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[Federal Register Volume 77, Number 22 (Thursday, February 2, 2012)]
[Proposed Rules]
[Pages 5318-5367]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2014]

[[Page 5317]]

Vol. 77

Thursday,

No. 22

February 2, 2012

Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 447

Medicaid Program; Covered Outpatient Drugs; Proposed Rule

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

[[Page 5318]]

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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.

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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)

[[Page 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 Sec.  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

[[Page 5320]]

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 (Sec.  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 Sec.  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 Sec.  
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 (Sec.  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 Sec.  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

[[Page 5321]]

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 Sec.  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 Sec.  447.512 Drugs: Aggregate upper limits of payment and 
Sec.  447.518 State plan requirements, findings, and assurances.
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    \1\ http://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.
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2. Authorized Generic Drug
    The definition of ``authorized generic drug'', presently set forth 
in Sec.  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 Sec.  447.506 and move 
this definition to Sec.  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 Sec.  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 Sec.  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 Sec.  447.502.

[[Page 5322]]

    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-the-counter (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

[[Page 5323]]

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 Sec.  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 Sec.  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

[[Page 5324]]

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 Sec.  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 Sec.  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 pre-natal 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.

[[Page 5325]]

                Table 1--List of Oral Solid Dosage Forms
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Bar, Chewable                        Capsule
Capsule (Immediate/Complete          Capsule, Coated
 Release) (Hard Or Soft Gelatin,
 Chewable Or Perle)
Capsule, Coated (Hard Or Soft        Capsule, Coated Pellets
 Gelatin)
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       Capsule, Gelatin Coated
 Release
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,      Tablet, Delayed Release
 Enteric Coated)
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     Tablet, Multilayer, Extended
 Coated)                              Release
Tablet, Orally Disintegrating,       Tablet, Orally Disintegrating
 Delayed Release
Tablet, Repeat Action (Coated)       Tablet, Soluble
Tablet, Sugar Coated                 Tablet, Sustained Action (Coated,
                                      Film Coated, Multilayer, Uncoated)
Tablet, Sustained Release, Film      Tablet, Uncoated, Lozenge
 Coated
Tablet, Uncoated, Lozenge,           Tablet, Uncoated, Troche
 Lypophilized
Tablet, Sustained Action, Membrane   Pastille
 Controlled
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            Tablet Effervescent for Solution
 Suspension
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

[[Page 5326]]

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 Sec.  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 (Sec.  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 (Sec.  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

[[Page 5327]]

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 Sec.  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 Sec.  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 
Sec.  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

[[Page 5328]]

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 Sec.  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-for-profit 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 self-insured 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 
not-for-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

[[Page 5329]]

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/PostmarketDrugSafetyInformationforPatientsandProviders/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 non-retail 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

[[Page 5330]]

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 Sec.  447.504(b).
a. Sales to Wholesalers (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  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 Sec.  447.504(c).

[[Page 5331]]

a. Prices to Other Federal Programs Including TRICARE--(Sec.  
447.504(c)(1)-Sec.  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 (Sec.  447.504(c)(4))
    The proposed definition of ``United States'' in Sec.  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 (Sec.  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)) (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  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

[[Page 5332]]

pharmacies are excluded from the determination of AMP.
i. Sales to Charitable and Not-for-Profit Pharmacies (Sec.  
447.504(c)(11)-Sec.  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 tax-exempt, 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 Sec.  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) (Sec.  
447.504(c)(14))
    As described earlier, we propose to revise the definition of bona 
fide service fees in Sec.  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 Sec.  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 (Sec.  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 (Sec.  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.

[[Page 5333]]

n. Medicare Coverage Gap Discount (Sec.  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 (Sec.  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 (Sec.  447.504(c)(19))
    We propose to exclude rebates under the national rebate agreement 
or a CMS-authorized 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 (Sec.  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 (Sec.  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 (Sec.  447.504(c)(22) and Sec.  
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 Sec.  
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 Sec.  
447.504(c)(26) that direct sales to physicians be excluded from the 
determination of AMP.
t. Direct Sales to Patients (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  
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 manufacturer-sponsored drug discount card program.
y. Manufacturer-Sponsored Patient Refund/Rebate Programs (Sec.  
447.504(c)(28))
    The Affordable Care Act did not explicitly address the treatment of 
prices negotiated under a manufacturer-sponsored 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 (Sec.  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

[[Page 5334]]

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 
(Sec.  447.504(d) and Sec.  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 Sec.  447.507 Identification of 
5i drugs to indicate how 5i drugs are to be identified. In Sec.  
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

[[Page 5335]]

 
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 self-administered 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, Sec.  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 physician-administered 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.
---------------------------------------------------------------------------

    \2\ While 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.
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 5336]]

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 Sec.  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 Sec.  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--Sec.  447.504(e)
a. Chargebacks and Other Discounts (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  447.505)

1. Definitions of Best Price and Providers
    We are proposing re-codifying the terms ``best price'' and 
``Providers'' under newly proposed Sec.  447.505(a). Additionally, we 
are proposing to revise the definition of the term ``best price'' at 
newly proposed Sec.  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 Sec.  
447.505(c)(1)-(11), be redesignated to Sec.  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 Sec.  447.505(d)(1)-(13), 
be redesignated to Sec.  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.

[[Page 5337]]

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 Sec.  
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 Sec.  447.505(c)(6).

E. Authorized Generics Drugs (Sec.  447.506)

    We propose to remove the definition of ``Authorized generic drugs'' 
from Sec.  447.506(a), as discussed in section II.B.1 of this 
regulation. In Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  447.504 and Sec.  447.505 respectively.

F. Exclusion From Best Price of Certain Sales at a Nominal Price (Sec.  
447.508)

    Currently, the existing regulations at Sec.  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 Sec.  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 State-owned 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

[[Page 5338]]

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 (Sec.  447.509)

1. Determination of Rebate Amount (Sec.  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 Sec.  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 Sec.  
447.502, would qualify.
    We propose in Sec.  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 Sec.  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 Sec.  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 (Sec.  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 Sec.  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 Sec.  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 drug-device 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/GuidanceComplianceRegulatoryInformation/Guidances/UCM198650.pdf.
    We are soliciting feedback from the industry, the public, and other

[[Page 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/informationondrugs/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-the-counter) 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 nine-digit NDC drug is a single source drug, innovator multiple 
source drug, or non-innovator 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.

[[Page 5340]]

    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

[[Page 5341]]

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 Sec.  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 x 23.1% = 300.00 x 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) x CPI-U] is less 
than the quarterly AMP, subtract [(Baseline AMP/Baseline CPI-U) x 
CPI] from the quarterly AMP to determine the additional URA. If the 
[(Baseline AMP/Baseline CPI-U) x CPI] is equal to or greater than 
the quarterly AMP, the additional URA is equal to zero.
    [(Baseline AMP/Baseline CPI-U) x CPI-U] = 100/170 x 200 = 0.5882 
x 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 x 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% x 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) (Sec.  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 
Sec.  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 Sec.  447.509(b). In Sec.  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 Sec.  
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

[[Page 5342]]

discounts under section 340B of the PHS Act. In Sec.  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 (Sec.  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 (Sec.  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 Sec.  447.504 ``Determination of AMP'' from Sec.  447.510 
``Requirements for Manufacturers''. In this proposed rule, we are 
proposing conforming regulatory amendments to add regulatory text to 
Sec.  447.510. Specifically, those references that will be added are at 
Sec.  447.510(a)(1), Sec.  447.510(c)(2)(i), and Sec.  447.510(d)(2).
    We are also proposing a conforming amendment to Sec.  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 (Sec.  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

[[Page 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 (Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 (Sec.  447.510(c)(1) to Sec.  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 DRA-based 
definition of AMP and the timeframe described below, we propose to 
revise Sec.  447.510(c)(1) and Sec.  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 Sec.  447.510(c)(1).

[[Page 5344]]

    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 Sec.  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 (Sec.  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 Sec.  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 x 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 (Sec.  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 (Sec.  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/alertsandbulletins/2010/SpAdvBulletin_AMP_ASP.pdf.

[[Page 5345]]

    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 (Sec.  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 Sec.  447.511 to clarify the requirements for 
States. In Sec.  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 Sec.  447.511(b), we propose that the States report drug 
utilization data as defined in Sec.  447.511(a) to CMS on a quarterly 
basis.
    In Sec.  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 Sec. Sec.  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 (Sec.  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 Sec.  447.514 ``Upper limits for 
multiple source drugs'' from Sec.  447.512 ``Drugs: Aggregate upper 
limits of payment''. We are proposing regulatory amendments to add 
those references back into the regulatory text of Sec.  447.512.
    Currently, Sec.  447.512(b) establishes guidelines for payment 
levels that the agency has determined to be appropriate. At Sec.  
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\
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    \3\ http://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.
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    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.
---------------------------------------------------------------------------

    \4\ Alabama-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).
---------------------------------------------------------------------------

K. Upper Limits for Multiple Source Drugs (Sec.  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 Sec.  447.502 
``Definitions.'' In accordance with these statutory requirements, we 
also propose that at least two

[[Page 5346]]

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 Sec.  
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\
---------------------------------------------------------------------------

    \5\ http://www.fda.gov/downloads/Drugs/DevelopmentApprovalProcess/UCM071436.pdf.
---------------------------------------------------------------------------

    ``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\
---------------------------------------------------------------------------

    \6\ Id., vii.
---------------------------------------------------------------------------

    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-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Federal-Upper-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)

[[Page 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 
FDA-approved, 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 AMP-based 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

[[Page 5348]]

[GRAPHIC] [TIFF OMITTED] TP02FE11.000

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

[[Page 5349]]

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 Sec.  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

[[Page 5350]]

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 (Sec.  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 Sec.  447.514 ``Upper limits for multiple source 
drugs'' from Sec.  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 Sec.  
447.518.
    In addition, to conform with the change from ``estimated 
acquisition cost'' to ``actual acquisition cost'', we propose in Sec.  
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 Sec.  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

[[Page 5351]]

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 (Sec.  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 Sec.  
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 Sec.  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 
non-covered 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 (Sec.  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 Sec.  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 Sec.  447.509(b) and Sec.  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 Sec.  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 (Sec.  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

[[Page 5352]]

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 (Sec.  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.

[[Page 5353]]

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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Hourly
                                                                          Burden per     Total      labor cost  Total labor  Total capital/
      Regulation Section(s)           OMB      Respondents   Responses     response      annual         of        cost of      maintenance    Total cost
                                  Control No.                              (hours)       burden     reporting    reporting      costs ($)        ($)
                                                                                        (hours)        ($)          ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   447.509(b), Sec.           * 0938-0582           56          224         12.1        2,712        36.41       98,744               0       98,744
 447.511........................
Sec.   447.510..................  * 0938-0578          600          600          240      144,000           60    8,640,000               0    8,640,000
Sec.   447.510..................  * 0938-0578          600          600            5        3,000           60      180,000               0      180,000
Sec.   447.510..................  * 0938-0578          600          600          2.5        1,500           60       90,000               0       90,000
Sec.   447.510..................  * 0938-0578          600         9600           20      192,000           60   11,520,000               0   11,520,000
Sec.   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.
---------------------------------------------------------------------------

    \7\ Except 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).)
    (** These are interactions among drug provisions and the 
interaction of drug provisions with Medicaid expansion.)

[[Page 5354]]

                                          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        Federal.......................        -$350        -$730        -$765        -$810        -$865      -$3,520
 rebate percentages for brand name drugs.   State.........................            0            0            0            0            0            0
                                                                           -----------------------------------------------------------------------------
Section 2501(a)(2)--Recapture of total      Federal.......................                        Included with affected provisions
 savings.                                   State.........................
                                                                           -----------------------------------------------------------------------------
Section 2501(b)--Increase rebate            Federal.......................          -30          -50          -55          -55          -65         -255
 percentages for generic drugs.             State.........................            0            0           -0            0            0            0
Section 2501(c)--Extension of collection    Federal.......................         -580         -720         -720         -770         -820       -3,610
 of rebates for MCOs.                       State.........................         -280         -490         -560         -580         -620       -2,530
Section 2501(d)--Rebates new formulation    Federal.......................         -160         -345         -360         -380         -400       -1,645
 drugs.                                     State.........................            0            0            0            0            0            0
Section 2501(e)--Maximum rebate amount....  Federal.......................           30           40           40           40           50          200
                                            State.........................           20           30           30           30           30          140
Section 2503--Providing adequate pharmacy   Federal.......................            0         -351         -702         -702         -702       -2,457
 *.                                         State.........................            0         -234         -468         -468         -468       -1,638
Interactions **...........................  Federal.......................         -310         -420         -440         -510         -700       -2,380
                                            State.........................            0            0            0            0           -5           -5
Total Impact..............................  Federal.......................       -1,400       -2,576       -3,002       -3,187       -3,502      -13,667
                                            State.........................         -260         -694         -998       -1,018       -1,063       -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]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       (In $millions)                          Total
                                                                                  ----------------------------------------------------------------------
                 Provision(s)                         Regulation section(s)                                                                 (FFYs 2010-
                                                                                      2010       2011       2012       2013       2014         2014)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Drug Rebates for Medicaid MCOs................  Sec.   447.509(b), Sec.   447.511       $0.1       $0.1       $0.1       $0.1       $0.1           $0.49
Requirements for manufacturers................  Sec.   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.
---------------------------------------------------------------------------

    \8\ http://www.cbo.gov/ftpdocs/113xx/doc11379/AmendReconProp.pdf.
---------------------------------------------------------------------------

    The estimates for section 2501(a)(1) of the Affordable Care Act 
were derived from baseline Medicaid prescription drug rebates developed 
for the mid-session 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

[[Page 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 
one-time 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 one-time 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 Sec.  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 Sec.  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 Sec.  447.514 of this proposed rule.
    However, other than the comparison chart provided in Sec.  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

[[Page 5356]]

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 Sec.  447.509(c) and 
Sec.  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 Sec.  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 Sec.  
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.

[[Page 5357]]

     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, non-profit 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
----------------------------------------------------------------------------------------------------------------
                                           Number of
           Small entity type               entities                      Impact (FFYs 2010-2014)
----------------------------------------------------------------------------------------------------------------
Pharmaceutical Manufacturers in                    600  Decrease in revenue of $5.4 billion as a result of
 Medicaid Drug Rebate Program.                           higher rebates over 5 years.
Small Retail Community Pharmacies.....          17,069  Minimal impact.
Small Rural Hospitals.................             700  Minimal impact.
Small (HMOs/MCOs) Health Maintenance             * 118  Decrease in revenue of $6.1 billion over 5 years.
 Organizations/Managed care
 organizations.
----------------------------------------------------------------------------------------------------------------
(* Figure may reflect overestimation relative to overall MCOs.)

[[Page 5358]]

    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=2465b064ba6965cc1fbd2eae60854b11&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 Sec.  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=2465b064ba6965cc1fbd2eae60854b11&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=2465b064ba6965cc1fbd2eae60854b11&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 
&

[[Page 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

Sec.  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 physician-administered 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.

Sec.  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

[[Page 5360]]

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

[[Page 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 
cross-licensed 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.

Sec.  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 not-for-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.

[[Page 5362]]

    (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 Sec.  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.

Sec.  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.

[[Page 5363]]

    (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 Sec.  
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.

Sec.  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 Sec.  447.504 and Sec.  447.505 of this 
subpart.

Sec.  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.

Sec.  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 Sec.  440.150 of 
this chapter.

[[Page 5364]]

    (3) A State-owned or operated nursing facility providing services 
as set forth in Sec.  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.

Sec.  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

[[Page 5365]]

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).

Sec.  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 Sec.  447.504 of this 
subpart.
    (2) Best price, calculated in accordance with Sec.  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 
Sec.  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 Sec.  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 
Sec.  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 
Sec.  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

[[Page 5366]]

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.

Sec.  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 fee-for-service basis.

Sec.  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 Sec.  447.514 of this subpart. If 
a specific limit has not been established under Sec.  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 Sec.  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 Sec.  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.

Sec.  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:

[[Page 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.

Sec.  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.

Sec.  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 Sec.  447.514(a) of 
this subpart, are in accordance with the upper limits specified in 
Sec.  447.514(b) of this subpart.
    (ii) In the aggregate, its Medicaid expenditures for all other 
drugs are in accordance with Sec.  447.512 of this subpart.
    (2) Assurances. The agency must make assurances satisfactory to CMS 
that the requirements set forth in Sec.  447.512 and Sec.  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.

Sec.  447.520  FFP: Conditions relating to physician-administered 
drugs.

    (a) No FFP is available for physician-administered 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 physician-administered 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.

Sec.  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
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