary. Consistent 

with these provisions, we propose to 

define clotting factors as those drugs or 

products for which a separate furnishing 

payment is authorized under section 

1842(o)(5) of the Act and which are 

included on a list of such factors 

specified and updated quarterly by 

CMS. 

6. Covered Outpatient Drug 

In accordance with section 1927 of 

the Act, manufacturers that have 

entered into a Rebate Agreement with 

the Secretary are responsible for paying 

rebates to States for their covered 

outpatient drugs for which payment has 

been made under the state plan. 

Manufacturers are responsible for 

submitting required drug product data, 

including each drug’s NDC. This NDC 

information is placed on the MDR file 

and used for assuring compliance with 

the statutory requirements. 

There have been products identified 

in the drug product data file that do not 

meet the definition of a covered 

outpatient drug. Therefore, we believe it 

is necessary to provide clarification 

regarding the definition of a covered 

outpatient drug in section 1927(k)(2) of 

the Act and the limiting definition at 

section 1927(k)(3) of the Act. 

Accordingly, we propose to add a 

definition of covered outpatient drug to 

§ 447.502. 


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We propose that a drug is considered 

a covered outpatient drug when the 

drug may be dispensed only upon 

prescription (except as discussed below 

with respect to certain non-prescription 

drugs), and it meets the following 

criteria as described in section 

1927(k)(2) of the Act: 

• The drug has been approved for 

safety and effectiveness as a 

prescription drug by the FDA under 

section 505 or 507 of the FFDCA where 

the manufacturer has obtained a NDA or 

under section 505(j) of the FFDCA 

where the manufacturer has obtained an 

Abbreviated New Drug Application 

(ANDA); 

• The drug was commercially used or 

sold in the United States before the date 

of the enactment of the Drug 

Amendments of 1962, or is identical, 

similar or related (within the meaning of 

section 310.6(b)(1) of title 21 of the CFR) 

to such a drug; and has not been the 

subject of a final determination by the 

Secretary that it is a ‘‘new drug’’ (within 

the meaning of section 201(p) of the 

Federal Food, Drug, and Cosmetic Act) 

or an action brought by the Secretary 

under section 301, 302(a), or 304(a) of 

such Act to enforce section 502(f) or 

505(a) of such Act; 

• The drug is one which is 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 for which the 

Secretary has not issued a notice for an 

opportunity for a hearing under section 

505(e) of the FFDCA on a proposed 

order of the Secretary to withdraw 

approval of an application for such drug 

under the FFDCA 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; 

• The drug is a biologic product, 

other than a vaccine which— 

(1) May only be dispensed upon 

prescription, 

(2) Is licensed under section 351 of 

the Public Health Service Act, and 

(3) Is produced at an establishment 

licensed under such section to produce 

such product; or 

• The drug is insulin certified under 

section 506 of the FFDCA. 

Consistent with section 1927(k)(3) of 

the Act, we propose that, except as 

discussed below, a drug, biological 

product, or insulin would not be 

considered a covered outpatient drug 

when that drug or product is billed as 

a bundled service with, and provided as 

part of or incident to and in the same 

setting as, any of the following services: 

• 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; 

• Physician services; 

• Outpatient hospital services; 

• Nursing facility and services 

provided by an intermediate care 

facility for the mentally retarded; 

• Other laboratory and x-ray services; 

or 

• Renal dialysis. 

We further propose that the above 

exemptions to the definition of covered 

outpatient drug for combined services 

would not apply if the drug is carved 

out and billed separately from the 

service (for example, an infusion drug 

and x-ray are billed separately, not as a 

composite radiology service; therefore, 

the infusion drug is a covered outpatient 

drug). 

Additionally, section 1927(k)(3) of the 

Act provides that the definition of 

covered outpatient drug does not 

include any such drug or product for 

which a NDC number is not required by 

the FDA or a drug or biological used for 

a medical indication which is not a 

medically accepted indication. We note 

that for the purposes of the MDR we use 

an NDC format at either the NDC–9, 

which includes the labeler code and 

product code, to identify the product 

information, or the NDC–11, which 

includes the labeler code, product code, 

and the package code, to identify the 

product’s package information. We are 

aware that FDA has a slightly different 

NDC format than what is used in the 

MDR program. (Please see the 

discussion under the definition of NDC.) 

For the purpose of the MDR program, 

we will continue to use the current NDC 

format of NDC–9, which includes the 

labeler code and the product code, to 

identify the product information and 

NDC–11, which includes the labeler 

code, product code, and package code, 

to identify the product’s package 

information. However, if there is change 

to the current NDC format as a result of 

FDA action, then we will issue 

guidance, as necessary, to notify the 

public as well as to explain its impact 

on the MDR program. 

We are not involved with and do not 

have oversight for the designation of the 

NDC. The FDA requires NDCs for drugs 

that must be listed with the FDA in 

accordance with Federal Food, Drug, 

and Cosmetics Act (FFDCA), as 

amended by the Food and Drug 

Administration Amendments Act of 

2007 (FDAAA) (Pub. L. 110–85). (21 

CFR 207.25(b)(8)). The FDAAA 

amended section 510(p) of the FFDCA 

(21 U.S.C 360) to explicitly require that 

registration and listing information 

(including the submission of updated 

information) required under section 510 

of the FFDCA, which includes 

information from both domestic and 

foreign establishments, be submitted by 

electronic means, unless the Secretary 

of Health and Human Services grants a 

request for waiver of this requirement 

because use of electronic means is not 

reasonable for the person requesting the 

waiver. 

Section 1927(k)(3) of the Act provides 

that a covered outpatient drug does not 

include any such drug or product for 

which an NDC number is not required 

by the FDA. However, in accordance 

with section 1927(k)(2), and the 

requirements of section 510 of the 

FFDCA, we propose that a drug, 

whether prescription or over-thecounter (OTC), would only be treated as 

a covered outpatient drug if the drug is 

both required to have an NDC and is 

listed electronically with the FDA. We 

believe this additional standard is 

needed to ensure compliance with the 

prescribed drug provisions, FDA 

approval provisions, and the NDC 

listing provisions. Furthermore, this 

proposal is necessary in order for us to 

assure compliance with the drug rebate 

submission requirements, for CMS to 

verify State utilization data and 

manufacturer product data, and to 

assure the correct calculation of the 

offset amounts mandated by the 

Affordable Care Act. Additionally, this 

proposal aligns with a proposal 

submitted as part of the fiscal year (FY) 

2012 President’s Budget to require drugs 

to be properly listed electronically with 

the FDA as a requirement to be covered 

under Medicaid. 

Therefore, if a manufacturer is 

required to list all of its NDCs 

electronically with the FDA, this would 

ensure that all the products in the MDR 

program meet the definition of section 

1927(k)(3) of the Act. In addition, it 

would permit us to verify State and 

manufacturer submissions by 

referencing the FDA’s electronic drug 

listing information. 

Manufacturers are required to update 

their registration and listing information 

electronically in accordance with FDA’s 

current registration and listing 

requirements. 

Additionally, in order for us to fully 

implement these provisions, we are 

requiring that manufacturers submit any 

relevant approved FDA application 

numbers. When a product is listed with 

the FDA, the manufacturer is required to 

provide to the FDA the NDC and the 

application number, if any, for the 

product (21 CFR 207.25(b)). An 


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application number will help CMS find 

information on the approval status to 

market a drug. See http://www.fda.gov/ 

Drugs/InformationOnDrugs/

ucm079436.htm. The application 

number assists CMS in obtaining 

information from FDA as to whether a 

drug has been approved under a NDA 

under section 505 of FFDCA or an 

ANDA under section 505(j) of FFDCA. 

This information is critical to the 

definition of a covered outpatient drug 

under section 1927(k)(2) of the Act. 

Under the MDR program reporting 

requirements, drug manufacturers are 

required to report to CMS a drug 

category for each NDC. The drug 

category represents whether an NDC is 

classified as a brand name drug (single 

source drug (S) or innovator multiple 

source drug (I)) or a generic drug 

(noninnovator multiple source drug 

(N)). We use these drug category 

indications to determine the appropriate 

rebate percentage to calculate the unit 

rebate amounts, as well as the offset 

amounts under the Affordable Care Act. 

We are also aware that some products 

that do not have an approved 

application number may be covered 

outpatient drugs. For example, we 

believe that certain products, such as 

prenatal prescription vitamins, 

potassium chloride, codeine sulfate, and 

hydrocortisone acetate may fall into this 

category. If a product does not have an 

FDA application number, in order to be 

considered a covered outpatient drug, 

the manufacturer must provide evidence 

demonstrating that its products meet the 

statutory definition of a covered 

outpatient drug under section 1927(k)(2) 

to 1927(k)(4). We will refer to this 

evidence of demonstration as covered 

outpatient drug status, or COD status. 

We are seeking public comments on this 

requirement, and in particular, 

comments identifying drugs or classes 

of drugs that do not have approved 

applications but should be deemed 

covered outpatient drugs. 

This submission of data would 

provide critical information needed to 

calculate and verify the accuracy of 

such drug information. 

Therefore, we propose that 

manufacturers report to CMS the 

number of an approved FDA application 

for a product or otherwise show that the 

product meets the statutory definition of 

a covered outpatient drug under 

sections 1927(k)(2) and (3) of the Act, in 

order for CMS to calculate the offset 

amounts and validate product data to 

ensure the correct rebate calculation for 

each NDC in the MDR Program. By 

having a correct approved FDA 

application number or the COD status, 

CMS can more accurately determine the 

unit rebate amounts and product 

classification, critical to the rebate 

percentage calculation. 

7. Customary Prompt Pay Discounts 

In § 447.502, we propose to add a 

definition of customary prompt pay 

discount to ensure consistent 

application of such discounts among 

manufacturers when calculating AMP. 

Therefore, we propose to define 

customary prompt pay discounts as any 

discount off of the purchase price of a 

drug routinely offered by the 

manufacturer to a wholesaler for prompt 

payment of purchased drugs within a 

timeframe that is consistent with its 

customary business practices for 

payment. 

8. Innovator Multiple Source Drug 

As currently defined in § 447.502, an 

innovator multiple source drug means a 

multiple source drug that was originally 

marketed under an original new drug 

application (NDA) approved by the 

FDA, including an authorized generic 

drug. It also includes a drug product 

marketed by any cross-licensed 

producers, labelers, or distributors 

operating under the NDA and a covered 

outpatient drug approved under a 

product license approval (PLA), 

establishment license approval (ELA), or 

antibiotic drug approval (ADA). In this 

rule, we propose to add multiple source 

drugs originally marketed under a BLA 

as the BLA approval process is a 

successor to the PLA and ELA and drugs 

sold under a BLA are explicitly 

referenced in the definition of single 

source drug. To ensure that the correct 

drug category is reported for an 

innovator multiple source drug, as was 

discussed in Manufacturer Release #82, 

we wish to remind manufacturers, as is 

consistent with current policy, that an 

innovator multiple source (I) drug 

should be reported to CMS for a brand 

name drug that has therapeutic 

equivalents available. To determine if 

therapeutic equivalents are available for 

a brand name drug or not, you can 

access the FDA’s Drugs@FDA at http:// 

www.accessdata.fda.gov/scripts/cder/

drugsatfda/index.cfm?

fuseaction=Search.Addlsearch_drug_

name and search by the Application 

Number. If therapeutic equivalents are 

available, then you will see the link to 

‘‘Therapeutic Equivalents’’ in the 

‘‘Drugs Details’’ page. If there are 

therapeutic equivalents available for the 

NDA or BLA, then the brand name drug 

should be reported as an innovator 

multiple source drug (I) to CMS. 

Additionally, over the course of the 

MDR program, questions have arisen 

regarding whether an ‘‘original NDA’’ is 

the same as an NDA and whether the 

drug category may be different if a drug 

is approved under an NDA. We are 

proposing to clarify that, for purposes of 

the MDR program, an original NDA is 

equivalent to an NDA filed by the 

manufacturer for approval under section 

505 of the FFDCA for purposes of 

approval by the FDA for safety and 

effectiveness. In light of this definition, 

we are also proposing to use the term 

‘‘NDA’’ when addressing such 

application types for brand name drugs 

and not use the term ‘‘original NDA’’ 

when referring to such drugs throughout 

this proposed rule. 

9. Line Extension Drug (New 

Formulation) 

The Affordable Care Act established a 

separate calculation for the unit rebate 

amount for a drug that is a line 

extension of a single source drug or an 

innovator multiple source drug that is 

an oral solid dosage form. Section 

1927(c)(2)(C) of the Act, added by 

section 2501(d) of the Affordable Care 

Act, defines line extension to mean a 

new formulation of a drug, such as an 

extended release formulation. We 

propose to define line extension as a 

single source or innovator multiple 

source drug that is an oral solid dosage 

form that has been approved by the 

FDA, listed in Drugs@FDA http://www.

accessdata.fda.gov/scripts/cder/

drugsatfda/application file, as a change 

to the initial brand name listed drug in 

that it represents a new version of the 

previously approved listed drug, such as 

a new ester, a new salt or other 

noncovalent derivative; a new 

formulation of a previously approved 

drug; a new combination of two or more 

drugs; or a new indication for an already 

marketed drug. We propose that 

regardless of whether the drug is 

approved under an NDA or a 

supplemental NDA, if the change to the 

drug is assigned to one of the above 

changes, it will be considered a line 

extension drug. 

These modifications to the initial 

brand name listed drug are often 

approved under section 505(b)(2) of the 

FFDCA. A section 505(b)(2) application 

is a new drug application submitted 

under section 505(b)(1) and approved 

under section 505(c) of the FFDCA. A 

section 505(b)(2) application is one for 

which one or more of the investigations 

relied upon by the applicant to show 

whether a drug is safe and effective 

were not conducted by or for the 

applicant and for which the applicant 

has not obtained a right of reference or 

use from the person by or for whom the 

investigations were conducted. Section 

505(b)(2), as described in FDA 


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regulations at 21 CFR 314.54, may be 

used in certain circumstances to seek 

approval of a drug product that 

represents a modification to a listed 

drug product. Examples of drugs that 

have been approved under the 505(b)(2) 

application include drugs with a new 

formulation, dosing regimen, change in 

active ingredient (such as a different salt 

or ester, combination product), and/or 

new drug indication. These types of 

drugs are assigned a Chemical Type by 

the FDA for the new drug application. 

A section 505(b)(2) application may be 

granted 3 years of exclusivity, may be 

eligible for orphan drug exclusivity or 

pediatric exclusivity. We have included 

these changes within our definition of 

line extension drugs. (See G.2. 

Treatment of New Formulations for 

further explanation of CMS’ proposal.) 

10. Manufacturer 

For purposes of the MDR Program, we 

propose to clarify our current definition 

of manufacturer by revising it to state 

that a ‘‘manufacturer means any entity 

that holds the NDC for a covered 

outpatient drug or biological product’’. 

This change in terminology is not 

intended change the scope of the 

definition. 

11. Multiple Source Drug 

On November 15, 2010, we published 

the ‘‘Medicaid Program; Withdrawal of 

Determination of Average Manufacturer 

Price, Multiple Source Drug Definition, 

and Upper Limits for Multiple Source 

Drugs’’ final rule in the Federal Register 

(75 FR 69591). That final rule withdrew 

the regulatory definition of multiple 

source drug. As previously noted, 

section 2503(a)(3) of the Affordable Care 

Act amended the definition of multiple 

source drug set forth in section 

1927(k)(7) of the Act. 

Therefore, in accordance with section 

1927(k)(7) of the Act, as revised, we 

propose to define multiple source drug 

in § 447.502 as a covered outpatient 

drug for which there is at least one other 

drug product which— 

(1) Is rated as therapeutically 

equivalent. For the list of drug products 

rated as therapeutically equivalent, we 

will use the FDA’s most recent 

publication of ’’Approved Drug 

Products with Therapeutic Equivalence 

Evaluations’’ which is currently 

available at http://www.fda.gov/cder/ 

orange/default.htm or which can be 

viewed at the FDA’s Freedom of 

Information Public Reading Room at 

5600 Fishers Lane, Rm. 12A–30, 

Rockville, MD 20857; 

(2) Is pharmaceutically equivalent and 

bioequivalent, as determined by the 

FDA; and 

(3) Is sold or marketed in the United 

States during the rebate period. 

12. National Drug Code 

The Drug Listing Act of 1972 requires 

each registered drug establishment to 

provide the FDA with a current list of 

all drugs manufactured, prepared, 

propagated, compounded, or processed 

by it for commercial distribution. (See 

section 510 of the FFDCA (21 U.S.C. 

360)). Drug products are identified and 

listed with FDA using a unique 

identifier called the National Drug Code 

(NDC). Under FDA regulations in 21 

CFR part 207, the NDC is identified as 

a 10-digit, 3-segment number. The first 

segment, the labeler code, is assigned by 

the FDA. A labeler is a firm that 

manufactures the drug, including a 

repacker or relabeler, or a firm that 

distributes the drug under its own trade 

name or label. The second segment, the 

product code, identifies a specific 

strength, dosage form, and formulation 

for a particular firm. The third segment, 

the package code, identifies the trade 

package size and type. Both the product 

and package codes are assigned by the 

firm. The NDC will be in one of the 

following configurations: 4–4–2, 5–3–2, 

or 5–4–1. 

In this proposed rule, we clarify that 

even though FDA currently uses a 

unique 10-digit NDC, for the purposes of 

the MDR program and this subpart we 

will continue to use an NDC format with 

the NDC–9, which includes the labeler 

code and the product code, to identify 

the product information and the NDC– 

11, which includes the labeler code, 

product code, and package code, to 

identify the product’s package 

information. Manufacturers may include 

a leading zero in the product code or the 

package code segments of the NDC in 

order to arrive at the 5–4 NDC–9 or 5– 

4–2 NDC–11 when reporting their 

product to the MDR program. 

13. Noninnovator Multiple Source Drug 

As currently defined in § 447.502, a 

noninnovator multiple source drug 

means: (1) A multiple source drug that 

is not an innovator multiple source drug 

or a single source drug, (2) a multiple 

source drug that is marketed under an 

abbreviated NDA (ANDA) or an 

abbreviated antibiotic drug application, 

and (3) a drug that entered the market 

before 1962 that was not originally 

marketed under an NDA. 

In addition to a noninnovator 

multiple source drug as described, 

currently, there are other drugs on the 

market that have not gone through the 

FDA approval process, including but 

not limited to certain prescription prenatal vitamins. 

Therefore, we propose to amend the 

definition of a noninnovator multiple 

source drug to also include these other 

drugs that have not gone through FDA 

approval process but otherwise meet the 

definition of ‘‘covered outpatient drug’’. 

However, if any of the drug products 

listed in this amended definition of a 

noninnovator multiple source drug 

subsequently receives a new NDA or 

ANDA approval from the FDA, the 

manufacturer must change the reporting 

of the product’s drug category to 

correlate with the new product 

application type and furnish the 

appropriate information. 

We also propose to amend the 

definition of noninnovator multiple 

source drug to clarify that for purposes 

of Medicaid payment and rebate 

calculations, the term shall include 

noninnovator drugs that are not 

therapeutically equivalent. 

14. Oral Solid Dosage Form 

CMS proposes to interpret oral solid 

dosage form in accordance to the FDA 

regulation at 21 CFR 206.3, which 

defines solid oral dosage form to mean 

capsules, tablets, or similar drug 

products intended for oral use. We also 

clarify that although FDA regulations at 

21 CFR 206.3 uses the term ‘‘solid oral 

dosage form,’’ section 1927(c)(2)(C) 

specifically used the term ‘‘oral solid 

dosage form’’ in reference to the 

treatment of new formulations. 

Therefore, CMS will treat the term ‘‘oral 

solid dosage form’’ to mean the same as 

FDA’s ‘‘solid oral dosage form.’’ 

CMS proposes to further interpret an 

oral route of administration as any drug 

that is intended to be taken by mouth. 

In accordance with these provisions, 

CMS is providing manufacturers with 

guidance in order to assist them in 

determining which drugs should be 

considered as oral solid dosage forms 

(please see Table 1). This list will be 

updated based on any changes to the 

FDA’s definition of solid dosage forms. 


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TABLE 1—LIST OF ORAL SOLID DOSAGE FORMS

Bar, Chewable Capsule 

Capsule (Immediate/Complete Release) (Hard Or Soft Gelatin, 

Chewable Or Perle) 

Capsule, Coated 

Capsule, Coated (Hard Or Soft Gelatin) Capsule, Coated Pellets 

Capsule, Coated, Extended Release Capsule, Delayed Action (Hard Or Gelatin, Coated, Enteric Coated) 

Capsule, Delayed Release Pellets Capsule, Enteric Coated Pellets 

Capsule, Extended Release Capsule, Film Coated (Hard Gelatin) 

Capsule, Film Coated, Extended Release Capsule, Gelatin Coated 

Capsule, Hard Gelatin Capsule, Liquid Filled 

Capsule, Repeat Action Capsule, Soft Gelatin 

Capsule, Soft Gelatin Liquid-Filled Capsule, Sustained Action (Hard Or Soft Gelatin, Coated, Film Coated) 

Dispersible Tablet 

Granule, Delayed Release Granule, Enteric Coated 

Gum (Chewing, Medicated) Lollipop 

Lozenge Pellet, Coated, Extended Release 

Tablet Tablet (Immediate/Complete Release) (Coated, Film Coated, Sugar 

Coated, Multilayer, Uncoated, Buccal, Chewable) 

Tablet, Chewable Tablet, Coated 

Tablet, Coated Particles Tablet, Controlled Release 

Tablet, Delayed Action (Coated, Enteric Coated) Tablet, Delayed Release 

Tablet, Delayed Release Particles Tablet, Dispersible 

Tablet, Enteric Coated Particles Tablet, Extended Release 

Tablet, Film Coated Tablet, Film Coated, Extended Release 

Tablet, Multilayer (Coated, Film Coated) Tablet, Multilayer, Extended Release 

Tablet, Orally Disintegrating, Delayed Release Tablet, Orally Disintegrating 

Tablet, Repeat Action (Coated) Tablet, Soluble 

Tablet, Sugar Coated Tablet, Sustained Action (Coated, Film Coated, Multilayer, Uncoated) 

Tablet, Sustained Release, Film Coated Tablet, Uncoated, Lozenge 

Tablet, Uncoated, Lozenge, Lypophilized Tablet, Uncoated, Troche 

Tablet, Sustained Action, Membrane Controlled Pastille 

Troche/Lozenge Wafer 

CMS would not consider the 

following as oral solid dosage forms 

because these dosage forms are intended 

to be made into a liquid or suspension 

prior to oral consumption. 

TABLE 2—LIST OF OTHER DOSAGE

FORMS

Capsule, for Microemulsion Granule, Effervescent, for Solution 

Granule Effervescent Tablet, Effervescent 

Granule, Effervescent, for Solution Tablet, for Solution 

Granule Effervescent, 

for Suspension 

Tablet Effervescent 

for Solution 

Granule, for Oral Suspension Tablet, for Suspension 

15. Over-the-Counter (OTC) Drug 

With the exception of certain tobacco 

cessation drugs for pregnant women, or 

an EPSDT service, section 1927(d)(2) of 

the Act currently allows States to 

exclude from coverage or otherwise 

restrict coverage of OTC drugs. We 

propose to add a definition of OTC 

drugs in order to clarify which products 

would be treated as OTC drugs in the 

Medicaid program. This definition is 

consistent with our current policy and 

would not change how these drugs are 

treated for purposes of coverage under 

the Medicaid program. We propose to 

define OTC drugs as drugs that are 

appropriate for use without the 

supervision of a health care professional 

such as a physician, and which can be 

purchased by a consumer without a 

prescription, although for Medicaid 

coverage a prescription continues to be 

required. OTC drugs may be marketed 

under an approved premarket 

application (NDA or ANDA) or in many 

cases, may be marketed under an OTC 

monograph. In some instances, FDA 

permits these drugs to be marketed 

under a monograph that is not yet final 

(such as where there is an OTC tentative 

final monograph), as stated in 21 CFR 

part 330 and FDA guidance. Unlike 

NDAs which are based on premarket 

approval of specific, finished drug 

products, monographs specify the active 

ingredients, indications, dosages, and 

claims that can be made by the OTC 

drug products. 

16. Pediatric Indications 

The Affordable Care Act established a 

minimum rebate percentage of 17.1 

percent of AMP for single source and 

innovator multiple source drugs 

approved by the FDA exclusively for 

pediatric indications. To implement this 

requirement, we propose to clarify 

which drugs will be subject to this 

minimum rebate percentage. In 

regulations at 21 CFR 201.57 and 21 

CFR 201.80, the FDA defines pediatric 

use for most drug labeling to mean use 

for pediatric populations and pediatric 

patients, that is, ‘‘the pediatric age 

group, from birth to 16 years, including 

age groups often called neo-nates, 

infants, children, and adolescents.’’ 

Accordingly, given the statutory 

amendments, we propose to define ‘‘a 

drug approved by the Food and Drug 

Administration exclusively for pediatric 

indications’’ to mean a drug product 

approved by the FDA exclusively with 

indications for pediatric use, with the 

pediatric age group defined from birth 

to 16 years. Drugs that are not approved 

and labeled exclusively for pediatric 

use, that merely reference use in 

children in any part of the labeling, or 

that receive a supplemental indication 

for pediatric use, will not qualify for the 

minimum rebate of 17.1 percent of AMP 

as specified in section 1927(c)(1)(B)(iii) 

of the Act. In accordance with the 

statute, we propose to apply this 

definition only to drug products whose 

FDA-approved labeling includes only 

indications for children from birth to 16 

years of age. Drugs without this explicit 

age labeling will not satisfy the 

requirement that the drug be approved 

exclusively for pediatric use and will 

not qualify for the minimum rebate of 

17.1 percent of AMP. We are proposing 

to apply such a definition only when 

this specific pediatric age cohort 


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appears in the ‘‘Indication and Usage’’ 

section of the FDA-approved labeling. 

17. Professional Dispensing Fee 

The definition of dispensing fee will 

remain unchanged as it already 

enumerates those costs to dispense a 

drug that the pharmacy incurs. 

However, we propose to replace the 

term ‘‘dispensing fee’’ with 

‘‘professional dispensing fee’’ as drug 

ingredient cost is only one component 

of the two-part formula that States 

generally use to reimburse pharmacies 

for prescribed drugs dispensed to 

Medicaid beneficiaries; and, we feel that 

this change from ‘‘dispensing fee’’ to 

‘‘professional dispensing fee’’ reinforces 

our position that once the 

reimbursement for the drug is properly 

determined, the dispensing fee should 

reflect the pharmacist’s professional 

services and costs associated with 

ensuring that possession of the 

appropriate covered outpatient drug is 

transferred to a Medicaid beneficiary. 

Therefore, as States change their 

payment for ingredient cost, we also 

propose to require States to reconsider 

the dispensing fee methodology 

consistent with the revised 

requirements. 

18. Single Source Drug 

As currently defined in § 447.502, a 

single source drug means a covered 

outpatient drug that is produced or 

distributed under an NDA approved by 

the FDA, including a drug product 

marketed by any cross-licensed 

producers or distributors operating 

under the NDA. It also includes a 

covered outpatient drug approved under 

a BLA, PLA, ELA, or ADA. 

As previously stated in the discussion 

of the proposed changes to the 

definition of innovator multiple source 

drug, for purposes of the MDR program, 

we have defined an original NDA as an 

NDA filed by the manufacturer with the 

FDA for purposes of approval for safety 

and effectiveness. Further, we wish to 

remind a manufacturer that as long as it 

has an approved NDA number issued by 

the FDA, a drug is considered to be a 

single source drug and is required to be 

reported with as an ‘‘S’’ drug category 

to CMS under the MDR program unless 

there are FDA approved therapeutic 

equivalents. To determine if therapeutic 

equivalents are available, you can access 

the FDA’s Drugs@FDA and search by the 

Application Number. If therapeutic 

equivalents are available for the NDA, 

then you will see the link to 

‘‘Therapeutic Equivalents’’ in the 

‘‘Drugs Details’’ page. If there are no 

therapeutic equivalents available for the 

NDA, then the brand name drug should 

be reported as an ‘‘S’’ to CMS. 

19. States 

Currently, for purposes of this 

subpart, the term ‘‘States’’ is defined as 

the 50 States and the District of 

Columbia. However, excluding the 

territories from this definition of States 

prevents them from receiving 

manufacturer rebates through the MDR 

program. We recognize that the 

territories have, over the years, 

expressed an interest in participating in 

the MDR program and that such rebates 

would in part offset the costs of 

providing Medicaid drugs. We have 

decided, in accordance with section 

1101(a)(1) of the Act, to propose 

revising the definition of States to 

include the 50 States, the District of 

Columbia, and the territories (the 

Commonwealth of Puerto Rico, the 

Virgin Islands, Guam, the Northern 

Mariana Islands and American Samoa). 

Therefore, for drug rebates, we believe 

it is in the best interests of the Medicaid 

program to include the territories in the 

definition of States so that they may 

achieve the savings that drug rebates 

provide and we propose that the 

definition of States should be revised 

accordingly. We also acknowledge that 

there may be concerns with the 

territories participating in the MDR 

program; therefore, we request 

comments regarding the inclusion of the 

territories in the definition of States. 

20. United States 

Similar to our review of the term 

‘‘States’’, we also examined our use of 

the term ‘‘United States’’. As with the 

term ‘‘States,’’ we defined United States 

only to mean the 50 States and the 

District of Columbia. However, section 

1101(a)(2) of the Act provides that when 

used in a geographic sense, the term 

‘‘United States’’ means, except where 

otherwise provided, the States. In 

accordance with this definition, we 

think it is reasonable to conclude that in 

this context, the term is used in the 

geographical sense in that it 

contemplates the sales of drugs in any 

of the States. (Please see section II.K. 

Upper limits for multiple source drugs 

(§ 447.514) of the preamble for further 

discussion on the sale of drugs on a 

nationwide basis.) Therefore, for the 

purposes of this subpart, we propose, in 

accordance with section 1101(a) of the 

Act, to define the ‘‘United States’’ to 

mean the 50 States plus the District of 

Columbia and the territories as 

described above. 

21. Wholesaler 

The Affordable Care Act added a 

definition of the term ‘‘wholesaler’’ at 

section 1927(k)(11) of the Act. We 

propose to adopt that definition and 

define wholesaler to mean a drug 

wholesaler that is engaged in wholesale 

distribution of prescription drugs to 

retail community pharmacies, including 

(but not limited to) manufacturers, 

repackers, distributors, own-label 

distributors, private-label distributors, 

jobbers, brokers, warehouses (including 

manufacturer’s and distributor’s 

warehouses, chain drug warehouses, 

and wholesale drug warehouses), 

independent wholesale drug traders, 

and retail community pharmacies that 

conduct wholesale distributions. 

We are not proposing that a 

wholesaler be licensed by the State 

inasmuch as that is not a requirement of 

the Act, in comparison to the definition 

of retail community pharmacy, where 

State licensing is required. In 

considering how to clarify this term, we 

reviewed the definition of ‘‘wholesale 

distributor,’’ that appears in section 

510(g) of the FFDCA, and regulations at 

21 CFR 807.3(s), which provide that the 

term ‘‘wholesale distributor’’ means 

‘‘any person (other than the 

manufacturer or the initial importer) 

who distributes a device from the 

original place of manufacture to the 

person who makes the final delivery or 

sale of the device to the ultimate 

consumer or user.’’ While this definition 

is helpful, it does not provide additional 

clarity to the definition in the Act. 

Therefore, we are proposing to define 

wholesaler as set forth in the Act, but 

are specifically seeking comment on 

further data sources or definitions we 

could apply here that would help to 

further clarify the term wholesaler. 

C. Determination of Average 

Manufacturer Price (§ 447.504) 

1. AMP Historical Background 

The Omnibus Budget Reconciliation 

Act of 1990 (OBRA ’90) (Pub. L. 101– 

508) added section 1927 to the Act, 

which became effective on January 1, 

1991. OBRA ’90 established the MDR 

program and defined the AMP with 

respect to a covered outpatient drug of 

a manufacturer for a rebate period as the 

average unit price paid to the 

manufacturer for the drug in the United 

States by wholesalers for drugs 

distributed to the retail pharmacy class 

of trade. Manufacturers who entered 

into and had in effect a rebate agreement 

with CMS were required to report AMP 

on a quarterly basis. The AMP was used 

to calculate the rebates paid by 

manufacturers to the States for drugs 


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dispensed to their Medicaid 

beneficiaries. 

The Deficit Reduction Act of 2005 

(DRA) made significant changes to the 

Medicaid prescription drug provisions 

of the Act. The DRA amended section 

1927(k)(1) of the Act to revise the 

definition of AMP to exclude customary 

prompt pay discounts to wholesalers, 

effective January 1, 2007. The DRA 

defined AMP, in part, to mean, with 

respect to a covered outpatient drug of 

a manufacturer for a calendar quarter, 

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. 

Section 6001(c)(3) of the DRA 

required the Office of Inspector General 

(OIG) to review the requirements for and 

manner in which AMP was to be 

determined and recommend changes to 

the Secretary by June 1, 2006. Section 

6001(c)(3) of the DRA also required the 

Secretary to clarify the requirements for 

and the manner in which AMPs are 

determined by promulgating a 

regulation no later than July 1, 2007, 

taking into consideration the OIG’s 

recommendation. 

In May 2006, the OIG issued a report, 

‘‘Determining Average Manufacturer 

Prices for Prescription Drugs under the 

Deficit Reduction Act of 2005’’. In this 

report the OIG recommended that CMS: 

• Clarify the requirements in regards 

to the definition of retail pharmacy class 

of trade and treatment of pharmacy 

benefit manager (PBM) rebates and 

Medicaid sales; and 

• Consider addressing issues raised 

by industry groups, such as: 

+ Administrative and service fees, 

+ Lagged price concessions for 

returned goods, 

+ The frequency of AMP reporting, 

+ AMP restatements, and 

+ Base date AMP. 

The OIG also recommended that the 

Secretary direct CMS to: 

• Issue guidance in the near future 

that specifically addresses the 

implementation of the AMP-related 

reimbursement provisions of the DRA; 

and 

• Encourage States to analyze the 

relationship between AMP and 

pharmacy acquisition cost to ensure that 

the Medicaid Program appropriately 

reimburses pharmacies for estimated 

acquisition costs. 

At that time, we recognized that there 

had been concerns expressed by the OIG 

and GAO in several prior reports 

regarding AMP because of 

inconsistencies in the way 

manufacturers determine AMP, changes 

in the marketplace, and the introduction 

of newer business practices such as 

payment of services fees. We also 

realized that, in light of the DRA 

amendments, AMP would serve two 

distinct purposes: determining rebates, 

and serving as the basis for establishing 

the FUL for multiple source drugs. As 

a result of a preliminary injunction that 

had been entered in a lawsuit 

challenging the definition of AMP, CMS 

had never used the AMP final rule as a 

basis for calculating FULs. 

Following the enactment of the 

Affordable Care Act, in the November 

15, 2010 Federal Register (75 FR 

69591), ‘‘Withdrawal of Determination 

of Average Manufacturer Price, Multiple 

Source Drug Definition, and Upper 

Limits for Multiple Source Drugs’’, we 

withdrew § 447.504 ‘‘Determination of 

AMP’’ from the AMP final rule 

following a period of notice and 

comment on the proposed withdrawal. 

2. AMP Under the Affordable Care Act 

On March 23, 2010, the Affordable 

Care Act was enacted. As noted above, 

section 2503 of the Affordable Care Act 

revised the definition of AMP. The 

Affordable Care Act was further 

amended by section 202 of the 

Education Jobs and Medicaid Funding 

Act (Pub. L. 111–226), which was 

enacted on August 10, 2010. 

For the determination of AMP, the 

Affordable Care Act revises the 

definition in section 1927(k) of the Act 

to eliminate the term ‘‘retail pharmacy 

class of trade’’ and adds a definition of 

the term ‘‘retail community pharmacy’’, 

as well as wholesaler. It identifies 

specific entities drug manufacturers are 

to include and exclude from the 

determination of AMP and (as amended 

by Pub. L. 111–226) clarifies exceptions 

to the excluded entities for inhalation, 

infusion, instilled, implanted, or 

injectable drugs that are not generally 

dispensed through a retail community 

pharmacy. 

In this proposed rule, we propose a 

new § 447.504 ‘‘Determination of AMP,’’ 

which would be based on section 

1927(k)(1) of the Act as amended by the 

Affordable Care Act. Below we provide 

a detailed discussion of the proposed 

definition of retail community 

pharmacy, other terms used in the 

determination of AMP, the entities 

proposed for inclusion and exclusion 

from AMP, and our proposed policy 

regarding the treatment of inhalation, 

infusion, instilled, implanted, or 

injectable drugs (also referred to as 5i 

drugs, defined in proposed § 447.507), 

that are not generally dispensed through 

a retail community pharmacy in the 

determination of AMP. 

These provisions of the Affordable 

Care Act became effective on October 1, 

2010 without regard to whether final 

regulations to carry out the provisions 

have been promulgated. Section 

2503(a)(2) of the Affordable Care Act 

revised the definition of AMP to mean, 

for a covered outpatient drug of a 

manufacturer for a rebate period, the 

average price paid to the manufacturer 

for the drug in the United States by 

wholesalers for drugs distributed to 

retail community pharmacies, and by 

retail community pharmacies that 

purchase drugs directly from the 

manufacturer. 

In accordance with section 

1927(k)(1)(B)(i) of the Act, as amended 

by section 2503(a)(2)(B) of the 

Affordable Care Act, drug manufacturers 

are to exclude the following from the 

determination of the AMP: 

• Customary prompt pay discounts 

extended to wholesalers; 

• Bona fide service fees paid by 

manufacturers to wholesalers or retail 

community pharmacies, including (but 

not limited to) distribution service fees, 

inventory management fees, product 

stocking allowances, and fees associated 

with administrative services agreements 

and patient care programs (such as 

medication compliance programs and 

patient education programs); 

• Reimbursement by manufacturers 

for recalled, damaged, expired, or 

otherwise unsalable returned goods, 

including (but not limited to) 

reimbursement for the cost of goods and 

any reimbursement of costs associated 

with return goods handling and 

processing, reverse logistics, and drug 

destruction; 

• Payments received from, and 

rebates or discounts provided to, PBMs, 

managed care organizations, health 

maintenance organizations, insurers, 

hospitals, clinics, mail order 

pharmacies, long term care providers, 

manufacturers, or any other entity that 

does not conduct business as a 

wholesaler or retail community 

pharmacy, unless the drug is an 

inhalation, infusion, instilled, 

implanted, or injectable drug that is not 

generally dispensed through a retail 

community pharmacy. 

• Discounts provided by 

manufacturers under the Medicare 

Coverage Gap Discount Program (section 

1860D–14A of the Act). 

Section 1927(k)(1)(B)(ii) of the Act 

specifies that, notwithstanding section 

1927(k)(1)(B)(i) of the Act, 

manufacturers are to include in the 

determination of AMP for a covered 

outpatient drug any other discounts, 

rebates, payments, or other financial 

transactions that are received by, paid 


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by, or passed through to retail 

community pharmacies. 

How AMP is defined and what sales 

are included in the determination of 

AMP affects manufacturers, pharmacy 

groups, the Federal and State 

governments and Medicaid 

beneficiaries, and often there are 

competing interests at play. The 

provisions of the Affordable Care Act 

regarding AMP serve two distinct 

purposes: Determining rebates and 

determining the basis for the FUL for 

multiple source drugs. 

There is a direct relationship between 

which entities are to be included and 

excluded from AMP calculations and 

the basis for determining the FUL for 

multiple source drugs. The Affordable 

Care Act defines AMP to include prices 

paid to manufacturers by wholesalers 

for drugs distributed to retail 

community pharmacies and by retail 

community pharmacies that purchase 

drugs directly from the manufacturer. 

These sales are typically at higher prices 

than those of the specifically excluded 

entities such as the pharmacy benefit 

managers, managed care organizations, 

health maintenance organizations, 

insurers, hospitals, clinics, mail order 

pharmacies, long term care providers, 

and manufacturers. AMP calculations 

based on those sales to retail community 

pharmacies, as opposed to other 

pharmacies (such as mail order 

pharmacies), would likely result in a 

higher AMP value, given that AMP 

would be limited to higher priced sales. 

This higher AMP value would benefit 

the retail pharmacy industry because it 

is likely that the FUL, based on those 

AMPs, would be higher and in turn the 

maximum pharmacy reimbursement, 

based on those FULs, would be higher. 

On the other hand, a higher AMP 

would, in all likelihood, result in higher 

rebate payments from manufacturers. A 

broader definition of AMP, which 

would include sales to entities that 

purchase drugs at lower prices, would 

likely lower the AMP value, which in 

turn would lower drug manufacturer 

rebate liabilities. 

AMP values also have an impact on 

States and potentially beneficiaries. 

Increasing AMP values and associated 

rebate payments would have a direct 

impact on State expenditures. However, 

increasing the FULs would also have a 

direct impact on State payments. On the 

other hand, if pharmacy reimbursement 

rates are too low, then it is conceivable 

that some pharmacies may elect not to 

participate in the Medicaid program, 

which could impact beneficiary access 

to pharmacy services. Similarly, States 

and the Federal government have an 

interest in assuring an appropriate level 

of rebates and beneficiaries’ access to 

care. 

3. Definitions 

Following is a detailed discussion of 

the specific terms associated with AMP 

calculations that we propose to define at 

§ 447.504(a). 

a. Average Unit Price 

We propose to define average unit 

price to mean a manufacturer’s quarterly 

sales included in AMP less all required 

adjustments divided by the total units 

sold and included in AMP by the 

manufacturer in a quarter. The quarterly 

sales figure used in this definition 

represent sales of the drug unit in the 

lowest identifiable amount (for example, 

tablet or capsule for solid dosage forms, 

milliliter for liquid forms, gram for 

ointments or creams) as reported by the 

manufacturer. 

b. Charitable and Not-for-Profit 

Pharmacies 

For the purposes of this subpart, we 

propose to define charitable and not-forprofit pharmacies as organizations 

described in section 501(c)(3) of the 

Internal Revenue Code of 1986. 

c. Insurers 

The DRA amended section 

1902(a)(25) of the Act by modifying the 

definition of ‘‘third parties’’ and ‘‘health 

insurers’’ to clarify the inclusion of selfinsured plans, managed care 

organizations, PBMs, or other parties 

that are by statute, contract, or 

agreement, legally responsible for 

payment of a claim for a health care 

item or service. Although, the DRA 

clarified ‘‘third parties’’, the Affordable 

Care Act referenced the term ‘‘insurer’’ 

in section 1927(k)(1)(B)(IV) of the Act 

and provided that payments received 

from many of these third party 

organizations (for example, pharmacy 

benefit managers, managed care 

organizations, health maintenance 

organizations, insurers) be excluded 

from the AMP calculation. 

For the purposes of this subpart, we 

propose to define insurers as entities 

that are responsible for the payment of 

drugs but do not directly purchase drugs 

from manufacturers and are not in the 

supply chain to receive delivery of these 

drugs. Instead, insurers are responsible 

for payment to pharmacies for drugs 

dispensed to their members, and do not 

take actual possession of these drugs. 

d. Net Sales 

We propose to define net sales to 

mean quarterly gross sales revenue to 

wholesalers for drugs distributed to 

retail community pharmacies and retail 

community pharmacies that purchase 

drugs directly from manufacturers less 

cash discounts allowed, and other price 

reductions (other than rebates under 

section 1927 of the Act or price 

reductions specifically excluded by 

section 1927 of the Act, or regulations 

under this subpart) which reduce the 

amount received by the manufacturer. 

e. Retail Community Pharmacy 

The Affordable Care Act eliminated 

the term ‘‘retail pharmacy class of 

trade’’ from the definition of AMP, and 

added section 1927(k)(10) of the Act to 

include a definition of the term ‘‘retail 

community pharmacy.’’ This change 

significantly narrows the entities 

previously included in the definition of 

retail pharmacy class of trade. In 

accordance with the Act, we propose to 

define retail community pharmacy to 

mean an independent pharmacy, a 

chain pharmacy, a supermarket 

pharmacy, or a mass merchandiser 

pharmacy that is licensed as a pharmacy 

by the State and that dispenses 

medications to the general public at 

retail prices. We further propose to 

incorporate the requirement set forth in 

section 1927(k)(10) of the Act that such 

term does not include a pharmacy that 

dispenses prescription medications to 

patients primarily through the mail, 

nursing home pharmacies, long-term 

care facility pharmacies, hospital 

pharmacies, clinics, charitable or notfor-profit pharmacies, government 

pharmacies, or pharmacy benefit 

managers. 

Section 1927(k)(1) of the Act as 

amended by the Affordable Care Act 

specifies that manufacturers are 

responsible for reporting the AMP based 

upon their sales to retail community 

pharmacies or wholesalers for drugs 

dispensed to retail community 

pharmacies. 

In addition, the statutory provision for 

the determination of AMP suggests there 

are entities (for example, specialty 

pharmacies, home infusion pharmacies, 

and home health care providers), which 

are conducting business as wholesalers 

or retail community pharmacies which 

could be included in the determination 

of AMP. Section 1927(k)(1)(B)(i)(IV) of 

the Act excludes from the determination 

of AMP ‘‘payments received from and 

rebates or discounts provided to * * * 

any other entity that does not conduct 

business as a wholesaler or a retail 

community pharmacy * * *’’. We 

believe that to give the provision some 

meaning, the statute contemplates the 

inclusion of payments and discounts 

from those entities that actually conduct 

business as a wholesaler or retail 

community pharmacy. This 


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interpretation gives meaning to this 

broad exclusion, and provides for a 

calculation of AMP consistent with our 

reading of the statute. If an entity that 

does not conduct business as a 

wholesaler or retail community 

pharmacy is to be excluded from the 

determination of AMP, we considered 

whether or not it would be reasonable 

to conclude that payments received 

from and rebates or discounts provided 

to an entity that conducts business as a 

wholesaler or retail community 

pharmacy should be included in the 

determination of AMP. Based upon our 

understanding of the program, certain 

covered outpatient drugs may only be 

dispensed through such entities that are 

conducting business as wholesalers or 

retail community pharmacies, such as 

certain oral covered outpatient drugs 

approved by the FDA requiring a Risk 

Evaluation and Mitigation Strategy 

(REMS), to ensure that the benefits of a 

drug or biological product outweigh its 

risks. A list of REMS drugs is publically 

accessible on the FDA Web site at 

http://www.fda.gov/Drugs/DrugSafety/

PostmarketDrugSafetyInformationfor

PatientsandProviders/ucm111350.htm. 

Some REMS drugs are required to be 

dispensed by specially certified 

pharmacies, resulting in certain 

manufacturers utilizing a restricted 

network of certified specialty and home 

infusion pharmacies, which are not 

specifically included in the definition of 

retail community pharmacy at section 

1927(k)(10) of the Act. In addition, 

certain oral covered outpatient drugs are 

dispensed solely through these specialty 

and home infusion pharmacies. 

Therefore, if these entities were to be 

excluded from AMP calculations, an 

AMP would not be available for these 

oral covered outpatient drugs. As a 

result, manufacturers would not be able 

to calculate rebates for these products 

and the statutory provisions requiring 

rebates for such drugs would, in 

essence, be rendered meaningless. We 

do not believe that the law should be 

read to create such a result. Section 

1927(b)(1) of the Act requires that 

manufacturers must provide rebates for 

all of their covered outpatient drugs for 

which payment was made under the 

State plan. These provisions were not 

amended by the Affordable Care Act. 

Therefore, we believe in light of the 

provisions of section 1927(k)(1)(B)(i) of 

the Act, there is a basis for allowing 

sales, rebates, and discounts provided to 

entities conducting business as 

wholesalers or retail community 

pharmacies to be included in the 

determination of AMP for those drugs 

for which an AMP could not otherwise 

be calculated. Such an interpretation 

continues to give meaning to the rebate 

responsibilities of manufacturers in 

section 1927(b) of the Act. Therefore, we 

propose to include in the determination 

of AMP payments received from and 

rebates or discounts provided to an 

entity that conducts business as a 

wholesaler or retail community 

pharmacy, such as specialty and home 

infusion pharmacies, and home 

healthcare providers, since these 

entities dispense medications to 

segments of the general public at retail 

prices. We specifically invite comments 

on this part of the proposed rule. 

Manufacturers contend that there is 

an administrative burden and difficulty 

in obtaining records assuring that their 

sales to wholesalers are distributed to 

retail community pharmacies. We took 

their concerns into consideration and 

considered whether or not to propose 

that the sales which cannot be definitely 

identified as sales to retail community 

pharmacies or wholesalers for drugs 

dispensed to retail community 

pharmacies would be eligible for 

inclusion in the sales that 

manufacturers use for AMP 

calculations. We received comments 

during the comment period for the 

Proposed Rule ‘‘Withdrawal of 

Determination of Average Manufacturer 

Price, Multiple Source Drug Definition, 

and Upper Limits for Multiple Source 

Drugs’’ published in the Federal 

Register on September 3, 2010 (75 FR 

54073) that raised issues regarding the 

implementation of the new definition of 

AMP. As these comments were outside 

the scope of that proposed rule, these 

comments were not specifically 

addressed as part of final rule published 

on November 15, 2010 (75 FR 69591). 

However, these comments do provide 

insight into issues of concern for the 

various stakeholders, especially in 

regards to the implementation of the 

new proposed definition of AMP. 

One of the issues raised was whether 

manufacturers should be allowed to 

presume that sales of drugs are 

distributed to retail community 

pharmacies when those sales of drugs 

are to wholesalers that do not further 

differentiate their sales among end 

purchasers. 

Based on information provided from 

these comments it is our understanding 

that wholesalers generally resell either 

to manufacturer-contracted customers 

(which would generate a chargeback or 

similar record), or to other purchasers 

with no contract discount arrangement 

with the manufacturer. In the case of 

sales to wholesalers where no 

chargeback record is generated, 

manufacturers contend that they have 

minimal to no verifiable information 

regarding the final transactions on this 

category of wholesaler re-sales. 

Manufacturers have expressed concern 

that they would not have adequate data 

regarding the wholesaler’s actual 

purchaser to accurately determine if the 

drug was ultimately sold to retail 

community pharmacies. Therefore, we 

considered proposing a so-called 

‘‘presumed inclusion’’ policy, where the 

manufacturer could (absent 

documentation to the contrary) presume 

that sales to wholesalers are for drugs 

distributed to retail community 

pharmacies, without data concerning 

that actual distribution. Based upon the 

comments we received from 

manufacturers we believe such a policy 

would be consistent with the market 

based on the typical chargeback 

arrangements that manufacturers have 

in place for institutional and other nonretail community pharmacy purchasers. 

The presumed inclusion policy would 

not require manufacturers to obtain data 

regarding the actual distribution to retail 

community pharmacies. Through the 

presumed inclusion policy, in the 

absence of chargeback or other verifiable 

data, manufacturers would be able to 

presume that the sales of drugs to 

wholesalers are for drugs that are 

distributed to retail community 

pharmacies. 

However, we recognize that there 

could be concerns with respect to 

whether manufacturers should be 

permitted to presume, in the absence of 

adequate documentation to the contrary, 

that prices paid by wholesalers are for 

drugs that are actually distributed to 

retail community pharmacies. Allowing 

this practice of presumptive inclusion 

could affect the calculation of the FULs 

for multiple source drugs because it 

arguably would permit the inclusion of 

lower AMPs in that calculation based on 

sales that may not have been actually 

distributed to retail community 

pharmacies. It could be argued that if 

manufacturers are allowed to presume 

that all drug sales are distributed to 

retail community pharmacies, AMP 

would be lower because it could include 

sales to entities (for example, mail order 

pharmacies and hospitals) that are able 

to buy the drugs at lower prices than 

retail community pharmacies. On the 

other hand, it could also be argued that, 

despite these concerns, there would be 

no adverse consequences to the FULs if 

manufacturers could presume sales 

distribution to retail community 

pharmacies because the sales that would 

be captured using the presumptive 

inclusion policy are those sales that do 

not generate chargebacks. In comments 


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we received during the comment period 

for the Proposed Rule, ‘‘Withdrawal of 

Determination of Average Manufacturer 

Price, Multiple Source Drug Definition, 

and Upper Limits for Multiple Source 

Drugs’’ published in the Federal 

Register on September 3, 2010 (75 FR 

54073), manufacturers claim that 

allowing the presumed inclusion policy 

would not create any adverse 

consequences concerning pharmacy 

payments. They believe that these sales 

would, in all likelihood, have a higher 

net price than institutional or 

chargeback-generating sales. 

Additionally, they contend that the 

volume of AMP-eligible sales used in 

calculating the FUL could be increased 

because the additional sales to 

wholesalers without chargeback data 

would be added to the volume 

calculation for determining the 

weighted average of monthly AMPs. 

Therefore, they argue that calculating 

AMPs utilizing the presumptive 

inclusion policy could result in higher 

AMPs than AMPs based on actual data 

and those higher AMPs would be 

weighted more heavily in the FULs 

calculation. 

We also considered instances where 

manufacturers are only including in 

their calculation of AMP those sales 

where there is adequate verifiable 

documentation showing that the drug 

was actually distributed to a retail 

community pharmacy, whether directly 

or through a wholesaler. However, we 

recognize that in this approach there 

may be instances where the wholesaler 

actually re-sells the drug to the retail 

community pharmacies but the 

manufacturer does not have 

documentation regarding that actual 

sale to the retail community pharmacy. 

Therefore, in contravention of the 

statute, those sales would not be 

included in the AMP calculation since 

the manufacturer does not have 

adequate documentation. 

While we recognize such concerns, 

we have decided to propose that 

manufacturers report the AMP based 

upon their actual sales to retail 

community pharmacies or wholesalers 

for drugs distributed to retail 

community pharmacies. Although we 

are not proposing a presumed inclusion 

policy, we did consider both approaches 

and recognize that there are obstacles 

with each. We acknowledge that a 

reasonable alternate approach would be 

one of presumed inclusion because the 

statute provides a more structured 

definition of what is to be included and 

excluded from AMP. However, we have 

concerns that a presumed inclusion 

policy would lead to the inclusion of 

sales by a manufacturer to entities not 

contemplated in the statutory definition. 

Accordingly, for purposes of this 

proposed rule, we are proposing that 

manufacturers must calculate AMP 

based on sales: (1) To wholesalers for 

drugs distributed to retail community 

pharmacies, or (2) to retail community 

pharmacies. We seek comments 

regarding this section and request 

information concerning distribution 

data, specifically data concerning 

wholesaler sales to the retail community 

pharmacies so that we can further 

consider this policy decision. 

4. Sales Included in the Determination 

of AMP 

Following is a discussion of specific 

sales, discounts, rebates, payments, 

nominal price sales, and other financial 

transactions that we propose to include 

in the determination of AMP at 

§ 447.504(b). 

a. Sales to Wholesalers (§ 447.504(b)(1)) 

The definition of AMP in section 

1927(k)(1) of the Act, as amended by the 

Affordable Care Act, specifies that AMP 

is to be calculated, in part, based on the 

prices paid by wholesalers for drugs 

dispensed through retail community 

pharmacies. Therefore, we propose that 

sales to wholesalers for drugs 

distributed to retail community 

pharmacies are to be included in the 

determination of AMP. 

b. Sales to Other Manufacturers 

(§ 447.504(b)(2)) 

We propose that sales to other 

manufacturers who act as wholesalers 

are to be included in the determination 

of AMP to the extent that such sales are 

for drugs distributed to retail 

community pharmacies. This provision 

should be read in concert with the 

definition of wholesaler found in 

section 1927(k)(11) of the Act. 

c. Retail Community Pharmacies 

(§ 447.504(b)(3)) 

Section 1927(k)(1)(B)(ii) of the Act, as 

revised by the Affordable Care Act 

specifies that manufacturers are to 

include in the determination of AMP, 

discounts, rebates, payments or other 

financial transactions that are received 

by, paid by, or passed through to, retail 

community pharmacies, as defined 

earlier in this section. Therefore, we 

propose to include in the determination 

of AMP, notwithstanding those price 

reductions specifically excluded by 

statute or this regulation, discounts, 

rebates, payments, or other financial 

transactions that are received by, paid 

by, or passed through to, retail 

community pharmacies. Again, we are 

unsure to what extent the manufacturer 

knows that such transactions occur. 

However, in accordance with our 

reading of the statute, the manufacturer 

must include such discounts where it 

has evidence or documentation 

demonstrating that such discounts have 

been passed through to the pharmacy. 

d. Entities Conducting Business as 

Retail Community Pharmacies or 

Wholesalers, Including But Not Limited 

to Specialty Pharmacies, Home Infusion 

Pharmacies and Home Healthcare 

Providers (§ 447.504(b)(4)) 

As discussed earlier, we believe in 

light of the provisions of section 

1927(k)(1)(B)(i) of the Act, there is a 

basis for allowing sales, rebates, and 

discounts provided to entities 

conducting business as wholesalers or 

retail community pharmacies to be 

included in the determination of AMP 

for those drugs for which an AMP could 

not otherwise be calculated. It is our 

understanding that certain covered 

outpatient drugs are dispensed 

primarily, if not solely, through such 

entities as specialty pharmacies, home 

infusion pharmacies, or home 

healthcare providers. We propose that 

these pharmacies be considered entities 

that are conducting business as 

wholesalers or retail community 

pharmacies. While not specifically 

identified in the statutory definition of 

retail community pharmacy, these 

pharmacies do conduct business as a 

retail community pharmacy inasmuch 

as they dispense medications to the 

general public at retail prices and are 

licensed by the State as a pharmacy. 

While they may be serving a specific 

part of the general public based on a 

certain medical condition, the drugs 

dispensed by these pharmacies are sold 

in the retail marketplace and are 

available to any member of the general 

public who has one of these medical 

conditions. Therefore, we propose that 

manufacturers are to include in the 

determination of AMP the sales of 

covered outpatient drugs that are 

dispensed through entities conducting 

business as wholesalers or retail 

community pharmacies, which include 

but are not limited to specialty 

pharmacies, home infusion pharmacies, 

and home healthcare providers. 

5. Sales Excluded From the 

Determination of AMP 

Following is a discussion of specific 

sales, discounts, rebates, payments and 

other payments that we propose to 

exclude from the determination of AMP 

at § 447.504(c). 


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a. Prices to Other Federal Programs 

Including TRICARE—(§ 447.504(c)(1)– 

§ 447.504(c)(3)) 

Manufacturers that participate in the 

MDR program can also participate in 

other Federal programs which set the 

prices and/or discounts for drugs, and 

these prices are not generally available 

to retail community pharmacies. We 

propose that in light of section 1927(k) 

of the Act, prices to Federal programs 

should be excluded from AMP. These 

Federal programs include the Indian 

Health Service (IHS), the DVA, a State 

home receiving funds under section 

1741 of title 38, United States Code, the 

Department of Defense (DoD), the Public 

Health Service (PHS), a covered entity 

described in section 1927(a)(5)(B) of the 

Act (including inpatient prices charged 

to hospitals described in section 340B 

(a)(4)(L) of the PHSA), the Federal 

Supply Schedule (FSS) of the General 

Services Administration (GSA); or any 

depot prices (including TRICARE) and 

single award contract prices, of any 

agency of the Federal government. 

On March 17, 2009, the Department of 

Defense (DoD) issued a regulation 

entitled, Civilian Health and Medical 

Program of the Uniformed Services 

(CHAMPUS)/TRICARE: Inclusion of 

TRICARE Retail Pharmacy Program in 

Federal Procurement of Pharmaceuticals 

(74 FR 11279). That regulation 

implements section 703 of the National 

Defense Authorization Act for fiscal 

year 2008 (NDAA, Pub. L. 110–181) 

which states that for any prescription 

filled on or after the date of enactment 

of the NDAA, the TRICARE Retail 

Pharmacy Program will be treated as an 

element of the DoD for purposes of 

procurement of drugs by Federal 

agencies under section 8126 of title 38, 

United States Code (U.S.C.). In 

accordance with that provision as well 

as the revised definition of AMP in 

section 1927(k)(1) of the Act, we 

propose that TRICARE Retail Pharmacy 

Program prices should be treated as 

prices to DoD and therefore excluded 

from the calculation of AMP. 

b. Sales Outside the 50 States, the 

District of Columbia and Territories 

(§ 447.504(c)(4)) 

The proposed definition of ‘‘United 

States’’ in § 447.502 would define 

‘‘United States’’ to mean the 50 States, 

the District of Columbia and the 

territories. We, therefore, propose that 

sales to entities outside the 50 States, 

the District of Columbia and the 

territories are not within the scope of 

the definition of sales to retail 

community pharmacy, and that drugs 

sold to these entities would not be 

considered eligible sales within the 

definition of AMP. Therefore, we 

propose that sales to entities not within 

the 50 States, the District of Columbia 

or the territories be excluded from the 

manufacturers’ determination of AMP. 

c. Hospitals and Hospital Pharmacy 

Sales (§ 447.504(c)(5)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act, specifies 

that sales to hospitals are excluded from 

the determination of AMP. Further, the 

term ‘‘retail community pharmacy’’ 

excludes hospital pharmacies. 

Therefore, we propose to clarify that 

sales to hospitals, including direct and 

indirect sales where the drug is used in 

either the inpatient setting or the 

outpatient pharmacy for outpatient 

hospital use are excluded from the 

determination of AMP. 

d. Sales to Health Maintenance 

Organizations (HMOs) (Including 

Managed Care Organizations (MCOs)) 

(§ 447.504(c)(6)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act, specifies 

that sales to HMOs and MCOs are 

excluded from the determination of 

AMP. The Affordable Care Act does not 

specifically address HMO/MCO 

operated pharmacies. However, given 

the broad reference in the statute to 

HMOs and MCOs, we propose to clarify 

that sales and associated rebates and 

discounts to HMO/MCO operated 

pharmacies are excluded from the 

determination of AMP. 

e. Long-Term Care Facility Pharmacies 

(§ 447.504(c)(7)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act, specifies 

that sales and associated rebates and 

discounts to long-term care providers 

are excluded from the determination of 

AMP. Further, the term retail 

community pharmacy excludes nursing 

home pharmacies and long-term care 

facility pharmacies. Therefore, we 

propose to clarify that sales and 

associated rebates and discounts to 

long-term care providers, including 

nursing facility pharmacies, nursing 

home pharmacies, long-term care 

facilities, long-term care facilities 

pharmacies, contract pharmacies for the 

nursing facility where these sales can be 

identified, and other entities where the 

drugs are dispensed through a nursing 

facility pharmacy, such as assisted 

living facilities, be excluded from the 

determination of AMP. 

f. Mail Order Pharmacies 

(§ 447.504(c)(8)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act, specifies 

that the term retail community 

pharmacy excludes pharmacies that 

dispense prescription medications to 

patients primarily through the mail. We 

consider these to be mail order 

pharmacies and as such we propose to 

clarify that sales to mail order 

pharmacies are excluded from the 

determination of AMP. 

g. Clinics and Other Outpatient 

Facilities (§ 447.504(c)(9)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act, specifies 

that sales to clinics are excluded from 

the determination of AMP. In 42 CFR 

440.90, clinic services is defined as 

preventative, diagnostic, therapeutic, 

rehabilitative, or palliative services that 

are furnished by a facility that is not 

part of a hospital but is organized and 

operated to provide medical care to 

outpatients. The term includes the 

following services furnished to 

outpatients: (a) Services furnished at the 

clinic by or under the direction of a 

physician or dentist, and (b) Services 

furnished outside the clinic by clinic 

personnel under the direction of a 

physician to an eligible individual who 

does not reside in a permanent dwelling 

or does not have a fixed home or 

mailing address. 

Although the Affordable Care Act did 

not specifically address the treatment of 

outpatient facilities in the determination 

of AMP, we believe that in accordance 

with the definition of AMP in section 

1927(k)(1) of the Act, as well as the 

definition of clinic in 42 CFR 440.90, 

sales to outpatient facilities such as 

surgical centers, ambulatory care 

centers, dialysis centers, End-Stage 

Renal Disease clinics, outpatient 

hospital clinics and mental health 

centers should be excluded from the 

AMP. Therefore, we propose to exclude 

sales and associated rebates and 

discounts to clinics and outpatient 

facilities from the determination of 

AMP. 

h. Government Pharmacies 

(§ 447.504(c)(10)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act, specifies 

that the definition of retail community 

pharmacy does not include government 

pharmacies. We propose to define 

government pharmacies as pharmacies 

operated or owned by Federal, state, 

county, and municipal governments. We 

also propose that sales to government 


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5332 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

pharmacies are excluded from the 

determination of AMP. 

i. Sales to Charitable and Not-for-Profit 

Pharmacies (§ 447.504(c)(11)– 

§ 447.504(c)(12)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act specifies that 

the definition of retail community 

pharmacy does not include charitable or 

not-for-profit pharmacies. We propose 

to define charitable or not-for-profit 

pharmacies as section 501(c) 

organizations. Section 501(c) 

organizations are those described in the 

Internal Revenue Code and are taxexempt, nonprofit corporations or 

associations. We propose that sales to 

these not-for-profit and charitable 

pharmacies be excluded from the 

determination of AMP. 

j. Insurers § 447.504(c)(13)) 

The Affordable Care Act defined AMP 

by specifying that payments received 

from, and rebates or discounts provided 

to insurers are to be excluded from the 

determination of AMP. Therefore, we 

propose to exclude from the 

determination of AMP payments 

received from, and any rebates, 

discounts, or payments that are 

provided directly to insurers and that 

are not passed on to retail community 

pharmacies. 

However, we note that drugs sold to 

wholesalers for distribution to retail 

community pharmacies or drugs sold 

directly to retail community pharmacies 

that are subsequently reimbursed by 

insurers when sold by the pharmacy to 

beneficiaries are part of the chain of 

sales from manufacturers to wholesalers 

or retail community pharmacies. In 

accordance with our reading of the 

statute, the sales to wholesalers for 

drugs distributed to retail community 

pharmacies and retail community 

pharmacies would be included in AMP 

calculations, regardless of how the drug 

is ultimately reimbursed when provided 

to the beneficiary. 

k. Administrative Fees, Including Bona 

Fide Service Fees, as Well as the 

Treatment of Group Purchasing 

Organizations (GPOs) (§ 447.504(c)(14)) 

As described earlier, we propose to 

revise the definition of bona fide service 

fees in § 447.502 to include fees 

provided as specific examples of bona 

fide service fees in the Affordable Care 

Act. The Affordable Care Act specifies 

that bona fide service fees paid by 

manufacturers to wholesalers or retail 

community pharmacies include, but are 

not limited to, distribution service fees, 

inventory management fees, product 

stocking allowances, and fees associated 

with administrative service agreements 

and patient care programs (such as 

medication compliance programs and 

patient education programs). 

The current regulations define bona 

fide service fees, in part, to mean fees 

paid by a manufacturer to an entity that 

represent fair market value for a bona 

fide, itemized service. We continue to 

be concerned that these fees could be 

used as a vehicle to provide discounts, 

as opposed to fees at ‘‘fair market value’’ 

for bona fide services. Thus, to avoid 

potential fraud concerns, we are 

retaining our definition, but we have 

chosen not to define ‘‘fair market value’’ 

at this time. Due to the rapidly changing 

market in which new types of 

arrangements arise, we believe that 

manufacturers should appropriately 

determine fair market value and make 

reasonable assumptions consistent with 

adequate documentation that will 

support their payment for these services 

at fair market rates sufficient that an 

outside party can determine the basis 

for the fair market value determination. 

This is consistent with the 2007 AMP 

Final Rule (72 FR 39184) and the ASP 

reporting rule (71 FR 69667). 

In accordance with the statute, we 

propose that bona fide service fees 

should be excluded from the calculation 

of AMP. We further propose that, in 

light of the statutory definition, 

administrative fees and other fees which 

are not specifically excluded by the 

Affordable Care Act, but which meet the 

definition of bona fide service fees, 

should also be excluded from the 

determination of AMP. We are not 

proposing to further define the type of 

fees used as examples in the definition 

of bona fide service fees because we 

believe that these terms can be read in 

concert with the current definition of 

bona fide service fee. As noted 

previously, they provide specific 

examples of what could qualify as a 

bona fide service fee. We note however 

that retroactive price adjustments, 

sometimes also known as price 

appreciation credits, do not meet the 

definition of a bona fide service fee as 

they do not reflect any service or offset 

of a bona fide service performed on 

behalf of the manufacturer. 

The statute does not specifically 

exclude GPO fees from the AMP 

calculation. To the extent that bona fide 

service fees, including, but not limited 

to distribution service fees, inventory 

management fees, product stocking 

allowances, and fees associated with 

administrative service agreements and 

patient care programs (such as 

medication compliance programs and 

patient education programs) and other 

fees to GPOs meet the definition of 

‘‘bona fide service fee,’’ we propose that 

such fees should be excluded from the 

determination of AMP and are not 

considered price concessions. However, 

as consistent with the definition of bona 

fide service fee at § 447.502 where these 

fees are passed on in whole or in part 

to a wholesaler or retail community 

pharmacy, the fees would not qualify as 

bona fide service fees. To the extent this 

occurs, such fees cannot be considered 

bona fide service fees and, in 

accordance with section 

1927(k)(1)(B)(ii) of the Act, should be 

included in AMP. 

l. Customary Prompt Pay Discounts 

(§ 447.504(c)(15)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act, specifies 

that customary prompt pay discounts 

that are extended to wholesalers are to 

be excluded from the determination of 

AMP. Therefore, we are proposing that 

customary prompt pay discounts 

extended to wholesalers be excluded 

from the determination of AMP. 

m. Returned Goods (§ 447.504(c)(16)) 

Section 1927(k) of the Act, as revised 

by the Affordable Care Act, specifies 

that reimbursement by manufacturers 

for recalled, damaged, expired, or 

otherwise unsalable returned goods, 

including (but not limited to) 

reimbursement for the cost of goods, 

and any reimbursement of costs 

associated with return goods handling 

and processing, reverse logistics, and 

drug destruction are excluded from the 

determination of AMP. We propose to 

incorporate this definition into this rule, 

but note that it is applicable only to the 

extent that payment for these returned 

goods covers the cost of returns and 

does not otherwise serve as payment to 

the pharmacy as a price concession. In 

addition, we propose to exclude the 

value of returned goods themselves from 

the determination of AMP when 

returned in good faith. 

We are not proposing to define the 

terms recalled, damaged, and expired as 

we believe they are self-explanatory 

within the standard industry practice. 

We likewise are not defining unsalable, 

but would also base it on standard 

industry practice to determine under 

what conditions and/or circumstances 

drugs would be considered unsalable. 

We are requesting comments regarding 

whether we should define these terms 

or further define how these industry 

standards should be set. We also request 

examples of what would qualify as 

unsalable. 


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n. Medicare Coverage Gap Discount 

(§ 447.504(c)(17)) 

Section 3301 of the Affordable Care 

Act established the Medicare Coverage 

Gap Discount Program under sections 

1860D–43 and 1860D–14A of the Act. 

Section 1101(c) of the Affordable Care 

Act further specified that discounts 

provided by manufacturers under the 

Medicare coverage gap discount 

program will be excluded from AMP. 

Therefore, we propose that discounts 

under the Medicare coverage gap 

discount program should be excluded 

from AMP. 

o. PBM Price Concessions 

(§ 447.504(c)(18)) 

Section 1927(k)(1)(B) of the Act, as 

revised by the Affordable Care Act, 

revised the definition of AMP by 

excluding payments received from, and 

rebates or discounts provided to, 

pharmacy benefit managers (PBMs) and 

mail order pharmacies. Therefore, we 

propose to exclude from the calculation 

of AMP, payments received from and 

rebates or discounts provided to PBMs, 

including their mail order pharmacy’s 

purchases to the extent that no part of 

the rebates, discounts or payments are 

received by, paid by, or passed through 

to retail community pharmacies. 

p. Treatment of Medicaid Rebates in 

AMP (§ 447.504(c)(19)) 

We propose to exclude rebates under 

the national rebate agreement or a CMSauthorized State supplemental rebate 

agreement paid to State Medicaid 

Agencies from the determination of 

AMP. We are doing so in light of the 

definition of section 1927(k)(1) of the 

Act, because these rebates affect the 

manufacturer and the State, and there is 

no direct effect on the sale price of these 

drugs to retail community pharmacies. 

Entities not specifically addressed in 

the statute. 

q. Sales to Hospices (§ 447.504(c)(20)) 

The Affordable Care Act did not 

specifically address the treatment of 

sales to hospices in the determination of 

AMP. We propose, in light of the 

revisions in sections 1927(k)(1)(A) and 

1927(k)(10) of the Act, to exclude 

hospice sales from the definition of 

AMP. Hospice pharmacies are outside 

the scope of the definition of retail 

community pharmacy. Further, these 

pharmacies serve a defined population 

and do not dispense medications to the 

general public at retail prices. 

r. Sales to Prisons (§ 447.504(c)(21)) 

We propose that the sales to prisons 

are outside the scope of the definition 

of retail community pharmacy; drugs 

sold to these entities serve a defined 

population in that facility and are not 

available to the general public. 

s. Direct Sales to Physicians 

(§ 447.504(c)(22) and § 447.504(d)(1)) 

Except for the sale of inhalation, 

infusion, instilled, implanted and 

injectable drugs (also referred to as the 

5i drugs, and which are discussed in 

detail later in this section) we do not 

believe, in light of the definition of 

retail community pharmacy in section 

1927(k)(10) of the Act, that physicians 

meet the definition of a retail 

community pharmacy. However, in light 

of the specific revisions to section 

1927(k)(1)(B)(i)(IV) by section 202 of the 

Education Jobs and Medicaid Funding 

Act (Pub. L. 111–226), we believe that 

certain sales to physicians should be 

included in AMP. Since we have 

defined the 5i drugs as those which are 

primarily physician-administered, we 

believe in light of the statutory 

amendments, the case can be made that 

the sale (and associated discounts) of 

these 5i drugs to physicians should be 

included in the determination of AMP. 

Therefore, we propose in § 447.504(d)(1) 

that for 5i drugs, sales (and associated 

rebates or discounts) to physicians are 

included in the determination of AMP. 

However, in the case of non-5i drugs, 

we propose at § 447.504(c)(26) that 

direct sales to physicians be excluded 

from the determination of AMP. 

t. Direct Sales to Patients 

(§ 447.504(c)(23)) 

We propose that direct sales to 

patients be excluded from AMP as these 

sales are outside the scope of the 

definition of retail community 

pharmacy in section 1927(k)(10) of the 

Act. 

u. Free Goods (§ 447.504(c)(24)) 

We propose that where a drug or any 

other item is given away, but not 

contingent on any purchase 

requirement, there is no sale and, 

therefore, that transaction would be 

excluded from the determination of 

AMP. 

v. Manufacturer Coupons 

(§ 447.504(c)(25)) 

We propose in light of the revised 

definition of AMP that manufacturer 

coupons to a consumer redeemed by the 

manufacturer, agent, or another entity 

acting on behalf of the manufacturer 

should be excluded from AMP, but only 

to the extent that the full value of the 

coupon is passed on to the consumer 

and the retail community pharmacy 

does not receive any discount, rebate or 

price concessions in connection with 

the manufacturer coupons. 

w. Voucher Programs (§ 447.504(c)(26)) 

We propose that manufacturer 

vouchers would be excluded from the 

determination of AMP because the 

benefits of such vouchers are passed 

onto the patient and the retail 

community pharmacy does not receive 

any discount, rebate or price 

concessions in connection with the 

manufacturer voucher programs. 

However, to the extent that the retail 

community pharmacy receives a 

discount, rebate, or other price 

concession, in accordance with section 

1927(k)(1)(B)(ii) of the Act, it shall be 

included in AMP. 

x. Manufacturer-Sponsored Drug 

Discount Card Programs 

(§ 447.504(c)(27)) 

We propose in light of the revised 

definition of AMP that prices negotiated 

under a manufacturer-sponsored drug 

discount program would be excluded 

from the determination of AMP, 

provided the discount is passed on to 

the patient and the retail community 

pharmacy does not receive any 

discount, rebate or price concessions in 

connection with the manufacturersponsored drug discount card program. 

y. Manufacturer-Sponsored Patient 

Refund/Rebate Programs 

(§ 447.504(c)(28)) 

The Affordable Care Act did not 

explicitly address the treatment of 

prices negotiated under a manufacturersponsored patient refund or rebate 

program. To the extent the manufacturer 

provides a full or partial refund or 

rebate to the patient for out-of-pocket 

costs and the retail community 

pharmacy does not realize any 

discounts or rebates or receive any price 

concession in connection with the 

manufacturer-sponsored patient refund/ 

rebate programs, we propose in light of 

the revised definition of AMP that 

prices negotiated under a manufacturer 

sponsored patient refund or rebate 

program would be excluded from the 

determination of AMP. 

z. Copayment and Patient Assistance 

Programs (§ 447.504(c)(29)) 

The Affordable Care Act did not 

address the treatment of patient 

assistance programs, including 

copayment assistance programs. We 

believe in light of the revised definition 

of AMP that patient assistance 

programs, including copayment 

assistance programs that provide free 

goods that are not contingent on future 

purchases to patients would be 


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excluded from the determination of 

AMP. Therefore, we propose that such 

patient assistance programs and 

copayment assistance programs are 

excluded from the determination of 

AMP. However, to the extent that the 

retail community pharmacy receives a 

discount, rebate, or other price 

concession in connection with the 

copayment and patient assistance 

programs, in accordance with section 

1927(k)(1)(B)(ii) of the Act, it shall be 

included in AMP. 

6. Inhalation, Infusion, Instilled, 

Implanted, and Injectable Drugs 

(§ 447.504(d) and § 447.507) 

In accordance to section 

1927(k)(1)(B)(i)(IV) of the Act, 

manufacturers are to exclude from the 

determination of AMP for a covered 

outpatient drug for a rebate period, any 

payments received from, and other 

discounts or rebates, that are provided 

to any other entity that does not conduct 

business as a wholesaler or retail 

community pharmacy. Certain specialty 

covered outpatient drugs are not 

generally dispensed through retail 

community pharmacies and in those 

instances manufacturers would be 

unable to generate an AMP which 

would prevent rebate calculations for 

those drugs. Section 202 of the 

Education, Jobs and Medicaid Funding 

Act (Pub. L. 111–226), enacted August 

10, 2010, amended the Affordable Care 

Act definition of AMP at section 

1927(k)(1) of the Act to include sales for 

the 5i drugs that are not generally 

dispensed through retail community 

pharmacies. This provision was added 

to ensure that an AMP could be 

calculated and Medicaid rebates could 

be collected from manufacturers for the 

5i drugs that are not generally sold at 

retail community pharmacies. (See 156 

Cong. Rec. S6766 (Aug. 5, 2010)). 

This provision went into effect on 

October 1, 2010 and revises a 

manufacturer’s AMP calculation for the 

5i drugs to include entities other than 

retail community pharmacies that 

dispense such drugs. 

While the enactment of this 

legislation addressed the need to ensure 

that rebates would be collected for these 

5i drugs that are ‘‘not generally 

dispensed through retail community 

pharmacies,’’ it also raised additional 

issues that were not directly addressed 

in the statute. Based upon section 

1927(k)(1)(B)(i)(IV) of the Act, we have 

identified the following issues that 

would require further clarification: 

(1) Identification of 5i drugs, (2) 

clarification of the term ‘‘not generally 

dispensed,’’ (3) determination of sales, 

discounts and rebates included in the 5i 

calculation, and (4) identification of 

other entities included in the definition. 

We also received requests from 

manufacturers and pharmacies 

requesting guidance on this provision; 

specifically regarding how to interpret 

‘‘not generally dispensed through a 

retail community pharmacy’’ and how 

to identify these 5i drugs. 

We considered issuing a list 

identifying the specific 5i drugs that are 

to be included in this category. Second, 

we considered how to define the term 

‘‘not generally dispensed.’’ Finally, we 

considered clarifying which sales, 

discounts, and other financial 

transactions would be included in the 

determination of AMP for these drugs. 

Based on our understanding of the 

market as well as other Federal 

programs, we believe most 5i drugs are 

administered parenterally or through an 

item of durable medical equipment 

(DME) and often require physician 

supervision during administration. We 

considered defining each type of 

administration route; however, we 

believe that it is not necessary to define 

the terms because the terms are 

essentially self explanatory. We are 

seeking comments on this decision. 

We considered using the Medicare 

Part B standards to identify 5i drugs, 

given that Medicare Part B covers a 

limited number of outpatient 

prescription drugs that are not usually 

self-administered, such as those given in 

a hospital outpatient department or 

doctor’s office. In addition, Medicare 

Part B covers outpatient prescription 

drugs provided through an item of 

durable medical equipment, such as an 

infusion pump or nebulizer, and 

injectable drugs administered by a 

licensed medical practitioner, if 

considered reasonable and necessary. 

Medicare Part B does not have a 

comprehensive, all inclusive list of 

covered inhalation, infusion, injectable, 

instilled, or implanted drugs. However, 

it already has a publicly available 

reference which lists drugs that are ‘‘not 

usually self-administered’’ and could be 

considered for coverage under Medicare 

Part B. In addition, the Medicare Part B 

ASP NDC–HCPCS Crosswalk file 

identifies drugs that could be 

considered for coverage under Medicare 

Part B; it is publically accessible on the 

CMS Web site at http://www.cms.gov/ 

McrPartBDrugAvgSalesPrice/ 

01a19_2010aspfiles.asp and is updated 

on a quarterly basis. The Medicare Part 

B ASP NDC–HCPCS Crosswalk file also 

includes drugs which do not meet the 

5i criteria, specifically those oral drugs 

covered by Part B following a transplant 

as well as Part B oral anti-emetics and 

oral cancer drugs. We considered using 

the Medicare Part B ASP NDC–HCPCS 

Crosswalk file to identify 5i drugs. 

However, we believe it would not be 

optimal because it is not an all inclusive 

list of inhalation, infusion, instilled, 

implanted and injectable drugs and 

therefore would likely miscategorize 

some 5i drugs. 

We also considered whether CMS or 

the manufacturers should determine 

which drugs qualify as a 5i drug. In 

doing so, we considered whether or not 

it would be difficult for manufacturers 

to determine which drugs should be 

classified as an inhalation, infusion, 

instilled, implanted, or injectable drugs 

for the determination of AMP using the 

route of administration approved by the 

FDA or based upon the drug’s NDC. 

We also considered if we should 

identify the 5i drugs based upon their 

NDC number. If we were to identify the 

5i drugs, we determined it would not 

provide reliable data and still require us 

to make available, as well as 

continuously update, a set of guidelines 

that would likely require an outside 

data source. In addition to the nuances 

of identifying existing drugs, it would 

be a continuous challenge to maintain a 

reliable list due to an evolving 

marketplace with the introduction of 

new drugs and removal of existing 

drugs. 

Although we determined it would not 

be practical for CMS to provide a list 

identifying the 5i drugs, we considered 

providing a list of routes of 

administration as identified by the FDA 

that we believe would be applicable for 

5i drugs. We believe this list would 

serve as a guide that manufacturers 

would use to determine if a drug could 

be considered as a 5i drug. We are 

proposing to add § 447.507 

Identification of 5i drugs to indicate 

how 5i drugs are to be identified. In 

§ 447.507(a) we propose to use the 

FDA’s Routes of Administration as a 

guide to identify 5i drugs. Below is a list 

of FDA routes of administration that we 

are proposing manufacturers use to 

identify 5i drugs. It includes, but is not 

limited to, the routes of administration 

listed in Table 3. This list comes from 

the FDA Structured Product Labeling, 

Route of Administration data standards 

located at http://www.fda.gov/ 

ForIndustry/DataStandards/ 

StructuredProductLabeling/ 

ucm162034.htm. 

TABLE 3—ROUTES OF ADMINISTRATION

FOR 5I IDENTIFICATION

Auricular (Otic) Intracavernous 

Conjunctival Intracavitary 

Endocervical Intracerebral 

Endosinusial Intracisternal 


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2While the Amended Master Agreement (9/7/00 

draft) between the Secretary of Veterans Affairs and 

the Manufacturer Identified in Section VIII of this 

Agreement has not been finalized and is therefore 

not an official DVA document, it is our 

understanding that it is still utilized by those in the 

industry when determining non-FAMP. 

TABLE 3—ROUTES OF ADMINISTRATION

FOR 5I IDENTIFICATION—Continued 

Endotracheal Intracorneal 

Epidural Intracoronal, Dental 

Extra-Amniotic Intracoronary 

Hemodialysis Intracorporus 

Cavernosum 

Infiltration Intradermal 

Interstitial Intradiscal 

Intra-Abdominal Intraductal 

Intra-Amniotic Intraduodenal 

Intra-Arterial Intradural 

Intra-Articular Intraepicardial 

Intrabiliary Intraepidermal 

Intrabronchial Intraesophageal 

Intrabursal Intragastric 

Intracardiac Intragingival 

Intracartilaginous Intrahepatic 

Intracaudal Intraileal 

Intralesional Iontophoresis 

Intralingual Irrigation 

Intraluminal Laryngeal 

Intralymphatic Nasal 

Intramammary Nasogastric 

Intramedullary Ophthalmic 

Intrameningeal Parenteral 

Intramuscular Percutaneous 

Intranodal Periarticular 

Intraocular Peridural 

Intraomentum Perineural 

Intraovarian Periodontal 

Intrapericardial Rectal 

Intraperitoneal Respiratory (Inhalation) 

Intrapleural Retrobulbar 

Intraprostatic Soft Tissue 

Intrapulmonary Subarachnoid 

Intraruminal Subconjunctival 

Intrasinal Subcutaneous 

Intraspinal Subgingival 

Intrasynovial Submucosal 

Intratendinous Subretinal 

Intratesticular Transendocardial 

Intrathecal Transmucosal 

Intrathoractic Transplacental 

Intratubular Transtracheal 

Intratumor Transtympanic 

Intratympanic Ureteral 

Intrauterine Urethral 

Intravascular Vaginal 

Intravenous 

Intraventricular 

Intravesical 

Intravitreal 

We propose that manufacturers 

identify 5i drugs based upon the FDA 

route of administration list that we have 

provided. We are interested in 

comments on this proposal, including 

comments regarding other FDA routes of 

administration that could be used to 

identify 5i drugs that are not reflected 

on the provided list. 

We believe that by utilizing the FDA 

route of administration, manufacturers 

will be readily able to identify products 

which are inhaled, infused, instilled, 

implanted, and injected as the 

information is readily available. 

However, manufacturers would need to 

determine if those products identified as 

5i drugs are ‘‘not generally dispensed 

through a retail community pharmacy’’. 

Therefore, we also considered how to 

establish a standard by which 

manufacturers would determine when a 

drug is ‘‘not generally dispensed 

through a retail community pharmacy.’’ 

We considered adopting the Medicare 

Part B guidelines used to determine if a 

drug is to be classified as selfadministered as a way to determine 

when a drug is ‘‘not generally 

dispensed’’ through a retail community 

pharmacy. In accordance with section 

1861(s)(2)(A) and 1861(s)(2)(B) of the 

Act, the Medicare Benefit Policy 

Manual, Chapter 15—Covered Medical 

and Other Services, § 50.2(C) provides 

guidance regarding the term ‘‘usually.’’ 

Specifically, it provides that the term is 

used to mean more than 50 percent of 

the time in determining when a drug is 

to be classified as self-administered. In 

light of this guidance, we believe that if 

a drug can be self administered, it is 

reasonable to assume that it is usually 

dispensed through a retail community 

pharmacy; however, for physicianadministered drugs, we believe it is 

reasonable to conclude that the drug 

may be provided by physicians or other 

licensed practitioner in a variety of 

entities (such as clinics and physician’s 

offices), and given the nature of the 

drugs, are usually not dispensed by a 

retail community pharmacy. 

If we were to adopt a similar 50 

percent methodology for determining 

when a drug is not generally dispensed 

through a retail community pharmacy, it 

would mean that a drug would be 

classified as ‘‘not generally dispensed’’ 

through a retail community pharmacy if 

more than 50 percent of the sales were 

to an entity other than a wholesaler for 

distribution to retail community 

pharmacies or retail community 

pharmacies that purchase drugs directly 

from the manufacturer. We believe that 

if we were to adopt a 50 percent 

methodology, some 5i drugs which are 

self-administered and generally 

dispensed through retail community 

pharmacies would be included in the 

alternate 5i AMP calculation due to the 

breadth of the percentage allowed in 

this calculation methodology. 

We also considered whether we could 

use the methodology commonly used by 

manufacturers to calculate the 

Department of Veterans Affairs (DVA) 

non-Federal Average Manufacturer Price 

(non-FAMP). This methodology is 

described in the draft ‘‘Amended Master 

Agreement’’,2 between the Secretary of 

Veterans Affairs and the Manufacturer 

in section VII of this Agreement. 

Manufacturers, manufacturer 

associations, pharmacies and pharmacy 

associations have repeatedly referred to 

this draft ‘‘Amended Master 

Agreement’’ when requesting guidance 

from CMS on the issue of defining ‘‘not 

generally dispensed’’. According to the 

definition of Wholesaler found in the 

draft ‘‘Amended Master Agreement,’’ 

manufacturers are to consider a buyer to 

be a wholesaler when drugs with unit 

sales of 90 percent or greater are to 

retailers, other merchants, industrial, 

institutional or commercial users. 

Manufacturers are responsible for using 

this 90 percent principle as a guideline 

to determine when their sales are to 

wholesalers in their determination of 

non-FAMP. We considered whether it 

would be reasonable to apply the same 

principle to 5i drug determinations as to 

when a drug is ‘‘not generally 

dispensed’’ through a retail community 

pharmacy. We considered adopting a 

similar 90 percent principle because the 

definition of AMP, as specified in 

section 1927(k)(1)(B) of the Act, as 

revised by the Affordable Care Act, 

reflects sales to wholesalers for drugs 

distributed to retail community 

pharmacies (and retail community 

pharmacies that purchase drugs directly 

from the manufacturer). Therefore, for 5i 

drugs, our understanding of the 90 

percent principle would be that if 90 

percent or more of the manufacturer’s 

sales for the respective drug were to an 

entity other than a wholesaler for 

distribution to retail community 

pharmacies or retail community 

pharmacies that purchase drugs directly 

from the manufacturer, then the drug 

would be classified as ‘‘not generally 

dispensed’’ through a retail community 

pharmacy. 

We believe providing a quantitative 

method to determine when a drug is 

‘‘not generally dispensed’’ through a 

retail community pharmacy would be 

preferable to a more qualitative drug 

specific approach as it provides a more 

definitive meaning to the term ‘‘not 

generally dispensed’’ through a retail 

community pharmacy. Therefore, in this 

proposed rule, we propose at 

§ 447.507(b)(1) to use the 90 percent 

principle to determine when a drug is 

not generally dispensed through a retail 

community pharmacy. However, we 

continue to have some concerns 

regarding whether the 90 percent 

threshold is reasonable because it might 

result in a portion of drugs eligible for 


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the 5i alternate AMP calculation to be 

omitted from AMP because the 

percentage of sales required to classify 

a drug as ‘‘not generally dispensed 

through a retail community pharmacy’’ 

may be too high. Manufacturers that 

enter into and have in effect a Medicaid 

drug rebate agreement, as set forth in 

section 1927(a) of the Act, are 

responsible for reporting AMP on a 

monthly and quarterly basis. Therefore, 

we propose at § 447.507(b)(2) that the 

determination of a 5i drug’s status as 

‘‘not generally dispensed’’ through a 

retail community pharmacy will need to 

be evaluated on a monthly and quarterly 

basis. We invite comments on this 

approach, including comments 

indicating if we should consider other 

quantitative options (for example, 75 

percent, or 50 percent) to identify if a 

5i drug is ‘‘not generally dispensed’’ 

through a retail community pharmacy 

and reasons as to why those options 

would be appropriate. We also invite 

comments on whether manufacturers 

should evaluate the status of a 5i drug’s 

status as ‘‘not generally dispensed’’ 

through a retail community pharmacy 

on a monthly or quarterly basis. 

We further propose at § 447.504(d) 

that, in light of section 

1927(k)(1)(B)(i)(IV) of the Act, AMP for 

these drugs will include all sales, 

rebates, discounts, or other financial 

transactions already proposed for 

inclusion in the determination of AMP 

as well as the sales, rebates, discounts, 

or other transactions concerning these 

drugs, that are provided to the following 

non-retail community pharmacy 

entities: 

• Direct sales to physicians. 

• Sales to pharmacy benefit 

managers, including their mail order 

pharmacy’s purchases. 

• Sales to HMOs, including MCOs. 

• Sales, discounts, or rebates paid 

directly to insurers. 

• Sales to hospitals. 

• Sales to clinics and outpatient 

facilities. 

• Sales to mail order pharmacies. 

• Sales to long-term care providers, 

including nursing facility pharmacies, 

nursing home pharmacies, long-term 

care facilities, contract pharmacies for 

the nursing facility where these sales 

can be identified with adequate 

documentation, and other entities where 

the drugs are dispensed through a 

nursing facility pharmacy, such as 

assisted living facilities. 

• Sales to hospices. 

• Sales to other manufacturers who 

conduct business as wholesalers or 

retail community pharmacies. 

7. Further Clarification on the 

Calculation of AMP—§ 447.504(e) 

a. Chargebacks and Other Discounts 

(§ 447.504(e)(1)) 

We propose that chargebacks must be 

included in the calculation of AMP, 

except for those chargebacks provided 

to any of the entities that are excluded 

from the determination of AMP. 

Inasmuch as we believe chargebacks are 

based on identified sales to a specific 

entity, a manufacturer cannot make 

assumptions regarding these 

chargebacks and must identify them to 

included or excluded AMP sales. 

Additionally, we propose that AMP is to 

include cash discounts except 

customary prompt pay discounts 

extended to wholesalers, free goods that 

are contingent on any purchase 

requirement, volume discounts, 

incentives, administrative fees, service 

fees (other than bona fide service fees), 

distribution fees, and any other rebates, 

discounts or other financial transaction, 

other than rebates under section 1927 of 

the Act, which reduce the price received 

by the manufacturer for drugs 

distributed to retail community 

pharmacies. 

b. Quarterly AMP (§ 447.504(e)(2)) 

Based on prior experience and on the 

MDR program submissions we believe 

that the quarterly AMP should be 

calculated as a weighted average of the 

monthly AMPs in the quarter. We 

believe that, based on our prior 

experience and the similarities of both 

calculations, this approach will 

minimize discrepancies between the 

monthly and the quarterly AMPs. 

Therefore, we propose that quarterly 

AMP is to be calculated as a weighted 

average of monthly AMPs in the quarter. 

c. Manufacturer Adjustments 

(§ 447.504(e)(3)) 

To account for discounts, rebates or 

other price concessions that may not be 

available during the rebate reporting 

period, we propose that the 

manufacturer must adjust the AMP for 

the applicable rebate period if 

cumulative discounts, rebates, or other 

arrangements subsequently adjust the 

prices actually realized, to the extent 

that these discounts, rebates or 

arrangements are not excluded from the 

determination of AMP by statute or 

regulation. 

D. Determination of Best Price 

(§ 447.505) 

1. Definitions of Best Price and 

Providers 

We are proposing re-codifying the 

terms ‘‘best price’’ and ‘‘Providers’’ 

under newly proposed § 447.505(a). 

Additionally, we are proposing to revise 

the definition of the term ‘‘best price’’ 

at newly proposed § 447.505(a) so that 

it is consistent with the definition of 

best price found in section 1927(c)(1)(C) 

of the Act. 

2. Prices Included in Best Price 

We believe that revising the definition 

of best price to be consistent with the 

definition provided in the statute 

provides sufficient detail as to which 

prices are to be included in the 

determination of best price. Therefore, 

we further propose the ‘‘Prices included 

in best price,’’ currently located in 

regulations at § 447.505(c)(1)–(11), be 

redesignated to § 447.505(b) and that it 

would be revised to remove the list of 

prices included in best price. Instead, 

the paragraph would read as follows: 

‘‘Except for those prices identified in 

paragraph (c) of this section, best price 

for covered outpatient drugs includes all 

prices and associated rebates, discounts, 

or other transactions that adjust prices 

either directly or indirectly.’’ 

3. AMP Methodology Applied to Best 

Price 

In order to provide consistency 

between the AMP and best price 

sections, where applicable, we are 

proposing to apply the same 

methodology to best price that we are 

applying to AMP. This will be 

accomplished by making the following 

revisions to the prices exempt from best 

price section. We propose the ‘‘Prices 

excluded from best price,’’ currently 

located in regulations at 

§ 447.505(d)(1)–(13), be redesignated to 

§ 447.505(c)(1)–(18). The current list of 

prices excluded from best price would 

be expanded to include three new price 

exclusions not currently identified in 

regulations. They are (1) manufacturer 

vouchers, (2) manufacturer-sponsored 

patient refund/rebate programs and (3) 

sales outside of the United States. These 

terms have been discussed earlier in the 

Determination of AMP section and the 

addition of them to the prices excluded 

from best price serves to align best price 

and AMP. We also propose to revise the 

phrasing of several of the existing prices 

listed in the ‘‘prices excluded from best 

price’’ section so they are consistent 

with the phrasing of the same items 

listed in the ‘‘sales excluded from the 

determination of AMP’’ section of the 

regulation. These changes do not alter 

the meaning or intention of the section, 

and applies the same treatment of sales, 

prices and discounts, where applicable, 

to best price that we are applying to 

AMP. 


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4. 340B Expanded List of Covered 

Entities Exempt From Best Price 

In accordance with section 7101 of 

the Affordable Care Act, we are 

proposing to clarify how manufacturers 

are to treat orphan drugs sold to new 

covered entities described in sections 

340B(a)(4)(M), (N) and (O) of the PHSA 

for best price. The Affordable Care Act 

expanded the list of entities eligible to 

enroll in the 340B drug pricing program 

to include certain children’s hospitals, 

freestanding cancer hospitals, critical 

access hospitals, rural referral centers, 

and sole community hospitals. 

Additionally, the Affordable Care Act 

amended the PHSA by excluding certain 

orphan drugs from being considered 

covered outpatient drugs for these 

newly covered entities. Section 204 of 

the Medicare and Medicaid Extenders 

Act of 2010 (Pub. L. 111–309) excludes 

certain children’s hospitals from this 

exclusion, effective as if included in the 

enactment of section 2302 of the HCERA 

of 2010. In accordance with sections 

1927(a)(5)(B) and 1927(c) of the Act, we 

propose that manufacturers can exclude 

only drugs purchased under the 340B 

Drug Pricing program from their best 

price calculation where the covered 

entities meet the conditions set by 

PHSA. We believe there may be 

circumstances in which covered entities 

purchase drugs outside of the 340B 

program, such as instances when drugs 

are purchased for inpatient use, drugs 

that have both inpatient and outpatient 

uses, and when a covered entity 

purchases drugs outside the 340B 

program to dispense to its Medicaid 

patients. In order to better understand 

the purchasing practices of covered 

entities and the scope of our proposed 

policy on best price, we invite 

comments regarding other 

circumstances in which covered entities 

purchase drugs outside of the 340B 

program. We believe that this position is 

consistent with our reading of these 

provisions and as a result strengthens 

the integrity of the MDR program 

because covered entities are prohibited 

from diverting drugs purchased under 

340B authority to anyone who is not a 

patient of the covered entity. These 

requirements are proposed in a new 

regulation at § 447.505(c)(2)(i) and (ii). 

5. Medicare Coverage Gap Discount 

Program (The Discount Program) 

The Affordable Care Act established 

the Discount Program under sections 

1860D–43 and 1860D–14A of the Act. 

The Discount Program makes 

manufacturer discounts available to 

applicable Medicare beneficiaries 

receiving applicable covered Part D 

drugs while in the coverage gap. 

In general, the discount on each 

applicable covered Part D drug is 50 

percent of an amount that is equal to the 

negotiated price. In accordance with the 

Affordable Care Act, manufacturer 

discounts attributed to the Discount 

Program will be excluded from the 

determination of best price as defined in 

§ 447.505(c)(6). 

E. Authorized Generics Drugs 

(§ 447.506) 

We propose to remove the definition 

of ‘‘Authorized generic drugs’’ from 

§ 447.506(a), as discussed in section 

II.B.1 of this regulation. In § 447.506(a), 

we propose to define the term ‘‘Primary 

manufacturer’’ to mean a manufacturer 

that holds the NDA of the authorized 

generic drug. We also propose to define 

the term ‘‘Secondary manufacturer of an 

authorized generic drug’’ to mean a 

manufacturer that is authorized by the 

primary manufacturer to sell the drug, 

but does not hold the NDA. In 

§ 447.506(b), we propose to revise the 

existing paragraph to specify that sales 

of an authorized generic drug must be 

included in the AMP calculation of the 

manufacturer holding the NDA, referred 

to in this discussion as the primary 

manufacturer, when such drugs are 

being sold directly to a wholesaler. In 

accordance with section 1927(k)(1)(C) of 

the Act, we propose in § 447.506(b) to 

require that the primary manufacturer of 

an authorized generic, include in its 

calculation of AMP all sales of its 

authorized generic drug product sold or 

licensed to a secondary manufacturer, 

including transfer prices and fees paid 

by the secondary manufacturer to the 

primary manufacturer, when the 

secondary manufacturer is acting as a 

wholesaler, as set forth in section 

1927(k)(11) of the Act. Additionally, the 

primary manufacturer holding the NDA 

must also include those sales in its AMP 

calculation that it makes directly to 

wholesalers including other 

manufacturers acting as wholesalers. 

In § 447.506(c), we propose to revise 

the existing paragraph to specify that a 

primary manufacturer holding the NDA 

must include the best price of an 

authorized generic drug in its 

computation of best price for a single 

source or innovator multiple source 

drug during a rebate period to any 

manufacturer, wholesaler, retailer, 

provider, HMO, non-profit entity, or 

governmental entity in the United 

States, when such drugs are being sold 

by the primary manufacturer holding 

the NDA. 

Further, we propose to add a new 

§ 447.506(d) to specify that the 

secondary manufacturer of an 

authorized generic drug must also 

provide a rebate based on its sales of 

authorized generic drugs, and must 

calculate AMP and best price consistent 

with the requirements specified at 

§ 447.504 and § 447.505 respectively. 

F. Exclusion From Best Price of Certain 

Sales at a Nominal Price (§ 447.508) 

Currently, the existing regulations at 

§ 447.508(a) defines nominal sales 

which should be excluded from a 

manufacturer’s best price calculation 

only when made to 340B covered 

entities as defined in section 340B(a)(4) 

of the PHSA, ICFs/MR, State-owned or 

operated nursing facilities and safety net 

providers or facilities/entities which the 

Secretary determines to be eligible. 

Previously, the Secretary did not 

exercise the authority to add other 

safety net providers for which sales at 

nominal prices are excluded from best 

price. Section 221 of the Omnibus 

Appropriations Act, 2009, Public Law 

111–8, enacted on March 11, 2009, 

revised section 1927(c)(1)(D) of the Act 

by expanding the definition of nominal 

priced sales to include sales of covered 

outpatient drugs to two new categories 

of entities. The expansion allows public 

or nonprofit entities (as defined by the 

Internal Revenue Service (IRS)), or 

State-owned or operated facilities 

providing the same services to the same 

populations as 340B(a)(4) entities of the 

PHSA but not funded as such and in 

compliance with the prohibition on 

abortion services as set forth in section 

1008 of the PHS Act or academic health 

care centers providing family planning 

services to be eligible for the nominal 

priced sales. 

We propose to revise § 447.508(a) to 

include the additional entities to which 

manufacturers may have nominal price 

sales excluded from best price. To 

qualify for the exception, entities must 

meet the criteria set forth below for 

either of the two new categories: 

• Category 1 criteria: 

+ The entity is an exempt 

organization as defined by section 

501(c)(3) of the Internal Revenue Code 

of 1986; and exempt from tax under 

section 501(a) of such Act, or is Stateowned or operated; and, 

+ Provides the same type of services 

to the same type of populations as a 

covered entity described in 340B(a)(4) of 

the PHS Act but does not receive 

funding under such section. 

• Category 2 criteria: The entity is a 

public or nonprofit entity or an entity 

based at an institution of higher 

learning, whose primary purpose is to 

provide health care services to students 

of that institution, that provides a 


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service or services as described under 

section 1001(a) of the PHS Act, 42 

U.S.C. 300. 

The legislation further provides that 

nothing in section 1927(c)(1)(D) of the 

Act should be construed to alter any 

existing statutory or regulatory 

prohibition on services for Category 1 

entities, including the prohibition set 

forth in section 1008 of the PHSA. 

Because these additions appear to 

address those nominal price sales that 

are not related to a manufacturer’s 

attempt to influence market share or for 

other marketing reasons, we are again 

choosing not to identify any further 

entities for which manufacturer 

nominally priced sales would be exempt 

from best price. 

G. Medicaid Drug Rebates (§ 447.509) 

1. Determination of Rebate Amount 

(§ 447.509(a)) 

Manufacturers that participate in the 

MDR program are required to pay 

rebates for covered outpatient drugs that 

are dispensed to Medicaid patients. The 

rebates are calculated based on formulas 

described in section 1927(c) of the Act. 

As described in the ‘‘Background’’ 

section above, the Affordable Care Act 

made several revisions to the statutory 

rebate formulas. In light of these 

revisions, we propose to incorporate the 

rebate formulas into Federal regulations. 

We propose in § 447.509(a)(1) that the 

basic rebate, for each dosage form and 

strength of a single source drug or an 

innovator multiple source drug, will be 

equal to the total number of units of 

each dosage form and strength paid for 

under the State plan in the rebate period 

multiplied by the greater of the 

difference between the AMP and best 

price of the drug or the AMP multiplied 

by: 

• 17.1 percent for a clotting factor for 

which a separate furnishing payment is 

made under section 1842(o)(5); 

• 17.1 percent for a drug approved by 

the FDA exclusively for pediatric 

indications; or 

• 23.1 percent for all other single 

source drugs and innovator multiple 

source drugs. 

We note that all clotting factors would 

not qualify for the minimum rebate 

percentage of 17.1 percent of AMP. Only 

those clotting factors for which a 

separate furnishing payment is made 

under section 1842(o)(5) of the Act 

would qualify as defined under the 

definition of clotting factors. Similarly, 

all drugs with pediatric indications 

would not qualify for the minimum 

rebate percentage of 17.1 percent of 

AMP. Only those drugs approved by the 

FDA exclusively for pediatric 

indications, in accordance with our 

proposed definition in § 447.502, would 

qualify. 

We propose in § 447.509(a)(2) that the 

additional rebate for single source and 

innovator multiple source drugs will be 

equal to the number of units for such 

dosage form and strength paid for under 

the State plan in the rebate period 

multiplied by the amount, if any, by 

which the AMP for the dosage form and 

strength of the drug for the period 

exceeds the base date AMP for such 

dosage form and strength, increased by 

the percentage by which the CPI–U for 

the month before the month in which 

the rebate period begins exceeds such 

index. 

We propose in § 447.509(a)(3) that the 

total rebate amount for single source 

drugs and innovator multiple source 

drugs will be equal to the basic rebate 

amount plus the additional rebate 

amount, if any. We also propose at 

§ 447.509(a)(5) that in no case will the 

total rebate amount exceed 100 percent 

of the AMP of the drug. 

2. Treatment of New Formulations 

(§ 447.509(a)(4)) 

The Affordable Care Act established a 

separate formula for calculating the unit 

rebate amount for a drug that is a line 

extension of a single source drug or an 

innovator multiple source drug that is 

an oral solid dosage form. For such a 

line extension drug, the rebate amount 

will be the amount calculated under 

section 1927 of the Act or, if greater, the 

product of the AMP for the line 

extension drug, the highest additional 

rebate (calculated as a percentage of 

AMP) under section 1927 for any 

strength of the original single source or 

innovator multiple source drug, and the 

total number of units of each dosage 

form and strength of the line extension 

drug paid for under the State plan in the 

rebate period (as reported by the State). 

We propose to incorporate this 

calculation in § 447.509(a)(4). 

The statute defines a line extension 

for purposes of the rebate calculation as 

a new formulation of a drug such as an 

extended release formulation. However, 

the statute did not provide further 

specificity as to how line extensions 

should be defined. Therefore, as 

previously described in the definition of 

a line extension, we will define line 

extension at § 447.502. CMS plans to 

define a line extension drug as a single 

source or innovator multiple source 

drug that is an oral solid dosage form 

that has been approved by the FDA as 

a change to the initial brand name listed 

drug in that it represents a new version 

of the previously approved drug, such 

as a new ester, a new salt, or other 

noncovalent derivative; a new 

formulation of a previously approved 

drug; a new combination of two or more 

drugs; or a new indication for an already 

marketed drug. Single source or 

innovator multiple source drugs that 

receive exclusivity are not proposed to 

be excluded from the definition of a line 

extension drug. For the purpose of 

calculating the unit rebate amount 

under the Affordable Care Act, we 

propose that both the initial brand name 

drug and the line extension drug have 

to be an oral solid dosage form drug. We 

also propose to exclude a new strength 

of the initial brand name drug from the 

definition of a line extension drug. We 

have adopted this policy in order to 

capture all new formulations (including 

extended release formulations) and 

potential line extensions of single 

source or innovator multiple source 

drugs. Further, we believe this policy is 

consistent with our understanding of 

the line extension provisions in the 

Affordable Care Act. We invite 

comments from the public on this 

proposed policy. 

We do not plan to exclude 

reformulations of existing products that 

incorporate abuse deterrent technologies 

from the definition of line extension 

drugs. The goal of these new 

formulations are to mitigate the risk of 

abuse—as opposed to the outright 

elimination of abuse—by preventing 

alternate routes of administration, or 

employing physical barriers that resist 

common methods of tampering, thus 

abuse deterrent formulations (ADFs) 

have the potential to decrease abuse of 

prescription drugs and improve patient 

and public safety. Some examples of 

abuse deterrent strategies that are under 

development include combination oral 

formulation products with an opioid 

agonist and opioid antagonist, 

formulations with other aversive 

characteristics, prodrugs, physically 

impenetrable formulations, and drugdevice combinations with patient 

recognition capability. However, the 

statute does not exclude reformulated 

drugs incorporating abuse deterrent 

technologies from the definition of a 

line extension drug and thus we do not 

plan to exclude drugs with this labeling 

from the definition. The types of drugs 

that we are considering as line 

extension drugs include these 

reformulated products. 

FDA draft guidance on the assessment 

of abuse potential of drugs can be found 

at http://www.fda.gov/downloads/

Drugs/GuidanceComplianceRegulatory

Information/Guidances/UCM198650.

pdf. 

We are soliciting feedback from the 

industry, the public, and other 


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Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5339 

stakeholders regarding whether existing 

or future reformulated products 

incorporating an abuse deterrent 

technology should be subject to the 

additional rebate formula under the 

Affordable Care Act. 

We have determined that we do not 

have the ability to identify the line 

extension of the initial brand name 

listed drug based on manufacturer 

rebate submissions. We consulted with 

the FDA to determine if the FDA 

currently keeps a list of line extension 

drugs as we have defined the term, and 

the FDA does not. Thus, we reviewed 

the drug information and data files 

publicly available at the FDA and 

propose to use the FDA’s list of 

Chemical Types to identify the line 

extension drug as well as the initial 

brand name listed drug of the line 

extension drug. 

The FDA classification is given to 

nonbiologic products during the review 

process and is finalized when the NDA 

is approved. This classification consists 

of Chemical Type classification, which 

classifies these drugs according to the 

type of change made to the initial brand 

name product. Chemical Type 

represents the newness of a drug 

formulation or a new indication for an 

existing drug formulation, as noted in 

http://www.fda.gov/Drugs/information

ondrugs/ucm079436.htm. The FDA 

classifies all NDAs based on Chemical 

Type. One measure of innovation is the 

newness of the listed drug or the drug’s 

active ingredient. The Chemical Type 

may identify the drug as new, or as 

related to the active ingredient of 

another drug that has already been 

approved. 

Based on the analysis of the FDA’s 

drug information and data files, we 

propose to use Chemical Types 2, 3, 4, 

and 6 on the FDA’s list of Chemical 

Types below as an indicator for line 

extension drugs as shown in Table 4. 

TABLE 4—NEW DRUG APPLICATION

CHEMICAL TYPES

Number Meaning 

1 ............ New molecular entity (NME). 

2 ............ New ester, new salt, or other 

noncovalent derivative. 

3 ............ New formulation. 

4 ............ New combination. 

5 ............ New manufacturer. 

6 ............ New indication. 

7 ............ Drug already marketed, but without an approved NDA. 

8 ............ OTC (over-the-counter) switch. 

Chemical Type 2 (new ester, new salt, 

or other noncovalent derivative) 

represents the incorporation of different 

salts or esters, or other noncovalent 

derivatives (such as a complex, chelate, 

or clathrate) of the molecule, 

responsible for the physiological or 

pharmacological action of the drug 

substance of an approved 

pharmaceutical ingredient into a 

marketed dosage form which represents 

a change to the listed drug (21 CFR 

314.108(a)). We propose to identify this 

Chemical Type as a line extension 

because it describes a new version of the 

initial brand name listed drug. 

Chemical Type 3 (new formulation of 

a previously approved drug) (not a new 

salt or new molecular entity) represents 

a change in the inactive ingredients 

(excipients) in a drug but no change in 

the amount of active ingredient. A new 

formulation may be a dosage form that 

contains the same active ingredient as 

was previously approved in a different 

dosage form as the initial brand name 

listed. Chemical Type 4 (new 

combination) represents a drug 

comprised of two or more components 

that are physically, chemically, or 

otherwise combined or mixed to 

produce a single drug product. We 

propose to identify this Chemical Type 

as a line extension because the new 

combination of the initial brand name 

listed drug of two or more active 

ingredients represents a new 

formulation of the initial brand name 

listed drugs that are combined to form 

one drug product. 

Chemical Type 6 (new indication for 

an already marketed drug) represents a 

change in the description of use of an 

already marketed initial brand name 

listed drug in the prevention, treatment, 

or diagnosis of a recognized disease or 

condition. According to the National 

Institute for Health Care Management, 

research performed on drugs that are 

already on the market may reveal that 

they provide safe and effective 

treatments for diseases or conditions 

other than the indication(s) for which 

the product was originally approved. 

We propose to identify this Chemical 

Type as a line extension because there 

is an approval for a new indication that 

represents a change to the initial brand 

name listed drug. 

Chemical Type 1 (new molecular 

entity) represents an active ingredient 

that has never before been marketed in 

the United States in any form. CMS 

proposes to use this Chemical Type to 

identify the initial brand name listed 

drug of a line extension. 

Chemical Type 5 (new manufacturer) 

is assigned to an already marketed drug 

when it has: (1) A new manufacturer, or 

(2) a product that duplicates another 

manufacturer’s already marketed drug 

product. We do not propose to consider 

this Chemical Type as a line extension 

because the change is a non drug-related 

change; rather, it is simply a transfer of 

the application from one manufacturer 

to another. 

Chemical Type 7 (drug already 

marketed, but without an approved new 

drug application (NDA)) represents 

drugs that have not been approved by 

the FDA. We do not propose to consider 

this Chemical Type as a line extension 

because these drugs have not been 

approved by the FDA. 

Chemical Type 8 (OTC (over-thecounter) switch) represents the process 

of transferring FDA-approved 

prescription medications to 

nonprescription, OTC status. We do not 

propose to consider this Chemical Type 

as a line extension because there is no 

new formulation of the initial brand 

name listed drug. 

We plan to identify line extension 

drugs by using drug information that is 

publicly available on the FDA Web 

sites. As stated, CMS currently does not 

have the ability to identify whether a 

drug is a line extension and which drug 

is the initial brand name listed drug of 

the line extension drug based on 

manufacturers’ MDRP submissions. 

Therefore, we plan to rely on drug 

information obtained from the FDA. In 

order for us to identify the line 

extension drugs using the FDA’s drug 

information to calculate the additional 

rebate, there are essentially five criteria 

that we believe must be met. First, the 

line extension drug should be a single 

source drug or innovator multiple 

source drug. Manufacturers are already 

required to report to CMS if their ninedigit NDC drug is a single source drug, 

innovator multiple source drug, or noninnovator multiple source drug; 

therefore, we have the information to 

make this determination. 

Second, the line extension drug has to 

be an oral solid dosage form of a single 

source drug or innovator multiple 

source drug in accordance with the 

definition of an oral solid dosage form 

previously provided. 

Third, the line extension is identified 

based on Drugs@FDA’s application file. 

Since we currently do not have the 

ability to identify whether the drug is 

the actual line extension of the initial 

brand name listed drug based on 

manufacturers’ submissions, we propose 

to rely on the FDA’s list of Chemical 

Types to identify which drug is a line 

extension drug, as described above. 

Because we do not approve new drugs 

or changes to a drug, using the Chemical 

Types would permit us to identify line 

extension drugs based on FDA data, 

since the FDA currently has an 

identifier for the Chemical Types in 

their Drugs@FDA’s application file. 


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Fourth, the initial brand name listed 

drug of the line extension drug needs to 

be identified to calculate the Affordable 

Care Act unit rebate amount for the line 

extension drug. Again, as described 

above, we plan to use Chemical Type 1 

to assist us in tracking back to the initial 

brand name listed drug of the line 

extension drug. Chemical Type 1 is 

assigned to an active ingredient that has 

not been marketed in the United States 

in any form; therefore, we have decided 

that this can be used as the initial brand 

name listed drug identifier. An active 

ingredient that has never been marketed 

in the United States would be approved 

by the FDA under a new NDA with no 

therapeutic equivalents, which would 

meet our definition of a single source 

drug. If there are therapeutic equivalents 

for the single source drug, then the drug 

category would change to an innovator 

multiple source drug in accordance with 

the rebate definition of an innovator 

multiple source drug. However, the 

innovator multiple source drug would 

retain the same NDA that was assigned 

to the single source drug that was first 

approved by the FDA. Additionally, the 

initial brand name listed drug has to be 

an oral solid dosage form per our 

definition of an oral solid dosage form. 

Lastly, CMS currently collects drug 

product and pricing information by 

NDC, not by active ingredient. However, 

the FDA information is mainly available 

by active ingredient. Therefore, we need 

to identify the line extension drugs by 

NDC. In order for CMS to translate the 

active ingredient into NDC, a manual 

matching process has to be done to 

match the Drugs@FDA’s application file 

against the FDA’s Orange Book’s 

product file: (1) To extract the Chemical 

Type and the application number, (2) to 

identify the oral solid dosage form, and 

(3) to obtain the FDA approval date for 

each drug. This file will then be 

matched with the FDA’s NDC 

Directory’s application and listing files 

to identify the NDC of each active 

ingredient to compile a master list of all 

initial brand name listed drugs and their 

line extension drugs by NDC. This 

master list will then be matched by NDC 

against the CMS’ drug product file to 

identify which of CMS’ NDCs are the 

initial brand name listed drugs and 

which are the line extension drugs. 

Since NDCs enter and exit the MDRP 

frequently, we propose to update the 

master list based on the FDA’s drug 

information on a quarterly basis and 

then match the master file against CMS’ 

drug product file to identify new initial 

brand name listed drugs and new line 

extension drugs for the initial three 

quarters. Following these initial three 

updates, manufacturers will be 

responsible for identifying and reporting 

to CMS which of their NDCs is the 

initial brand name listed drug and 

which is the line extension drug. This 

is necessary to effectuate the line 

extension provisions of the Affordable 

Care Act. Additionally, as mentioned in 

the definition of a line extension drug, 

we propose that a new strength of the 

initial brand name listed drug would 

not qualify as a line extension drug. 

Furthermore, if we were to consider a 

new strength to be a line extension, it 

would be difficult to identify the first 

strength of the initial brand name listed 

drug because multiple strengths are 

often launched simultaneously and 

CMS would not be able to track back to 

the first strength of the initial brand 

name listed drug. We invite comments 

from the public on all aspects of this 

proposed policy. 

We also do not plan to exclude a 

single source or innovator multiple 

source drug that receives 3-year 

exclusivity, pediatric exclusivity, or 7- 

year orphan drug exclusivity from the 

definition of a line extension drug. Drug 

manufacturers may separately obtain a 

3-year exclusivity or a pediatric 

exclusivity. Drug manufacturers can 

reformulate a drug before it goes off 

patent by developing a new formulation 

such as a time-release version or by 

combining it with another existing drug, 

marketing it for another illness, or 

claiming a patent on an inactive 

ingredient. The 3-year exclusivity 

protection as indicated in sections 

505(c)(3)(D)(iii), (c)(3)(D)(iv), 

(j)(5)(D)(iii), and (c)(5)(D)(iv) of the 

FFDCA, and at 21 CFR 314.108 is 

granted for a drug product that contains 

an active moiety that has been 

previously approved, when the 

application contains reports of new 

clinical investigations (other than 

bioavailability studies) conducted or 

sponsored by the sponsor that were 

essential to approval of the application. 

This exclusivity requires conducting 

new clinical studies that are judged to 

be essential for approval of the change. 

Changes to a drug that qualify for this 

exclusivity are changes that we are 

considering for the definition of a line 

extension drug. 

According to section 505A of FFDCA 

(Food and Drug Administration 

Modernization Act (FDAMA) and Best 

Pharmaceuticals for Children Act 

(BPCA), drug manufacturers can also 

apply for a pediatric exclusivity, which 

permits certain applicants to obtain an 

additional 6-month period of exclusivity 

on the use of a drug moiety in pediatric 

patients. We do not plan to exclude 

drugs that have this exclusivity from the 

definition of line extension drugs. 

According to sections 526–527 of 

FFDCA and regulations at 21 CFR 316, 

drug manufacturers can apply for a 

7-year orphan drug exclusivity. Orphan 

drug exclusivity promotes research and 

marketing for the development of drugs 

to treat rare diseases, defined as a 

disease affecting 200,000 or fewer 

patients in the United States, by 

granting a 7-year protection against 

competition for the designated orphan 

indication. We do not plan to exclude 

drugs that have this exclusivity from the 

definition of line extension drugs. 

For the purpose of calculating the unit 

rebate amount (URA) for the line 

extension drug, the highest additional 

rebate as added by the Affordable Care 

Act for a line extension shall be referred 

to as the Alternative URA. We propose 

to interpret section 1927(c)(2) to provide 

that the URA determination is based on 

the greater of the Standard URA 

calculated under section 1927 of the Act 

without regard to the alternative rebate 

calculation provided in the Affordable 

Care Act, or the Alternative URA for the 

line extension drug under the 

Affordable Care Act. As previously 

stated, to effectuate the line extension 

provisions of the Affordable Care Act, 

we propose that both the initial brand 

name listed drug and the line extension 

drug are reported to CMS under the 

MDR program for the purpose of 

calculating the URA for a line extension 

drug. 

Additionally, to calculate the 

Alternative URA, the line extension 

drug should be tracked back to the 

initial brand name listed drug. We 

recognize that there are multiple issues 

when it comes to tracking the line 

extension back to the initial brand name 

drug, such as when the line extension 

drug and the initial brand name listed 

drug are marketed by two different 

manufacturers or when the initial brand 

name listed drug has been terminated 

from the Medicaid drug rebate program. 

However, in accordance with the 

statute, manufacturers are responsible 

for calculating the Alternative URA for 

their line extension drugs. 

We propose that when the initial 

brand name listed drug has been 

terminated that manufacturers should 

not be responsible for calculating the 

Alternative URA. The initial brand 

name listed drug must be active in the 

Medicaid drug rebate program to 

calculate the Alternative URA. We 

propose that we would calculate the 

URA for line extension drugs and will 

provide this amount to States on the 

quarterly rebate tape as in the current 

rebate process. However, in accordance 

with the current process, manufacturers 

are responsible for calculating and 


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making rebate payments to each State 

Medicaid Agency. Therefore, 

manufacturers are responsible for 

ensuring that all necessary product and 

pricing data, whether such information 

is for the initial brand name listed drug 

or the line extension drug, are 

exchanged between the manufacturer of 

the initial brand name listed drug and 

the manufacturer of the line extension 

drug to accurately calculate the URA for 

the line extension drug and provide 

rebates in accordance with the statute. 

As provided in § 447.509(a)(5), 

section 2501(e) of the Affordable Care 

Act added section 1927(c)(2) of the Act 

to cap the URA at 100 percent of AMP 

for all brand name drugs. Therefore, this 

cap will also apply to the URA 

calculation for the line extension drugs 

as well. 

Below are the proposed steps 

outlining how we plan to calculate the 

URA for a line extension drug. For 

clarification purposes, the highest 

additional rebate as added by the 

Affordable Care Act for a line extension 

shall be referred to as the ‘‘Alternative 

URA’’ and the URA calculation based 

on section 1927 of the Act (without 

regard to the alternative rebate 

calculation provided in the Affordable 

Care Act) shall be referred to as 

‘‘Standard URA.’’ 

Step 1—Standard URA = Basic Rebate 

Amount + Additional Rebate Amount 

Step 2—The Alternative URA is calculated 

as the product of the AMP of the line 

extension that is an oral solid dosage form 

and the highest additional rebate (calculated 

as a percentage of AMP) for any strength of 

the original drug. 

Step 3—URA = The greater of (1) Standard 

URA or (2) the Alternative URA. 

Step 4—Determine if the URA is greater 

than 100 percent of AMP. 

a. If the URA is greater than 100 percent 

of AMP, then the URA = AMP. 

b. If the URA is less than 100 percent of 

AMP, then use the calculated URA. 

Below is an example of calculating 

the URA for a line extension drug. 

Baseline AMP (line extension) = 100.00 

AMP (line extension) = 300.00 

Best Price (line extension) = 250.00 

Baseline CPI–U = 170.00 

CPI–U = 200.00 

Step 1—Calculate Standard URA 

Greater of 

a. AMP × 23.1% = 300.00 × 23.1% = 69.30 

or 

b. AMP ¥ Best Price = 300.00 ¥ 250.00 

= 50.00 

The greater of the two results (69.30 or 

50.00) is 69.30 

Basic Rebate Amount for the line extension 

drug = 69.30 

Additional Rebate Amount calculated 

under section 1927 of the Act Formula: If the 

[(Baseline AMP/Baseline CPI–U) × CPI–U] is 

less than the quarterly AMP, subtract 

[(Baseline AMP/Baseline CPI–U) × CPI] from 

the quarterly AMP to determine the 

additional URA. If the [(Baseline AMP/ 

Baseline CPI–U) × CPI] is equal to or greater 

than the quarterly AMP, the additional URA 

is equal to zero. 

[(Baseline AMP/Baseline CPI–U) × CPI–U] 

= 100/170 × 200 = 0.5882 × 200 = 117.65 

117.65 is less than 300.00; then, 117.65 is 

subtracted from 300.00, 300.00 ¥ 117.65 = 

182.35 

Additional Rebate Amount under section 

1927 = 182.35 

Standard URA = 69.30 + 182.35 = 251.65 

Step 2—Calculate the Alternative URA 

AMP (line extension) = 300.00 

AMP (initial brand name listed drug) 

strength A = 280.00 

AMP (initial brand name listed drug) 

strength B = 275.00 

AMP (initial brand name listed drug) 

strength C = 270.00 

Additional Rebate Amount (initial brand 

name listed drug) strength A = 200.00 

Additional Rebate Amount (initial brand 

name listed drug) strength B = 125.00 

Additional Rebate Amount (initial brand 

name listed drug) strength C = 110.00 

Strength A additional rebate amount ratio 

= 200/280 = 0.7143 

Strength B additional rebate amount ratio 

= 125/275 = 0.5636 

Strength C additional rebate amount ratio 

= 110/270 = 0.4074 

Highest additional rebate (calculated as a 

percentage of AMP) for any strength of the 

initial brand name listed drug = 0.7143 

Alternative URA = Product of the AMP of 

the line extension that is an oral solid dosage 

form and the highest additional rebate 

(calculated as a percentage of AMP) for any 

strength of the original drug 

Alternative URA = 300 × 0.7143 = 214.29 

Step 3—URA of the line extension drug = 

the greater of 

(1) Standard URA = 251.65 or 

(2) Alternative URA = 214.29 

URA of the line extension drug = 251.65 

Step 4—Determine if the URA is greater 

than 100 percent of AMP. 

AMP (line extension) = 300.00 = 100% × 

300.00 = 300.00 

URA = 251.65 

URA is less than 100 percent of AMP; 

therefore, URA is equal to 251.65 

3. Rebates for Drugs Dispensed Through 

Medicaid Managed Care Organizations 

(MCOs) (§ 447.509(b)) 

From the inception of the MDR 

program, section 1927(j)(1) of the Act 

exempted participating manufacturers 

from paying drug rebates for drugs 

dispensed to individuals enrolled in 

MCOs. The Affordable Care Act 

eliminated this exemption. Effective 

March 23, 2010, section 1927(b) of the 

Act, as amended by section 2501(c) of 

the Affordable Care Act requires 

manufacturers that participate in the 

drug rebate program to pay rebates for 

drugs dispensed to individuals enrolled 

with a Medicaid MCO if the MCO is 

responsible for coverage of such drugs. 

The requirement to collect rebates 

beginning March 23, 2010 is irrespective 

of any existing contracts States may 

have with MCOs. To comply with this 

section of the law and to assure that 

States fully collect these increased 

rebates, States must obtain utilization 

data from each Medicaid MCO in order 

for States to request quarterly rebates 

from manufacturers as well as report it 

in their quarterly utilization reports to 

CMS. This data reporting will also have 

other quality-related benefits for States 

and the Medicaid program in terms of 

providing timely information on drug 

utilization. 

Section 2501(c) of the Affordable Care 

Act also amended section 1903(m)(2)(A) 

of the Act, effective March 23, 2010, by 

adding new conditions for Federal 

financial participation for MCO 

contracts including that: 

• Any covered outpatient drug 

provided by the MCO is eligible for the 

rebates authorized under section 1927 of 

the Act; 

• MCO capitation rates will be based 

on actual cost experience related to 

rebates and subject to Federal 

regulations at § 438.6 regarding actuarial 

soundness of capitation payments; and 

• The MCO must report to the State 

information on the total number of units 

of each dosage form, strength and 

package size by NDC of each covered 

outpatient drug dispensed to Medicaid 

MCO enrollees and such other data that 

the Secretary determines necessary for 

the State to access the rebates 

authorized by this provision. 

Section 2501(c) also made a 

conforming amendment to section 

1927(j)(1) of the Act, effective March 23, 

2010, to specify that certain covered 

outpatient drugs in this section are not 

subject to the rebate requirements if 

such drugs are both dispensed by health 

maintenance organizations (HMOs), 

including Medicaid MCOs that contract 

under section 1903(m), and are subject 

to discounts under section 340B of the 

Public Health Service Act. 

In accordance with these revisions to 

sections 1927 and 1903 of the Act, we 

propose a new § 447.509(b). In 

§ 447.509(b)(1), we propose to require 

participating manufacturers to pay 

rebates for covered outpatient drugs 

dispensed to individuals enrolled in 

Medicaid MCOs if the MCO is 

responsible for payment for such drugs. 

In § 447.509(b)(2), we propose that 

manufacturers are exempt from the 

requirement in paragraph (b)(1) if such 

drugs are dispensed by health 

maintenance organizations, including 

MCOs that contract under section 

1903(m) of the Act, and subject to 


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discounts under section 340B of the 

PHS Act. In § 447.509(b)(3), we propose 

that a Medicaid MCO that is responsible 

for covered outpatient drugs dispensed 

to Medicaid beneficiaries must submit a 

report to the State within thirty days of 

the end of each quarter. We also propose 

the specific data that MCOs must 

include in such reports. It is expected 

that the States will ensure that the 

MCOs comply with providing timely 

utilization data to meet the State 

reporting requirements. 

4. Federal Offset of Rebates 

(§ 447.509(c)) 

Section 2501(a)(2) of the Affordable 

Care Act added section 1927(b)(1)(C) of 

the Act, which provides that, effective 

January 1, 2010, the amount of the 

savings resulting from the increases in 

the rebate percentages described above 

will be remitted to the Federal 

government. These offset amounts are in 

addition to the amounts applied as a 

reduction under section 1927(b)(1)(B) of 

the Act. 

We propose to calculate the offset as 

described below. 

For single source or innovator 

multiple source drugs that are subject to 

a minimum rebate percentage of 23.1 

percent of AMP: 

• If the difference between AMP and 

best price is less than or equal to 15.1 

percent of AMP, then we propose to 

offset the full 8 percent of AMP (the 

difference between 23.1 percent of AMP 

and 15.1 percent of AMP). 

• If the difference between AMP and 

best price is greater than 15.1 percent of 

AMP but less than 23.1 percent of AMP, 

then we propose to offset the difference 

between 23.1 percent of AMP and AMP 

minus best price. 

• If the difference between AMP and 

best price is greater than or equal to 23.1 

percent of AMP, then we propose to not 

take any offset amount. 

For single source or innovator 

multiple source drugs that are blood 

clotting factors and drugs approved by 

the FDA exclusively for pediatric 

indications that are subject to a rebate 

percentage of 17.1 percent of AMP: 

• If the difference between AMP and 

best price is less than or equal to 15.1 

percent of AMP, then we propose to 

offset the full 2 percent of AMP (the 

difference between 17.1 percent of AMP 

and 15.1 percent of AMP). 

• If the difference between AMP and 

best price is greater than 15.1 percent of 

AMP but less than 17.1 percent of AMP, 

then we propose to offset the difference 

between 17.1 percent of AMP and AMP 

minus best price. 

• If the difference between AMP and 

best price is greater than or equal to 17.1 

percent of AMP, then we propose to not 

take any offset amount. 

In the September 28, 2010 State 

Medicaid Director (SMD) letter, #10– 

019, we stated that for a drug that is a 

line extension of a brand name drug that 

is an oral solid dosage form, we planned 

to apply the same offset calculation as 

described above to the basic rebate. 

Further, we planned to offset only the 

difference in the additional rebate of the 

reformulated drug based on the 

calculation methodology of the 

additional rebate for the drug preceding 

the requirements of the Affordable Care 

Act and the calculation of rebates for the 

reformulated drug, if greater, in 

accordance with the Affordable Care 

Act. If there is no difference in the 

additional rebate amount in accordance 

with the Affordable Care Act, then we 

do not plan to take any offset amount. 

(A copy of the SMD letter can be found 

at http://www.cms.gov/smdl/

downloads/SMD10019.pdf.) 

However, after further review of the 

offset provisions in section 2501 of the 

Affordable Care Act, we have decided to 

reconsider our instructions regarding 

the calculation of the offset provisions 

for line extension drugs to reflect the 

difference between the URA for the drug 

calculated based on the applicable 

rebate percentage in section 1927 of the 

Act prior to the Affordable Care Act and 

the calculation of the URA for the line 

extension drug, if greater, in accordance 

with the Affordable Care Act. If there is 

no difference between the URA for the 

line extension drug based on the 

Affordable Care Act and URA 

calculation based on the applicable 

rebate percentage in section 1927 prior 

to the Affordable Care Act, then we do 

not plan to take any offset amount. If 

there is a difference then we will offset 

the amount of that difference. 

For noninnovator multiple source 

drugs, we plan to offset an amount equal 

to 2 percent of the AMP (the difference 

between 13 percent of AMP and 11 

percent of AMP) since these drugs are 

unaffected by best price. 

For covered outpatient drugs that are 

dispensed to Medicaid MCO enrollees, 

we propose to offset the non-Federal 

share limited to the difference between 

the rebate percentages in effect outside 

of the MCO context on December 31, 

2009 and the rebate percentages in effect 

on January 1, 2010, as described 

previously. Specifically, we planned for 

States to retain the non-Federal share of 

rebates below the 15.1 percent rebate 

percentage for single source or 

innovator multiple source drugs and 11 

percent for noninnovator multiple 

source drugs as in effect on December 

31, 2009. In addition, we planned for 

States to retain the non-Federal share of 

the amount above the revised minimum 

rebates for brand name drugs. 

Additionally, we do not plan to offset 

the non-Federal share of any 

supplemental rebate States may receive 

above the increased Federal rebate 

percentages. 

To ensure efficiency and uniformity, 

CMS plans to calculate a unit rebate 

offset amount (UROA) that will, on a 

quarterly basis, identify the amount of 

offset per unit of drug at the 9-digit NDC 

for States. The UROA will be provided 

to States in a manner similar to how 

States currently receive the URA every 

quarter. States will then match the 

UROA with the number of units of the 

drug for which they receive payment 

from a manufacturer to determine the 

Quarterly Rebate Offset amount (QROA) 

for that drug. All QROAs for all drugs 

of all manufacturers will then be added 

together to determine the Total QROA. 

This then will be the amount that States 

offset on the Quarterly Expenditure 

reports. Adjustments to the UROA will 

be treated as prior period adjustments 

(PPAs) and will be reported to the States 

the same way that URA PPAs are 

currently transmitted. 

Please note that the offset provision 

would also apply to the Territories that 

participate in the MDR program. 

H. Requirements for Manufacturers 

(§ 447.510) 

In the Medicaid Program; Withdrawal 

of Determination of Average 

Manufacturer Price, Multiple Source 

Drug Definition, and Upper Limits for 

Multiple Source Drugs final rule 

published in the November 15, 2010 

Federal Register (75 FR 69591), we 

made conforming amendments to delete 

references to § 447.504 ‘‘Determination 

of AMP’’ from § 447.510 ‘‘Requirements 

for Manufacturers’’. In this proposed 

rule, we are proposing conforming 

regulatory amendments to add 

regulatory text to § 447.510. 

Specifically, those references that will 

be added are at § 447.510(a)(1), 

§ 447.510(c)(2)(i), and § 447.510(d)(2). 

We are also proposing a conforming 

amendment to § 447.510(g) to clarify 

that the electronic format in which the 

product and pricing data is submitted to 

CMS must be submitted in a format 

designated by CMS. 

1. Failure to Report Quarterly AMP 

(§ 447.510(a)(5)) 

In an effort to better ensure timely 

quarterly AMP reporting at the end of 

each rebate period, in accordance with 

the statute at section 1927(b), a 

manufacturer that fails to submit and 

certify a quarterly AMP to CMS for a 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5343 

product by the 30th day after the end of 

each quarter will be reported to the OIG. 

We propose, in accordance with the 

statutory requirements at section 

1927(b)(3)(C)(i), that manufacturer will 

be subject to a civil monetary penalty 

for each product not reported on the 

thirty-first day. Please see the OIG’s 

Special Advisory Bulletin issued in 

September 2010 regarding reporting 

AMP timely, http://oig.hhs.gov/fraud/

docs/alertsandbulletins/2010/

SpAdvBulletin_AMP_ASP.pdf. 

Additionally, we are considering 

adding regulatory guidance on 

suspension and termination for 

manufacturers that do not report 

quarterly AMP on a timely basis or are 

otherwise out of compliance with rebate 

requirements. We have considered a 

number of formal and informal 

administrative procedures similar to 

those set forth in 42 CFR part 498 or 42 

CFR 430.18, which would permit an 

opportunity for reconsideration and 

administrative appeals. We are 

considering the appropriate terms and 

procedures for suspension and 

termination and, therefore, we invite 

comments from the public. 

2. Reporting Revised Monthly and 

Quarterly AMP, Best Price, Customary 

Prompt Pay Discounts, or Nominal 

Prices (§ 447.510(b)) 

In this proposed rule, we propose to 

revise the 12-quarter rule filing 

limitation currently in place for 

manufacturers to report revisions to 

their quarterly AMP, best price, 

customary prompt pay discounts, or 

nominal prices. We initially established 

a time limit of 12 quarters for 

manufacturers to report revisions to 

their quarterly pricing data. The 12- 

quarter period established a time limit 

within which manufacturers are 

responsible for reporting revisions to 

pricing data in part to decrease 

associated administrative burdens on 

manufacturers and States. Despite the 

effective date of January 1, 2004 for the 

12-quarter rule, we are still receiving 

requests from manufacturers to make 

revisions to the pricing data that fall 

outside of the 12-quarter period. 

Therefore, we propose that any request 

from manufacturers submitted to CMS 

to revise the monthly and quarterly 

AMP, best price, customary prompt pay 

discounts, or nominal prices that are 

outside of the 12-quarter filing deadline 

will be considered, only if it falls within 

one of the following categories: 

• The change is a result of the drug 

category change or a market date 

change. 

• The change is an initial submission 

for a product. 

• The change is due to termination of 

a manufacturer from the MDR Program 

for failure to submit pricing data and 

must submit pricing data to reenter the 

program. 

• The change is due to a technical 

correction (such as a keying error), that 

is, not based on any changes in sales 

transactions or pricing adjustments from 

such transactions. 

• The change is to address specific 

underpayments to States, or potential 

liability regarding those underpayments, 

as required by CMS, applicable law or 

regulations, or an OIG or DOJ 

investigation. 

We propose that § 447.510(b)(1) be 

revised to clarify that a manufacturer is 

required to report to CMS any revisions 

to correct AMP, best price, customary 

prompt pay discounts, or nominal 

prices for a period not to exceed 12- 

quarters from the quarter in which the 

data were due. The 12-quarter limit is 

meant to be a specific time limit for any 

revision. Any revision request, except 

for those falling within the exceptions 

noted above, must be made within this 

12-quarter time period. We propose to 

add to § 447.510(b) that any revision 

request that falls outside of the 12- 

quarter time limit will not be considered 

by CMS, unless it falls under the above 

five criteria. We also propose to revise 

timeframe for reporting revised monthly 

AMP in § 447.510(d)(3) to clarify that 

the only exceptions to the 36-month 

limit for reporting monthly AMP would 

be considered by CMS if it falls under 

the same five criteria. 

We are contemplating whether to 

allow manufacturers that have revisions 

to their pricing data beyond the 12- 

quarter limit that meet the five criteria 

above to revise their pricing data on a 

retroactive basis: (1) Without any time 

limits back to beginning of the program, 

1991, or (2) with some time limits 

outside of the 12-quarter restrictions. In 

other words, we are considering 

whether we should impose a timeframe 

as to how far back we should allow 

manufacturers to make this revision. We 

invite public comments on suggestions 

as to how far back we should allow 

manufacturers to make revisions to their 

pricing data if their request meets one 

of the above five exceptions. 

Additionally, to ensure that any 

revision to pricing data is consistent 

across the monthly and the quarterly 

AMP data, if a revision request is 

submitted for monthly AMP and AMP 

units, then a revision request is also 

required for quarterly AMP. In addition, 

if a revision request is submitted for 

quarterly AMP, then a revision request 

is also required for monthly AMP and 

AMP units. 

3. Recalculations Including Good Cause 

Separate from pricing data revision 

request, we are proposing an option for 

manufacturers to submit a recalculation 

request outside of the 12-quarter time 

limit based on good cause, which would 

permit a manufacturer to revise its 

methodology for calculating AMP and 

best price. Our regulations at 

§ 447.510(b) specify that manufacturers 

have a 12-quarter time limit to report 

price revisions. Manufacturers are 

responsible for reporting any revisions 

to AMP or best price within the 12 

quarter limit, which begins with the 

quarter in which the data was due. As 

is the case with all pricing data 

submitted under the MDR program, if a 

subsequent review of the manufacturers’ 

pricing data by CMS, the OIG, or 

another authorized government agency 

determines or reveals that adjustments 

or revisions are necessary irrespective of 

the quarter, the manufacturer is 

responsible under the statute to comply 

with that determination. Based on 

questions from manufacturers often as a 

result of False Claims Act concerns, we 

have considered allowing manufacturers 

to submit recalculations of AMP and 

best price outside of the twelve quarter 

time limit due to good cause. We plan 

to establish a good cause option to allow 

manufacturers to submit their pricing 

data due to a recalculation of the 

methodology for calculating AMP and 

best price outside of the 12-quarter time 

limit to address underpayments and 

potential liability regarding those 

underpayments that may extend outside 

of that 12-quarter period. We are 

considering proposing a ‘‘good cause’’ 

option to extend the time limit for filing 

a recalculation request, similar to that 

used in Medicare. We invite comments 

from the public on this option. 

4. Base Date AMP (§ 447.510(c)(1) to 

§ 447.510 (c)(4)) 

In the 2007 AMP final rule, we 

allowed manufacturers to report a 

revised base date AMP to CMS within 

the first four full calendar quarters 

following the publication date of the 

final rule. To differentiate between the 

timeframe when manufacturers were 

allowed to report revised base date 

AMPs in accordance with the DRAbased definition of AMP and the 

timeframe described below, we propose 

to revise § 447.510(c)(1) and 

§ 447.510(c)(2) by inserting ‘‘DRA’’ 

before base date AMP where it occurs. 

We also propose to remove the notation 

‘‘[OFR: insert publication date of the 

final rule]’’ and replace it with ‘‘July 17, 

2007’’ in § 447.510(c)(1). 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
5344 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

The Affordable Care Act significantly 

revised the definition of AMP to mean 

for a covered outpatient drug (including 

those sold under section 505(c) of the 

FFDCA), the average price paid to the 

manufacturer for the drug in the United 

States by wholesalers for drugs 

distributed to retail community 

pharmacies and retail community 

pharmacies that purchase drugs directly 

from the manufacturer. To reflect the 

changes to AMP as set forth in the 

Affordable Care Act, we propose to 

allow manufacturers to recalculate base 

AMP in accordance with the definition 

of AMP in § 447.504 of this subpart. 

Base AMP is used in the calculation of 

the additional rebate described in 

section 1927(c)(2) of the Act. This 

additional rebate is defined as the 

difference between the current quarterly 

AMP reported to CMS and the base date 

AMP trended forward using the CPI–U. 

We propose this revision so that the 

additional rebate would not increase 

solely due to the changes in the 

definition of AMP. We propose giving 

manufacturers the option to report a 

recalculated base date AMP based on 

the Affordable Care Act. We propose to 

allow manufacturers the option to 

decide whether they will recalculate 

and report to CMS an Affordable Care 

Act base date AMP in light of the 

revised definition of AMP or continue to 

use their existing base AMP. We 

propose to give manufacturers this 

option because we are aware that some 

manufacturers may not have the actual 

data needed to recalculate their base 

date AMP or may find the 

administrative burden to be more costly 

than the savings gained. We propose to 

provide manufacturers with the option 

to report the recalculated Affordable 

Care Act base date AMP for a period of 

four full calendar quarters beginning 

with the first full quarter after the 

publication of the final rule. 

5. Calculation of Monthly AMP 

(§ 447.510(d)(2)) 

Section 1927(e)(5) of the Act specifies 

that the Secretary is to implement a 

smoothing process for AMP, which shall 

be similar to the smoothing process 

used in determining the average sales 

price (ASP) of a drug or biological under 

Medicare Part B. The Medicare Part B 

regulations at § 414.804(a)(3) specify 

that the ASP methodology for 

smoothing lagged price concessions 

requires that manufacturers calculate 

the total lagged price concessions for the 

previous 12-month period and convert 

the dollar amount to a percentage of 

sales over that same 12-month period. 

This percentage is then applied to the 

current quarter’s sales to estimate the 

lagged price concessions for that 

quarter. 

Therefore, we are proposing 

manufacturers would be required to use 

a 12-month rolling percentage to 

estimate the value of lagged price 

concessions in their calculations of the 

monthly and quarterly AMPs. 

Specifically, we are proposing that a 

manufacturer’s monthly AMP is to be 

calculated based on the weighted 

average of the prices for all the 

manufacturer’s package sizes of each 

covered outpatient drug sold by the 

manufacturer during a month. It is 

calculated as net sales divided by 

number of units of the drug sold, 

excluding goods or any other items 

specifically excluded in the statute or 

regulations. The drug unit is the lowest 

identifiable amount (for example, tablet 

or capsule for solid dosage forms, 

milliliter for liquid forms, gram for 

ointments or creams) as reported by the 

manufacturer. 

Monthly AMP should be calculated 

consistent with this methodology, based 

on the best data available to the 

manufacturer at the time of submission. 

In calculating monthly AMP, a 

manufacturer should estimate the 

impact of its lagged price concessions 

using a 12-month rolling percentage to 

estimate the value of those discounts. 

Following is an example of how 

manufacturers would calculate the 

monthly AMP by using a 12-month 

rolling percentage to estimate the lagged 

price concessions: 

• Total lagged price concessions over 

the most recent 12-month period = 

$150,000. 

• Total sales subject to AMP reporting 

for the most recent 12-month period = 

$600,000. 

• $150,000/$600,000 = 0.25 (or 25 

percent). 

• The result (25 percent) is the 

percentage manufacturers subtract from 

their total sales for that month to 

estimate lagged price concessions for 

that month. 

• Current month sales = $50,000. 

• $50,000 × 25 percent (estimated 

percentage of lagged price concessions) 

= $12,500 estimated lagged price 

concessions for the current month. 

• $50,000¥$12,500 = $37,500 (net 

total sales after subtracting estimated 

lagged price concessions for the current 

month). 

• Units sold during current month = 

10,000 units. 

• $37,500/10,000 units = $3.75 AMP. 

The only differences between the 

proposed AMP smoothing process 

methodology and the ASP smoothing 

process methodology is that the ASP 

smoothing process is applied on a 

quarterly basis whereas the AMP 

smoothing process will be applied on a 

monthly basis and by statutory 

definition, the ASP calculation includes 

more sales than in the AMP calculation. 

We believe this process will result in 

more stable AMP calculations on a 

month to month basis, because the 

estimated lagged price concessions will 

increase as sales increase, and likewise 

as sales decrease. In addition, it meets 

the statutory requirement that the AMP 

smoothing process be similar to the 

smoothing process used in determining 

the ASP. 

6. Manufacturer Reported AMP Units 

(§ 447.510(d)(6)) 

Section 2503(b) of the Affordable Care 

Act requires manufacturers to submit to 

CMS on a monthly basis the total 

number of units that are used to 

calculate the monthly AMP for each 

covered outpatient drug no later than 30 

days after the last day of each prior 

month. We propose that the 

manufacturer report monthly AMP units 

as the number of units that are used to 

calculate the monthly AMP to be 

reported to CMS. Additionally, in order 

to be consistent and to implement the 

rebate and FUL provisions, the monthly 

units should be of the unit type that is 

reported as part of the product data and 

the unit type used in the quarterly and 

monthly AMP calculation for each NDC 

to ensure consistency in the calculation 

as well as the reporting of the monthly 

and quarterly AMP and the AMP units. 

7. Failure To Report Monthly AMP and 

AMP Units (§ 447.510(d)(7)) 

Currently a manufacturer must submit 

a monthly AMP to CMS no later than 30 

days after the last day of the prior 

month. Under the Affordable Care Act, 

a manufacturer will be required to 

submit the total number of units that are 

used to calculate the monthly AMP no 

later than 30 days after the last day of 

the prior month. To ensure that each 

manufacturer is reporting timely to 

CMS, a manufacturer that fails to submit 

and certify monthly AMP and the AMP 

Units for a product to CMS by the 30th 

day after the end of each month will be 

reported to the OIG. We propose, in 

accordance with the statutory 

requirements at section 1927(b)(3)(C)(i), 

that the manufacturer will be subject to 

civil monetary penalty for each product 

not reported on the thirty-first day. 

Please see the OIG’s Special Advisory 

Bulletin issued in September 2010 

regarding reporting AMP timely, http:// 

oig.hhs.gov/fraud/docs/alertsand

bulletins/2010/SpAdvBulletin_

AMP_ASP.pdf. 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5345 

3http://oig.hhs.gov/oas/reports/region6/

60000023.htm. http://oig.hhs.gov/oas/reports/

region6/60100053.htm. http://oig.hhs.gov/oas/

reports/region6/60200041.htm. 

4Alabama-10–008, effective date September 22, 

2010 (Alabama AAC Survey information available 

at http://al.mslc.com/Faqs.aspx) and Oregon-10–13, 

effective date January 1, 2011 (Oregon AAC Survey 

information available at http://or.mslc.com/

AACList.aspx or http://or.mslc.com/uploadedFiles/ 

Oregon/OR%20Communications%20Plan.pdf). 

Additionally, we are considering 

adding regulatory guidance on 

suspension and termination for 

manufacturers that do not report 

monthly AMP and AMP Units on a 

timely basis. As noted previously, we 

have considered a number of formal and 

informal administrative procedures 

similar to those set forth in 42 CFR part 

498 or 42 CFR 430.18. Therefore, we 

invite comments on these procedures 

from the public. 

I. Requirements for States (§ 447.511) 

Section 1927(b)(2)(A) of the Act 

specifies that States are required to 

report to each manufacturer, not later 

than 60 days after the end of each rebate 

period, information on the total number 

of units of each dosage form and 

strength and package size of each 

covered outpatient drug dispensed, and 

to promptly transmit a copy of such 

report to the Secretary. Effective March 

23, 2010, the Affordable Care Act 

amended section 1927(b)(2)(A) of the 

Act to require that the State include in 

those reports, the information reported 

by each Medicaid MCO. 

We propose a new § 447.511 to clarify 

the requirements for States. In 

§ 447.511(a), we propose to list the data 

that the State must provide to 

participating drug manufacturers. We 

further propose that States must submit 

this data within 60 days after the end of 

each quarter. 

In § 447.511(b), we propose that the 

States report drug utilization data as 

defined in § 447.511(a) to CMS on a 

quarterly basis. 

In § 447.511(c), we propose that a 

State that has participating Medicaid 

MCOs, which includes covered 

outpatient drugs in its capitated 

arrangements with the MCOs, report 

data listed in §§ 447.511(a) for covered 

outpatient drugs dispensed to 

individuals eligible for medical 

assistance who are enrolled with the 

MCO and for which the MCO is 

responsible for coverage of such drugs 

under section 1903 of the Act. We 

further propose that this data be 

identified separately from the data 

pertaining to drugs that the State 

reimburses on a fee-for-service basis. 

With the proposed change in the 

definition of ‘‘State’’ to include the 

territories, we recognize that these 

requirements would ultimately be 

applicable to the territories. We are also 

aware that it will take the territories 

time in order to upgrade their computer 

systems and come into compliance with 

the MDR program requirements. 

Therefore, we are proposing that the 

requirements discussed in this section 

would not be effective for the territories 

until one year after the first day of the 

first full quarter after the publication of 

the final rule. 

J. Drugs: Aggregate Upper Limits of 

Payment (§ 447.512) 

In the ‘‘Medicaid Program; 

Withdrawal of Determination of Average 

Manufacturer Price, Multiple Source 

Drug Definition, and Upper Limits for 

Multiple Source Drugs’’ final rule that 

we published in the November 15, 2010 

Federal Register (75 FR 69591), we 

made conforming amendments to 

remove references to § 447.514 ‘‘Upper 

limits for multiple source drugs’’ from 

§ 447.512 ‘‘Drugs: Aggregate upper 

limits of payment’’. We are proposing 

regulatory amendments to add those 

references back into the regulatory text 

of § 447.512. 

Currently, § 447.512(b) establishes 

guidelines for payment levels that the 

agency has determined to be 

appropriate. At § 447.512(b)(1), we 

propose to replace the term ‘‘EAC’’ with 

the term ‘‘AAC’’ as we have previously 

proposed to replace ‘‘estimated 

acquisition cost’’ with ‘‘actual 

acquisition cost’’. Further, we propose 

to add the word ‘‘professional’’ to the 

description of dispensing fee in this 

section. 

We are proposing these changes in 

terminology in part because we believe 

that using the AAC in determining the 

drug ingredient component of the 

reimbursement formula will be more 

reflective of actual prices paid, as 

opposed to unreliable published 

compendia pricing. 

Currently, States usually determine 

EAC for single source drugs and drugs 

other than multiple source drugs for 

which either a specific Federal Upper 

Limit (FUL) or State maximum 

allowable cost (SMAC) has been 

established by paying the lower of: 

• A percentage decrease applied to a 

commercially published reference price 

such as average wholesale price (AWP) 

or a percentage increase to wholesale 

acquisition cost (WAC), or 

• The pharmacy’s usual and 

customary charge to the public. 

Using a commercially published 

reference price as the basis for Medicaid 

pharmacy reimbursement has been 

problematic for both the States and the 

Federal government. Several reports 

issued by the OIG have shown that AWP 

is often a significantly inflated price, 

and not necessarily reflective of a 

pharmacy’s actual purchase price for a 

drug. (OIG Audit reports—A–06–00– 

00023, A–06–01–00053, A–06–02– 

00041).3

Further, AWP raises other concerns 

when used as a basis for payment, as 

evidenced by litigation relating to its 

use. See New England Carpenters 

Health Benefits Fund v. First DataBank, 

602 F.Supp.2d 277, 279 (D.Mass. 2009) 

(in which the Court stated that ‘‘despite 

its name, AWP is not an average of 

prices charged by wholesalers to 

providers (such as pharmacies and 

doctors) and it does not necessarily bear 

any relationship to any prices actually 

charged in the marketplace.’’) 

At this time the commercial 

compendium, First DataBank, Inc. has 

reported that it is scheduled to cease the 

publication of AWP as of September 

2011. While other drug pricing 

compendia may publish both AWPs and 

WACs, we have concerns, based on the 

previously referenced OIG reports, that 

these prices will not be based on actual 

costs or reflect actual prices that 

providers pay for these drugs. 

Certain States, in order to calculate 

more accurate payment rates, have 

already begun to base some of their drug 

prices on survey data based on 

pharmacy invoice prices.4 We believe 

that these surveys of pharmacy 

providers will assist States in 

determining valid reference prices from 

which to develop drug ingredient 

reimbursement. Section 447.518 of this 

proposed regulation provides further 

discussion about how States can 

develop and justify their AAC. 

K. Upper Limits for Multiple Source 

Drugs (§ 447.514) 

Section 2503(a) of the Affordable Care 

Act revises the definition of ‘‘multiple 

source drug’’ established in section 

1927(k)(7)(A)(i) of the Act to mean, for 

a rebate period, a covered outpatient 

drug for which there is at least one other 

drug product which is rated as 

therapeutically equivalent (under the 

FDA’s most recent publication of the 

Orange Book), is pharmaceutically and 

bioequivalent, as determined by the 

FDA; and is sold or marketed in the 

United States during the period. We 

propose this definition be included in 

§ 447.502 ‘‘Definitions.’’ In accordance 

with these statutory requirements, we 

also propose that at least two 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
5346 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

5http://www.fda.gov/downloads/Drugs/

DevelopmentApprovalProcess/UCM071436.pdf. 6 Id., vii. 

therapeutically equivalent (‘‘A’’ rated) 

formulations must be listed in the FDA’s 

Orange Book in order for the drug to be 

defined as a multiple source drug. 

Also, section 2503(a) of the Affordable 

Care Act revised section 1927(e) of the 

Act to change the requirement for a FUL 

to be established for each multiple 

source drug for which the FDA has rated 

two or more products therapeutically 

and pharmaceutically equivalent, to 

three or more products, regardless of 

other formulations. In accordance with 

this statutory requirement, we are 

proposing in § 447.514(a)(1) that a FUL 

be established for each multiple source 

drug for which the FDA has rated three 

or more products therapeutically and 

pharmaceutically equivalent. We 

propose that the FUL will be calculated, 

in accordance with section 1927(e)(4) of 

the Act, using only therapeutically and 

pharmaceutically equivalent drugs. Any 

other formulations of the drug listed in 

the FDA Orange Book that are not 

therapeutically and pharmaceutically 

equivalent to the reference listed drug, 

for example, ‘‘B’’ rated drugs, will not 

be used in the calculation of the FUL. 

For purposes of applying this rule, we 

consider drug products to be 

therapeutically equivalent if they are 

identified as A-rated in the current 

edition of FDA’s Orange book. Per the 

FDA’s Orange Book, drug products are 

considered to be therapeutic equivalents 

only if they are pharmaceutical 

equivalents and if they can be expected 

to have the same clinical effect and 

safety profile when administered to 

patients under the conditions specified 

in the labeling. Drug products are 

considered pharmaceutical equivalents 

if they contain the same active 

ingredient(s), are of the same dosage 

form, route of administration and are 

identical in strength or concentration. In 

general, with limitations that may apply 

to particular patients, the FDA believes 

that products classified as 

therapeutically equivalent can be 

substituted with the full expectation 

that the substituted product will 

produce the same clinical effect and 

safety profile as the prescribed product.5

‘‘B’’ rated drugs are drugs that FDA 

does not consider therapeutically 

equivalent to other pharmaceutically 

equivalent products. Per the FDA 

Orange Book, drug products designated 

with a ‘‘B’’ code fall under one of three 

main policies: 

• The drug products contain active 

ingredients or are manufactured in 

dosage forms that have been identified 

by FDA as having documented 

bioequivalence problems or a significant 

potential for such problems and for 

which no adequate studies 

demonstrating bioequivalence have 

been submitted to FDA; or 

• The quality standards are 

inadequate or the FDA has an 

insufficient basis to determine 

therapeutic equivalence; or 

• The drug products are under 

regulatory review.6

Therefore, we propose that any 

alternative formulations not 

therapeutically equivalent to the 

reference listed product in FDA’s 

Orange Book will not be subject to the 

FUL. We propose that the FUL will only 

be applied to those drugs that are 

therapeutically equivalent to the 

reference listed drug, that is, ‘‘A’’ rated 

drugs that are pharmaceutically 

equivalent to the reference listed drug; 

however, we are inviting comments on 

the issue of the FUL being applied to 

drugs that are not therapeutically 

equivalent to the reference listed drug. 

In accordance with section 2503(a) of 

the Affordable Care Act, we are 

proposing that the FUL will be 

calculated as no less than 175 percent 

of the weighted average of the most 

recently reported monthly AMPs for 

pharmaceutically and therapeutically 

equivalent multiple source drug 

products. We plan to determine the 

weighted average on the basis of 

manufacturer submitted utilization of 

the most recently reported monthly 

AMPs for all therapeutically equivalent 

innovator (I) and non-innovator (N) 

multiple source drug products that, by 

definition elsewhere in this proposed 

rule, are available for purchase by retail 

community pharmacies on a nationwide 

basis. 

In computing the FUL, we would use 

the monthly AMP and the monthly 

utilization data submitted by the 

manufacturer. Using the monthly AMP 

data will provide for the timeliest 

pricing data and allow revisions to the 

FUL list on a monthly basis. In addition, 

the statute requires us to use the 

recently reported monthly AMPs to 

calculate the FUL. It will also permit us 

to update the FULs on a timely basis in 

accordance with the provisions of 

section 1927(f)(1)(B) of the Act. 

The currently reported AMP is based 

on the nine-digit NDC and is specific to 

the product code, combining all package 

sizes of the drug into the same 

computation of AMP. Inasmuch as this 

computation is used to determine the 

AMP that is currently reported by 

manufacturers, we propose to use this 

AMP for the FUL calculation. 

Section 2503(a) of the Affordable Care 

Act redefines AMP, effective October 1, 

2010. Due to this change in the 

determination of AMP, and the 

requirement that the monthly AMP 

under this calculation first be reported 

for October 2010 data, CMS received 

these revised monthly AMPs and 

utilization data beginning in November 

2010. While the law required 

manufacturers to change their 

calculation of AMP effective October 1, 

2010, we did not issue FULs based on 

this data. Further, we decided to not use 

data submitted before December 15, 

2010 to calculate the FULs, as there was 

some concern within the industry that 

manufacturers may have based their 

AMP calculation on prior AMP 

regulations that were in effect until 

December 15, 2010. 

In the interim, CMS has been 

reviewing monthly pricing data 

submitted and continues to work 

towards increasing labeler compliance 

of reporting data timely. When 

establishing a FUL, we propose to 

disregard the AMP of an NDC which has 

been terminated. We note that we have 

published four sets of draft FUL files on 

our Web site. We invited comments 

from stakeholders and we have posted 

several of those comments and our 

responses to those comments at http:// 

www.medicaid.gov/Medicaid-CHIPProgram-Information/By-Topics/

Benefits/Prescription-Drugs/FederalUpper-Limits-.html. 

In calculating the FUL, we propose to 

eliminate covered outpatient drugs 

designated as single source (S) drugs 

from the FUL calculation because the 

FUL in the statute, is based on the 

weighted average of AMPs for multiple 

source drugs, and, single source drugs 

are, by definition, not multiple source 

drugs, and should be reported according 

to the statute. We note here that there 

should be no instances of an (S) drug in 

a FUL group, as labelers should be 

reporting drugs that are therapeutically 

equivalent drug products as (I) drugs, 

and statutory provisions require us to 

use only multiple source drugs when 

calculating the FUL. We propose to rely 

on manufacturer submitted data in 

determining if a drug product is used in 

the calculation of the FUL, that is, if it 

is an (I) or an (N) drug. CMS has issued 

guidance previously, and more recently, 

requested drug labelers to review the 

drug category for which their NDC is 

reported, and if they determine that an 

incorrect drug category has been 

reported to CMS for a product, they are 

required to request a drug category 

change for the product. We have also 

recently reminded labelers that 

changing a drug category from (S) to (I) 


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Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5347 

has no prior approval requirement from 

CMS, and that these changes can and 

should be made timely by the labeler via 

the Drug Data Reporting for Medicaid 

system. See Manufacturer Releases No. 

80 and No. 82 (issued on January 5, 

2010 and November 1, 2010, 

respectively). Accordingly, we propose 

to include pharmaceutically and 

therapeutically equivalent innovator 

multiple source and non-innovator 

multiple source drugs when calculating 

the weighted average of monthly AMPs. 

In light of our experience with the 

implementation of section 1927 of the 

Act, we believe that when a drug 

product has at least one other FDAapproved, pharmaceutically and 

therapeutically equivalent drug product, 

the drug is generally sold or marketed 

on a nationwide basis. Further, we 

believe that when a drug product has at 

least two FDA-approved, 

pharmaceutically and therapeutically 

equivalent drug products, that all retail 

community pharmacies would be able 

to purchase at least one of the drug 

products through a pharmaceutical 

market channel of distribution, 

including, but not limited to, a national, 

regional, or specialty drug wholesaler, 

chain warehouse, group purchasing 

organization, or directly from the drug 

manufacturer. We do not believe it is 

necessary that each retail community 

pharmacy have the ability to purchase 

every supplier’s pharmaceutically and 

therapeutically equivalent drug in order 

for the Secretary to calculate the FUL for 

pharmaceutically and therapeutically 

equivalent multiple source drug 

products, provided the retail 

community pharmacy is able to 

purchase at least one of the drug 

products. We invite comments on the 

issue of national availability in the 

context of the FUL requirements and 

request comments regarding specific 

instances where such drug products are 

not available for purchase by retail 

community pharmacies on a nationwide 

basis. Further, as noted previously, we 

will not be using the AMP of a 

terminated NDC to set the FUL 

beginning with the first day of the 

month after the termination date 

reported by the manufacturer to CMS, 

and a weighted average, using the 

monthly AMP unit data, will be used to 

calculate the FUL. 

We further propose to establish the 

upper limit reimbursement at 175 

percent of the weighted average of 

monthly AMPs in the aggregate. 

We analyzed the FUL and determined 

that the weighted AMP multiplied by 

175 percent including (I) and (N) drugs 

would be an adequate reimbursement 

methodology, per the below chart that 

shows the analysis of the fiscal year 

2009 estimated aggregate expenditures, 

comparing reimbursement using the 

DRA AMP-based FUL methodology to 

the pre-DRA FUL methodology, 

weighted AMP FUL, weighted AMP 

multiplied by 175 percent, and 

Indiana’s State Maximum Allowable 

Cost (IN’s SMAC). Utilization data 

provided to CMS by States were used to 

calculate the total number of units 

reimbursed for each drug group and was 

multiplied by the DRA AMP-based FUL, 

the pre-DRA FUL, the weighted AMP 

FUL, the weighted AMP multiplied by 

175 percent FUL, and IN’s SMAC to get 

the aggregate limit for each drug group 

based on each formula used to calculate 

the FUL. We chose IN’s SMAC as one 

of the formulas in our comparative 

analysis because IN’s SMAC, in 

accordance with its State plan, is 

developed by using pharmacy invoices, 

and is equal to the average AAC per 

drug adjusted by a multiplier of at least 

1.0. IN’s Office of Medicaid Policy and 

Planning reviews the SMAC rates on an 

ongoing basis, and adjusts the rates as 

necessary to reflect prevailing market 

conditions and ensure reasonable access 

by providers to drugs at or below the 

applicable SMAC rate. Currently, IN 

adjusts their average AAC using a 

multiplier of 1.2. There are 

approximately 550 drug groups reflected 

in this estimated analysis. Because 

utilization data are reported on a 

quarterly basis while the DRA AMPbased FUL is generated on a monthly 

basis, the estimated aggregate limit is 

calculated for each month using the 

quarterly utilization data averaged out 

by the 3 months. This calculation was 

done for all four quarters of fiscal year 

2009, which was then aggregated to get 

the fiscal year 2009 estimated aggregate 

expenditure for each FUL formula. Each 

bar represents the aggregate expenditure 

while the percentage amount represents 

the comparison to the DRA AMP-based 

FUL. 

The estimated aggregate is calculated 

with the availability of at least three 

therapeutically equivalent drug 

products. 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

In a recent report issued by the 

Government Accountability Office 

(GAO) ‘‘Medicaid Outpatient 

Prescription Drugs: Estimated Changes 

to Federal Upper Limits Using the 

Formula under the Patient Protection 

and Affordable Care Act’’ (GAO–11– 

141R), the GAO found that Affordable 

Care Act FULs were higher than the 

undiscounted average retail pharmacy 

acquisition costs for 34 of the 40 drugs 

in the sample and was 35 percent higher 

than the sum total of the undiscounted 

pharmacy acquisition costs for these 

drugs, which would have also lowered 

the Medicaid expenditures on these 

drugs by 60 percent. 

Furthermore, the GAO stated that the 

Affordable Care Act FULs could further 

exceed the retail pharmacy acquisition 

costs if the GAO was to take into 

consideration factors that were not used 

in the analysis of this report. The GAO 

stated that the acquisition cost data the 

GAO used do not include rebates paid 

by manufacturers to retail pharmacies. If 

included, any applicable rebates would 

have reduced the average retail 

acquisition costs for the drugs in the 


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sample; thus, the Affordable Care Act 

FULs would exceed the retail pharmacy 

acquisition costs by more than 35 

percent. Additionally, if the Affordable 

Care Act FULs were to be calculated 

using the new AMPs based on the 

revised definition under the Affordable 

Care Act, then the Affordable Care Act 

FULs would have exceeded the retail 

pharmacy acquisition costs by even 

greater than 35 percent. 

Therefore, based in part on the 

findings from the GAO report, we 

believe that calculating the Affordable 

Care Act FULs at weighted AMP times 

175 percent would be a more than 

adequate reimbursement to the 

pharmacies. 

The Affordable Care Act’s revisions to 

section 1927(e)(5) of the Act allow but 

do not require the Secretary to calculate 

the FUL above the 175 percent of the 

weighted average of AMPs. Based on the 

data described above, we have decided 

to calculate the FUL at 175 percent. 

Using any percentage greater than 175 

percent would further inflate the 

aggregate expenditures depicted on our 

chart. As provided in the chart above, 

calculating the FUL as 175 percent of 

the weighted AMP, including multiple 

source drugs, that is, I and N drugs, 

yields a reimbursement that is just 

slightly higher than Indiana’s SMAC 

which is based on actual pharmacy 

acquisition data and is consistent with 

the GAO’s findings that these levels are 

generally in excess of the actual 

acquisition cost of the drug. Because it 

is virtually impossible to price each 

drug at its actual acquisition cost to 

each pharmacy and reflect the changes 

in the marketplace at the same time they 

occur, the upper limit reimbursement 

continues to be established in the 

aggregate. States maintain their right to 

adjust reimbursement on a drug by drug 

basis to the extent that the State’s 

reimbursement remains under the 

aggregate upper limit. 

Thus, using a factor of 175 percent of 

weighted monthly AMPs should yield 

adequate reimbursement for pharmacy 

providers, while achieving cost savings 

for the Medicaid program compared to 

pre-DRA FULs. 

L. FULs Smoothing Process 

As discussed previously, section 

2503(a) of the Affordable Care Act 

amended the FUL provision at section 

1927(e)(5) of the Act to specify that the 

Secretary shall implement a smoothing 

process for AMPs which shall be similar 

to the smoothing process used in 

determining the ASP of a drug or 

biological under Medicare Part B. In 

order to ensure that the smoothing 

process being utilized by manufacturers 

is uniform and consistent with statutory 

requirements, as was discussed in 

Manufacturer Release #83, a 

manufacturer should estimate the 

impact of its lagged price concessions 

using a 12-month rolling percentage to 

estimate the value of those discounts. 

This guidance is restated in the 

preamble language of this proposed rule 

and would be codified in proposed 

regulatory text at § 447.510(d)(2). 

We also considered whether to 

implement a further smoothing process 

applicable to the FUL calculation. While 

the statute requires us to use the most 

recently reported monthly AMPs to 

calculate the FUL, it did not address 

smoothing the FULs themselves. 

However, after reviewing the first 

months of the draft FULs, which we 

posted on our Web site, we note that 

there is some variability in the FULs 

from one month to the next. Therefore, 

we looked at various approaches for 

smoothing the FULs, as follows. We 

considered: 

• Using the mean of the most recently 

reported monthly AMPs over a specific 

period of time; for example, three 

months, to minimize the variability of 

the monthly AMPs before weighting the 

monthly AMPs and multiplying the 

result by 175 percent to calculate the 

FUL; 

• Using the median of the most 

recently reported monthly AMPs over a 

specific period of time; for example, 

three months, before weighting the 

monthly AMPs and multiplying the 

result by 175 percent to calculate the 

FUL; 

• Weighting the most recently 

reported monthly AMPs over a specific 

period of time; for example, three 

months, to minimize the variability of 

the monthly AMPs before weighting the 

monthly AMPs and multiplying the 

result by 175 percent to calculate the 

FUL; 

• After calculating the FUL as the 

weighted average of monthly AMPs in a 

FUL product group, calculate the mean 

of the FULs for each product group over 

a specific period of time; for example, 

three months, to smooth the FUL if 

there is variability in the calculated FUL 

from month to month; 

• Excluding outlier monthly weighted 

AMPs that are less than a certain 

percentage of the next highest monthly 

AMP for therapeutically and 

pharmaceutically equivalent products; 

• Excluding a monthly AMP if the 

percent change is greater than a certain 

percentage when compared to the last 

manufacturer reported and certified 

monthly AMP; 

• Increasing the calculated FUL by a 

certain percentage if the FUL is less 

than a certain percentage from the last 

FUL; 

• Calculating the FUL using only 

monthly weighted AMPs within a FUL 

Product Group that have a certain 

percentage of the market share based on 

the monthly AMP units reported to us 

by drug manufacturers. 

• Using the mean of the monthly 

weighted average of AMPs for an entire 

FUL Product Group over a specific 

period of time; for example, three 

months; and/or, 

• Excluding monthly AMPs that are 

higher or lower than the standard 

deviation of the mean of all the monthly 

AMPs in a specific FUL Product Group. 

Smoothing the pricing data using one 

of these methodologies would prevent 

some month-to-month fluctuations in 

the FULs. However, implementing any 

of the smoothing methods would have 

limitations. For example, it could 

require that for the entire averaging 

period, all manufacturers have timely 

reported monthly AMP and AMP units 

or that we look at alternatives to that. 

Further, it would require us to look at 

how to add newly available generic 

drugs or other changes in circumstances 

that affect these FULs. We are 

concerned that this could skew a 

resultant FUL so that it would be less 

representative of the price at which the 

pharmacy could purchase that drug. For 

example, it could cause a FUL for a 

particular FUL group to be lower than 

if we use only one month of AMP data 

in the calculation depending on the 

reported and certified monthly AMP 

and AMP units over the averaging 

period. As such, it may not capture 

price increases in a drug or reflect 

changes in price caused by a shortage of 

the drug. Conversely, it could overstate 

the price of drugs where more 

manufacturers are coming into the 

marketplace and the price of the drug 

was decreasing over time. 

After careful consideration, we have 

decided not to propose a specific 

methodology to smooth the FULs at this 

time. Because AMPs are based on prices 

paid to manufacturers by wholesalers 

for drugs distributed to retail 

community pharmacies and by retail 

community pharmacies that purchase 

drugs directly from the manufacturer, 

they are subject to some fluctuations 

and variances in the generic drug 

market, which may result in 

fluctuations in the AMP-based FUL 

from month to month. Furthermore, 

these changes may be present even if we 

decide to implement a smoothing 

process over and above the smoothing 

process that manufacturers are presently 

using for AMP calculations. As 

previously mentioned, price changes 


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can occur as a result of product 

shortages, manufacturing disruptions, 

seasonal supply and demand, and 

products with a short shelf life. We are 

inviting comments on this issue, 

including the benefit of such a process, 

the options we considered, options we 

have not considered, and whether a 

smoothing process is necessary. 

M. State Plan Requirements, Findings, 

and Assurances (§ 447.518) 

In the Medicaid Program; Withdrawal 

of Determination of Average 

Manufacturer Price, Multiple Source 

Drug Definition, and Upper Limits for 

Multiple Source Drugs final rule 

published in the November 15, 2010 

Federal Register (75 FR 69591), we 

made conforming amendments which 

deleted references to § 447.514 ‘‘Upper 

limits for multiple source drugs’’ from 

§ 447.518 ‘‘State plan requirements, 

findings and assurances’’. We are 

proposing conforming regulatory 

amendments to those references and are 

adding them in the regulatory text of 

§ 447.518. 

In addition, to conform with the 

change from ‘‘estimated acquisition 

cost’’ to ‘‘actual acquisition cost’’, we 

propose in § 447.518(c) to require all 

States to provide data to adequately 

support proposed changes in 

reimbursement using AAC. This 

supporting data could include, but is 

not limited to, a national survey, to 

create a database of actual acquisition 

costs that States may use as a basis for 

determining State-specific rates. 

Additionally, a State survey of retail 

pharmacy providers or other reliable 

data which reflects the pharmacy 

provider’s price to acquire a drug could 

be used as a basis to support proposed 

changes in reimbursement. We believe 

that surveying pharmacy providers for 

acquisition costs or using other reliable 

data, based on actual sales transactions, 

as a base from which to develop an 

appropriate ingredient cost 

reimbursement is reasonable. 

Alternatively, the use of an AMP, which 

is based on actual sales data and 

reported and certified by drug 

manufacturers, could be considered as a 

reimbursement metric. The State can 

also determine the relationship of the 

AMP to factors such as the wholesaler 

markup, which covers the cost of 

distribution and other service charges 

by the wholesaler, to determine a 

reasonable reimbursement that would 

appropriately compensate pharmacies 

for these costs. 

We are inviting comments on the 

practicality of requiring each State to 

conduct a survey, the frequency of such 

a survey, and how closely we would 

expect the State to conform to the 

survey results in the reimbursement 

rates they propose in their SPA, 

including the use of acquisition cost 

averaging, AMPs as a basis for 

reimbursement, including the 

application of an appropriate markup 

factor or other methods of determining 

the ingredient cost. 

Although we considered various 

alternatives for how AAC will apply in 

the case of reimbursement for covered 

outpatient drugs purchased under other 

Federal drug programs such as the 340B 

Drug Pricing Program and the Federal 

Supply Schedule (FSS) we are not 

proposing specific methodologies. 

Through these programs, certain Federal 

grantees and others can purchase drugs 

at significant discounts, and these drugs 

will then be reimbursed through the 

State Medicaid program for Medicaid 

beneficiaries. Under current HRSA 

policy, participating covered entities are 

permitted to dispense drugs purchased 

outside of 340B authority for their 

Medicaid patients, often referred to as 

the ‘‘Medicaid carve out’’ option. In 

accordance with section 340B(a)(5) of 

the PHS Act and section 1927(a)(5)(C) of 

the Act, a covered entity is not 

permitted to seek Medicaid payment for 

a drug that is subject to discounts under 

the 340B Drug Pricing Program and a 

Medicaid rebate in order to protect drug 

manufacturers from paying a Medicaid 

rebate on drugs that are already subject 

to a Federal discount. This ‘‘duplicate 

discount’’ prohibition in the Medicaid 

statute only applies to drugs purchased 

through the 340B Drug Pricing Program 

and does not apply to drugs carved out 

for Medicaid patients and billed to the 

Medicaid program. 

In a recent OIG report, ‘‘State 

Medicaid Policies and Oversight 

Activities Related to 340B–Purchased 

Drugs’’, OEI–05–00321, the OIG 

reported that many State Medicaid 

agencies have written policies that 

direct covered entities to bill at cost for 

the ingredient cost of 340B purchased 

drugs or relied on HRSA’s 1993 

guidance directing covered entities to 

bill States at AAC (although that 

guidance is no longer in effect and was 

superseded by subsequent HRSA 

guidance directing covered entities to 

refer to States’ policies). We believe that 

paying 340B providers at cost for these 

340B drugs would meet the AAC 

requirements but seek further comments 

on what other methodologies would 

meet the AAC requirements. 

IHS, tribal and urban Indian 

organization pharmacies may purchase 

drugs through the FSS or the 340B 

program and are oftentimes paid the 

Medicaid reimbursement rates 

established in State plans. In turn, 

States are reimbursed at 100 percent 

Federal medical assistance percentage 

for services provided in IHS and tribal 

pharmacies. While we have considered 

alternatives for payment methodologies 

for IHS, tribal and urban Indian 

pharmacies, we are proposing no 

specific methodologies and invite 

public comment on Medicaid payment 

levels for these facilities. In addition, 

pursuant to E.O. 13175 and the HHS 

Tribal Consultation Policy (December 

2010), the CMS will consult with Tribal 

officials prior to the formal 

promulgation of this regulation. 

We propose that States that do not 

have specific methodologies develop 

such methodologies for these providers 

consistent with our proposed shift from 

EAC to AAC. In addition, we propose to 

add a new requirement at § 447.518(a) 

that the State plan must describe the 

agency’s payment methodology for 

drugs dispensed by a covered entity 

participating in the 340B Drug Pricing 

Program or by a contract pharmacy 

under contract with a participating 

covered entity. 

In addition, States would be required 

to submit a SPA through the formal 

review process, as well as comply with 

all Federal requirements including 

consultation with tribal governments 

and IHS, tribal and urban Indian 

programs pursuant to section 5006 of 

the American Recovery and 

Reinvestment Act of 2009 (Pub. L. 111– 

5), when submitting a request to change 

their professional dispensing fee. As is 

true for the drug ingredient 

reimbursement, we do not intend to 

mandate a specific formula or 

methodology which the States must use 

to determine their dispensing fee, 

however, as is consistent with current 

policy, States would still be required to 

substantiate how their dispensing fee 

reimbursement to pharmacy providers 

reasonably reflects the cost of 

dispensing a drug and will ensure 

access for these drugs to Medicaid 

beneficiaries. Where the professional 

dispensing fee might differ because of 

unique circumstances for 340B covered 

entities or IHS and tribal pharmacies, 

the State should look at these 

circumstances to determine if a different 

professional dispensing fee is warranted 

for these entities. One component of the 

reimbursement formula should not be 

revised without appropriately 

evaluating the other part. 

With the proposed change in the 

definition of ‘‘State’’ to include the 

territories, we acknowledge that these 

same requirements could ultimately be 

applicable to the territories. Since the 

territories that participate in the 


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Medicaid Program are already required 

to submit changes to their State Plans 

through the State Plan Amendment 

process, we are proposing that the 

requirements discussed in this section 

would be effective for the territories in 

the same manner in which they would 

be effective for the 50 States and the 

District of Columbia. 

N. Optional Coverage of Investigational 

Drugs and Other Drugs Not Subject To 

Rebate (§ 447.522) 

Investigational drugs, also referred to 

as experimental drugs, do not fall 

within the definition of covered 

outpatient drugs set forth in section 

1927(k) of the Act; therefore, these drugs 

are not subject to rebate. However, 

Medicaid coverage may be provided 

under section 1905(a)(12) of the Act at 

the State’s option, and FFP is available 

to the extent it is consistent with section 

1903(i) of the Act and § 440.120. 

There are a number of other items that 

may also be covered as prescribed drugs 

or products under section 1905(a)(12) of 

the Act, such as whole blood products. 

We propose to add § 447.522 to clarify 

that States providing coverage of 

investigational drugs may only pay for 

and receive FFP for these drugs when 

they are billed for in accordance with 

the FDA final rules 21 CFR Part 312 and 

316, as amended by the final rules 

published in the August 13, 2009 

Federal Register (‘‘Charging for 

Investigational Drugs Under and 

Investigational New Drug Application’’ 

(74 FR 40872) and ‘‘Expanded Access to 

Investigational Drugs for Treatment 

Use’’ (74 FR 40900)). These regulations 

clarify the circumstances under which 

charging for an investigational drug in a 

clinical trial is appropriate, set forth 

criteria for charging for an 

investigational drug for the different 

types of expanded access for treatment, 

and clarify what costs can be recovered. 

We are also adding a provision to 

allow for the coverage of other noncovered outpatient drugs. 

III. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

3506(c)(2)(A) of the Paperwork 

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements 

(ICRs): 

A. ICR’s Regarding Medicaid Drug 

Rebates (§ 447.509) 

As discussed earlier in the preamble, 

section 2501(c) of the Affordable Care 

Act amended section 1903(m) of the Act 

by specifying new conditions for MCO 

contracts, including that covered 

outpatient drugs dispensed to 

individuals eligible for medical 

assistance under Title XIX of the Act 

who are enrolled with a Medicaid MCO 

shall be subject to the same rebate 

required by the rebate agreement 

authorized under section 1927 of the 

Act. Proposed § 447.509(b) adds 

requirements for States to collect 

necessary drug utilization data from 

Medicaid MCOs in order to include 

MCO data in the quarterly rebate 

requests. 

We estimate that these requirements 

would affect the 51 State Medicaid 

Programs, as well as the territories. The 

burden associated with the inclusion of 

Medicaid MCOs in the Drug Rebate 

Program is the time and effort it would 

take for the State Medicaid Program to 

gather the drug utilization information 

from the Medicaid MCOs and the 

subsequent inclusion of said data in the 

State’s quarterly rebate request to 

manufacturers. Our current reporting 

hour burden, specific to the invoice and 

State utilization data reporting within 

the MDR Program, for the current State 

Medicaid Programs is 2,346 hours per 

quarter or 9,384 hours annually, at a 

total estimated cost of $302,165. 

As referenced in § 447.509(b) and 

§ 447.511, we believe the collection of 

drug utilization data from MCOs and the 

subsequent inclusion of said data in the 

State’s quarterly rebate request to the 

manufacturers will add a total 678 hours 

per quarter or 2,712 hours annually to 

the current reporting burden for the 

States (which include the 50 States, 

District of Columbia, and the territories). 

Therefore, the total new reporting 

burden, as a result of this proposed rule 

requesting additional requirements to 

collect drug utilization data from MCOs, 

will be 2,712 hours annually at a total 

estimated cost of $98,744. 

The aforementioned burden estimates 

will be submitted for OMB review and 

approval as a revision to the information 

collection request currently approved 

under OMB control number 0938–0582. 

Proposed § 447.509(c) would also 

require States to remit to the Federal 

government the amount of the savings 

resulting from the increases in the 

rebate percentages. The reporting 

process is similar to the current 

reporting process for drug expenditures 

and rebates onto the CMS–64 Form. In 

addition to reporting onto the CMS–64 

Form the quarterly amount for 

prescribed drug expenditures, Federal 

rebates, and rebates under State side bar 

agreements, States will report the total 

quarterly rebate offset amount that they 

are remitting to the Federal government 

for the fee-for-service rebates they 

currently receive from drug 

manufacturers and for the MCO rebates 

they will receive from drug 

manufacturers. The information 

collection requirements and burden 

associated with CMS–64 are already 

approved by OMB through April 30, 

2014, and have been assigned OMB 

control number 0938–0067. This 

proposed rule does not impose any new 

or revised burden or reporting or 

recordkeeping requirements concerning 

CMS–64. 

B. ICR’s Regarding Requirements for 

Manufacturers (§ 447.510) 

Manufacturers must report, 

electronically, product and quarterly 

pricing information to CMS not later 

than 30 days after the end of the rebate 

period. Monthly pricing and units are 

due no later than 30 days after the end 

of the month. In addition, customary 

prompt pay discounts and nominal 

prices must be reported quarterly. The 

proposed rule would significantly revise 

the definitions of AMP and best price 

and, therefore, would require the 

manufacturers to reconfigure their 

pricing systems to correctly calculate 

AMP and best price. In addition, 

manufacturers must submit the total 

number of units that are used to 

calculate the monthly AMP. Therefore, 

the burden associated with these new 

requirements is the time and effort it 

would take for a drug manufacturer to 

reconfigure its pricing systems to 

correctly calculate AMP and best price 

before it can submit the required data to 

CMS. We estimate that these 

requirements would affect the 

approximately 600 drug manufacturers 

in the Medicaid Rebate Program. We 

believe the changes to the AMP and best 

price definitions will require 240 hours 


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per manufacturer, for a one-time total of 

144,000 burden hours with a one-time 

total estimated burden cost of 

$8,640,000. Once the pricing systems 

have been reconfigured, there should be 

no additional burden in time or effort 

than that which already exists. 

Manufacturers will be required to 

submit the FDA application number 

issued by FDA when the product is 

approved. If the product does not 

currently have an FDA application 

number, the manufacturer must submit 

evidence demonstrating that the product 

is otherwise a covered outpatient drug. 

CMS shall refer to this evidence of 

demonstration as covered outpatient 

drug status, or COD status. 

This information should not be 

difficult for the manufacturer to 

determine since the manufacturer 

should already know the FDA 

application number of the product when 

it was approved by FDA, or the reason 

it qualifies as a covered outpatient drug, 

if there is no application number. 

We estimate that these requirements 

would affect approximately 600 drug 

manufacturers that participate in the 

Medicaid Drug Rebate Program. The 

burden associated with the reporting of 

the FDA application number or the COD 

status is the time and the effort it would 

take for each drug manufacturer to 

retrieve this information from their 

records and submit it to CMS. 

Therefore, we believe that the new 

requirements to report the FDA 

application number and the COD status 

will require a one-time total of 3,000 

hours at a one-time total estimated 

burden cost of $180,000. 

Manufacturers will also be required to 

identify drugs that are approved by the 

FDA exclusively for pediatric 

indications. These drugs will be referred 

by CMS as ‘‘Exclusively Pediatric’’ 

drugs. This information should not be 

difficult for manufacturers to determine 

and therefore would not add any 

significant hourly burden since the 

exclusively for pediatric indications 

will be provided by the FDA upon 

approval of these drugs. 

Additionally, manufacturers will need 

to consider certain requirements when it 

comes to the calculation of their AMP 

for inhalation, infusion, instilled, 

implanted, and injectable drugs (5i), 

when not generally dispensed through 

retail community pharmacies. Using the 

methodology proposed earlier in this 

rule, a manufacturer would be required 

to identify and determine the AMP of 

these drugs. It is our estimate that these 

requirements would affect 

approximately 600 drug manufacturers 

that participate in the Medicaid Drug 

Rebate Program. The burden associated 

with the initial reporting of the 5i drugs 

is the time and the effort it would take 

for each drug manufacturer to identify 

these drugs and then to determine 

which of the 5i drugs are not generally 

dispensed through a retail community 

pharmacy by using the methodology 

proposed earlier in this rule. However, 

it is our understanding that each drug 

manufacturer should have some 

knowledge as to which drug is a 5i 

based on the approval information the 

manufacturer received from the FDA as 

well as the FDA Route of 

Administration list that CMS has 

identified. Once the manufacturer has 

established its initial list of 5i drugs, it 

would then be required on both a 

monthly, as well as quarterly basis, to 

determine which of those drugs are not 

generally dispensed through a retail 

community pharmacy. Therefore, we 

believe that the new reporting 

requirements will require a one-time 

total of 1,500 burden hours for 

manufacturers to identify the 5i drugs at 

a one-time total estimated burden cost 

of $90,000. In addition, on both a 

monthly and quarterly basis (12 months, 

plus 4 quarters, for a total of 16 times 

per year) the manufacturer will be 

required to determine whether the 

percentage of sales for the 5i drugs has 

met the threshold to be considered not 

generally dispensed through a retail 

community pharmacy. Specifically, we 

estimate that it will add 20 hours per 

response with 16 responses per year for 

each manufacturer to identify which 5i 

drugs are not generally dispensed 

through a retail community pharmacy. 

This equates to a total estimate of 320 

additional hours annually per 

manufacturer. The total annual burden 

hours for the 600 drug manufacturers 

participating in the Medicaid Rebate 

Program is estimated to be 192,000 

hours with a total cost of $11,520,000. 

Furthermore, manufacturers 

participating in the rebate program that 

have reformulated drugs are now 

required to calculate an alternative 

rebate calculation for certain drugs. In 

order to calculate the alternative rebate 

calculation for a line extension drug of 

a brand name in an oral solid dosage 

form, the line extension drug and the 

initial brand name listed drug need to 

be identified. Although CMS will be 

identifying both the initial brand name 

listed drug and the line extension drug 

for the initial three quarters for 

manufacturers, they will be responsible 

for identifying the initial brand name 

listed drug and the line extension drug 

after the initial three quarters. 

Manufacturers are responsible for 

calculating the unit rebate amount for 

the line extension drug. 

We estimate that these requirements 

would affect approximately 600 drug 

manufacturers that participate in the 

Medicaid Drug Rebate Program. The 

burden associated with the reporting of 

the initial brand name listed drug and 

the line extension drug is the time and 

the effort it would take for each drug 

manufacturer to identify these drugs. 

However, it is our understanding that 

each drug manufacturer should have 

some knowledge on which drug is the 

line extension based on the approval 

information that the manufacturer 

received from the FDA as well as the 

Chemical Type that CMS has identified 

as a line extension drug and the initial 

brand name listed drug. Therefore, we 

believe that the new reporting 

requirements to identify the initial 

brand name listed drug and the line 

extension drug would add 20 additional 

hours per quarter, per manufacturer; or 

48,000 total hours annually to the drug 

manufacturers at a total estimated cost 

of $2,880,000. 

Finally, a manufacturer is required to 

retain records for 10 years from the date 

the manufacturer reports data to CMS 

for that rebate period. While this 

requirement is subject to the PRA, we 

believe this is a usual and customary 

business practice as defined in 5 CFR 

1320.3(b)(2) and, therefore, the 

associated burden is exempt from the 

PRA. 

The aforementioned burden estimates 

will be submitted for OMB review and 

approval as a revision to the information 

collection request currently approved 

under OMB control number 0938–0578. 

C. ICR’s Regarding Requirements for 

States (§ 447.511) 

The definition of the term ‘‘States’’ 

would be revised to include the 

territories: The Commonwealth of 

Puerto Rico, the Virgin Islands, Guam, 

the Northern Mariana Islands and 

American Samoa, in addition to the 50 

States and the District of Columbia. The 

territories will be able to receive 

manufacturer rebates through the MDR 

program in the same manner that the 50 

States and the District of Columbia are 

currently receiving rebates. 

In order for territories to be able to 

begin collecting rebates from the 

manufacturers, the territories will be 

required to come into compliance with 

the MDR program because the systems 

that the territories currently have are not 

setup for the MDR program. As a result, 

these territories will likely have to 

utilize contractors in order to ensure 

that their systems are in place to begin 

to collect rebates from manufacturers. 


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7Except as noted below, savings estimates were 

developed by the Office of the Actuary (OACT) and 

the Center for Medicaid, CHIP and Survey & 

Certification (CMCS) at CMS and are consistent 

with the President’s FY 2012 budget baseline. 

(* The estimates for section 2503 were developed 

by CMS. An alternative methodology discussed 

below produces a 5-year cost to States and Federal 

government of $1.7 billion explained in the 

alternatives considered section of the Regulatory 

Impact Analysis).) 

Continued 

We are unsure what the time, effort and 

cost would be for this compliance 

process to be completed and seek 

comments specific to this issue. 

States will have to report the total 

MCO rebates they receive from 

manufacturers onto the MBES CMS–64 

Form and submit this data to CMS on 

a quarterly basis. The information 

collection requirements and burden 

associated with CMS–64 are already 

approved by OMB through April 30, 

2014, and have been assigned OMB 

control number 0938–0067. This 

proposed rule does not impose any new 

or revised burden or reporting or 

recordkeeping requirements concerning 

CMS–64. 

TABLE 5—ANNUAL RECORDKEEPING AND REPORTING REQUIREMENTS

Regulation Section(s) OMB 

Control No. 

Respondents Responses 

Burden per 

response 

(hours) 

Total annual 

burden 

(hours) 

Hourly labor 

cost of 

reporting 

($) 

Total labor 

cost of 

reporting 

($) 

Total capital/ 

maintenance 

costs 

($) 

Total cost 

($) 

§ 447.509(b), § 447.511 ......... * 0938–0582 56 224 12.1 2,712 36.41 98,744 0 98,744 

§ 447.510 ............................... * 0938–0578 600 600 240 144,000 60 8,640,000 0 8,640,000 

§ 447.510 ............................... * 0938–0578 600 600 5 3,000 60 180,000 0 180,000 

§ 447.510 ............................... * 0938–0578 600 600 2.5 1,500 60 90,000 0 90,000 

§ 447.510 ............................... * 0938–0578 600 9600 20 192,000 60 11,520,000 0 11,520,000 

§ 447.510 ............................... * 0938–0578 600 2400 20 48,000 60 2,880,000 0 2,880,000 

Total ............................... .................... 3,056 14,024 .................... 391,212 .................... 23,408,744 ........................ 23,408,744 

* The data contained in the table reflects the burden associated with the proposed revisions to the information collection requests approved under the OMB control 

numbers listed. The table does not display the currently approved burden for the listed OMB control numbers. 

We have submitted a copy of this 

proposed rule to the OMB for its review 

of information collection and 

recordkeeping. These requirements are 

not effective until they have been 

approved by the OMB. 

If you comment on these information 

collection and recordkeeping 

requirements, please do either of the 

following: 

1. Submit your comments 

electronically as specified in the 

ADDRESSES section of this proposed rule; 

or 

2. Submit your comments to the 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, 

Attention: CMS Desk Officer, [CMS– 

2345–P] Fax: (202) 395–6974; or 

Email: OIRA_submission@

omb.eop.gov 

IV. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

V. Economic Analyses 

A. Regulatory Impact Analysis 

1. Introduction 

We have examined the impacts of this 

rule as required by Executive Order 

12866 on Regulatory Planning and 

Review (September 30, 1993), Executive 

Order 13563 on Improving Regulation 

and Regulatory Review (January 18, 

2011), the Regulatory Flexibility Act 

(RFA) (September 19, 1980, Pub. L. 96– 

354), section 1102(b) of the Act, section 

202 of the Unfunded Mandates Reform 

Act of 1995 (March 22, 1995, Pub. L. 

104–4), Executive Order 13132 on 

Federalism (August 4, 1999), and the 

Congressional Review Act (5 U.S.C. 

804(2)). 

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. This rule 

has been designated an ‘‘economically’’ 

significant rule, under section 3(f)(1) of 

Executive Order 12866. Accordingly, 

the rule has been reviewed by the Office 

of Management and Budget. 

We solicit comment on the entire 

Economic Analyses section. 

2. Statement of Need 

This proposed rule would implement 

changes to section 1927 of the Act as set 

forth in section 221 of Division F, Title 

II, of the Omnibus Appropriations Act, 

2009 (Pub. L. 111–8, enacted on March 

11, 2009). This includes changes to, (1) 

section 1927 of the Act as set forth in 

sections 2501, 2503, and 3301(d)(2) of 

the Patient Protection and Affordable 

Care Act of 2010 (Pub. L. 111–148, 

enacted on March 23, 2010), (2) section 

1927 of the Act as set forth in sections 

1101(c) and 1206 of the Health Care and 

Education Reconciliation Act of 2010 

(HCERA) (Pub. L. 111–152, enacted on 

March 30, 2010), and (3) section 1927 of 

the Act as set forth in section 202 of the 

Education Jobs and Medicaid Funding 

Act (Pub. L. 111–226, enacted on 

August 10, 2010). It also proposes to 

codify other requirements in section 

1927 of the Act pertaining to the 

Medicaid drug rebate program and 

revise certain regulatory provisions 

presently codified at 42 CFR part 447, 

subpart I and make other changes. 

3. Overall Impacts 

Overall, we estimate this rule would 

save approximately $17.7 billion for 

Federal Fiscal Years (FFYs) 2010 

through 2014, reflecting $13.7 billion in 

Federal savings and $4.0 billion in State 

savings, as shown in the Table 6. These 

impact estimates represent the increased 

percentages of rebates on generic and 

brand name drugs, the treatment of new 

formulations, the change in the 

maximum rebate amounts, the extension 

of rebate collection for Medicaid 

managed care organizations, and 

provides for adequate pharmacy 

reimbursement. Lastly, we estimate 

costs to MCOs, drug manufacturers, and 

States in the amount of $81.4 million for 

FFYs 2010 through 2014 which includes 

administrative and infrastructure 

expenses necessary to implement the 

required systems changes. 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
5354 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

(** These are interactions among drug provisions 

and the interaction of drug provisions with 

Medicaid expansion.) 

8http://www.cbo.gov/ftpdocs/113xx/doc11379/

AmendReconProp.pdf. 

TABLE 6—STATE AND FEDERAL SAVINGS (¥) OR COSTS (+) (FFYS 2010–2014) 

[In $millions] 7

Affordable Care Act section and provision 2010 2011 2012 2013 2014 Total 

2010–2014 

Section 2501(a)(1)—Increase minimum rebate percentages for brand name drugs.Federal ............

State ................

¥$350 

0 

¥$730 

0 

¥$765 

0 

¥$810 

0 

¥$865 

0 

¥$3,520 

0 

Section 2501(a)(2)—Recapture of total savings ................. Federal ............

State ................

Included with affected provisions 

Section 2501(b)—Increase rebate percentages for generic 

drugs.

Federal ............

State ................

¥30 

0 

¥50 

0 

¥55 

¥0 

¥55 

0 

¥65 

0 

¥255 

0 

Section 2501(c)—Extension of collection of rebates for 

MCOs.

Federal ............

State ................

¥580 

¥280 

¥720 

¥490 

¥720 

¥560 

¥770 

¥580 

¥820 

¥620 

¥3,610 

¥2,530 

Section 2501(d)—Rebates new formulation drugs ............. Federal ............

State ................

¥160 

0 

¥345 

0 

¥360 

0 

¥380 

0 

¥400 

0 

¥1,645 

0 

Section 2501(e)—Maximum rebate amount ....................... Federal ............

State ................

30 

20 

40 

30 

40 

30 

40 

30 

50 

30 

200 

140 

Section 2503—Providing adequate pharmacy * .................. Federal ............

State ................

0 

0 

¥351 

¥234 

¥702 

¥468 

¥702 

¥468 

¥702 

¥468 

¥2,457 

¥1,638 

Interactions ** ....................................................................... Federal ............

State ................

¥310 

0 

¥420 

0 

¥440 

0 

¥510 

0 

¥700 

¥5 

¥2,380 

¥5 

Total Impact ......................................................................... Federal ............

State ................

¥1,400 

¥260 

¥2,576 

¥694 

¥3,002 

¥998 

¥3,187 

¥1,018 

¥3,502 

¥1,063 

¥13,667 

¥4,033 

Total Federal & State Impacts ..................................... ......................... ¥1,660 ¥3,270 ¥4,000 ¥4,205 ¥4,565 ¥17,700 

TABLE 7—COSTS TO MCOS, DRUG MANUFACTURERS, AND STATES

[FFYs 2010–2014] 

Provision(s) Regulation section(s) 

(In $millions) Total 

2010 2011 2012 2013 2014 (FFYs 2010– 

2014) 

Drug Rebates for Medicaid MCOs .................................. § 447.509(b), § 447.511 ...... $0.1 $0.1 $0.1 $0.1 $0.1 $0.49 

Requirements for manufacturers ..................................... § 447.510 ............................ 23.3 14.4 14.4 14.4 14.4 80.91 

Total Costs ................................................................................................................. 23.4 14.5 14.5 14.5 14.5 81.4 

4. Detailed Economic Analysis 

All savings estimates provided were 

developed by the Office of the Actuary 

(OACT) and the Center for Medicaid, 

CHIP and Survey & Certification (CMCS) 

at CMS. We note that the Congressional 

Budget Office (CBO), in its estimates of 

the budgetary effects of these provisions 

of the Affordable Care Act, reached 

similar aggregate estimates with a $600 

million difference between CMS and 

CBO total estimates. The report can be 

seen at the following link (http://

www.cbo.gov/ftpdocs/113xx/doc11379/

AmendReconProp.pdf). CBO reached an 

estimated savings of $13.1 billion in 

Federal outlay reduction for FFY 2010– 

2014 compared to CMS’ estimates of 

$13.7 billion for that same time period.8

Savings estimates for sections 2501 and 

2503 of the Affordable Care Act reflect 

increased rebate percentages for generic 

and brand name drugs, treatment of new 

formulations, revised FULs, and 

extended collection of rebates to MCOs. 

As well as a cost estimate for provision 

of section 2501(e) of Affordable Care Act 

for maximum rebate amount. The 

following analysis describes the 

methodology used to reflect each 

provision’s savings estimates. 

The estimates for section 2501(a)(1) of 

the Affordable Care Act were derived 

from baseline Medicaid prescription 

drug rebates developed for the midsession review (MSR) of the FY 2010 

budget. Data from the MDR system was 

used to estimate the share of rebates 

attributable to single source and 

innovator multiple source drugs. Using 

this data, we developed a model to 

estimate the effect of raising the 

minimum rebate by fitting a distribution 

to data on brand drug rebates as a 

percent of AMP with and without the 

15.1 percent minimum. The distribution 

was then used to calculate the mean 

rebate percentage taking into account 

the new minimums specified in section 

2501(a) of the Affordable Care Act. 

These percentages were applied to 

baseline brand drug rebates to estimate 

potential savings from the provision. A 

behavioral offset of 40 percent was 

applied to the potential savings to 

account for actions on the part of 

manufacturers to minimize the impact 

of the higher rebate payments (for 

example, by raising prices). 

The estimate for section 2501(a)(2) of 

the Affordable Care Act represents the 

State share of savings projected for 

subsections (a)(1),(b), and (d) of section 

2501 and is included in the Federal 

savings of those subsections. 

The impact of section 2501(b) of the 

Affordable Care Act was estimated using 

MDR data to estimate the share of 

baseline Medicaid drug rebates 

attributable to non-innovator, multiple 

source drugs. Increasing the rebate from 

11 percent to 13 percent of AMP results 

in additional rebates of 2 percent of 

AMP, or about 18 percent (2/11) of 

projected generic drug rebates. 

For section 2501(c) of the Affordable 

Care Act, current projections of 

Medicaid prescription drug spending 

and managed care premiums were 

developed as part of the MSR 2010 

Medicaid baseline. The estimated 

impact represents two different effects 

of this section. First, current 

prescription drug spending by Medicaid 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5355 

managed care plans would receive 

additional rebates. Estimates for (1) the 

portion of managed care plan 

expenditures going to rebates and (2) the 

level of additional rebates that could be 

obtained by the managed care plans 

were developed to calculate this impact. 

Second, it is anticipated that some 

fee-for-service prescription drug 

spending that is currently carved out of 

Medicaid managed care plans would be 

included in future managed care 

contracts. To develop this estimate, 

estimates were made for (1) the 

increased efficiency of managed care 

plans in managing prescription drug 

use, and (2) the increased administrative 

costs by including additional 

expenditures under managed care plans. 

It was also assumed that 10 percent of 

current fee-for-service drug spending 

would eventually shift to Medicaid 

managed care plans. 

About 75 percent of the savings to the 

Federal government from this section 

are estimated to come from the impact 

of additional rebates for managed care 

plan expenditures on prescription 

drugs, and about 25 percent are 

estimates to come from the impact of 

moving fee-for-service prescription drug 

spending into managed care plans. 

The impact for section 2501(d) of the 

Affordable Care Act utilized MDR data 

and focused on new formulations that 

are extended-release forms of the initial 

brand name listed drug. The analysis 

concluded that by calculating the 

additional rebate, based on the initial 

brand name listed drug, Medicaid 

rebates would increase by about 5 

percent. A behavioral offset of 15 

percent was applied to these potential 

savings. 

The estimates for section 2501(e) of 

the Affordable Act were derived from an 

analysis of MDR data for single source 

and innovator multiple source drugs for 

which the unit rebate amount exceeds 

the AMP. The amount of rebates in 

excess of AMP was found to account for 

approximately one percent of total 

Medicaid rebates. 

The estimate for FULs under section 

2503 was developed by calculating the 

FUL based on weighted AMP times 175 

percent, including (I) innovator and (N) 

non-innovator drugs, for the purpose of 

savings and providing adequate 

reimbursement to pharmacy providers. 

a. Anticipated Effects on Drug 

Manufacturers 

As previously indicated in the 

Collection of Information there are 

approximately 600 drug manufacturers 

that participate in the Medicaid Drug 

Rebate program. The rule would require 

all drug manufacturers to provide an 

increased rebate percentage for generic 

and brand name drugs. 

The burden associated with the drug 

program is for labelers to gather and 

report existing sales and product 

information on an additional monthly 

basis and an expanded quarterly basis. 

As mentioned previously there are 

approximately 600 drug manufacturers 

who will have to provide reporting drug 

information to CMS. We believe each 

manufacturer will spend a one-time 

annual burden of approximately 

144,000 total hours in complying with 

these requirements. The estimated onetime cost to labelers is $8.6 million. 

This information is required for the new 

base AMP and the new best price. This 

is based on the Bureau of Labor 

Statistics (BLS) average rate of $60.00 an 

hour for a computer systems analyst. 

Manufacturers also will be required to 

submit the FDA application number 

issued by FDA when the product is 

approved. If the product does not 

currently have an FDA application 

number, the manufacturer must provide 

a demonstration that product is a 

covered outpatient drug, or a COD 

status. We estimate that these 

requirements would affect 

approximately 600 drug manufacturers 

that participate in the Medicaid Drug 

Rebate Program. The burden associated 

with the reporting of the FDA 

application number or the COD status is 

the time and the effort it would take for 

each drug manufacturer to retrieve this 

information from their records and 

submit it to CMS. Therefore, we believe 

that the new requirements to report the 

FDA application number or the COD 

status will require a total one-time 

burden of 3,000 hours at an estimated 

cost of $180,000. This is based on the 

BLS average rate of $60.00 an hour for 

a computer systems analyst. 

In addition, we believe that it will 

take time for manufacturers to identify 

the drugs that fall into 5i drugs category. 

We estimate they will spend a one-time 

total of 1,500 burden hours to identify 

these drugs. This translates to a onetime cost for manufacturers to identify 

the 5i drugs of $90,000, utilizing the 

average BLS wage rate of $60 an hour 

for this function. Furthermore, we 

believe that it will require all 

manufacturers to spend 192,000 total 

hours annually in identifying which 

drugs fall into the 5i category. The 

estimated cost to the labelers for this 

addition is $11.5 million. This is also 

based on the average BLS wage rate of 

$60 an hour for this function. More 

information on manufacturer 

requirements can be found in § 447.510 

of this proposed rule. 

Lastly, we believe that the initial 

identification of the initial brand name 

listed drug and the line extension would 

also add an additional 48,000 annual 

hours to identify which drugs with the 

extension qualify. The estimated 

additional cost to labelers for this 

addition is also $2.9 million. This figure 

is also based on the average BLS wage 

rate of $60 an hour for this function. 

Additional information can be found in 

section § 447.510 of this proposed rule. 

b. Anticipated Effects on Retail 

Community Pharmacies 

Retail community pharmacies would 

be affected by this regulation, as the law 

will result in FULs that are closer to the 

acquisition cost of the drug. In a 2009 

OIG report titled ‘‘A Comparison of 

Medicaid Federal Upper Limit Amounts 

to Acquisition Costs, Medicare Payment 

Amounts, and Retail Prices,’’ the OIG 

found that for the fourth quarter of FY 

2007 the pre-DRA FUL reimbursement 

was more than double the average 

pharmacy acquisition cost for 46 of the 

50 highest- expenditure FUL drugs. The 

Affordable Care Act FULs would 

generally reduce those limits in 

comparison to the pre-DRA highly 

inflated FULs and, thereby, reduce 

Medicaid payment for drugs subject to 

the limits. However, we note that since 

States had the option to reimburse at 

their SMAC, instead of the pre-DRA 

FUL, the actual reimbursement to the 

pharmacies under the Affordable Care 

Act FUL may be more compared to that 

SMAC reimbursement. An example of 

this is exemplified in comparing the 

pre-DRA FUL, the Affordable Care Act 

FUL and Indiana’s SMAC, as explained 

the preamble of § 447.514 of this 

proposed rule. 

However, other than the comparison 

chart provided in § 447.514 of this 

proposed rule, we have not analyzed 

how each State’s MAC program would 

impact the total savings under the new 

Affordable Care Act FUL methodology. 

Therefore, we invite public comments 

on this impact. The Federal savings in 

section 2503 of the Affordable Care Act 

reflect this change in reimbursement for 

retail community pharmacies. Although 

there are savings to the Medicaid 

program largely realized because of 

lower payment to pharmacies, 

pharmacies may receive a higher 

reimbursement under the Affordable 

Care Act FUL than they would when 

compared to what States currently 

reimburse pharmacies. 

c. Anticipated Effects on State Medicaid 

Programs 

States share in the savings from this 

rule. As noted in the Table 6, we 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
5356 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

estimate a 5-year State savings of over 

$4.0 billion. We also note States would 

be impacted by the provisions of this 

regulation that offset the States’ share of 

the increased rebate amounts under the 

Affordable Care Act. State 

administrative costs associated with this 

regulation are minor; as States currently 

pay based on a FUL, have already 

determined their drug reimbursement 

rates, and currently collect claims 

information on physician administered 

drugs. 

The States will have added reporting 

data for the MCOs to CMS and we 

believe that this will require a total of 

2,712 hours annually costing the States 

$98,744. 

Also, as a result of the increased 

rebate amounts under the national 

rebate agreement, manufacturers may 

reduce rebates they pay to States 

through supplemental rebate 

agreements. While this potential loss of 

supplemental rebates is not a direct 

consequence of this proposed rule, we 

recognize that this may occur. 

The interactions of the drug 

provisions with the Medicaid expansion 

in the Affordable Care Act will provide 

States a savings of $5 million in FFY 

2014. More information can be found in 

§ 447.509(c) and § 447.511 of this 

proposed rule. 

d. Anticipated Effects on U.S. 

Territories 

The definition of the term ‘‘States’’ 

would be revised to include the 

territories: The Commonwealth of 

Puerto Rico, the Virgin Islands, Guam, 

the Northern Mariana Islands and 

American Samoa, in addition to the 50 

States and the District of Columbia. The 

territories will be able to receive 

manufacturer rebates through the MDR 

program in the same manner that the 50 

States and the District of Columbia are 

currently receiving rebates. 

In order for territories to be able to 

begin collecting rebates from the 

manufacturers, the territories will be 

required to come into compliance with 

the MDR program because the systems 

that the territories currently have are not 

setup for the MDR program. As a result, 

these territories will likely have to 

utilize contractors in order to ensure 

that their systems are in place to begin 

to collect rebates from manufacturers. 

We do not have cost estimates for this 

compliance process to be completed and 

solicit comment specific to this issue. 

5. Alternatives Considered 

We considered a number of different 

policies and approaches during the 

development of this proposed rule. 

As mentioned in the Determination of 

AMP § 447.504, the goal of the 

Affordable Care Act is to capture the 

AMP for those drugs that would be 

difficult for manufacturers to calculate 

an AMP based on only retail community 

pharmacy sales. Therefore, to eliminate 

any problems that may result from a 

manufacturer not able to determine an 

AMP for a particular drug, Congress 

amended the Affordable Care Act to 

include inhalation, infusion, instilled, 

implanted, or injectable drugs that are 

not generally dispensed through retail 

community pharmacies. We considered 

whether we need to define and 

determine which drugs constitute the 

five aforementioned. Also, we looked at 

Medicare Part B drugs and considered 

using their list to define these drugs. 

Though, when speaking with our 

counterparts in Medicare Part B, the 

ASP NDC–HCPCS covered drugs that 

are usually not self administered were 

not all inclusive. In addition to using 

the Medicare Part B list, we also 

considered whether CMS or 

manufacturers would be responsible for 

defining which drugs would fall into 

this category. Additionally, we 

considered using the FDAs dosage forms 

and route of administrations to assist 

manufacturers in determining which 

drugs meet this requirement. 

We propose to use a multistep process 

to identify if the drug is not generally 

dispensed. To recap, first manufacturers 

would identify which drugs would fall 

within the parameters of the five 

aforementioned drugs. Then, they 

would need to determine if the drug is 

‘‘not generally dispensed’’ through a 

retail community pharmacy. (See 

§ 447.504 to learn more about the 

alternatives considered in developing 

AMP policy.) 

With regard to the offset of the 

increased rebate percentages, we did 

consider offsetting the non-Federal 

share of the entire difference between 

the minimum rebate percentages in 

effect on December 31, 2009 and the 

new minimum rebate percentages in 

effect under Affordable Care Act, 

regardless of whether States received a 

rebate amount based on the difference 

between AMP and best price. However, 

after careful consideration of the 

provision in 2501 of the Affordable Care 

Act, we propose to calculate the offset 

amount to reflect rebates based on the 

difference between AMP and best price. 

We also considered a different 

interpretation when calculating the 

offset for line extension drugs. However, 

we believe that the new alternative 

rebate calculation is more aligned than 

the statute. 

We also considered determining 

whether there would be a cost or 

savings in implementing the Affordable 

Care Act FUL by comparing simulations 

of the DRA FUL and new Affordable 

Care Act FUL, using price, utilization, 

and reimbursement data from the MDR 

system combined with generic group 

codes from First Data Bank. The 

difference in savings from these 

simulations (expressed as a percent of 

total Medicaid drug spending) was 

applied to projected Medicaid 

prescription drug spending developed 

for the mid-session review of the FY 

2010 Budget, resulting in a five-year 

Federal and State cost of $1.7 billion for 

the Affordable Care Act FULs compared 

to the DRA FULs. However, this 

alternative does not take into account a 

State’s ability to choose to reimburse at 

the SMACs, which may be lower than 

the FUL for a drug. As a result, this 

alternative/methodology yields a cost to 

the States and Federal government, 

when in actuality it should reflect a 

savings as many States have 

implemented their own SMAC and 

reimburse below the FUL. In addition, 

the DRA FUL was never implemented 

and therefore this alternative is based on 

unpublished FULs and not 

representative of actual reimbursement. 

We solicit comment on the 

Alternatives Considered section. 

6. Accounting Statement and Table 

As required by OMB’s Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/circulars/ 

a004/a-4.pdf), in the Table 8 we have 

prepared an accounting statement 

showing the classification of the 

transfers and costs associated with the 

provisions of this proposed rule. Table 

9 provides our best estimate of the 

decreases in Medicaid payments and 

increase in drug rebates under sections 

2501(a), 2501(b), 2501(c), 2501(d), 

2501(e), and 2503 of the Affordable Care 

Act. All transfers to the Federal and 

State Medicaid program are from retail 

pharmacies and drug manufacturers. 

Lastly, we present the costs to MCOs, 

Drug Manufacturers, and States. 


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TABLE 8—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED TRANSFERS AND COSTS, FROM FFYS 2010 TO 2014 

[In $millions] 

Category TRANSFERS 

Annualized Monetized Transfers Year Dollar Discount Rate Period Covered 

2011 7% 3% FFYs 2010– 

2014 

Primary Estimate ............................................... ¥$2,667.5 ¥$2,704.8 

From/To .............................................................. Reduction in transfers from the Federal Government to State Governments. 

Category TRANSFERS 

Annualized Monetized Transfers Year Dollar Discount Rate Period Covered 

2011 7% 3% FFYs 2010– 

2014 

Primary Estimate ............................................... ¥$780.0 ¥$795.1 

From/To .............................................................. Reduction in transfers from the State Governments to Retail Pharmacies and increased transfers from Drug Manufacturers to State Governments. 

Category COSTS 

Annualized Monetized Transfers Year Dollar Units Discount Rate Period Covered 

2011 7% 3% FFYs 2010– 

2014 

Primary Estimate ............................................... $16.5 $16.4 

Costs to MCOs, Drug Manufacturers, and States. 

7. Conclusion 

We estimate savings from this 

regulation of $17.7 billion over 5 years, 

$13.7 billion to the Federal government 

and $4.0 billion to the States. Most of 

these savings result from the increased 

rebate percentages on brand name drugs 

and the offsets of the total savings of the 

increased rebate percentage, treatment 

of new formulations, and from the 

collection of rebates from enrollees of 

MCOs. Lastly, we estimate costs to 

MCOs, drug manufacturers, and States 

of $81.4 million for FFYs 2010 through 

2014. 

While the effects of this regulation are 

substantial, they are a result of changes 

in the law. 

B. Regulatory Flexibility Act Analysis 

The RFA requires agencies to analyze 

options for regulatory relief of small 

entities, if a rule has a significant impact 

on a substantial number of small 

entities. For purposes of the RFA, small 

entities include small businesses, nonprofit organizations, and small 

governmental jurisdictions. Individuals 

and States are not included in the 

definition of a small entity. For 

purposes of the RFA, three types of 

small businesses are potentially 

impacted by this proposed rule. These 

include small retail community 

pharmacies, small pharmaceutical 

manufacturers participating in the 

Medicaid Drug Rebate Program, and 

small Medicaid managed care 

organizations (MCOs). More detailed 

analysis on the impact of these entities 

is provided in the Detailed Economic 

Analysis section (V.A.4) above. The 

great majority of hospitals and most 

other health care providers and 

suppliers are small entities, either by 

being nonprofit organizations or by 

meeting the Small Business 

Administration’s (SBA) definition of a 

small business (having revenues of less 

than $7.0 million to $34.5 million in 

any one year). 

TABLE 9—IMPACT ON SMALL ENTITIES

Small entity type Number of 

entities Impact (FFYs 2010–2014) 

Pharmaceutical Manufacturers in Medicaid Drug Rebate Program ................................. 600 Decrease in revenue of $5.4 billion as 

a result of higher rebates over 5 

years. 

Small Retail Community Pharmacies ............................................................................... 17,069 Minimal impact. 

Small Rural Hospitals ....................................................................................................... 700 Minimal impact. 

Small (HMOs/MCOs) Health Maintenance Organizations/Managed care organizations * 118 Decrease in revenue of $6.1 billion 

over 5 years. 

(* Figure may reflect overestimation relative to overall MCOs.) 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
5358 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

For purposes of the RFA, most of the 

retail pharmacies are considered small 

businesses according to the SBA’s size 

standards with total revenues of $25.5 

million or less in any 1 year 

(http://ecfr.gpoaccess.gov/cgi/t/text/

text-idx?c=ecfr&sid=2465b064ba6965

cc1fbd2eae60854b11&rgn=div8&

view=text&node=13:1.0.1.1.16.1.266.9&

idno=13). The latest 2007 SBA estimates 

that there are approximately 17,069 

small pharmacies. These pharmacies 

would be affected by this regulation as 

the law will result in lower FULs for 

most drugs subject to the payment 

limits, thus reducing Medicaid 

payments to pharmacies for generic 

drugs. The revision to the FULs would 

generally reduce those limits and, 

thereby reduce Medicaid payments for 

drugs that are subject to the payment 

limits. The savings for section 2503 of 

the Affordable Care Act reflect this 

statutory change. Beginning September 

2011, the publication of AWP by First 

Databank would in all likelihood cease; 

therefore, CMS proposes to replace the 

term ‘‘estimated acquisition cost’’ with 

Actual Acquisition Cost (AAC) and 

require States to begin paying pharmacy 

providers based on the AAC of the drug. 

Additionally States will reimburse 

providers with a comparable dispensing 

fee as mentioned in § 447.502 of this 

proposed rule. There will be a savings 

for States and the Federal government 

for reimbursing pharmacists at AAC 

because of the highly inflated prices that 

the Medicaid programs are currently 

reimbursing providers. 

According to the SBA size standards, 

drug manufacturers are considered 

small businesses if they have fewer than 

750 employees 

(http://ecfr.gpoaccess.gov/cgi/t/text/

text-idx?c=ecfr&sid=2465b064ba6965

cc1fbd2eae60854b11&rgn=div8&view=

text&node=13:1.0.1.1.16.1.266.9&

idno=13). Approximately 600 drug 

manufacturers currently participate in 

the Medicaid Drug Rebate Program. We 

believe most manufacturers are small 

businesses. We anticipate this rule 

would have an impact on small drug 

manufacturers. We believe there will be 

an impact on these entities and solicit 

comments on this analysis. 

The rule would require all drug 

manufacturers participating in the 

Medicaid Drug Rebate program to 

increase the rebate percentages that they 

are currently paying. Manufacturers are 

required by the Affordable Care Act to 

pay the increased percentages. The 

savings for sections 2501(a)(1), 2501(b) 

and 2501(d) reflect this statutory 

change. 

According to the SBA’s size 

standards, an HMO, of which we have 

included MCOs, is considered a small 

business if it has revenues of $10 

million or less in any one year (http:// 

ecfr.gpoaccess.gov/cgi/t/text/text-idx?

c=ecfr&sid=2465b064ba6965cc1fbd2eae

60854b11&rgn=div8&view=text&

node=13:1.0.1.1.16.1.266.9&idno=13). 

The SBA estimates that there are 

approximately 118 small HMO/MCO 

Medical centers that meet this 

threshold. Because of limited data 

available, we are unable to quantify how 

many MCOs fall within the HMO 

standard and meet the $10 million 

threshold. We do contend that only a 

small portion of the small MCOs meet 

this standard. We request any 

information that may help us better 

estimate the portion of MCOs that meet 

the SBA standard. The small Medicaid 

MCOs may be affected by this rule if 

manufacturers reduce rebate payments 

to them to any extent that these rebates 

are paid to the States but these costs 

would likely be mitigated because it is 

likely that the MCOs rates would be 

adjusted. 

Therefore, the Secretary has 

determined that this proposed rule 

would have a significant economic 

impact on a substantial number of small 

entities. We offer an analysis of the 

alternatives considered in section V.A.5 

of this proposed rule. The analysis 

above, together with the remainder of 

this preamble, constitutes the initial 

regulatory flexibility analysis. We solicit 

comment on the RFA analysis. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 603 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a metropolitan statistical area and has 

fewer than 100 beds. There are 

approximately 700 small rural hospitals 

that meet this definition. We do not 

expect this rule to have a significant 

impact on small rural hospitals although 

States are now required to furnish 

rebates from MCOs including NDCs for 

physician administered drugs. The 

national cost of this provision would be 

estimated at $580 million for FY 2010. 

However, the impact on these entities 

would be minimal because there would 

be no other requirement except for 

providing NDC numbers for physician 

administered drugs. Therefore, the 

Secretary has determined that this 

proposed rule would not have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. At this time, we are unable to 

specifically estimate quantitative effects 

on small retail pharmacies, particularly 

those in low income areas where there 

are high concentrations of Medicaid 

beneficiaries. We request any 

information that may help us better 

assess those effects before we make final 

decisions. 

C. Unfunded Mandates Reform Act 

Analysis 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

also requires that agencies assess 

anticipated costs and benefits before 

issuing any rule whose mandates 

require spending in any 1 year of $100 

million in 1995 dollars, updated 

annually for inflation. In 2011, that 

threshold is approximately $136 

million. We expect this proposed rule 

would impose additional costs to 

manufacturers, whereas it would likely 

increase savings for States and the 

Federal government. A detailed 

discussion on costs is offered below. We 

believe the rule would not impose 

additional costs to States and local 

governments. This proposed rule will 

have tribal implications, and in 

accordance with E.O. 13175 and the 

HHS Tribal Consultation Policy 

(December 2010), CMS will consult with 

Tribal officials prior to the formal 

promulgation of this regulation. 

There would be additional costs for 

drug manufacturers. This occurs as a 

result of the increased rebate 

percentages for generic and brand name 

drugs, and the treatment of new 

formulation drugs which for 

manufacturers, total over $11.2 billion 

dollars over the next 5 years. 

VI. Federalism Analysis 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

This proposed rule does not impose 

substantial direct requirement costs on 

State or local governments, preempts 

State law, or otherwise has Federalism 

implications. 

List of Subjects in 42 CFR Part 447 

Accounting, Administrative practice 

and procedure, Drugs, Grant programs— 

health, Health facilities, Health 

professions, Medicaid, Reporting and 

recordkeeping requirements, Rural 

areas. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 


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Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5359 

Medicaid Services proposes to amend 

42 CFR chapter IV as set forth below: 

PART 447—PAYMENTS FOR 

SERVICES 

1. The authority citation for part 447 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

Act (42 U.S.C. 1302). 

2. Subpart I is revised to read as 

follows: 

Subpart I—Payment for Drugs 

Secs. 

447.500 Basis and purpose. 

447.502 Definitions. 

447.504 Determination of Average 

Manufacturer Price. 

447.505 Determination of best price. 

447.506 Authorized generic drugs. 

447.507 Identification of 5i drugs. 

447.508 Exclusion from best price of certain 

sales at a nominal price. 

447.509 Medicaid drug rebates. 

447.510 Requirements for manufacturers. 

447.511 Requirements for States. 

447.512 Drugs: Aggregate upper limits of 

payment. 

447.514 Upper limits for multiple source 

drugs. 

447.516 Upper limits for drugs furnished as 

part of services. 

447.518 State plan requirements, findings, 

and assurances. 

447.520 FFP: Conditions relating to 

physician-administered drugs. 

447.522 Optional coverage of 

investigational drugs and other drugs not 

subject to rebate. 

Subpart I—Payment for Drugs 

§ 447.500 Basis and purpose. 

(a) Basis. This subpart— 

(1) Interprets those provisions of 

section 1927 of the Act that set forth 

requirements for drug manufacturers’ 

calculating and reporting average 

manufacturer prices (AMPs) and best 

prices and that set upper payment limits 

for covered outpatient drugs. 

(2) Implements section 1903(i)(10) of 

the Act with regard to the denial of 

Federal financial participation (FFP) in 

expenditures for certain physicianadministered drugs. 

(3) Implements section 1902(a)(54) of 

the Act with regard to a State plan that 

provides covered outpatient drugs. 

(4) Implements section 

1903(m)(2)(A)(xiii) of the Act, in part, 

and section 1927(b) of the Act with 

regard to rebates for covered outpatient 

drugs dispensed to individuals eligible 

for medical assistance who are enrolled 

in Medicaid Managed Care 

Organizations (MCOs). 

(5) Implements section 1902(a)(30)(A) 

of the Act with regard to the efficiency, 

economy, and quality of care in the 

context of payments for covered 

outpatient drugs. 

(b) Purpose. This subpart specifies 

certain requirements in the Social 

Security Act, including changes from 

the Affordable Care Act and other 

requirements pertaining to Medicaid 

payment for drugs. 

§ 447.502 Definitions. 

For the purpose of this subpart, the 

following definitions apply: 

5i drug means an inhalation, infusion, 

instilled, implanted, or injectable drug 

that is not generally dispensed through 

a retail community pharmacy. 

Actual acquisition cost (AAC) means 

the agency’s determination of the 

pharmacy providers’ actual prices paid 

to acquire drug products marketed or 

sold by specific manufacturers. 

Authorized generic drug means any 

drug sold, licensed, or marketed under 

a new drug application (NDA) approved 

by the Food and Drug Administration 

(FDA) under section 505(c) of the 

Federal Food, Drug and Cosmetic Act 

(FFDCA) that is marketed, sold or 

distributed under a different labeler 

code, product code, trade name, 

trademark, or packaging (other than 

repackaging the listed drug for use in 

institutions) than the brand name drug. 

Bona fide service fee means a fee paid 

by a manufacturer to wholesalers or 

retail community pharmacies; that 

represents fair market value for a bona 

fide, itemized service actually 

performed on behalf of the manufacturer 

that the manufacturer would otherwise 

perform (or contract for) in the absence 

of the service arrangement; and that is 

not passed on in whole or in part to a 

client or customer of an entity, whether 

or not the entity takes title to the drug. 

The fee includes, but is not limited to, 

distribution service fees, inventory 

management fees, product stocking 

allowances, and fees associated with 

administrative service agreements and 

patient care programs (such as 

medication compliance programs and 

patient education programs). 

Brand name drug means a single 

source or innovator multiple source 

drug. 

Bundled sale means any arrangement 

regardless of physical packaging under 

which the rebate, discount, or other 

price concession is conditioned upon 

the purchase of the same drug, drugs of 

different types (that is, at the nine-digit 

National Drug Code (NDC) level) or 

another product or some other 

performance requirement (for example, 

the achievement of market share, 

inclusion or tier placement on a 

formulary), or where the resulting 

discounts or other price concessions are 

greater than those which would have 

been available had the bundled drugs 

been purchased separately or outside 

the bundled arrangement. 

(1) The discounts in a bundled sale, 

including but not limited to those 

discounts resulting from a contingent 

arrangement, are allocated 

proportionally to the total dollar value 

of the units of all drugs sold under the 

bundled arrangement. 

(2) For bundled sales where multiple 

drugs are discounted, the aggregate 

value of all the discounts in the bundled 

arrangement must be proportionally 

allocated across all the drugs in the 

bundle. 

Clotting factor means a hemophilia 

clotting factor for which a separate 

furnishing payment is made under 

section 1842(o)(5) of the Act and which 

is included on a list of such factors 

specified and updated regularly by the 

CMS and posted on the CMS Web site. 

Consumer Price Index—Urban (CPI– 

U) means the index of consumer prices 

developed and updated by the U.S. 

Department of Labor. It is the CPI for all 

urban consumers (U.S. average) for the 

month before the beginning of the 

calendar quarter for which the rebate is 

paid. 

Covered outpatient drug means of 

those drugs which are treated as a 

prescribed drug for the purposes of 

section 1905(a)(12) of the Act, a drug 

which may be dispensed only upon a 

prescription (except as provided in 

paragraphs (2) and (3) of this definition). 

(1) A drug can only be considered a 

covered outpatient drug if it: 

(i) Is approved for safety and 

effectiveness as a prescription drug by 

the FDA under section 505 or 507 of the 

FFDCA where the manufacturer has 

obtained a NDA and also under section 

505(j) of the FFDCA where the 

manufacturer has obtained an ANDA; 

(ii) Was commercially sold in the 

United States before the enactment of 

the Drug Amendments of 1962 or which 

is identical, similar, or related (within 

the meaning described in FDA 

regulations at 21 CFR 310.6(b)(1)) to 

such a drug, and which has not been the 

subject of a final determination by the 

Secretary that it is a ‘‘new drug’’ (within 

the meaning of section 201(p) of the 

FFDCA) or an action brought by the 

Secretary under sections 301, 302(a), or 

304(a) of FFDCA to enforce section 

502(f) or 505(a) of the FFDCA; 

(iii) Is 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 (within the meaning described 

in FDA regulations at 21 CFR 

310.6(b)(1)) to such a drug or for which 

the Secretary has not issued a notice for 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
5360 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

an opportunity for a hearing under 

section 505(e) of the FFDCA. This 

provision specifies a proposed order of 

the Secretary to withdraw approval of 

an application for such drug under 

section 505(e) of the FFDCA 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; 

(iv) Is a biologic product other than a 

vaccine that may only be dispensed 

upon a prescription and is licensed 

under section 351 of the Public Health 

Service Act (PHSA) and is produced at 

an establishment licensed under section 

351 of the PHSA to produce such 

product; or 

(v) Is insulin certified under section 

506 of the FFDCA. 

(2) A covered outpatient drug does 

not include any drug, biologic product, 

or insulin provided as part of or 

incident to and in the same setting as, 

any of the following services (and for 

which payment is made as part of that 

service instead of as a direct 

reimbursement for the drug): 

(i) Inpatient Services; 

(ii) Hospice Services; 

(iii) Dental Services, except that drugs 

for which the State plan authorizes 

direct reimbursement to the dispensing 

dentist are covered outpatient drugs; 

(iv) Physician services; 

(v) Outpatient hospital services; 

(vi) Nursing facility and services 

provided by an intermediate care 

facility for the mentally retarded; 

(vii) Other laboratory and x-ray 

services; or 

(viii) Renal dialysis. 

(3) A covered outpatient drug does 

not include: 

(i) Any drug product, prescription or 

OTC, for which an NDC number is not 

required by the FDA; 

(ii) Any drug product that is not listed 

electronically with the FDA; 

(iii) Any drug product for which a 

manufacturer has not submitted to CMS 

evidence to demonstrate that the drug 

product satisfies the criteria in 

paragraph (1) of this definition; 

(iv) Any drug product or biological 

used for a medical indication which is 

not a medically accepted indication; or 

(v) Over-the-counter products that are 

not drugs. 

Customary prompt pay discount 

means any discount off of the purchase 

price of a drug routinely offered by the 

manufacturer to a wholesaler for prompt 

payment of purchased drugs within a 

specified timeframe and consistent with 

customary business practices for 

payment. 

Innovator multiple source drug means 

a multiple source drug marketed under 

a new drug application (NDA) approved 

by the FDA, including an authorized 

generic drug. It includes a drug product 

marketed by any cross-licensed 

producers, labelers, or distributors 

operating under the NDA and a covered 

outpatient drug approved under a 

biologic license application (BLA), 

product license approval (PLA), 

establishment license approval (ELA) or 

antibiotic drug approval (ADA). For 

purposes of the MDR program, an 

original NDA is equivalent to an NDA 

filed by the manufacturer for approval 

under section 505 of the FFDCA for 

purposes of approval by the FDA for 

safety and effectiveness. 

Lagged price concession means any 

discount or rebate that is realized after 

the sale of the drug, but does not 

include customary prompt pay 

discounts. 

Line extension means a single source 

or innovator multiple source drug that 

is in an oral solid dosage form that has 

been approved by the FDA as a change 

to the initial brand name listed drug in 

that it represents a new version of the 

previously approved listed drug, such as 

a new ester, a new salt, or other 

noncovalent derivative; a new 

formulation of a previously approved 

drug; a new combination of two or more 

drugs; or a new indication for an already 

marketed drug. 

Manufacturer means any entity that 

holds the NDC for a covered outpatient 

drug or biological product and— 

(1) Is engaged in the production, 

preparation, propagation, compounding, 

conversion, or processing of covered 

outpatient 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 

(2) Is engaged in the packaging, 

repackaging, labeling, relabeling, or 

distribution of covered outpatient drug 

products and is not a wholesale 

distributor of drugs or a retail pharmacy 

licensed under State law. 

(3) For authorized generic products, 

the term ‘‘manufacturer’’ will also 

include the original holder of the NDA. 

(4) For drugs subject to private 

labeling arrangements, the term 

‘‘manufacturer’’ will also include the 

entity under whose own label or trade 

name the product will be distributed. 

Multiple source drug means, for a 

rebate period, a covered outpatient drug 

for which there is at least one other drug 

product which— 

(1) Is rated as therapeutically 

equivalent as reported in the FDA’s 

most recent publication of ‘‘Approved 

Drug Products with Therapeutic 

Equivalence Evaluations’’ which is 

available at http://www.fda.gov or can 

be viewed at the FDA’s Freedom of 

Information Public Reading Room at 

5600 Fishers Lane, rm. 12A–30, 

Rockville, MD 20857 or successor 

publications and Web sites; 

(2) Is pharmaceutically equivalent and 

bioequivalent, as determined by the 

FDA; and 

(3) Is sold or marketed in the United 

States during the rebate period. 

National drug code (NDC) means the 

numerical code maintained by the FDA 

that includes the labeler code, product 

code, and package code. For purposes of 

this subpart, the NDC is considered to 

be an 11-digit code, unless otherwise 

specified in this subpart as being 

without regard to package size (that is, 

the 9-digit numerical code). 

National rebate agreement means the 

rebate agreement developed by CMS 

and entered into by CMS on behalf of 

the Secretary or his or her designee and 

a manufacturer to implement section 

1927 of the Act. 

Nominal price means a price that is 

less than 10 percent of the AMP in the 

same quarter for which the AMP is 

computed. 

Noninnovator multiple source drug 

means— 

(1) A multiple source drug that is not 

an innovator multiple source drug or a 

single source drug; 

(2) A multiple source drug that is 

marketed under an abbreviated NDA or 

an abbreviated antibiotic drug 

application; 

(3) A covered outpatient drug that 

entered the market before 1962 that was 

not originally marketed under an NDA; 

(4) Any drug that has not gone 

through an FDA approval process, but 

otherwise meet the definition of covered 

outpatient drug; or 

(5) Any noninnovator drug that is not 

therapeutically equivalent. 

(6) If any of the drug products listed 

in this definition of a noninnovator 

multiple source drug subsequently 

receives a new NDA or ANDA approval 

from the FDA, the manufacturer must 

change the reporting of the product’s 

drug category to correlate with the new 

product application type and furnish 

the appropriate information. 

Oral solid dosage form means 

capsules, tablets, or similar drugs 

products intended for oral use as 

defined in accordance with the FDA 

regulation at 21 CFR 206.3 that defines 

solid oral dosage form. 

Over-the-counter drug means a drug 

that is appropriate for use without the 

supervision of a health care professional 

such as a physician, and which can be 


srobinson on DSK4SPTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5361 

purchased by a consumer without a 

prescription. 

Pediatric indication means a 

specifically stated indication for use by 

the pediatric age group, meaning from 

birth through 16 years of age, or a subset 

of this group, as specified in the 

‘‘Indications and Usage’’ section of the 

FDA approved labeling. 

Professional dispensing fee means the 

professional fee which— 

(1) Is incurred at the point of sale or 

service and pays for costs in excess of 

the ingredient cost of a covered 

outpatient drug each time a covered 

outpatient drug is dispensed; 

(2) Includes only pharmacy costs 

associated with ensuring that possession 

of the appropriate covered outpatient 

drug is transferred to a Medicaid 

beneficiary. Pharmacy costs include, but 

are not limited to, reasonable costs 

associated with a pharmacist’s time in 

checking the computer for information 

about an individual’s coverage, 

performing drug utilization review and 

preferred drug list review activities, 

measurement or mixing of the covered 

outpatient drug, filling the container, 

beneficiary counseling, physically 

providing the completed prescription to 

the Medicaid beneficiary, delivery, 

special packaging, and overhead 

associated with maintaining the facility 

and equipment necessary to operate the 

pharmacy; and 

(3) Does not include administrative 

costs incurred by the State in the 

operation of the covered outpatient drug 

benefit including systems costs for 

interfacing with pharmacies. 

Rebate period means a calendar 

quarter. 

Single source drug means a covered 

outpatient drug that is produced or 

distributed under an NDA approved by 

the FDA and has an approved NDA 

number issued by the FDA, including a 

drug product marketed by any crosslicensed producers or distributors 

operating under the NDA. It also 

includes a covered outpatient drug 

approved under a biological license 

application (BLA), product license 

approval (PLA), establishment license 

approval (ELA), or antibiotic drug 

approval (ADA). For purposes of the 

MDR program, an original NDA is 

equivalent to an NDA filed by the 

manufacturer for approval under section 

505 of the FFDCA for purposes of 

approval by the FDA for safety and 

effectiveness. 

States means the 50 States, the 

District of Columbia and the territories 

(the Commonwealth of Puerto Rico, the 

Virgin Islands, Guam, the Northern 

Mariana Islands and America Samoa). 

United States means the 50 States, the 

District of Columbia, and the territories 

(the Commonwealth of Puerto Rico, the 

Virgin Islands, Guam, the Northern 

Mariana Islands and America Samoa). 

Wholesaler means a drug wholesaler 

that is engaged in wholesale distribution 

of prescription drugs to retail 

community pharmacies, including but 

not limited to manufacturers, repackers, 

distributors, own-label distributors, 

private-label distributors, jobbers, 

brokers, warehouses (including 

manufacturer’s and distributor’s 

warehouses, chain drug warehouses, 

and wholesale drug warehouses), 

independent wholesale drug traders, 

and retail community pharmacies that 

conduct wholesale distributions. 

§ 447.504 Determination of Average 

Manufacturer Price. 

(a) Definitions. For the purpose of this 

section, the following definitions apply: 

Average Manufacturer Price (AMP) 

means, with respect to a covered 

outpatient drug of a manufacturer 

(including those sold under an NDA 

approved under section 505(c) of the 

Federal Food, Drug, and Cosmetic Act 

(FFDCA)), the average price paid to the 

manufacturer for the drug in the United 

States by wholesalers for drugs 

distributed to retail community 

pharmacies and retail community 

pharmacies that purchase drugs directly 

from the manufacturer. 

Average unit price means a 

manufacturer’s sales included in AMP 

less all required adjustments divided by 

the total units sold and included in 

AMP by the manufacturer in a quarter. 

Charitable and not-for profit 

pharmacies means organizations 

exempt from taxation as defined by 

section 501(c)(3) of the Internal Revenue 

Code of 1986. 

Insurers means entities that are 

responsible for payment to pharmacies 

for drugs dispensed to their members, 

and do not take actual possession of 

these drugs or pass on manufacturer 

discounts or rebates to pharmacies. 

Net sales means quarterly gross sales 

revenue less cash discounts allowed, 

except customary prompt pay discounts 

extended to wholesalers, and all other 

price reductions (other than rebates 

under section 1927 of the Act or price 

reductions specifically excluded by 

statute or regulation) which reduce the 

amount received by the manufacturer. 

Retail community pharmacy means 

an independent pharmacy, a chain 

pharmacy, a supermarket pharmacy, 

and a mass merchandiser pharmacy that 

is licensed as a pharmacy by the State 

and that dispenses medications to the 

general public at retail prices. Such term 

does not include a pharmacy that 

dispenses prescription medications to 

patients primarily through the mail, 

nursing home pharmacies, long-term 

care facility pharmacies, hospital 

pharmacies, clinics, charitable or notfor-profit pharmacies, government 

pharmacies, or pharmacy benefit 

managers. 

(b) Sales, nominal price sales, 

discounts, rebates, payments, or other 

transactions included in AMP. Except 

for those sales, nominal price sales, 

rebates, discounts and other financial 

transactions identified in paragraph (c) 

of this section, AMP for covered 

outpatient drugs includes the following 

sales, nominal price sales and 

associated discounts, rebates, payments, 

or other transactions: 

(1) Sales to wholesalers for drugs 

distributed to retail community 

pharmacies. 

(2) Sales to other manufacturers who 

act as wholesalers for drugs distributed 

to retail community pharmacies. 

(3) Sales, discounts, rebates (other 

than rebates under section 1927 of the 

Act or as otherwise specified in 

regulations), payments, or other 

financial transactions that are received 

by, paid by, or passed through to retail 

community pharmacies. 

(4) Sales, discounts, rebates (other 

than rebates under section 1927 of the 

Act or as otherwise specified in 

regulations), payments, or other 

financial transactions that are received 

by, paid by, or passed through to 

entities that conduct business as 

wholesalers or retail community 

pharmacies, which includes but is not 

limited to specialty pharmacies, home 

infusion pharmacies and home 

healthcare providers. 

(c) Sales, nominal price sales, rebates, 

discounts, or other transactions 

excluded from AMP. AMP excludes the 

following sales, nominal sales, rebates, 

discounts, or other transactions: 

(1) Any prices on or after October 1, 

1992, to the Indian Health Service (IHS), 

the Department of Veterans Affairs 

(DVA), a State home receiving funds 

under 38 U.S.C. 1741, the Department of 

Defense (DoD), the Public Health 

Service (PHS), or a covered entity 

described in section 1927(a)(5)(B) of the 

Act (including inpatient prices charged 

to hospitals described in section 

340B(a)(4)(L) of the PHSA). 

(2) Any prices charged under the 

Federal Supply Schedule (FSS) of the 

General Services Administration (GSA). 

(3) Any depot prices (including 

TRICARE) and single award contract 

prices, as defined by the Secretary, of 

any agency of the Federal government. 

(4) Sales outside the United States. 


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(5) Direct and indirect sales to 

hospitals. 

(6) Sales to health maintenance 

organizations (HMOs) (including 

managed care organizations (MCOs)), 

including HMO or MCO operated 

pharmacies. 

(7) Sales to long-term care providers, 

including nursing facility pharmacies, 

nursing home pharmacies, long-term 

care facilities, contract pharmacies for 

the nursing facility where these sales 

can be identified with adequate 

documentation, and other entities where 

the drugs are dispensed through a 

nursing facility pharmacy, such as 

assisted living facilities. 

(8) Sales to mail order pharmacies. 

(9) Sales to clinics and outpatient 

facilities (for example, surgical centers, 

ambulatory care centers, dialysis 

centers, and mental health centers). 

(10) Sales to government pharmacies 

(for example, a Federal, State, county, or 

municipal-owned pharmacy). 

(11) Sales to charitable pharmacies. 

(12) Sales to not-for-profit 

pharmacies. 

(13) Sales, associated rebates, 

discounts, or other price concessions 

paid directly to insurers. 

(14) Bona fide service fees paid by 

manufacturers to wholesalers, retail 

community pharmacies, or any other 

entity that conducts business as a 

wholesaler or a retail community 

pharmacy, including but not limited to 

inventory management fees, product 

stocking allowances, and fees associated 

with administrative agreements and 

patient care programs (such as 

medication compliance programs and 

patient education programs), including 

bona fide service fees paid to Group 

Purchasing Organizations. 

(15) Customary prompt pay discounts 

extended to wholesalers. 

(16) Reimbursement by the 

manufacturer for recalled, damaged, 

expired, or otherwise unsalable returned 

goods, including (but not limited to) 

reimbursement for the cost of the goods 

and any reimbursement of costs 

associated with return goods handling 

and processing, reverse logistics, and 

drug destruction but only to the extent 

that such payment covers only those 

costs. 

(17) Associated discounts, rebates, or 

other price concessions provided under 

the Medicare Coverage Gap Discount 

Program under section 1860D–14A of 

the Act. 

(18) Sales to PBMs, including their 

mail order pharmacy’s purchases. 

(19) Rebates under the national rebate 

agreement or a CMS-authorized State 

supplemental rebate agreement paid to 

State Medicaid Agencies under section 

1927 of the Act. 

(20) Sales to hospices (inpatient and 

outpatient). 

(21) Sales to prisons. 

(22) Direct sales to physicians. 

(23) Direct sales to patients. 

(24) Free goods, not contingent upon 

any purchase requirement. 

(25) Manufacturer coupons to a 

consumer redeemed by the 

manufacturer, agent, pharmacy or 

another entity acting on behalf of the 

manufacturer, but only to the extent that 

the full value of the coupon is passed on 

to the consumer and the pharmacy, 

agent, or other entity does not receive 

any price concession. 

(26) Manufacturer vouchers. 

(27) Prices negotiated under 

Manufacturer-sponsored drug discount 

card programs. 

(28) Goods provided free of charge 

under Manufacturer-sponsored patient 

refund/rebate programs. 

(29) Goods provided free of charge 

under Manufacturer copayment 

assistance programs and patient 

assistance programs. 

(d) Sales and associated discounts, 

rebates, payments, or other transactions 

included in AMP for inhalation, 

infusion, instilled, implanted, or 

injectable drugs (5i drugs) not generally 

dispensed through a retail community 

pharmacy. AMP for 5i covered 

outpatient drugs indentified in 

accordance with § 447.507 of this 

subpart shall include sales and 

associated discounts, rebates, payments 

or other financial transactions to all 

entities as specified in paragraph (b) of 

this section, as well as the following 

sales and associated discounts, rebates, 

payments or other transactions: 

(1) Sales to physicians. 

(2) Sales to pharmacy benefit 

managers where the PBM is not acting 

as an insurer, including its mail order 

pharmacy purchases. 

(3) Sales to health maintenance 

organizations (HMOs), including 

managed care organizations (MCOs). 

(4) Sales, discounts, or rebates paid 

directly to insurers (except for rebates 

under section 1927 of the Act and this 

subpart). 

(5) Sales to hospitals. 

(6) Sales to clinics and outpatient 

facilities (for example, surgical centers, 

ambulatory care centers, dialysis 

centers, mental health centers). 

(7) Sales to mail order pharmacies. 

(8) Sales to long-term care providers, 

including nursing facility pharmacies, 

nursing home pharmacies, long-term 

care facilities, contract pharmacies for 

the nursing facility where these sales 

can be identified with adequate 

documentation, and other entities where 

the drugs are dispensed through a 

nursing facility pharmacy, such as 

assisted living facilities. 

(9) Sales to hospices. 

(10) Sales to other manufacturers who 

conduct business as a wholesaler or 

retail community pharmacy. 

(e) Further clarification of AMP 

calculation. 

(1) AMP includes cash discounts 

except customary prompt pay discounts 

extended to wholesalers, free goods that 

are contingent on any purchase 

requirement, volume discounts, 

chargebacks that can be identified with 

adequate documentation, incentives, 

administrative fees, service fees, 

distribution fees, and any other rebates, 

discounts or other financial 

transactions, other than rebates under 

section 1927 of the Act, which reduce 

the price received by the manufacturer 

for drugs distributed to retail 

community pharmacies. 

(2) Quarterly AMP is calculated as a 

weighted average of monthly AMPs in 

that quarter. 

(3) The manufacturer must adjust the 

AMP for a rebate period if cumulative 

discounts, rebates, or other 

arrangements subsequently adjust the 

prices actually realized, to the extent 

that such cumulative discounts, rebates, 

or other arrangements are not excluded 

from the determination of AMP by 

statute or regulation. 

§ 447.505 Determination of best price. 

(a) Definitions. For the purpose of this 

section, the following definitions apply: 

Best price means, for a single source 

drug or innovator multiple source drug 

of a manufacturer (including the lowest 

price available to any entity for any 

such drug of a manufacturer that is sold 

under an NDA approved under section 

505(c) of the FFDCA), the lowest price 

available from the manufacturer during 

the rebate period to any wholesaler, 

retailer, provider, health maintenance 

organization, nonprofit entity, or 

governmental entity in the United States 

in any pricing structure (including 

capitated payments), in the same quarter 

for which the AMP is computed. 

Provider means a hospital, HMO, 

including an MCO, or entity that treats 

or provides coverage or services to 

individuals for illnesses or injuries or 

provides services or items in the 

provision of health care. 

(b) Prices included in best price. 

Except for those prices identified in 

paragraph (c) of this section, best price 

for covered outpatient drugs includes all 

prices and associated rebates, discounts, 

or other transactions that adjust prices 

either directly or indirectly. 


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(c) Prices excluded from best price. 

Best price excludes the following: 

(1) Any prices on or after October 1, 

1992, charged to the IHS, the DVA, a 

State home receiving funds under 38 

U.S.C. 1741, the DoD, or the PHS. 

(2) Prices to 340B covered entities. 

(i) Prices charged under the 340B drug 

pricing program to a covered entity 

described in section 1927(a)(5)(B) of the 

Act; and 

(ii) Any inpatient prices charged to 

hospitals described in section 

340B(a)(4)(L) of the PHSA. 

(3) Any prices charged under the FSS 

of the GSA. 

(4) Any prices provided to a 

designated State Pharmacy Assistance 

Program (SPAP). 

(5) Any depot prices (including 

TRICARE) and single award contract 

prices, as defined by the Secretary, of 

any agency of the Federal government. 

(6) Any prices charged which are 

negotiated by a prescription drug plan 

under Part D of title XVIII, by any MA– 

PD plan under Part C of such title with 

respect to covered Part D drugs, or by 

a Qualified Retiree Prescription Drug 

Plan (as defined in section 1860D– 

22(a)(2) of the Act) for such drugs on 

behalf of individuals entitled to benefits 

under Part A or enrolled under Part B 

of Medicare, or any discounts provided 

by manufacturers under the Medicare 

coverage gap discount program under 

section 1860D–14A of the Act. 

(7) Rebates under the national rebate 

agreement or a CMS-authorized 

supplemental rebate agreement paid to 

State Medicaid Agencies under section 

1927 of the Act. 

(8) Prices negotiated under 

manufacturer-sponsored drug discount 

card programs. 

(9) Manufacturer coupons to a 

consumer redeemed by a consumer, 

agent, pharmacy or another entity acting 

on behalf of the manufacturer; but only 

to the extent that the full value of the 

coupon is passed on to the consumer 

and the pharmacy, agent, or other entity 

does not receive any price concession. 

(10) Goods provided free of charge 

under Manufacturer copayment 

assistance programs and patient 

assistance programs. 

(11) Goods provided free of charge 

under Manufacturer-sponsored patient 

refund or rebate programs. 

(12) Manufacturer vouchers. 

(13) Free goods, not contingent upon 

any purchase requirement. 

(14) Reimbursement by the 

manufacturer for recalled, damaged, 

expired, or otherwise unsalable returned 

goods, including, but not limited to, 

reimbursement for the cost of the goods 

and any reimbursement of costs 

associated with return goods handling 

and processing, reverse logistics, and 

drug destruction but only to the extent 

that it only covers these costs. 

(15) Nominal prices to certain entities 

as set forth in § 447.508 of this subpart. 

(16) Bona fide service fees paid by 

manufacturers to wholesalers, retail 

community pharmacies, or any other 

entity that conducts business as a 

wholesaler or a retail community 

pharmacy, including but not limited to 

inventory management fees, product 

stocking allowances, and fees associated 

with administrative agreements and 

patient care programs (such as 

medication compliance programs and 

patient education programs), including 

bona fide service fees paid to Group 

Purchasing Organizations. 

(17) PBM rebates, discounts, or other 

financial transactions except their mail 

order pharmacy’s purchases or where 

such rebates, discounts, or other 

financial transactions are designed to 

adjust prices at the retail or provider 

level. 

(18) Sales outside the United States. 

(d) Further clarification of best price. 

(1) Best price is net of cash discounts, 

free goods that are contingent on any 

purchase requirement, volume 

discounts, customary prompt pay 

discounts, chargebacks, returns, 

incentives, promotional fees, 

administrative fees, service fees, 

distribution fees, and any other 

discounts or price reductions and 

rebates, other than rebates under section 

1927 of the Act, which reduce the price 

available from the manufacturer. 

(2) Best price must be determined on 

a unit basis without regard to package 

size, special packaging, labeling or 

identifiers on the dosage form or 

product or package. 

(3) The manufacturer must adjust the 

best price for a rebate period if 

cumulative discounts, rebates, or other 

arrangements subsequently adjust the 

prices available from the manufacturer. 

§ 447.506 Authorized generic drugs. 

(a) Definitions. For the purpose of this 

section, the following definitions apply: 

Primary manufacturer means a 

manufacturer that holds the NDA of the 

authorized generic drug. 

Secondary manufacturer of an 

authorized generic drug means a 

manufacturer that is authorized by the 

primary manufacturer to sell the drug 

but does not hold the NDA. 

(b) Inclusion of authorized generic 

drugs in AMP by a primary 

manufacturer. The primary 

manufacturer must include in its 

calculation of AMP its sales of 

authorized generic drugs that have been 

sold or licensed to a secondary 

manufacturer, acting as a wholesaler, or 

when the primary manufacturer holding 

the NDA sells directly to a wholesaler. 

(c) Inclusion of authorized generic 

drugs in best price by a primary 

manufacturer. A primary manufacturer 

holding the NDA must include the best 

price of an authorized generic drug in 

its computation of best price for an 

innovator multiple source drug during a 

rebate period to any manufacturer, 

wholesaler, retailer, provider, HMO, 

non-profit entity, or governmental entity 

in the United States, only when such 

drugs are being sold by the 

manufacturer holding the NDA. 

(d) Inclusion of authorized generic in 

AMP and best price by a secondary 

manufacturer. The secondary 

manufacturer of an authorized generic 

drug must provide a rebate based on its 

sales of authorized generics, and must 

calculate AMP and best price, consistent 

with the requirements specified in 

§ 447.504 and § 447.505 of this subpart. 

§ 447.507 Identification of 5i drugs. 

A manufacturer must identify each 

covered outpatient drug that is a 5i drug 

that is not generally dispensed through 

a retail community pharmacy. 

(a) Identification of a 5i drug. A 

manufacturer must use the list of FDA’s 

Routes of Administration posted on the 

CMS Web site to identify each covered 

outpatient drug that qualifies as a 5i 

drug. 

(b) Not generally dispensed through a 

retail community pharmacy. A 

manufacturer must determine if the 5i 

drug is not generally dispensed through 

a retail community pharmacy based on 

the percentage of sales to entities other 

than retail community pharmacies. 

(1) A 5i drug is not generally 

dispensed through a retail community 

pharmacy if 90 percent or more of the 

sales of the 5i drug, during the reporting 

period, were to entities other than retail 

community pharmacies or wholesalers 

for drugs distributed to retail 

community pharmacies. 

(2) A manufacturer is responsible for 

determining whether a 5i drug is not 

generally dispensed through a retail 

community pharmacy on a monthly and 

quarterly basis. 

§ 447.508 Exclusion from best price of 

certain sales at a nominal price. 

(a) Exclusion from best price. Sales of 

covered outpatient drugs by a 

manufacturer at nominal prices are 

excluded from best price when 

purchased by the following entities: 

(1) A covered entity as described in 

section 340B(a)(4) of the PHSA. 

(2) An ICF/MR providing services as 

set forth in § 440.150 of this chapter. 


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(3) A State-owned or operated nursing 

facility providing services as set forth in 

§ 440.150 of this chapter. 

(4) A public or non-profit entity or 

facility at an institution of higher 

learning whose primary purpose is to 

provide health care services to students 

of that institution, and provide family 

planning services described under 

section of 1001(a) of PHSA, 42 U.S.C. 

300. 

(5) An entity that— 

(i) Is described in section 501(c)(3) of 

the Internal Revenue Code of 1986 and 

exempt from tax under section 501(a) of 

that Act or is State-owned or operated; 

and 

(ii) Is providing the same services to 

the same type of population as a 

covered entity described in section 

340B(a)(4) of the PHSA but is not in 

receipt of grant funds under that Act. 

(b) Nonapplication. This restriction 

does not apply to sales by a 

manufacturer of covered outpatient 

drugs that are sold under a master 

agreement under 38, U.S.C. 8126. 

(c) Rule of construction. Nothing in 

this subpart is construed to alter any 

existing statutory or regulatory 

prohibition on services for an entity 

described paragraph (a) of this section, 

including the prohibition set forth in 

section 1008 of the PHSA. 

§ 447.509 Medicaid drug rebates. 

(a) Determination of rebate amount. 

(1) Basic rebate for single source 

drugs and innovator multiple source 

drugs. The amount of basic rebate for 

each dosage form and strength of a 

single source drug or an innovator 

multiple source drug is equal to the 

product of— 

(i) The total number of units of each 

dosage form and strength paid for under 

the State plan in the rebate period (as 

reported by the State); and 

(ii) The greater of— 

(A) The difference between the AMP 

and the best price for the dosage form 

and strength of the drug; or 

(B) The AMP for the dosage form and 

strength of the drug multiplied by one 

of the following percentages— 

(1) For a clotting factor, 17.1 percent; 

(2) For a drug approved by the FDA 

exclusively for pediatric indications, 

17.1 percent; or 

(3) For all other single source drugs 

and innovator multiple source drugs, 

23.1 percent. 

(2) Additional rebate for single source 

and innovator multiple source drugs. In 

addition to the basic rebate described in 

paragraph (a)(1) of this section, for each 

dosage form and strength of a single 

source drug or an innovator multiple 

source drug, the rebate amount will be 

increased by an amount equal to the 

product of— 

(i) The total number of units of such 

dosage form and strength paid for under 

the State plan in the rebate period; and 

(ii) The amount, if any, by which— 

(A) The AMP for the dosage form and 

strength of the drug for the period 

exceeds: 

(B) The base date AMP for such 

dosage form and strength, increased by 

the percentage by which the consumer 

price index for all urban consumers 

(United States city average) for the 

month before the month in which the 

rebate period begins exceeds such index 

associated with the base date AMP of 

the drug. 

(3) Total rebate. The total rebate 

amount for single source drugs and 

innovator multiple source drugs is equal 

to the basic rebate amount plus the 

additional rebate amount, if any. 

(4) Treatment of new formulations. 

(i) In the case of a drug that is a line 

extension of a single source drug or an 

innovator multiple source drug that is 

an oral solid dosage form, the rebate 

obligation is the amount computed 

under paragraphs (a)(1) through (a)(3) of 

this section for such new drug or, if 

greater, the product of all of the 

following: 

(A) The AMP of the line extension of 

a single source drug or an innovator 

multiple source drug that is an oral 

solid dosage form. 

(B) The highest additional rebate 

(calculated as a percentage of AMP) 

under this section for any strength of the 

original single source drug or innovator 

multiple source drug. 

(C) The total number of units of each 

dosage form and strength of the line 

extension product paid for under the 

State plan in the rebate period (as 

reported by the State). 

(ii) The term ‘‘line extension’’ means, 

with respect to a drug, a new 

formulation of the drug, such as an 

extended release product. 

(iii) Identification of line extension 

drugs. 

(A) The FDA’s list of Chemical Types, 

listed in FDA Drugs in FDA’s database, 

is used to identify the line extension 

drug and the initial brand name listed 

drug. 

(B) Chemical Type 2, new ester, new 

salt, or other noncovalent derivative; 

Chemical Type 3, new formulation; 

Chemical Type 4, new combination; and 

Chemical Type 6, new indication are 

determined to be line extension drugs. 

(C) Chemical Type 1, new molecular 

entity, represents the initial brand name 

listed drug. 

(5) Limit on rebate. In no case will the 

total rebate amount exceed 100 percent 

of the AMP of the drug. 

(6) Rebate for noninnovator multiple 

source drugs. The amount of the rebate 

for each dosage form and strength of a 

noninnovator multiple source drug will 

be equal to the product of— 

(i) The total number of units of such 

dosage form and strength for which 

payment was made under the State plan 

for the rebate period; and 

(ii) The AMP for the dosage form and 

strength for the rebate period multiplied 

by 13 percent. 

(b) Rebates for drugs dispensed 

through Medicaid managed care 

organizations (MCOs). 

(1) Manufacturers participating in the 

Medicaid drug rebate program will pay 

rebates for covered outpatient drugs 

dispensed to individuals enrolled in 

Medicaid MCOs if the MCO is 

contractually required to provide such 

drugs. 

(2) Manufacturers are exempt from the 

requirement in paragraph (b)(1) of this 

section if such drugs are: 

(i) Dispensed by health maintenance 

organizations including MCOs that 

contract under section 1903(m) of the 

Act. 

(ii) Discounted under section 340B of 

the PHSA. 

(3) Within 30 days of the end of each 

quarter, a Medicaid MCO that 

contractually provides covered 

outpatient drugs dispensed to Medicaid 

beneficiaries must report to the State the 

following data: 

(i) MCO identifier. 

(ii) National Drug Code. 

(iii) Period covered. 

(iv) Product FDA list name. 

(v) Total units. 

(vi) Total number of prescriptions. 

(vii) Amount reimbursed. 

(c) Federal offset of rebates. States 

must remit to the Federal government 

the amount of the savings resulting from 

the increases in the rebate percentages. 

(1) For single source or innovator 

multiple source drugs other than blood 

clotting factors and drugs approved by 

the FDA exclusively for pediatric 

indications: 

(i) If AMP minus best price is less 

than or equal to AMP times 15.1 

percent, then the offset amount is the 

full 8 percent of AMP (the difference 

between 23.1 percent of AMP and 15.1 

percent of AMP). 

(ii) If AMP minus best price is greater 

than AMP times 15.1 percent but less 

than AMP times 23.1 percent, then the 

offset amount is the difference between 

AMP times 23.1 percent and AMP 

minus best price. 

(iii) If AMP minus best price is equal 

to or greater than AMP times 23.1 

percent, then there is no offset amount. 

(2) For single source or innovator 

multiple source drugs that are clotting 


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factors and drugs approved by the FDA 

exclusively for pediatric indications that 

are subject to a rebate percentage of 17.1 

percent of AMP: 

(i) If AMP minus best price is less 

than or equal to AMP times 15.1 

percent, then the offset amount is the 

full 2 percent of AMP (the difference 

between 17.1 percent of AMP and 15.1 

percent of AMP). 

(ii) If AMP minus best price is greater 

than AMP times 15.1 percent but less 

than AMP times 17.1 percent, then the 

offset amount is the difference between 

AMP times 17.1 percent and AMP 

minus best price. 

(iii) If AMP minus best price is equal 

to or greater than AMP times 17.1 

percent, then there is no offset amount. 

(3) For a drug that is a line extension 

of a single source or innovator multiple 

source drug that is an oral solid dosage 

form, the offset amount is the difference 

between the URA calculation for the 

drug calculated based on the applicable 

rebate percentage in section 1927 of the 

Act prior to the Affordable Care Act and 

the calculation of the URA for the line 

extension drug, if greater, in accordance 

with the Affordable Care Act. 

(4) For noninnovator multiple source 

drugs, the offset amount is equal to 2 

percent of the AMP (the difference 

between 13 percent of AMP and 11 

percent of AMP). 

§ 447.510 Requirements for 

manufacturers. 

(a) Quarterly reports. A manufacturer 

must report product and pricing 

information for covered outpatient 

drugs to CMS not later than 30 days 

after the end of the rebate period. The 

quarterly pricing report must include 

the following: 

(1) AMP, calculated in accordance 

with § 447.504 of this subpart. 

(2) Best price, calculated in 

accordance with § 447.505 of this 

subpart. 

(3) Customary prompt pay discounts, 

which are reported as an aggregate 

dollar amount for each covered 

outpatient drug at the nine-digit NDC 

level, provided to all wholesalers in the 

rebate period. 

(4) Prices that fall within the nominal 

price exclusion, which are reported as 

an aggregate dollar amount and include 

all sales of single source and innovator 

multiple source drugs to the entities 

listed in § 447.508(a) of this subpart for 

the rebate period. 

(5) A manufacturer that fails to submit 

a quarterly AMP to CMS for a product 

by the thirtieth day after the end of each 

rebate period will be subject to civil 

monetary penalties for each product not 

reported on the thirty-first day of 

$10,000 per day per drug. 

(b) Reporting revised quarterly AMP, 

best price, customary prompt pay 

discounts, or nominal prices. 

(1) A manufacturer must report to 

CMS any revision to AMP, best price, 

customary prompt pay discounts, or 

nominal prices for a period not to 

exceed 12 quarters from the quarter in 

which the data were due. Any revision 

request that exceeds 12 quarters will not 

be considered, except for the following 

reasons: 

(i) The change is a result of the drug 

category change or a market date 

change. 

(ii) The change is an initial 

submission for a product. 

(iii) The change is due to termination 

of a manufacturer from the MDR 

program for failure to submit pricing 

data and must submit pricing data to 

reenter the program. 

(iv) The change is due to a technical 

correction, that is, not based on any 

changes in sales transactions or pricing 

adjustments from such transactions. 

(v) The change is to address specific 

underpayments to States, or potential 

liability regarding those underpayments, 

as required by CMS or court order, or 

pursuant to an internal investigation, or 

an OIG or DOJ investigation. 

(2) A manufacturer may report 

revisions to AMP, best price, customary 

prompt pay discounts, or nominal 

prices for a period in excess of 12 

quarters from the quarter in which the 

data were due based on the approval of 

CMS for good cause. 

(3) A manufacturer must report 

revisions to AMP within the 12-quarter 

time period, except when the revision 

would be solely as a result of data 

pertaining to lagged price concessions. 

(c) Base date AMP report. 

(1) Reporting period. A manufacturer 

may report a revised DRA base date 

AMP to CMS within the first four full 

calendar quarters following July 17, 

2007. 

(2) Recalculation of the DRA base 

date AMP. 

(i) A manufacturer’s recalculation of 

the DRA base date AMP must only 

reflect the revisions to AMP as provided 

for in § 447.504 of this subpart. 

(ii) A manufacturer may choose to 

recalculate the DRA base date AMP on 

a product-by-product basis. 

(iii) A manufacturer must use actual 

and verifiable pricing records in 

recalculating the DRA base date AMP. 

(3) Reporting a revised Affordable 

Care Act base date AMP. A 

manufacturer may report a revised 

Affordable Care Act base date AMP to 

CMS within the first four full calendar 

quarters following [publication date of 

the final rule]. 

(4) Recalculation of the Affordable 

Care Act base date AMP. 

(i) A manufacturer’s recalculation of 

the Affordable Care Act base date AMP 

must only reflect the revisions to AMP 

as provided for in § 447.504 of this 

subpart. 

(ii) A manufacturer may choose to 

recalculate the Affordable Care Act base 

date AMP on a product-by-product 

basis. 

(iii) A manufacturer must use actual 

and verifiable pricing records in 

recalculating the Affordable Care Act 

base date AMP. 

(d) Monthly AMP. 

(1) Definition. Monthly AMP means 

the AMP that is calculated on a monthly 

basis. A manufacturer must submit a 

monthly AMP to CMS not later than 30 

days after the last day of each prior 

month. 

(2) Calculation of monthly AMP. 

Monthly AMP is calculated based on 

§ 447.504 of this subpart, except the 

period covered is based on monthly, as 

opposed to quarterly, sales. 

(i) The monthly AMP is calculated 

based on the weighted average of prices 

for all the manufacturer’s package sizes 

of each covered outpatient drug sold by 

the manufacturer during a month. 

(ii) It is calculated as net sales divided 

by number of units sold, excluding 

goods or any other items specifically 

excluded in the statute or regulations. 

Monthly AMP is calculated based on the 

best data available to the manufacturer 

at the time of submission. 

(iii) In calculating monthly AMP, a 

manufacturer must estimate the impact 

of its lagged price concessions using a 

12-month rolling percentage to estimate 

the value of those discounts. 

(3) Timeframe for reporting revised 

monthly AMP. A manufacturer must 

report to CMS revisions to monthly 

AMP for a period not to exceed 36 

months from the month in which the 

data were due, except as allowed in 

paragraph (b)(1) of this section. 

(4) Exception. A manufacturer must 

report revisions to monthly AMP within 

the 36-month time period, except when 

the revision would be solely as a result 

of data pertaining to lagged price 

concessions. 

(5) Terminated products. A 

manufacturer must not report a monthly 

AMP for a terminated product beginning 

with the first month after the expiration 

date of the last lot sold. 

(6) Monthly AMP units. A 

manufacturer must report the total 

number of units that are used to 

calculate the monthly AMP in the same 

unit type as used to compute the AMP 


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5366 Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 

to CMS not later than 30 days after the 

last day of each month. 

(7) Failure to report product 

information, monthly AMP and AMP 

units. A manufacturer that fails to 

submit a monthly AMP and the total 

number of units that are used to 

calculate that monthly AMP to CMS for 

a product by the thirtieth day after the 

last day of each month will be subject 

to civil monetary penalty for each 

product not reported on the thirty-first 

day of $10,000 per drug per day. 

(e) Certification of pricing reports. 

Each report submitted under paragraphs 

(a) through (d) of this section must be 

certified by one of the following: 

(1) The manufacturer’s chief executive 

officer (CEO). 

(2) The manufacturer’s chief financial 

officer (CFO). 

(3) An individual other than a CEO or 

CFO, who has authority equivalent to a 

CEO or a CFO; or 

(4) An individual with the directly 

delegated authority to perform the 

certification on behalf of an individual 

described in paragraphs (e)(1) through 

(e)(3) of this section. 

(f) Recordkeeping requirements. 

(1) A manufacturer must retain 

records (written or electronic) for 10 

years from the date the manufacturer 

reports data to CMS for that rebate 

period. 

(i) The records must include these 

data and any other materials from which 

the calculations of the AMP, the best 

price, customary prompt pay discounts, 

and nominal prices are derived, 

including a record of any assumptions 

made in the calculations. 

(ii) The 10-year timeframe applies to 

a manufacturer’s quarterly and monthly 

submissions of pricing data, as well as 

any revised pricing data subsequently 

submitted to CMS. 

(2) A manufacturer must retain 

records beyond the 10-year period if all 

of the following circumstances exist: 

(i) The records are the subject of an 

audit, or of a government investigation 

related to pricing data that are used in 

AMP, best price, customary prompt pay 

discounts, or nominal prices of which 

the manufacturer is aware. 

(ii) The audit findings or investigation 

related to the AMP, best price, 

customary prompt pay discounts, or 

nominal price have not been resolved. 

(g) Data reporting format. All product 

and pricing data, whether submitted on 

a quarterly or monthly basis, must be 

submitted to CMS in an electronic 

format designated by CMS. 

§ 447.511 Requirements for States. 

(a) Invoices submitted to participating 

drug manufacturers. Within 60 days of 

the end of each quarter, the State must 

bill participating drug manufacturers an 

invoice which includes, at a minimum, 

all of the following data: 

(1) The State code. 

(2) National Drug Code. 

(3) Period covered. 

(4) Product FDA list name. 

(5) Unit rebate amount. 

(6) Units reimbursed. 

(7) Rebate amount claimed. 

(8) Number of prescriptions. 

(9) Medicaid amount reimbursed. 

(10) Non-Medicaid amount 

reimbursed. 

(11) Total amount reimbursed. 

(b) Data submitted to CMS. On a 

quarterly basis, the State must submit 

drug utilization data to CMS, which will 

be the same information as submitted to 

the manufacturers. 

(c) State that has participating 

Medicaid Managed Care Organizations 

(MCO). A State that has participating 

Medicaid Managed Care Organizations 

(MCO), which includes covered 

outpatient drugs in its contracts with 

the MCOs, must report data described in 

paragraph (a) of this section for covered 

outpatient drugs dispensed to 

individuals eligible for medical 

assistance who are enrolled with the 

MCO and for which the MCO is 

required under contract for coverage of 

such drugs under section 1903 of the 

Act. This data must be identified 

separately from the data pertaining to 

drugs that the State reimburses on a feefor-service basis. 

§ 447.512 Drugs: Aggregate upper limits of 

payment. 

(a) Multiple source drugs. Except for 

brand name drugs that are certified in 

accordance with paragraph (c) of this 

section, the agency payment for 

multiple source drugs must not exceed, 

in the aggregate, the amount that would 

result from the application of the 

specific limits established in accordance 

with § 447.514 of this subpart. If a 

specific limit has not been established 

under § 447.514 of this subpart, then the 

rule for ‘‘other drugs’’ set forth in 

paragraph (b) of this section applies. 

(b) Other drugs. The agency payments 

for brand name drugs certified in 

accordance with paragraph (c) of this 

section and drugs other than multiple 

source drugs for which a specific limit 

has been established under § 447.514 of 

this subpart must not exceed, in the 

aggregate, payment levels that the 

agency has determined by applying the 

lower of the following: 

(1) AAC plus a professional 

dispensing fee established by the 

agency; or 

(2) Providers’ usual and customary 

charges to the general public. 

(c) Certification of brand name drugs. 

(1) The upper limit for payment for 

multiple source drugs for which a 

specific limit has been established 

under § 447.514 of this subpart does not 

apply if a physician certifies in his or 

her own handwriting (or by an 

electronic alternative means approved 

by the Secretary) that a specific brand is 

medically necessary for a particular 

beneficiary. 

(2) The agency must decide what 

certification form and procedure are 

used. 

(3) A check off box on a form is not 

acceptable but a notation like ‘‘brand 

necessary’’ is allowable. 

(4) The agency may allow providers to 

keep the certification forms if the forms 

will be available for inspection by the 

agency or HHS. 

§ 447.514 Upper limits for multiple source 

drugs. 

(a) Establishment and issuance of a 

listing. 

(1) CMS will establish and issue 

listings that identify and set upper 

limits for multiple source drugs 

available for purchase by retail 

community pharmacies on a nationwide 

basis that the FDA has rated at least 

three drug products as pharmaceutically 

and therapeutically equivalent in its 

most current edition of ‘‘Approved Drug 

Products with Therapeutic Equivalence 

Evaluations’’ (including supplements or 

in successor publications). Only 

pharmaceutically and therapeutically 

equivalent formulations will be used to 

determine such limit, and such limit 

will only be applied to those 

therapeutically equivalent drug 

products 

(2) CMS publishes the list of multiple 

source drugs for which upper limits 

have been established and any revisions 

to the list in Medicaid Program 

issuances. 

(b) Specific upper limits. The agency’s 

payments for multiple source drugs 

identified and listed periodically by 

CMS in Medicaid Program issuances 

must not exceed, in the aggregate, prior 

to the application of any Federal or 

State drug rebate considerations, 

payment levels determined by applying 

for each drug entity a professional 

dispensing fee established by the State 

agency plus an amount established by 

CMS that is equal to 175 percent of the 

weighted average of the most recently 

reported monthly AMP using 

manufacturer submitted utilization data. 

(c) Ensuring a drug is for sale 

nationally. To assure that a multiple 

source drug is for sale nationally, CMS 

will consider the following additional 

criteria: 


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Federal Register / Vol. 77, No. 22 / Thursday, February 2, 2012 / Proposed Rules 5367 

(1) The AMP of a terminated NDC will 

not be used to set the Federal upper 

limit (FUL) beginning with the first day 

of the month after the termination date 

reported by the manufacturer to CMS. 

(2) The monthly AMP units data will 

be used to calculate the weighted 

average of monthly AMPs for all 

multiple source drugs to establish the 

FUL. 

(d) The FUL will be applied as an 

aggregate upper limit. 

§ 447.516 Upper limits for drugs furnished 

as part of services. 

The upper limits for payment for 

prescribed drugs in this subpart also 

apply to payment for drugs provided as 

part of skilled nursing facility services 

and intermediate care facility services 

and under prepaid capitation 

arrangements. 

§ 447.518 State plan requirements, 

findings, and assurances. 

(a) State plan. The State plan must 

describe comprehensively the agency’s 

payment methodology for prescription 

drugs, including the agency’s payment 

methodology for drugs dispensed by all 

of the following: 

(1) A covered entity described in 

section 1927(a)(5)(B) of the Act. 

(2) A contract pharmacy under 

contract with a covered entity described 

in section 1927(a)(5)(B) of the Act. 

(3) An Indian Health Service, tribal 

and urban Indian pharmacy. 

(b) Findings and assurances. Upon 

proposing significant State plan changes 

in payments for prescription drugs, and 

at least annually for multiple source 

drugs and triennially for all other drugs, 

the agency must make the following 

findings and assurances: 

(1) Findings. The agency must make 

the following separate and distinct 

findings: 

(i) In the aggregate, its Medicaid 

expenditures for multiple source drugs, 

identified and listed in accordance with 

§ 447.514(a) of this subpart, are in 

accordance with the upper limits 

specified in § 447.514(b) of this subpart. 

(ii) In the aggregate, its Medicaid 

expenditures for all other drugs are in 

accordance with § 447.512 of this 

subpart. 

(2) Assurances. The agency must 

make assurances satisfactory to CMS 

that the requirements set forth in 

§ 447.512 and § 447.514 of this subpart 

concerning upper limits and in 

paragraph (b)(1) of this section 

concerning agency findings are met. 

(c) Recordkeeping. The agency must 

maintain and make available to CMS, 

upon request, data, mathematical or 

statistical computations, comparisons, 

and any other pertinent records to 

support its findings and assurances. 

(d) Data requirements. When 

proposing changes to the ingredient cost 

reimbursement or professional 

dispensing fee reimbursement, States 

must provide adequate data, including, 

but not limited to, a State or national 

survey of retail pharmacy providers or 

other reliable data which reflects the 

pharmacy’s actual or average acquisition 

cost as a base to support any proposed 

change in ingredient cost 

reimbursement. States must submit to 

CMS the proposed change in 

reimbursement and the supporting data 

through a State plan amendment 

through the formal review process. 

§ 447.520 FFP: Conditions relating to 

physician-administered drugs. 

(a) No FFP is available for physicianadministered drugs for which a State 

has not required the submission of 

claims using codes that identify the 

drugs sufficiently for the State to bill a 

manufacturer for rebates. 

(1) As of January 1, 2006, a State must 

require providers to submit claims for 

single source, physician-administered 

drugs using Healthcare Common 

Procedure Coding System codes or NDC 

numbers to secure rebates. 

(2) As of January 1, 2007, a State must 

require providers to submit claims for 

physician-administered single source 

drugs and the 20 multiple source drugs 

identified by the Secretary using NDC 

numbers. 

(b) As of January 1, 2008, a State must 

require providers to submit claims for 

the 20 multiple source physicianadministered drugs identified by the 

Secretary as having the highest dollar 

value under the Medicaid Program 

using NDC numbers to secure rebates. 

(c) A State that requires additional 

time to comply with the requirements of 

this section may apply to the Secretary 

for an extension. 

§ 447.522 Optional coverage of 

investigational drugs and other drugs not 

subject to rebate. 

(a) Medicaid coverage of 

investigational drugs may be provided 

at State option under section 1905(a)(12) 

of the Act when such drug has been 

indicated by the FDA for human trials. 

(b) A State agency electing to provide 

coverage of an investigational drug must 

include in its State plan a description of 

the coverage and payment for such drug. 

(c) The State plan must indicate that 

any payments for investigational drugs 

will be reimbursed in accordance with 

the FDA final rules at 21 CFR parts 312 

and 316 if they are to be eligible to 

receive FFP for these drugs. 

(d) Medicaid coverage of other drugs 

may be provided at State option under 

section 1905(a)(12) of the Act provided 

that they are not covered outpatient 

drugs or fail to be listed electronically 

with the FDA. 

(e) Investigational drugs and other 

drugs are not subject to the rebate 

requirements of section 1927 of the Act 

provided they do not meet the 

definition of a covered outpatient drug 

as set forth in section 1927(k) of the Act. 

Authority: Catalog of Federal Domestic 

Assistance Program No. 93.778, Medical 

Assistance Program. 

Dated: March 16, 2011. 

Donald M. Berwick, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: August 16, 2011. 

Kathleen Sebelius, 

Secretary. 

Editorial Note: This document was 

received at the Office of the Federal Register 

on January 26, 2012. 

[FR Doc. 2012–2014 Filed 1–27–12; 11:15 am] 

BILLING CODE 4120–01–P 


srobinson on DSK4SPTVN1PROD with PROPOSALS2