<PRORULE>
<PREAMB>
<AGENCY TYPE='S'>DEPARTMENT OF HEALTH AND HUMAN SERVICES
<SUBAGY>Centers for Medicare & Medicaid Services
<CFR>42 CFR Part 447 <DEPDOC>[CMS-2345-P] <RIN>RIN 0938-AQ41 <SUBJECT>Medicaid Program; Covered Outpatient Drugs
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Proposed rule.
SUMMARY: This proposed rule would revise requirements pertai ning 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 othe r requirements related to covered outpatient drugs, including key aspects of Medicaid c overage, payment, and the drug rebate
program. Therefore, we are proposing to am end 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 f our ways (please choose only one of the ways listed):CMS-2345-P 2
1. Electronically . You may submit electronic comments on this regulation to http://www.regulations.gov. Follow the inst ructions 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 comme nts 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 deli ver (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--CMS-2345-P 3

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 Hube rt H. Humphrey Building is not readily available to persons without Federal govern ment identification, commenters must leave their comments in the CMS drop slots loca ted in the main lobby of the building. A stamp-in clock is available for persons wishi ng 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 indicat ed as appropriate for hand or courier delivery may be delayed and if received af ter the comment period closes may not be considered.CMS-2345-P 4
Submission of comments on paperwork requirements . You may submit comments on this document's paperwork requi rements by following the instructions at the end of the "Collection of Information Requirements" section in this document. For information on viewing public comme nts, see the beginning of the <E T='02'>SUPPLEMENTARY INFORMATION</E> section.
FOR FURTHER INFORMATION CONTACT: Angel Davis, (410)786-4693, and Meagan Kh au, (410)786-1357, for issues related to rebates for line extensions. Lisa Ferrandi, (410)786-5445, for issues re lated 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, fo r issues related to the determination of Average Manufacturer Price (AMP). Meagan Khau, (410)786-1357, for issues re lated 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 relate d to the Regulatory Impact Analysis. Wendy Tuttle, (410)786-8690, fo r all other inquiries.CMS-2345-P 5

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 persona lly 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 av ailable for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Cent ers 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 appointm ent to view public comments, phone 1-800-743-
3951. <HD1>I. Background <HD2>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 Fede ral 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, manu facturers must enter into a Medicaid drug rebate agreement as set forth in section 1927(a) 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.CMS-2345-P 6
This proposed rule would implement cha nges to section 1927 of the Act made by sections 2501, 2503, and 3301(d)(2) of the Patient Protection a nd Affordable Care Act of 2010 (Pub. L. 111-148, enacted on March 23, 2 010), and sections 1101(c) and 1206 of the Health Care and Education Reconc iliation 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 sec tion 1927 of the Act as set fort h 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 outpatie nt drugs. It would implement changes to section 1927 of the Act as set forth in section 221 of Divisi on 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 pert aining to the Medicaid drug rebate (MDR) program and revise certain re gulatory provisions presently codified at 42 CFR part 447, subpart I and make other cha nges concerning rebate requireme nts. As discussed below, these proposed revisions are cons istent with the Secretary's au thority set forth in section 1102 of the Act to publish regulations that are necessary to the efficient administration of the Medicaid program. <HD2>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 percen tage for most single source and innovator multiple source drugs from 15.1 percent of th e average manufacturer price (AMP) to 23.1 percent of AMP. Section 2501(a) of the A ffordable 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 sourceCMS-2345-P 7
and innovator multiple source drugs approve d by the Food and Drug Administration (FDA) exclusively for pediatri c 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 am ounts attributable to the incr eased rebate percentages be remitted to the Federal government. The am endments 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) c ontracts, including that covered outpatient drugs dispensed to individuals eligible for medical assistance under Title XIX of the Act who are enrolled wi th a Medicaid MCO shall be subject to the same rebate required by the rebate agreement authorized under secti on 1927 of the Act. The Affordable Care Act also amended secti on 1903(m) of the Act to establish that MCO capitation rates shall be based on actual cost experience relate d to rebates and subject to Federal regulations at §438.6 regarding actuarial soundness of capitation payments. The legislation also provided that MCOs are responsible for re porting to the State certain utilization data and such other data as the Secretary determin es 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 s ection 1927(b) of theCMS-2345-P 8
Act by requiring States to include informa tion on drugs paid for by Medicaid MCOs under the State plan during the rebate period when requesting rebates from manufacturers. Finally, secti on 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 mainte nance 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 se ction 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 Ca re Act amended sec tion 1927(c)(2) of the Act by adding a new subparagraph (D) and es tablishing 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 lim it 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 therap eutically equivalent multiple source drug products that are available for purchase by retail community pharmacies on a nationwideCMS-2345-P 9
basis. Additionally, it speci fies that the Secretary shall implement a smoothing process for AMP which shall be similar to the smoothi ng process used in determining the average sales price (ASP) of a drug or biological und er 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 Stat es by wholesalers for drugs distributed to retail community pharmacies and retail co mmunity 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 mu ltiple source drug if at least one other therapeutically equivalent dr ug product is sold or marketed in the United States, as opposed to in a State, during the rebate peri od. It added to sec tion 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 manufacturer s report, not later th an 30 days after the last day of each month of a rebate peri od under the agreement, on the manufacturer’s total number of units that are used to cal culate the monthly AMP for each covered outpatient drug. It also amended the preexisti ng requirement that the Secretary disclose AMPs to instead require the Secretary to pos t, on a Web site accessible to the public, the weighted average of the most recently re ported monthly AMPs and the average retail survey price determined for each multiple s ource drug in accordance with section 1927(f) of the Act.CMS-2345-P 10
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 Ac t were effective October 1, 2010. Section 2503(d) of the Affordable Care Act furthe r specified that the amendments made by section 2503 shall take effect w ithout 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 pr ovided by manufacturers under the Medicare coverage gap discount program under section 1860D-14A of the Act are exempt from a manufacturer’s best price cal culation, effective for drugs dispensed on or after July 1,
2010. Section 7101(a) of the Affordable Ca re 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, critic al access hospitals, rural referral centers and sole community hospitals. Section 204 of the Medicare and Me dicaid Extenders Act of 2010 (Pub. L. 111- 309) revised section 340B of the PHSA by remo ving children’s hospitals from the orphan drug exclusion described in section 2302 of HCERA. Section 1101(c) of HCERA also in cludes a conforming amendment to the definition of AMP under Medicaid at sect ion 1927(k) of the Act by providing that discounts provided by manufactur ers under the Medicare cove rage gap discount programCMS-2345-P 11

under section 1860D-14A of the Act are excl uded from a manufactur er’s determination of AMP, effective March 30, 2010. <HD2>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 s upport of, and raising concerns with, the AMP and FUL provisions. However, we not e 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 ru le and we do not expect to address those comments in subsequent rulemaking. <HD2>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 incl usion of territories in the MDR program. These changes are described in greater deta il below under section II. Provisions of the Proposed Regulations.CMS-2345-P 12
<HD1>II. Provisions of the Proposed Regulations This proposed rule would revise regu lations concerning the MDR program, set forth at section 1927 of the Act. It impleme nts, consistent with our general rulemaking authority, sections 2501, 2503, a nd 3301(d)(2) of the Affordable Care Act and sections 1101(c) and 1206 of HCERA, which revise requ irements concerning the rebate program and payments for prescription drugs under the Medicaid program. The specific provisions we propose are de scribed in detail below. <HD2>A. Basis and Purpose (§447.500) Section 2501(c) of the Affordable Ca re Act established new requirements for manufacturers that participate in the MDR pr ogram to pay rebates for drugs dispensed to individuals enrolled with a Medicaid MCO if the MCO is responsible for coverage of such drugs. We propose to add § 447.500(a)(4) which would specify sections 1903(m)(2)(A)(xiii) and 1927(b) of the Act as th e basis for rebates for covered outpatient drugs dispensed to individuals eligible for medical assistance who are enrolled in Medicaid MCOs. We propose to add §447.500(a)(5) which would add section 1902(a)(30)(A) as an additional basi s for calculating payments for covered outpatient drugs. <HD2>B. Definitions (§447.502) <HD3>1. Actual Acquisition Cost States generally reimburse pharmacies for covered outpatient drugs that are prescribed and dispensed to Medicaid benefi ciaries based on a two-part formula, which addresses the ingredient cost of a drug and a reasonable disp ensing 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 byCMS-2345-P 13
providers for a drug marketed or sold by a part icular drug labeler and the cost associated with ensuring that possession of the appropria te covered outpatient dr ug is transferred to a Medicaid beneficiary. Th ese reimbursement formulas are subject to review and approval by CMS through the State plan amendment (SPA) process. In general, States currently reimburse for the covered outpatient drug based, in part, on the estimated acquisition cost (EAC). The EAC, as currently defined in Federal regulations at §447.502 is the agency’s best es timate of the price ge nerally and currently paid by providers for a drug marketed or sold by a particular manufact urer or labeler in the package size of drug most frequently pur chased by providers. We are proposing to both rename and revise this defini tion 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 Medica id care and services is consistent with efficiency, economy, and quality of care. In accordance with thes e provisions and in light of the OIG reports concerning publis hed prices (OIG Audit reports – A-06-00- 00023, A-06-01-00053, A-06-02-00041) 1 , we believe it is necessa ry for States to have a more accurate reference price to base reimbur sement 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 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 de termine the actual pri ce of each individual drug, payment based on an average of the act ual acquisition costs from a number of

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.htmCMS-2345-P 14
representative pharmacies woul d still fit within this defi nition, as data used in the calculation of the average acquisition cost w ould be reflective of actual purchase prices for pharmacy providers. Within this framework, States can develop payment methodologies consistent with this regulat ory definition for their Medicaid pharmacy reimbursement. Therefore, in §447.502, we pr opose to define actual acquisition cost as the agency’s determination of the actual pr ices paid by pharmacy providers to acquire drug products marketed or sold by specific ma nufacturers. This issue and its possible effects on ingredient cost reimbursement is discussed further in both §447.512 Drugs: Aggregate upper limits of payment and §447.518 State plan requirements, findings, and

assurances. <HD3>2. Authorized generic drug The definition of “authorized generic drug”, presently set forth in §447.506(a), applies to rebate calculations, as set forth in subpart I “Pay ment for Drugs.” Therefore, we propose to remove the definition of “Authorized generic drug” from §447.506 and move this definition to §447.502. We would c ontinue to define th e 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 differe nt labeler code, product code, trade name, trademark, or packaging (other than repackag ing the listed drug for use in institutions) than the listed brand drug. For purposes of the MDR Program, an au thorized generic is any drug product marketed under the innovator or brand ma nufacturer’s New Drug Application (NDA) approved under section 505(c) of the FFDCA, but labeled with a different NDC than theCMS-2345-P 15
innovator or brand product. Authorized gene rics are categorized as innovator multiple source drugs for the purpose of computing the drug rebate. <HD3>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 re present fair market value for a bona fide, itemized service actually perf ormed on behalf of the manufac turer 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 cust omer 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 w holesalers or retail community pharmacies including, but are not limited to, distribu tion service fees, inventory management fees, product stocking allowances, an d fees associated with administrative service agreements and pa tient care programs (such as medication compliance programs and patient education programs). In §447.502, we propose to revise our current definition of bona fide service fees to include these fees paid by manufacturers to wholesalers or retail community pharmacies. <HD3>4. Bundled Sales In the AMP final rule published on July 17, 2007, bundled sale was defined as an arrangement, regardless of phys ical packaging, under which th e rebate, discount, or other price concession is conditi oned upon the purchase of the sa me drug, drugs of different types (that is, at the nine-digit National Dr ug Code (NDC) level) or another product or some other performance requirement (for ex ample, 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 theCMS-2345-P 16
bundled drugs been purchased separately or outside the bundled arrangement. For bundled sales, the discounts ar e allocated proportionally to the total dollar value of the units of all drugs sold under the bundled ar rangement. For bundled sales where multiple drugs are discounted, the aggregate value of all the discounts in the bundled arrangement must be proportionally alloca ted across all the drugs in the bundle. In response to manufacturer questions regard ing whether a discount and resulting price for each product in a single customer contract that is inde pendent and not continge nt on the discount or pricing of any other product in the contract should be a pplied across all products; we stated previously that where a discount or price concession is esta blished independently and not conditioned upon any other purchase or performance requirement (for example the achievement of market sh are, inclusion or tier placement on a formulary), or where the discount is not greater than if purchas ed outside of multi-pr oduct arrangement, there is no bundle within the meaning described in §447.502. Though this is not addressed in the Affordable Care Act, we continue to agr ee with our response to this issue and thus have decided to include it in this discussion in order to fu rther 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, includi ng 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. <HD3>5. Clotting Factor The Affordable Care Act establishe d 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 furnis hing payment is authorized under section 1842(o)(5) of the Act and which is included on a list of such factors specified andCMS-2345-P 17
updated regularly by the Secretary. Consiste nt with these provisi ons, we propose to define clotting factors as thos e 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. <HD3>6. Covered Outpatient Drug In accordance with section 1927 of the Act, manufacturers that have entered into a Rebate Agreement with the Secretary are respons ible for paying rebates to States for their covered outpatient drugs for which paymen t 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 id entified in the drug product da ta file that do not meet the definition of a covered outpatient drug. Therefore, we believe it is necessary to provide clarification regardi ng the definition of a covere d 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 defi nition of covered outpatient drug to §447.502. We propose that a drug is considered a covered outpatient drug when the drug may be dispensed only upon prescription (ex cept as discussed below with respect to certain non-prescription drugs), and it meet s 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);CMS-2345-P 18

● 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 Secr etary 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 describe d in section 107(c)(3) of the Drug Amendments of 1962 and for which the Secret ary has determined there is a compelling justification for its medical need or is identi cal, 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 propos ed order of the Secretary to withdraw approval of an application for such drug under the FFDCA beca use the Secretary has determined that the drug is less than effective for some or all conditions of use pres cribed, 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 th e Public Health Service Act, and (3) Is produced at an establishment licen sed under such section to produce such product; or

● The drug is insulin certifie d under section 506 of the FFDCA. Consistent with section 1927(k)(3) of the Act, we propose that, except as discussed below, a drug, biologi cal product, or insulin would not be considered a coveredCMS-2345-P 19
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 follo wing services:

● Inpatient Hospital Services;

● Hospice Services;

● Dental Services, except that drugs fo r which the State plan authorizes direct reimbursement to the dispensing de ntist are covered outpatient drugs;

● Physician services;

● Outpatient hospital services;

● Nursing facility and serv ices provided by an intermed iate 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 ca rved out and billed separately from the service (for example, an infusion drug and x-ray are billed separately, not as a composite radiology service; therefor e, the infusion drug is a covered outpatient drug). Additionally, section 192 7(k)(3) of the Act provides th at the definition of covered outpatient drug does not include any such drug or product fo r 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 th at 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 iden tify the product’s package information. WeCMS-2345-P 20
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 th e current NDC format of NDC-9, which includes the labeler code and the product c ode, to identify the product information and NDC-11, which includes the labele r code, product code, and p ackage code, to identify the product’s package information. However, if ther e is change to the current NDC format as a result of FDA action, then we will issue gui dance, as necessary, to notify the public as well as to explain its imp act 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 mu st 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 51 0(p) of the FFDCA (21 U.S.C 360) to explicitly require that regi stration and listing information (including the submission of updated information) required under s ection 510 of the FFDCA, which includes information from both domestic and foreign establishments, be submitted by electronic means, unless the Secretary of Health and Huma n Services grants a request for waiver of this requirement because use of electroni c 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-t he-counter (OTC), would only be treated as a covered outpatient dr ug if the drug is both required to have anCMS-2345-P 21
NDC and is listed electronically with the FDA. We believe this additional standard is needed to ensure compliance with the prescribed drug provi sions, FDA approval provisions, and the NDC listing provisions. Fu rthermore, 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 manufactur er 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 submitte d as part of the fiscal year (FY) 2012 President’s Budget to require dr ugs 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 pr oducts in the MDR program meet the definition of section 1927(k)(3) of the Act. In addition, it would pe rmit us to verify State and manufacturer submissions by referencing th e FDA’s electronic dr ug listing information. Manufacturers are required to update their registrati on and listing information electronically in accordance with FDA’s curre nt registration and listing requirements. Additionally, in order for us to fully imp lement these provisions, we are requiring that manufacturers submit any relevant a pproved FDA application numbers. When a product is listed with the FDA, the manufactur er is required to provide to the FDA the NDC and the application number, if any, fo r the product (21 C.F.R. 207.25(b)). An application number will help CMS find inform ation on the approval status to market a drug. See http://www.fda.gov/Drugs/Inf ormationOnDrugs/ucm079436.htm . The application number assists CM S in obtaining information from FDA as to whether a drug has been approved under a NDA under sec tion 505 of FFDCA or an ANDA under section 505(j) of FFDCA. This information is critical to the definition of a coveredCMS-2345-P 22
outpatient drug under section 1927(k)(2) of th e 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 multip le 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 re bate amounts, as well as the offset amounts under th e Affordable Care Act. We are also aware that some products th at 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 consider ed 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 outpati ent drug status, or C OD 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 cr itical 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 ot herwise show that the product meets the statutory definition of a cove red outpatient drug under sections 1927(k)(2) and (3) of the Act, in order for CMS to calculate the offset amounts and validate pr oduct data to ensureCMS-2345-P 23

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, critic al to the rebate percentage calculation. <HD3>7. Customary prompt pay discounts In §447.502, we propose to add a definition of customary prompt pay discount to ensure consistent applicati on of such discounts among manuf acturers when calculating AMP. Therefore, we propose to define cust omary 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. <HD3>8. Innovator Multiple Source Drug As currently defined in §447.502, an innovator multiple source drug means a multiple source drug that was originally mark eted under an original new drug application (NDA) approved by the FDA, including an author ized generic drug. It also includes a drug product marketed by any cross-licensed prod ucers, labelers, or distributors operating under the NDA and a covered outpatient drug approved under a product license approval (PLA), establishment license a pproval (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 su ccessor 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 remi nd manufacturers, as is consistent with current policy, that an innovator multiple source (I) drug should be reported to CMS for aCMS-2345-P 24
brand name drug that has therapeutic equivalent s 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/dru gsatfda/index.cfm?fuseaction=Search.Add lsearch_drug_name and search by the Applic ation Number. If therap eutic equivalents are available, then you will see the link to “Therape utic 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 innova tor multiple source drug (I) to CMS. Additionally, over th e 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 a pproved 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 unde r section 505 of the FFD CA 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 addres sing such application types for brand name drugs and not use the term “original NDA” wh en referring to such drugs throughout this proposed rule. <HD3>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 solidCMS-2345-P 25
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 re presents a new versio n of the previously approved listed drug, such as a new ester, a new salt or other nonc ovalent derivative; a new formulation of a previously approved drug; a new combination of two or more drugs; or a new indication for an already ma rketed 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 sect ion 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 th e applicant to show whether a drug is safe and effective were not conducted by or for th e 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 describe d in FDA regulations at 21 CFR 314.54, may be used in certain circumstances to seek approval of a drug produc t that represents a modification to a listed drug product. Exampl es 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 as signed 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 ex clusivity or pediatric exclusivity. We haveCMS-2345-P 26
included these changes within our definition of line extension drugs. (See G.2. Treatment of New Formulations for further explanation of CMS’ proposal.) <HD3>10. Manufacturer For purposes of the MDR Program, we propos e to clarify our current definition of manufacturer by revising it to state that a “m anufacturer means any entity that holds the NDC for a covered outpatient dr ug or biological product”. Th is change in terminology is not intended change the scope of the definition. <HD3>11. Multiple Source Drug On November 15, 2010, we published the “Medicaid Program; Withdrawal of Determination of Average Manufacturer Pr ice, 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 regulat ory 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 sectio n 1927(k)(7) of the Act, as revised, we propose to define multiple source drug in §447.502 as a covered outpatient drug for which there is at least on e other drug product which-- (1) Is rated as therapeutically equivale nt. For the list of drug products rated as therapeutically equivalent, we will use th e FDA's most recent publication of ”Approved Drug Products with Therapeutic Equivalence Evalua tions” 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 Readi ng Room at 5600 Fishers Lane, rm. 12A-30, Rockville, MD 20857;CMS-2345-P 27
(2) Is pharmaceutically equivalent and bioequivalent, as determined by the FDA; and (3) Is sold or marketed in the Un ited States during the rebate period. <HD3>12. National Drug Code The Drug Listing Act of 1972 requires each registered drug establishment to provide the FDA with a curre nt list of all drugs manuf actured, prepared, propagated, compounded, or processed by it for commerci al distribution. (See section 510 of the FFDCA (21 U.S.C. 360)). Drug products ar e identified and liste d with FDA using a unique identifier called the Na tional Drug Code (NDC). Un der FDA regulations in 21 CFR part 207, the NDC is identified as a 10-di git, 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 progr am 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 p ackage information. Manufacturers may include a leading zero in the product code or the package codeCMS-2345-P 28
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. <HD3>13. Noninnovator Multiple Source Drug As currently defined in §447.502, a noninnovator multiple source drug means: (1) A multiple source drug that is not an innovator multiple source drug or a single source drug, (2) a multiple source drug that is mark eted 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 th e definition of “covered outpati ent 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 th e 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 paym ent and rebate calculations, the term shall include noninnovator drugs that are not therapeutically equivalent. <HD3>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 soli d oral dosage form to mean capsules,CMS-2345-P 29
tablets, or similar drug products intended for or al 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 “ora l 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 inte rpret 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 assi st them in determining which drugs should be considered as oral solid dosage forms (pl ease see Table 1). This list will be updated based on any changes to the FDA’s definition of solid dosage forms. TABLE 1: List of Oral Solid Dosage Forms Bar, Chewable Capsule Capsule (Immediate/Complete Release) (Hard Or Soft Gelatin, Chewable Or Perle) Capsule, Coated

Capsule, Coated (Hard Or Soft Gelatin) Capsule, Coated Pellets Capsule, Coated, Extended Release Capsule, Delayed Action (Hard Or Gelatin, Coated, Enteric Coated) Capsule, Delayed Release Pellets Capsule, Enteric Coated Pellets Capsule, Extended Release Capsul e, Film Coated (Hard Gelatin) Capsule, Film Coated, Extended Re lease Capsule, Gelatin Coated Capsule, Hard Gelatin Capsule, Liquid Filled Capsule, Repeat Action Capsule, Soft Gelatin Capsule, Soft Gelatin Liquid-Filled Ca psule, Sustained Action (Hard Or Soft Gelatin, Coated, Film Coated Dispersible Tablet Granule, Delayed Release Granule, Enteric Coated Gum (Chewing, Medicated) Lollipop Lozenge Pellet, Coated, Extended Release Tablet Tablet (Immediate/Complete Release) (Coated, Film Coated, Sugar Coated, Multilayer, Uncoated, Buccal, Chewable) Tablet, Chewable Tablet, Coated Tablet, Coated Particles Tablet, Controlled Release Tablet, Delayed Action (Coated, Enteric Coated) Tablet, Delayed Release Tablet, Delayed Release Part icles Tablet, DispersibleCMS-2345-P 30
Tablet, Enteric Coated Particles Tablet, Extended Release Tablet, Film Coated Tablet, Film Coated, Extended Release Tablet, Multilayer (Coated, Film Coated) Tablet, Multilayer, Extended Release Tablet, Orally Disi ntegrating, Delayed Release Tablet, Orally Disintegrating Tablet, Repeat Action (C oated) Tablet, Soluble Tablet, Sugar Coated Tablet, Sustained Action (Coated, Film Coated, Multilayer, Uncoated) Tablet, Sustained Release, Film Coated Tablet, Uncoated, Lozenge Tablet, Uncoated, Lozenge, Lypophili zed Tablet, Uncoated, Troche Tablet, Sustained Action, Membrane Controlled Pastille Troche/Lozenge Wafer

CMS would not consider the following as oral solid dosage forms because these dosage forms are intended to be made into a liquid or suspension prior to oral consumption.
TABLE 2: List of Other Dosage Forms Capsule, for Microemulsion Granule, Effervescent, for Solution Granule Effervescent Tablet, Effervescent Granule, Effervescent, for Solution Tablet, for Solution Granule Effervescent, for Suspension Tablet Effervescent for Solution Granule, for Oral Suspension Tablet, for Suspension

<HD3>15. Over-the-Counter (OTC) Drug With the exception of certain tobacco ce ssation 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 consis tent 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 appropr iate for use without the supervision of a health care professi onal such as a physician, and which can beCMS-2345-P 31
purchased by a consumer without a pres cription, although for Medicaid coverage a prescription continues to be required. OT C 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 perm its 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, fi nished drug products, monographs specify the active ingredients, indications, dosages, and claims that can be made by the OTC drug products. <HD3>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 mi nimum 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 pedi atric patients, that is , “the pediatric age group, from birth to 16 years, including age groups often called neo-nates, infants, children, and adolescents.” Accordingly, give n 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 pe diatric use, that merely reference use in children in any part of the la beling, or that receive a supplem ental indication for pediatric use, will not qualify for the minimum rebate of 17.1 percent of AMP as specified inCMS-2345-P 32
section 1927(c)(1)(B)(iii) of the Act. In acco rdance with the statute, we propose to apply this definition only to drug products w hose FDA-approved labeling includes only indications for children from birth to 16 year s of age. Drugs wit hout this explicit age labeling will not satisfy the requirement th at the drug be approved exclusively for pediatric use and will not qualify for the mini mum rebate of 17.1 percent of AMP. We are proposing to apply such a definition only when this specific pediatric age cohort appears in the “Indi cation and Usage” section of the FDA-approved labeling. <HD3>17. Professional Dispensing Fee The definition of dispensing fee will rema in unchanged as it already enumerates those costs to dispense a drug that the pharm acy 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 “profe ssional dispensing fee” reinforces our position that once the reimbursement for the drug is properly determine d, the dispensing fee should reflect the pharmacist’s professional services and cost s associated with ensuring that possession of the appropriate covered out patient drug is transf erred to a Medicaid beneficiary. Therefore, as St ates change their payment for ingredient cost, we also propose to require States to reconsider th e dispensing fee methodol ogy consistent with the revised requirements. <HD3>18. Single Source Drug As currently defined in §447.502, a single s ource drug means a covered outpatient drug that is produced or di stributed under an NDA approved by the FDA, including a drug product marketed by any cross-licensed producers or distributors operating underCMS-2345-P 33
the NDA. It also includes a covered outpa tient 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 manu facturer with the FDA for purposes of approval for safety and effectiveness. Furthe r, 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 re ported 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 therap eutic equivalents available for the NDA, then the brand name drug should be reported as an “S” to CMS.
<HD3>19. States Currently, for purposes of this subpart, th e 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 year s, 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 Ameri can Samoa). Therefore, for drug rebates,CMS-2345-P 34

we believe it is in the best interests of th e Medicaid program to incl ude the territories in the definition of States so that they may ach ieve 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 territorie s participating in the MDR program; therefore, we request comments regard ing the inclusion of the territories in the definition of States. <HD3>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 accord ance 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 a ny of the States. (Please see section II. K. Upper limits for multiple source drugs (§447.514) of the preamble for further discussion on the sale of drugs on a nationwide basis.) Therefore, for the purposes of this subpart, we propose, in accordance with section 1101(a) of the Act, to define the “United States” to mean the 50 States plus the District of Colu mbia and the territories as described above. <HD3>21. Wholesaler The Affordable Care Act added a defini tion of the term “wholesaler” at section 1927(k)(11) of the Act. We propose to adopt that definition and de fine wholesaler to mean a drug wholesaler that is engaged in w holesale distribution of prescription drugs to retail community pharmacies, in cluding (but not limited to) manufacturers, repackers, distributors, own-label dist ributors, private-label dist ributors, jobbers, brokers,CMS-2345-P 35
warehouses (including manufacturer’s a nd distributor’s warehouses, chain drug warehouses, and wholesale drug warehouses), in dependent wholesale drug traders, and retail community pharmacies that co nduct wholesale distributions. We are not proposing that a wholesaler be licensed by th e State inasmuch as that is not a requirement of the Act, in compar ison to the definition of retail community pharmacy, where State licensing is required. In considering how to clarify this term, we reviewed the definition of “whol esale distributor,” that appears in se ction 510(g) of the FFDCA, and regulations at 21 CFR 807.3(s), wh ich provide that “the term "wholesale distributor" means “any person (other than th e 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 th e ultimate consumer or user.” While this definition is helpful, it does not provide additio nal clarity to the definition in the Act. Therefore, we are proposing to define whol esaler as set forth in the Act, but are specifically seeking comment on further data so urces or definitions we could apply here that would help to further clarify the term wholesaler. <HD2>C. Determination of Av erage Manufacturer Price (§447.504) <HD3>1. AMP Historical Background The Omnibus Budget Reconciliation Ac t of 1990 (OBRA '90) (Pub. L. 101-508) added section 1927 to the Act, which becam e 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 repor t AMP on a quarterly basis. The AMP wasCMS-2345-P 36

used to calculate the rebates paid by manufacturers to the St ates for drugs 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 outpatie nt 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 J une 1, 2006. Section 6001(c)(3) of the DRA also required the Secretary to clarify the re quirements for and the manner in which AMPs are determined by promulgating a regulati on 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 Defic it 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 mana ger (PBM) rebates and Medicaid sales; and

● Consider addressing issues rais ed by industry groups, such as: + Administrative and service fees, + Lagged price concessions for returned goods, + The frequency of AMP reporting,CMS-2345-P 37
+ 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 ther e had been concerns expressed by the OIG and GAO in several prior reports regarding AM P because of inconsistencies in the way manufacturers determine AMP, changes in the marketplace, and the introduction of newer business practices such as payment of serv ices fees. We also r ealized that, in light of the DRA amendments, AMP would serve two distinct purposes: de termining rebates, and serving as the basis for establishing the FU L for multiple source drugs. As a result of a preliminary injunction that had been entere d in a lawsuit challeng ing the definition of AMP, CMS had never used the AMP final rule as a basis for calculating FULs. Following the enactment of the Affordab le Care Act, in the November 15, 2010 Federal Register (75 FR 69591), “Withdrawal of Determination of Average Manufacturer Price, Multiple Source Drug Definition, and Upper Limits for Multiple Source Drugs”, we withdrew §447.504 “Determina tion of AMP” from the AMP final rule following a period of notice and commen t on the proposed withdrawal. <HD3>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 revise d the definition of AMP. The AffordableCMS-2345-P 38
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 Afford able Care Act revises the definition in section 1927(k) of the Act to e liminate 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 incl ude and exclude from the determination of AMP and (as amended by Pub. L. 111-226) clarif ies exceptions to the excluded entities for inhalation, infusion, instilled, implanted, or injectable drugs th at are not generally dispensed through a retail community pharmacy. In this proposed rule, we propos e a new §447.504 “Determination of AMP,” which would be based on section 1927(k)(1) of the Act as amended by the Affordable Care Act. Below we provide a detailed disc ussion of the proposed definition of retail community pharmacy, other terms used in the determination of AMP, the entities proposed for inclusion and exclusion from AM P, and our proposed policy regarding the treatment of inhalation, infusion, instilled, implanted, or inject able drugs (also referred to as 5i drugs, defined in proposed §447.507), th at are not generally dispensed through a retail community pharmacy in the determination of AMP. These provisions of the Affordable Ca re 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 Affo rdable 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 th e drug in the United States by wholesalers for drugs distributed to retail commun ity pharmacies, and by retail community pharmacies that purchase drugs di rectly from the manufacturer.CMS-2345-P 39
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 disc ounts extended to wholesalers;

● Bona fide service fees paid by ma nufacturers to wholesalers or retail community pharmacies, including (but not lim ited to) distribution service fees, inventory management fees, product stocking allowances, and fees associated with administrative services agreements and patie nt care programs (such as medication compliance programs and patient education programs);

● Reimbursement by manufacturers for r ecalled, damaged, expired, or otherwise unsalable returned goods, includ ing (but not limited to) reimbursement for the cost of goods and any reimbursement of costs asso ciated 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 main tenance organizations, insure rs, hospitals, clinics, mail order pharmacies, long term care providers, ma nufacturers, or any other entity that does not conduct business as a wholesaler or reta il community pharmacy, unless the drug is an inhalation, infusion, instilled, implanted, or inje ctable drug that is no t generally dispensed through a retail community pharmacy.

● Discounts provided by manufacturer s 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, manu facturers are to include in the determination of AMP for a covered outpatient drug any other discount s, rebates, payments, or other financialCMS-2345-P 40
transactions that are received by, paid by, or passed through to retail community pharmacies. How AMP is defined and what sales ar e included in the de termination of AMP affects manufacturers, pharmacy groups , the Federal and State governments and Medicaid beneficiaries, and of ten there are competing interest s 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 betwee n which entities are to be included and excluded from AMP calculations and the basis for determining the FUL for multiple source drugs. T he Affordable Care Act defines AMP to include prices paid to manufacturers by wholesalers for drugs distri buted to retail comm unity pharmacies and by retail community pharmacies that purchas e drugs directly fr om the manufacturer. These sales are typically at hi gher prices than those of the specifically excluded entities such as the pharmacy benefit managers, mana ged care organizations, health maintenance organizations, insurers, hospitals, clinic s, 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 defi nition of AMP, which would incl ude sales to entities thatCMS-2345-P 41
purchase drugs at lower prices, would likely lower the AMP value, which in turn would lower drug manufacturer re bate liabilities. AMP values also have an impact on St ates 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 be neficiary access to pharmacy se rvices. Similarly, States and the Federal government have an interest in assuring an appropria te level of rebates and beneficiaries’ access to care. <HD3>3. Definitions Following is a detailed discussion of the specific terms associated with AMP calculations that we propos e to define at §447.504(a). a. Average Unit Price We propose to define average unit price to mean a manufacturer’s quarterly sales included in AMP less all required adjustments divided by the total units sold and included in AMP by the manufacturer in a quarter. The quarterly sales figure used in this definition represent sales of the drug unit in the lowest identifiable amount (for example, tablet or capsule for solid dosage forms, millil iter 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 propos e to define charitable and not-for-profit pharmacies as organizations described in sec tion 501(c)(3) of the In ternal Revenue Code of 1986.CMS-2345-P 42

c. Insurers The DRA amended section 1902(a)(25) of the Act by modifying the definition of “third parties” and “health in surers” to clarify the inclus ion of self-insured plans, managed care organizations, PBMs, or other pa rties 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 provi ded that payments received from many of these third part y organizations (for example, pharmacy benefit managers, managed care organizations, health maintena nce 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 pa yment to pharmacies for drugs dispensed to their members, and do not take actual posse ssion of these drugs. d. Net Sales We propose to define net sales to me an quarterly gross sales revenue to wholesalers for drugs distribu ted to retail community pharmacies and retail community pharmacies that purchase drugs directly fr om manufacturers less cash discounts allowed, and other price reductions (other than reba tes 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 pharmacyCMS-2345-P 43
The Affordable Care Act eliminated the term “retail pharmacy class of trade” from the definition of AMP, and added sect ion 1927(k)(10) of the Act to include a definition of the term “retail community pharm acy.” This change significantly narrows the entities previously included in the defini tion 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 furt her 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 medicati ons to patients primarily through the mail, nursing home pharmacies, long-term care f acility pharmacies, hospital pharmacies, clinics, charitable or not-for-profit phar macies, government pharmacies, or pharmacy benefit managers. Section 1927(k)(1) of the Act as amende d by the Affordable Care Act specifies that manufacturers are responsible for repor ting the AMP based upon their sales to retail community pharmacies or wholesalers fo r drugs dispensed to retail community pharmacies. In addition, the statutory provision for th e determination of AMP suggests there are entities (for example, specialty phar macies, 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 disc ounts provided to...any other entity that does not conduct business as a wholesaler or a retail community pharmacy...”. We believeCMS-2345-P 44
that to give the provision some meaning, the statute contemplates the inclusion of payments and discounts from those entities that actually conduct busin ess as a wholesaler or retail community pharmacy. This interpreta tion gives meaning to this broad exclusion, and provides for a calculation of AMP consistent with our reading of th e statute. If an entity that does not conduct business as a w holesaler 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 receiv ed from and rebates or discounts provided to an entity that conducts business as a wholes aler 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 wholesaler s 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 li st of REMS drugs is publically ac cessible on the FDA Web site at http://www.fda.gov/Drugs/DrugSafety/Postma rketDrugSafetyInformationforPatientsandP roviders/ucm111350.htm

. Some REMS drugs are require d to be dispensed by specia lly certified pharmacies, resulting in certain manufactur ers utilizing a restricted networ k of certified specialty and home infusion pharmacies, which are not specifi cally 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 we re to be excluded from AMP calculations, an AMP would not be available for these oral covered outpatient dr ugs. As a result, manufacturers would not be able to calculate rebates for th ese products and the statutoryCMS-2345-P 45
provisions requiring rebates for such drugs woul d, 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 manu facturers 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 c onducting business as w holesalers or retail community pharmacies to be included in th e determination of AMP for those drugs for which an AMP could not otherwise be calcula ted. Such an interpretation continues to give meaning to the rebate res ponsibilities of manuf acturers in section 192 7(b) of the Act. Therefore, we propose to incl ude in the determination of AMP payments received from and rebates or discounts provide d to an entity that conducts business as a wholesaler or retail community pharmacy, such as specialty and home in fusion pharmacies, and home healthcare providers, since these entities dispense medications to segments of the general public at retail prices. We sp ecifically invite comments on th is part of the proposed rule. Manufacturers contend that there is an administrative burden and difficulty in obtaining records assuring that their sales to wholesaler s are distributed to retail community pharmacies. We took their concer ns into consideration and considered whether or not to propose that the sales which cannot be definitely id entified 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 Mu ltiple Source Drugs” published in the FederalCMS-2345-P 46
Register on September 3, 2010 (75 FR 54073) that raised issues regarding the implementation of the new definition of AM P. As these comments were outside the scope of that proposed rule, these comments we re not specifically a ddressed 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 stakeh olders, 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 distri buted to retail community pharmacies when those sales of drugs are to wholesalers th at do not further differen tiate their sales among end purchasers. Based on information provided from thes e comments it is our understanding that wholesalers generally resell e ither to manufacture r-contracted customers (which would generate a chargeback or similar record), or to other purchasers w ith no contract discount arrangement with the manufacturer. In the case of sales to wholesalers where no chargeback record is generated, manufacturer s contend that they have minimal to no verifiable information regardi ng the final transactions on this category of wholesaler resales. Manufacturers have expressed concer n that they would not have adequate data regarding the wholesaler’s act ual 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) pr esume that sales to wholesalers are for drugs distributed to retail community pharmacies, without data concerning that actua l distribution. Based upon the comments we received from manufactur ers we believe such a policy would be consistent with the market based on th e typical chargeback arrangements thatCMS-2345-P 47
manufacturers have in place for instituti onal and other non-retail community pharmacy purchasers. The presumed inclusion policy would not require manuf acturers 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 wholesal ers are for drugs that are actually distributed to retail community pharmacies. Allowing th is practice of presumptive inclusion could affect the calculation of the FULs for mu ltiple 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 be cause it could include sales to entities (for example, mail order pharmacies and hospita ls) 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 distribu tion to retail community pharmacies because the sales that would be capt ured using the presumptive in clusion policy are those sales that do not generate chargebacks. In comme nts we received during the comment period for the Proposed Rule, “Withdrawal of Dete rmination of Average Manufacturer Price, Multiple Source Drug Definition, and Uppe r Limits for Multiple Source Drugs” published in the Federal Register on September 3, 2010 (75 FR 54073), manufacturersCMS-2345-P 48
claim that allowing the presumed inclus ion 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 institu tional or chargeback-generating sales. Additionally, they contend that the volume of AMP-eligible sales used in calculating the FUL could be increased because the additiona l sales to wholesalers without chargeback data would be added to the volume calculati on 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 ma nufacturers are only including in their calculation of AMP those sales where ther e is adequate verifiable documentation showing that the drug was actually distribut ed 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 calcula tion 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 th eir actual sales to retail community pharmacies or wholesalers for drugs dist ributed to retail community pharmacies. Although we are not proposing a presumed inclusion policy, we did consider both approaches and recognize that there are obs tacles with each. We acknowledge that a reasonable alternate approach would be one of presumed inclusion because the statuteCMS-2345-P 49
provides a more structured defini tion 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 c ontemplated in the st atutory definition. Accordingly, for purposes of this proposed rule, we are propos ing 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 re quest information concerning di stribution data, specifically data concerning wholesaler sales to the re tail community pharmacies so that we can further consider this policy decision. <HD3>4. Sales Included in the Determination of AMP Following is a discussion of specific sales, discounts, rebates, payments, nominal price sales, and other financial transac tions that we propose to include in the determination of AMP at §447.504(b). a. Sales to wholesalers (§447.504(b)(1)) The definition of AMP in section 1927( k)(1) of the Act, as amended by the Affordable Care Act, specifies that AMP is to be calculated, in pa rt, based on the prices paid by wholesalers for drugs dispense d through retail comm unity pharmacies. Therefore, we propose that sale s to wholesalers for drugs dist ributed to retail community pharmacies are to be included in the determination of AMP. b. Sales to other manu facturers (§447.504(b)(2)) We propose that sales to other manufactur ers who act as wholesalers are to be included in the determination of AMP to th e 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.CMS-2345-P 50
c. Retail community pharmacies (§447.504(b)(3)) Section 1927(k)(1)(B)( ii) of the Act, as revised by the Affordable Care Act specifies that manufacturers ar e to include in the determ ination of AMP, discounts, rebates, payments or other financial transac tions that are received by, paid by, or passed through to, retail community pharmacies, as defi ned earlier in this sect ion. Therefore, we propose to include in the determination of AMP, notwithstanding t hose price reductions specifically excluded by statute or this regulation, discounts, rebates, payments, or other financial transactions that are receiv ed by, paid by, or passed through to, retail community pharmacies. Again, we are unsur e to what extent the manufacturer knows that such transactions occur. However, in accordance with our readi ng of the statute, the manufacturer must include such discount s where it has evidence or documentation demonstrating that such discounts have been passed through to the pharmacy. d. Entities conducting business as retail community pharmacies or wholesalers, including but not limited to Specialty Pharmacies, Home Infusion Pharmacies and Home Healthcare Providers (§447.504(b)(4)) As discussed earlier, we believe in light of the provisions of section 1927(k)(1)(B)(i) of the Act, there is a basis for allowi ng sales, rebates, and discounts provided to entities conducti ng business as wholesalers or retail community pharmacies to be included in the determination of AM P for those drugs for which an AMP could not otherwise be calculated. It is our understanding that certai n covered outpatient drugs are dispensed primarily, if not solely, through su ch entities as specialty pharmacies, home infusion pharmacies, or home healthcare provide rs. We propose that these pharmacies be considered entities that ar e conducting business as wholes alers or retail community pharmacies. While not specifically identifie d in the statutory definition of retailCMS-2345-P 51
community pharmacy, these pharmacies do c onduct 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 marketpla ce 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 th rough 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. <HD3>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 fr om the determination of AMP at §447.504(c). a. Prices to other Federal Progr ams including TRICARE – (§447.504(c)(1)- §447.504(c)(3)) Manufacturers that participate in the MDR program can also participate in other Federal programs which set the prices and/or discounts for drugs, and these prices are not generally available to retail community pharmaci es. We propose that in light of section 1927(k) of the Act, prices to Federal progr ams should be excluded from AMP. These Federal programs include the Indian H ealth 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 H ealth Service (PHS), a covered entity described in section 1927(a)(5)(B) of the Act (including inpatient prices charged to hos pitals described in section 340B (a)(4)(L) of the PHSA), the Fe deral Supply Schedule (FSS) of the GeneralCMS-2345-P 52
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 TRICAR E Retail Pharmacy Program in Federal Procurement of Pharmaceuticals (74 FR 11279). That regulation implements section 703 of the National Defense Aut horization Act for fiscal ye ar 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 Dist rict of Columbia and Territories (§447.504(c)(4)) The proposed definition of “United St ates” in §447.502 would define “United States” to mean the 50 States, the District of Columbia and the territor ies. We, therefore, propose that sales to entities outside the 50 States, the Dist rict of Columbia and the territories are not within the scope of th e definition of sales to retail community pharmacy, and that drugs sold to these entiti es would not be consid ered eligible sales within the definition of AMP. Therefore, we propose that sales to entities not within the 50 States, the District of Columb ia or the territories be excl uded from the manufacturers’ determination of AMP.CMS-2345-P 53
c. Hospitals and Hospital ph armacy sales (§447.504(c)(5)) Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that sales to hospitals are excluded from the determination of AMP. Further, the term “retail community pharmacy” excludes hospital pharmacies . Therefore, we propose to clarify that sales to hospitals, including direct and indirect sales where the drug is used in either the inpatient setting or the outpatient pharmacy for outpatie nt hospital use are excluded from the determination of AMP. d. Sales to health maintenance organiza tions (HMOs) (including managed care organizations (MCOs)) (§447.504(c)(6)) Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that sales to HMOs and MCOs are excluded from the determination of AMP. The Affordable Care Act does not specifically addres s 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 discount s to HMO/MCO operated pharmacies are excluded from the determination of AMP. e. Long-term care facility pharmacies (§447.504(c)(7)) Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that sales and associated rebates and discounts to long-term care providers are excluded from the determination of AMP. Further, the term retail community pharmacy excludes nursing home pharmacies and long-term care fac ility pharmacies. Therefore, we propose to clarify that sales and associated reba tes and discounts to long-term care providers, including nursing faci lity pharmacies, nursing home pharmac ies, long-term care facilities, long-term care facilities pharmacies, contract pharmacies for the nursing facility where these sales can be identified, and other entiti es where the drugs are dispensed through aCMS-2345-P 54
nursing facility pharmacy, such as assisted living facilities, be excluded from the determination of AMP. f. Mail Order Pharmacies (§447.504(c)(8)) Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that the term retail community pharmacy excludes pharmacies that dispense prescription medications to patients primarily through the mail. We consider these to be mail order pharmacies and as such we propose to clarif y that sales to mail order pharmacies are excluded from the determination of AMP. g. Clinics and other outpatient facilities (§447.504(c)(9)) Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that sales to clinics are excluded from the de termination of AMP. In 42 CFR 440.90, clinic services is defined as preventative, diagnosti c, therapeutic, rehabilitative, or palliative services that are furnished by a facility that is not part of a hospita l but is organized and operated to provide medical car e 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 th e clinic by clinic personnel under the direction of a physician to an e ligible 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 addres s 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 Ac t, as well as the de finition of clinic in 42 CFR 440.90, sales to outpatient facilities such as surgical centers, ambulatory care centers, dialysis centers, End-Stage Renal Dise ase clinics, outpatient hospital clinics and mental health centers should be excluded fr om the AMP. Therefore, we propose toCMS-2345-P 55

exclude sales and associated rebates and discoun ts to clinics and outpatient facilities from the determination of AMP. h. Government pharmacies (§447.504(c)(10)) Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that the definition of retail co mmunity pharmacy does not include government pharmacies. We propose to define government pharmaci es as pharmacies operated or owned by Federal, state, county, and municipal govern ments. We also propose that sales to government pharmacies are excluded from the determination of AMP. i. Sales to charitable and not- for-profit pharmacies (§447.504(c)(11)- §447.504(c)(12)) Section 1927(k) of the Act, as revised by the Affordable Care Act specifies that the definition of retail comm unity 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) organizat ions are those described in the Internal Revenue Code and are tax-exempt, nonprofit co rporations or associations. We propose that sales to these not-for-profit and char itable pharmacies be excluded from the determination of AMP. j. Insurers §447.504(c)(13)) The Affordable Care Act defined AM P by specifying that payments received from, and rebates or discounts provided to insurers are to be excluded from the determination of AMP. Therefore, we pr opose to exclude from the determination of AMP payments received from, and any rebates, discounts, or payments that are provided directly to insurers and th at are not passed on to retail community pharmacies.CMS-2345-P 56
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 ma nufacturers to wholesalers or retail community pharmacies. In accordance with our reading of the stat ute, 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 serv ice fees, as well as the treatment of Group Purchasing Organizations (GPOs) (§447.504(c)(14)) As described earlier, we propose to revise the definition of bona fide service fees in §447.502 to include fees provided as specific ex amples of bona fide service fees in the Affordable Care Act. The Affordable Care Ac t specifies that bona fi de service fees paid by manufacturers to wholesaler s or retail community pharmacies include, but are not limited to, distribution service fees, inve ntory management fees, product stocking allowances, and fees associated with admini strative service agreements and patient care programs (such as medication compliance pr ograms 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 reta ining our definition, but we have chosen not to define "fair market value" at this time. Due to the ra pidly changing market in which new types of arrangements arise, we belie ve that manufacturer s should appropriatelyCMS-2345-P 57

determine fair market value and make reasona ble assumptions consistent with adequate documentation that will support their payment fo r these services at fair market rates sufficient that an outside party can determ ine 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 fu rther propose that, in li ght of the statutory definition, administrative fees and other fees which are not specifi cally excluded by the Affordable Care Act, but which meet the defi nition of bona fide serv ice 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 con cert 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 ad justments, 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 offs et 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, incl uding, but not limited to distribution service fees, inventory management fees, product stoc king allowances, and fees associated with administrative service agreements and pa tient care programs (such as medication compliance programs and patient education prog rams) and other fees to GPOs meet the definition of “bona fide service fee”, we pr opose that such fees s hould be excluded from the determination of AMP and are not cons idered price concessions. However, asCMS-2345-P 58

consistent with the definition of bona fide service fee at §447.502 where these fees are passed on in whole or in part to a wholesal er 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 sect ion 1927(k)(1)(B)(ii) of the Act, should be included in AMP. <HD3>l. Customary prompt pay discounts (§447.504(c)(15)) Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that customary prompt pay discounts that are extende d to wholesalers are to be excluded from the determination of AMP. Therefore, we are proposing that customary prompt pay discounts extended to wholesalers be excl uded from the determination of AMP. m. Returned Goods (§447.504(c)(16)) Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that reimbursement by manufacturers for recalled, damaged, expired, or otherwise unsalable returned goods, including (but not limited to) reimbursement for the cost of goods, and any reimbursement of costs associated with return goods handling and processing, reverse logistics, and drug de struction are excluded from th e 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 th ese returned goods covers the cost of return s 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 term s recalled, damaged, and expired as we believe they are self-explanat ory within the standard industry practice. We likewise are not defining unsalable, but would also base it on standard in dustry practice to determineCMS-2345-P 59

under what conditions and/or ci rcumstances 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. n. Medicare Coverage Gap Discount (§447.504(c)(17)) Section 3301 of the Affordable Care Ac t 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 speci fied that discounts pr ovided by manufacturers under the Medicare coverage gap discount program will be excluded from AMP. Therefore, we propose that discounts under th e Medicare coverage gap discount program should be excluded from AMP. o. PBM Price Concessions (§447.504(c)(18)) Section 1927(k)(1)(B) of the Act, as revised by the Affo rdable Care Act, revised the definition of AMP by excluding payments received from, and rebates or discounts provided to, pharmacy benefit managers (PB Ms) 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, disc ounts or payments are received by, paid by, or passed through to retail community pharmacies. p. Treatment of Medicaid Re bates in AMP (§447.504(c)(19)) We propose to exclude rebates under th e national rebate agreement or a CMSauthorized State supplemental rebate agreemen t paid to State Medicaid Agencies from the determination of AMP. We are doing so in light of the de finition of sectionCMS-2345-P 60
1927(k)(1) of the Act, because these rebates affect the manufacture r and the State, and there is no direct effect on the sale price of these drugs to retail community pharmacies. Entities not specifically a ddressed in the statute. q. Sales to Hospices (§447.504(c)(20)) The Affordable Care Act did not specifi cally address the treatment of sales to hospices in the determination of AMP. We pr opose, in light of the revisions in sections 1927(k)(1)(A) and 1927(k)(10) of the Act, to ex clude hospice sales from the definition of AMP. Hospice pharmacies are outside the sc ope of the definition of retail community pharmacy. Further, these pharmacies serv e a defined population and do not dispense medications to the general public at retail prices. r. Sales to prisons (§447.504(c)(21)) We propose that the sales to prisons are outside the scope of the definition of retail community pharmacy; drugs sold to these enti ties serve a defined population in that facility and are not availabl e to the general public. s. Direct sales to physicians (§447.504(c)(22) and §447.504(d)(1)) Except for the sale of inhalation, infusion, instilled, implanted and injectable drugs (also referred to as the 5i drugs, and which are discussed in detail later in this section) we do not believe, in light of the definition of retail community pharmacy in section 1927(k)(10) of the Act, that physicians meet the definition of a retail community pharmacy. However, in light of the specifi c revisions to secti on 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 s hould be included in AMP. Since we have defined the 5i drugs as those which are prim arily physician-administered, we believe in light of the statutory amendments, the case can be made that the sale (and associatedCMS-2345-P 61
discounts) of these 5i drugs to physicians s hould be included in the determination of AMP. Therefore, we propose in §447.504(d)(1) that for 5i drugs, sales (and associated rebates or discounts) to physicians are includ ed in the determination of AMP. However, in the case of non-5i drugs, we propose at §447.504(c)(26) that direct sales to physicians be excluded from the determination of AMP. t. Direct sales to patients (§447.504(c)(23)) We propose that direct sales to patients be excluded from AMP as these sales are outside the scope of the definition of reta il community pharmacy in section 1927 (k)(10) of the Act. u. Free Goods (§447.504(c)(24)) We propose that where a drug or any other item is given away, but not contingent on any purchase requirement, there is no sale and, therefore, that transaction would be excluded from the determination of AMP. v. Manufacturer Coupons (§447.504(c)(25)) We propose in light of the revised de finition of AMP that manufacturer coupons to a consumer redeemed by the manufacturer, ag ent, 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 connect ion with the manufacturer
coupons. w. Voucher Programs (§447.504(c)(26)) We propose that manufacturer vouchers would be excluded from the determination of AMP because the benefits of such vouchers are pass ed onto the patient and the retail community pharmacy does not receive any discount, rebate or priceCMS-2345-P 62

concessions in connection w ith the manufacturer voucher programs. However, to the extent that the retail community pharmacy r eceives a discount, re bate, or other price concession, in accordance with section 1927(k)(1)( B)(ii) of the Act, it shall be included in AMP. x. Manufacturer-sponsored Drug Discount Card Programs (§447.504(c)(27)) We propose in light of the revised defini tion 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 disc ount, rebate or pr ice concessions in connection with the manuf acturer-sponsored drug disc ount card program. y. Manufacturer-sponsored patient refu nd/rebate programs (§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 re bate to the patient for outof–pocket costs and the reta il 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 manu facturer sponsored patient re fund or rebate program would be excluded from the determination of AMP. z. Copayment and Patient Assistance Programs (§447.504(c)(29)) The Affordable Care Act did not addre ss the treatment of patient assistance programs, including copayment assistance program s. 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 patientsCMS-2345-P 63

would be 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. <HD3>6. Inhalation, infusion, instille d, implanted, and injectable Drugs (§447.504(d) and §447.507) In accordance to section 1927(k)(1)(B)(i)(IV ) of the Act, manufacturers are to exclude from the determination of AMP for a covered outpatient drug for a rebate period, any payments received from, and other discoun ts or rebates, that are provided to any other entity that does not conduc t business as a wholesaler or retail community pharmacy. Certain specialty covered out patient drugs are not genera lly dispensed through retail community pharmacies and in those instances manufacturers would be unable to generate an AMP which would prevent rebate calculati ons for those drugs. Section 202 of the Education, Jobs and Medicaid Funding Ac t (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 ensu re that an AMP could be calculated and Medicaid rebates could be co llected from manufacturers fo r the 5i drugs that are not generally sold at retail community pharmacies. (See 156 Cong. Rec. S6766 (Aug. 5, 2010)).CMS-2345-P 64
This provision went into effect on Oct ober 1, 2010 and revises a manufacturer’s AMP calculation for the 5i drugs to incl ude entities other than retail community pharmacies that dispense such drugs. While the enactment of this legislation a ddressed 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 additiona l 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 clar ification: (1) Identific ation of 5i drugs, (2) clarification of the term "not generally dispensed," (3) dete rmination of sales, discounts and rebates included in the 5i calculation, and (4) identification of ot her entities included in the definition. We also received requests from ma nufacturers and pha rmacies requesting guidance on this provision; sp ecifically regardi ng how to interpret “not generally dispensed through a retail community pharmacy ” and how to identify these 5i drugs. We considered issuing a list identifying th e specific 5i drugs that are to be included in this category. Second, we consider ed how to define the term “not generally dispensed.” Finally, we consid ered clarifying which sales, discounts, and other financial transactions would be incl uded 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 parent erally or through an item of durable medical equipment (DME) and often require physicia n supervision during administration. We considered defining each type of administrati on route; however, we be lieve that it is not necessary to define the terms because the terms are essentially self explanatory. We are seeking comments on this decision.CMS-2345-P 65
We considered using the Me dicare Part B standards to identify 5i drugs, given that Medicare Part B covers a limited number of outpatient prescrip tion drugs that are not usually self-administered, such as those give n in a hospital outpatient department or doctor’s office. In addition, Medicare Pa rt B covers outpatient prescription drugs provided through an item of durable medical eq uipment, such as an infusion pump or nebulizer, and injectable drugs administer ed by a licensed medica l practitioner, if considered reasonable and necessary. Medicare Part B does not have a compre hensive, all inclusive list of covered inhalation, infusion, injectable, instilled, or implanted drugs. However, it already has a publicly available reference which lists drugs th at are “not usually se lf-administered” and could be considered for coverage under Medicar e Part B. In additi on, the Medicare Part B ASP NDC-HCPCS Crosswalk f ile identifies drugs that could be considered for coverage under Medicare Part B; it is pub lically accessible on the CMS Web site at http://www.cms.gov/McrPartBDrugA vgSalesPrice/01a19_2010aspfiles.asp and is updated on a quarterly basis. The Medicar e Part B ASP NDC-HC PCS Crosswalk file also includes drugs which do not meet the 5i criteria, specifically those oral drugs covered by Part B following a transplant as we ll as Part B oral anti-emetics and oral cancer drugs. We considered using the Me dicare Part B ASP NDC-HCPCS Crosswalk file to identify 5i drugs. However, we believ e it would not be optimal because it is not an all inclusive list of inhalation, infusion, instilled, impla nted and injectable drugs and therefore would likely miscat egorize 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,CMS-2345-P 66
infusion, instilled, implanted, or injectable dr ugs for the determination of AMP using the route of administration approved by th e FDA or based upon the drug’s NDC. We also considered if we should id entify the 5i drugs based upon their NDC number. If we were to identify the 5i drugs, we determined it woul d not provide reliable data and still require us to make available, as well as continuously update, a set of guidelines that would likely requ ire an outside data source. In addition to the nuances of identifying existing drugs, it would be a conti nuous challenge to maintain a reliable list due to an evolving marketplace with the introduction of new dr ugs 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 provi ding 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 proposi ng to add §447.507 Identification of 5i drugs to indicate how 5i drugs are to be identified. In §447.507(a) we propose to use the FDA’s Routes of Administration as a gui de to identify 5i drugs. Belo w is a list of FDA routes of administration that we are propos ing manufacturers use to identif y 5i drugs. It includes, but is not limited to, the routes of administra tion 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/DataStanda rds/StructuredProductLabeling/ucm162034.h

tm

.

TABLE 3: ROUTES OF ADMINIS TRATION FOR 5i IDENTIFICATION Auricular (Otic) Conjunctival Endocervical EndosinusialCMS-2345-P 67

Endotracheal Epidural Extra-Amniotic Hemodialysis Infiltration Interstitial Intra-Abdominal Intra-Amniotic Intra-Arterial Intra-Articular Intrabiliary Intrabronchial Intrabursal Intracardiac Intracartilaginous Intracaudal Intracavernous Intracavitary Intracerebral Intracisternal Intracorneal Intracoronal, Dental Intracoronary Intracorporus Cavernosum Intradermal Intradiscal Intraductal Intraduodenal Intradural Intraepicardial Intraepidermal Intraesophageal Intragastric Intragingival Intrahepatic Intraileal Intralesional Intralingual Intraluminal Intralymphatic Intramammary Intramedullary Intrameningeal Intramuscular Intranodal Intraocular Intraomentum Intraovarian Intrapericardial Intraperitoneal Intrapleural Intraprostatic Intrapulmonary Intraruminal Intrasinal Intraspinal Intrasynovial Intratendinous Intratesticular Intrathecal Intrathoractic Intratubular Intratumor Intratympanic Intrauterine Intravascular Intravenous Intraventricular Intravesical Intravitreal Iontophoresis Irrigation Laryngeal Nasal Nasogastric Ophthalmic Parenteral PercutaneousCMS-2345-P 68

Periarticular Peridural Perineural Periodontal Rectal Respiratory (Inhalation) Retrobulbar Soft Tissue Subarachnoid Subconjunctival Subcutaneous Subgingival Submucosal Subretinal Transendocardial Transmucosal Transplacental Transtracheal Transtympanic Ureteral Urethral Vaginal

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 rout e of administration, manufacturers will be readily able to identify products which are inhaled, infused, instilled, implanted, and injected as the information is readily availa ble. However, manufact urers would need to determine if those products iden tified as 5i drugs are “not generally dispensed through a retail community pharmacy”. Therefore, we al so 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-administere d as a way to determine when a drug is “not generally dispensed” through a retail commun ity 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 Serv ices, §50.2(C) provides guidance regardingCMS-2345-P 69
the term “usually.” Specifically, it provides th at 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 beli eve 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 othe r 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 re tail community pharmacy, it would mean that a drug would be classified as “not gene rally dispensed” thro ugh a retail community pharmacy if more than 50 percen t of the sales were to an en tity other than a wholesaler for distribution to retail community pharmaci es 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 whic h are self-administered and generally dispensed through retail community pharmacies would be included in the alternate 5i AMP calculation due to the br eadth of the percentage a llowed in this calculation methodology. We also considered whether we c ould use the methodology commonly used by manufacturers to calculate the Department of Veterans Affairs (DVA) non-Federal Average Manufacturer Price (non-FAMP). Th is methodology is desc ribed in the draft “Amended Master Agreement” 2 , between the Secretary of Veterans Affairs and the

2 While the Amended Master Agreement (9/7/00 draft) between the Secretary of Veterans Affairs and the Manufacturer Identified in Section VI II 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.CMS-2345-P 70
Manufacturer in section VII of this Ag reement. Manufacturers, manufacturer associations, pharmacies and pharmacy associations have repeatedly referred to this draft “Amended Master Agreement” when request ing guidance from CMS on the issue of defining “not generally dispensed”. Accordi ng to the definition of Wholesaler found in the draft “Amended Master Agreement,” manuf acturers are to consider a buyer to be a wholesaler when drugs with unit sales of 90 percent or greater ar e to retailers, other merchants, industrial, institutional or comme rcial users. Manufacturers are responsible for using this 90 percent princi ple as a guideline to determine when their sales are to wholesalers in their determination of non-FA MP. We considered whether it would be reasonable to apply the same principle to 5i dr ug determinations as to when a drug is “not generally dispensed” through a retail comm unity 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 distribu ted to retail community pharmacies (and retail community pharmacies that purchase drugs directly from th e manufacturer). Therefore, for 5i drugs, our understanding of the 90 percen t principle would be that if 90 percent or more of the manufacturer’s sales for the re spective drug were to an entity other than a wholesaler for distribution to retail community pharmacies or retail community pharmacies that purchase drugs directly from th e manufacturer, then the drug w ould be classified as “not generally dispensed” through a retail community pharmacy. We believe providing a qua ntitative method to determine when a drug is “not generally dispensed” through a retail community pharmacy would be preferable to a more qualitative drug specific appro ach as it provides a more definitive meaning to the term “not generally dispensed” th rough a retail community pharmacy. Therefore, in thisCMS-2345-P 71
proposed rule, we propose at §447.507(b)(1) to use the 90 percent principle to determine when a drug is not generally dispensed through a retail community pharmacy. However, we continue to have some concerns rega rding whether the 90 pe rcent threshold is reasonable because it might result in a portion of drugs eligible for the 5i alternate AMP calculation to be omitted from AMP because the pe rcentage of sales required to classify a drug as “not generally dispen sed through a retail community pharmacy” may be too high. Manufacturers that enter into and have in eff ect a Medicaid drug rebate agreement, as set forth in section 1927(a) of the Act, are re sponsible for reporting AMP on a monthly and quarterly basis. Therefore, we propose at §447.507(b)(2) that the determination of a 5i drug’s status as “not generally dispensed” through a retail community pharmacy will need to be evaluated on a monthly and quart erly basis. We invite comments on this approach, including comments indicating if we should consider other quantitative options (for example, 75 percent, or 50 percent) to identify if a 5i drug is “not generally dispensed” through a retail community pharmacy and reasons as to why those options would be appropriate. We also invite comments on whether manufacturers should evaluate the status of a 5i drug’s status as “not generally dispensed” through a retail community pharmacy on a monthly or quarterly basis. We further propose at §447.504(d) that, in li ght of section 1927( k)(1)(B)(i)(IV) of the Act, AMP for these drugs will include all sa les, 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 th ese drugs, that are provided to the following non-retail community pharmacy entities:

● Direct sales to physicians.CMS-2345-P 72

● Sales to pharmacy benefit managers , including their mail order pharmacy’s purchases.

● Sales to HMOs, including MCOs.

● Sales, discounts, or rebate s 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 facilitie s, contract pharmacies for the nursing facility where these sales can be identifi ed with adequate documentation, and other entities where the drugs are dispensed th rough a nursing facility pharmacy, such as assisted living facilities.

● Sales to hospices.

● Sales to other manufacturers who c onduct business as wholesalers or retail community pharmacies. <HD3>7. Further clarification on the calculation of AMP - §447.504(e) a. Chargebacks and other discounts (§447.504(e)(1)) We propose that chargebacks must be incl uded in the calculation of AMP, except for those chargebacks provide d to any of the entities that are excluded from the determination of AMP. Inasmuch as we be lieve chargebacks are based on identified sales to a specific entity, a manufacturer cannot make assumptions regarding these chargebacks and must identify them to incl uded 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 continge nt on any purchaseCMS-2345-P 73
requirement, volume discounts, incentives, admi nistrative fees, servic e fees (other than bona fide service fees), dist ribution fees, and any other re bates, discounts or other financial transaction, other than rebates unde r section 1927 of the Act, which reduce the price received by the manufactur er for drugs distributed to retail community pharmacies. b. Quarterly AMP (§447.504(e)(2)) Based on prior experience and on the MDR program submissions we believe that the quarterly AMP should be calculated as a weighted average of the monthly AMPs in the quarter. We believe that, based on our prior experience and the similarities of both calculations, this approach will minimize discrepancies between the monthly and the quarterly AMPs. Therefore, we propose that quarterly AMP is to be calculated as a weighted average of monthly AMPs in the quarter. c. Manufacturer adjustments (§447.504(e)(3)) To account for discounts, rebates or othe r price concessions that may not be available during the rebate reporting period, we propose th at the manufacturer must adjust the AMP for the applicab le rebate period if cumulative discounts, rebates, or other arrangements subsequently adjust the prices actually realized, to th e extent that these discounts, rebates or arrangements are not ex cluded from the determination of AMP by statute or regulation. <HD2>D. Determination of Best Price (§447.505) <HD3>1. Definitions of Best Price and Providers We are proposing re-codifying the te rms “best price” and “Providers” under newly proposed §447.505(a). Additionally, we are proposing to revise the definition of the term “best price” at newly proposed §447.505( a) so that it is consistent with the definition of best price found in section 1927(c)(1)(C) of the Act.CMS-2345-P 74

<HD3>2. Prices included in Best Price We believe that revising the definition of best price to be consistent with the definition provided in the statut e 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 locate d in regulations at §447.505(c)(1)-(11), be redesignated to §447.505(b) and th at it would be revised to remove the list of prices included in best price. Inst ead, the paragraph would read as follows: “Except for those prices identified in paragraph (c) of this se ction, best price for c overed outpatient drugs includes all prices and associat ed rebates, discounts, or ot her transactions that adjust prices either directly or indirectly.” <HD3>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 accomplishe d by making the following revisions to the prices exempt from best price section. We propose the “Prices excluded from best price,” currently located in regulations at §447.505(d)(1)-(13), be redesignated to §447.505(c)(1)-(18). The current list of prices excluded from best price would be expanded to include three new price exclusions not currentl y identified in regulations. They are (1) manufacturer vouchers, (2) manuf acturer-sponsored patient refund/rebate programs and (3) sales outside of the United States. These terms have been discussed earlier in the Determination of AMP secti on 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 theCMS-2345-P 75

“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, wh ere applicable, to best price that we are applying to AMP. <HD3>4. 340B Expanded List of Covered Entities Exempt from Best Price In accordance with section 7101 of the Afford able Care Act, we are proposing to clarify how manufacturers ar e to treat orphan drugs sold to new covered entities described in sections 340B(a)(4)(M), (N) a nd (O) of the PHSA for best price. The Affordable Care Act expanded the list of en tities eligible to en roll in the 340B drug pricing program to include certain childre n’s hospitals, freestanding cancer hospitals, critical access hospitals, rural referral centers, and sole community hospitals. Additionally, the Affordable Care Act ame nded the PHSA by ex cluding certain orphan drugs from being considered covered outpatient drugs for th ese newly covered entities. Section 204 of the Medicare and Medicai d 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 pr opose that manufacturers can exclude only drugs purchased under the 340B Drug Pricing pr ogram 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 pu rchase drugs outside of the 340B program, such as instances when drugs are purchase d for inpatient use, drugs that have both inpatient and outpatient uses, and when a c overed entity purchases drugs outside the 340B program to dispense to its Medicaid pa tients. In order to better understand the purchasing practices of cove red entities and the scope of our proposed policy on best price, we invite comments regarding othe r circumstances in which covered entitiesCMS-2345-P 76
purchase drugs outside of the 340B program. We believe that this po sition is consistent with our reading of these provisions and as a result strengthens the integrity of the MDR program because covered entities are prohibi ted from diverting drugs purchased under 340B authority to anyone who is not a patient of the covere d entity. These requirements are proposed in a new regulati on at §447.505(c)(2)(i) and (ii). <HD3>5. Medicare Coverage Gap Disc ount 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 applicab le 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 pri ce. In accordance with the Affordable Care Act, manufacturer discounts attributed to the Discount Program will be excluded from the determination of best price as defined in §447.505(c)(6). <HD2>E. Authorized generics drugs (§447.506) We propose to remove the definition of “Authorized generic drugs” from §447.506(a), as discussed in sec tion II.B.1 of this regulati on. In §447.506(a), we propose to define the term “Primary manufacturer” to mean a manufacturer that holds the NDA of the authorized generic drug. We also propose to define the term “Secondary manufacturer of an authorized generic drug” to mean a manufacturer that is authorized by the primary manufacturer to sell the drug, but does not hold the NDA. In §447.506(b), we propose to revise the existing paragraph to specify that sales of an authorized generic drug must be included in the AMP calculation of the manufacturer holding the NDA, referred to in this discussion as the primary manufacturer, when such drugs are being soldCMS-2345-P 77
directly to a wholesaler. In accordance with section 1927(k)(1)(C) of the Act, we propose in §447.506(b) to require that the primar y manufacturer of an authorized generic, include in its calculation of AMP all sales of its authorized generi c drug product sold or licensed to a secondary manuf acturer, including transfer pr ices and fees paid by the secondary manufacturer to the primary manuf acturer, when the sec ondary manufacturer is acting as a wholesaler, as set forth in sec tion 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 wholes alers including other ma nufacturers acting as wholesalers. In §447.506(c), we propose to revise the existing paragraph to specify that a primary manufacturer holding the NDA must in clude the best price of an authorized generic drug in its computation of best pr ice for a single source or innovator multiple source drug during a rebate period to any manu facturer, wholesaler, retailer, provider, HMO, non-profit entity, or governmental entity in the United States, when such drugs are being sold by the primary manufacturer holding the NDA. Further, we propose to add a new §447.506( d) to specify that the secondary manufacturer of an authorized generic drug mu st also provide a rebate based on its sales of authorized generic drugs, and must calcul ate AMP and best price consistent with the requirements specified at §447.504 and §447.505 respectively. <HD2>F. Exclusion from Best Price of certain sales at a nominal price (§447.508) Currently, the existing regulations at §447.508(a) defines nominal sales which should be excluded from a manu facturer’s best price calcula tion only when made to 340B covered entities as defined in section 340B(a )(4) of the PHSA, ICFs/MR, State-owned orCMS-2345-P 78
operated nursing facilities and safety net providers or facilities/entities which the Secretary determines to be eligible. Previously, the Secretary di d not exercise the authority to add other safety net providers for which sales at nominal prices ar e excluded from best pr ice. Section 221 of the Omnibus Appropriations Act, 2009, P ublic Law 111-8, enacted on March 11, 2009, revised section 1927(c)(1)(D) of the Act by e xpanding 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 (a s defined by the Internal Revenue Service (IRS)), or State-owned or opera ted facilities providing the same services to the same populations as 340B(a)(4) entiti es of the PHSA but not funde d as such and in compliance with the prohibition on abortion services as set forth in section 1008 of the PHS Act or academic health care centers providing family planning services to be eligible for the nominal priced sales. We propose to revise §447.508(a) to incl ude 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 se t forth below for either of the two new categories:

● Category 1 criteria: + The entity is an exempt organizati on 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.CMS-2345-P 79

● Category 2 criteria: The entity is a pub lic 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 service or services as described under section 1001(a) of the PHS Act, 42 U.S.C. 300. The legislation further provides that no thing in section 1927( c)(1)(D) of the Act should be construed to alter any existing statutory or regul atory prohibition on services for Category 1 entities, includi ng the prohibition set forth in section 1008 of the PHSA. Because these additions appear to addre ss those nominal price sales that are not related to a manufacturer’s attempt to infl uence market share or for other marketing reasons, we are again choosing not to identify any further ent ities for which manufacturer nominally priced sales would be exempt from best price. <HD2>G. Medicaid drug rebates (§447.509) <HD3>1. Determination of rebate amount (§447.509(a)) Manufacturers that participate in the MD R program are required to pay rebates for covered outpatient drugs that are dispense d to Medicaid patients. The rebates are calculated based on formulas described in sectio n 1927(c) of the Act. As described in the “Background” section above, the Affordable Care Act made several revisions to the statutory rebate formulas. In light of these revisions, we propose to incorporate the rebate formulas into Federal regulations. We propose in §447.509(a)(1) that the basic rebate, for each dosage form and strength of a single source drug or an innovato r multiple source drug, will be equal to the total number of units of each dosage form a nd 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:CMS-2345-P 80

● 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 so urce drugs and innovator multiple source drugs. We note that all clotting factors woul d 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. Sim ilarly, all drugs with pediatric indications would not qualify for the minimum rebate pe rcentage of 17.1 percent of AMP. Only those drugs approved by the FDA exclusivel y for pediatric indications, in accordance with our proposed defini tion in §447.502, would qualify. We propose in §447.509(a)(2) that the addi tional 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 dosag e 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 mont h before the month in which the rebate period begins exceeds such index. We propose in §447.509(a)(3) that the total rebate amount for single source drugs and innovator multiple source drugs will be equal to the basic rebate amount plus the additional rebate amount, if any. We also propose at §447.509(a)(5) that in no case will the total rebate amount exceed 100 percent of the AMP of the drug.CMS-2345-P 81
<HD3>2. Treatment of New Formulations (§447.509(a)(4)) The Affordable Care Act established a separate formula for calculating the unit rebate amount for a drug that is a line ex tension of a single sour ce drug or an innovator multiple source drug that is an oral solid dosag e form. For such a line extension drug, the rebate amount will be the amount calculated unde r section 1927 of the Act or, if greater, the product of the AMP for the line extens ion drug, the highest additional rebate (calculated as a percentage of AMP) under se ction 1927 for any streng th of the original single source or innovator multiple source dr ug, and the total number of units of each dosage form and strength of the line extension drug paid fo r under the State plan in the rebate period (as reported by the State). We propose to incorporate this calculation in §447.509(a)(4). The statute defines a line extension for pur poses of the rebate calculation as a new formulation of a drug such as an extended re lease formulation. Howe ver, the statute did not provide further specificity as to how line extensions should be defined. Therefore, as previously described in the definition of a lin e extension, we will define line extension at §447.502. CMS plans to define a line extens ion 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 dr ug 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 previous ly 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 ex clusivity are not proposed to be excluded from the definition of a line extension drug. For the purpose of calcu lating the unit rebate amount under the Affordable Care Act, we propose that both the initial brand name drugCMS-2345-P 82
and the line extension drug have to be an or al solid dosage form drug. We also propose to exclude a new strength of the initial br and 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 extens ion 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 defini tion 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 altern ate routes of administration, or employing physical barriers that resist common met hods of tampering, thus abuse deterrent formulations (ADFs) have the potential to decrease abuse of prescription drugs and improve patient and public safety. Some exampl es of abuse deterrent strategies that are under development include combination oral fo rmulation products with an opioid agonist and opioid antagonist, formulations with ot her 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 ex clude 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 a buse potential of drugs can be found at http://www.fda.gov/downloads/Drugs/Guidanc eComplianceRegulatoryInformation/GuidCMS-2345-P 83
ances/UCM198650.pdf We are soliciting feedback from the i ndustry, the public, and other stakeholders regarding whether existing or future refo rmulated 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 base d 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 th e FDA does not. Thus, we reviewed the drug information and data files publicly availabl e at the FDA and propose to use the FDA’s list of Chemical Types to identify the line ex tension 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 a pproved. 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 Chem ical Type may identify the drug as new, or as related to the active ingredient of a nother drug that has alre ady been approved. Based on the analysis of the FDA’s drug in formation 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.CMS-2345-P 84
TABLE 4: New Drug App lication 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 de rivative) represents the incorporation of different salts or esters , or other noncovalent de rivatives (such as a complex, chelate, or clathrate) of the mo lecule, responsible for the physiological or pharmacological action of the drug substance of an approved pharmaceutical ingredient into a marketed dosage form which repres ents a change to the listed drug (21 CFR 314.108(a)). We propose to iden tify this Chemical Type as a line extens ion because it describes a new version of the in itial 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 am ount of active ingredient. A new formulation may be a dosage form that contains the same active i ngredient as was previously approved in a different dosage form as th e initial brand name listed. Chemical Type 4 (new combination) represents a drug comprised of two or more component s that are physically, chemically, or otherwise combined or mixe d 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.CMS-2345-P 85
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 di sease 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 indica tion(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) re presents an active ingredient that has never before been marketed in the United Stat es in any form. CMS proposes to use this Chemical Type to identify the initial br and name listed drug of a line extension. Chemical Type 5 (new manufacturer) is assigned to an al ready marketed drug when it has: (1) A new ma nufacturer, or (2) a produc t that duplicates another manufacturer’s already marketed drug produc t. 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 app lication from one manufact urer to another. Chemical Type 7 (drug already market ed, 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-th e-counter) switch) represents t he process of transferring FDA-approved prescription medicat ions to nonprescription, OTC status. WeCMS-2345-P 86
do not propose to consider this Chemical T ype as a line extension because there is no new formulation of the initi al brand name listed drug. We plan to identify line ex tension drugs by using drug in formation 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 a nd which drug is the initi al brand name listed drug of the line extension drug based on manuf acturers' MDRP submissions. Therefore, we plan to rely on drug information obtained fr om the FDA. In order for us to identify the line extension drugs using the FDA’s dr ug 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 requi red to report to CMS if th eir 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 extens ion drug has to be an oral solid dosage form of a single source drug or innovator multiple source drug in accordance with the defi nition 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 dr ug 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 ex tension drugs based on FDA data, since the FDA currently has an identifier for the Chemical Types in their Drugs@FDA’s application file.CMS-2345-P 87
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 us e 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 ingr edient 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 categor y would change to an innovator multiple source drug in accordance with the rebate defi nition 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 fi rst approved by the FDA. Additionally, the initial brand name listed drug has to be an or al solid dosage form per our definition of an oral solid dosage form. Lastly, CMS currently collects drug produc t and pricing information by NDC, not by active ingredient. However, the FDA in formation 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 brandCMS-2345-P 88
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 lin e extension drugs. Since NDCs enter and exit the MDRP freque ntly, 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 iden tify 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 exte nsion provisions of the Af fordable Care Act. Additionally, as mentioned in the definition of a line extension drug, we propose that a new strength of the initial brand name liste d drug would not qualify as a line extension drug. Furthermore, if we were to cons ider a new strength to be a line extension, it would be difficult to identify the first stre ngth 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 th e initial brand name listed drug. We invite comments from the public on all as pects 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 dr ug. Drug manufacturers may separately obtain a 3-year exclusivity or a pediatric exclusivit y. 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 dr ug, marketing it for another illness, or claiming a patent on an inactive ingredient . The 3-year exclusivity protection asCMS-2345-P 89

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, wh en the application cont ains reports of new clinical investigations (other than bioavail ability studies) conducte d or sponsored by the sponsor that were essential to approval of the applicati on. 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 exclus ivity are changes that we are considering for the definition of a line extension drug. According to section 505A of FFDCA (Food and Dr ug 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-mont h 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 exclusiv ity. Orphan drug exclusivity promotes research and marketing for the deve lopment of drugs to treat rare diseases, defined as a disease affecti ng 200,000 or fewer patients in the United States, by granting a 7-year protection against competition for th e designated orphan indication. We do not plan to exclude drugs that ha ve this exclusivity from the definition of line extension drugs. For the purpose of calculating the unit re bate 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 Altern ative URA. We propose to interpret sectionCMS-2345-P 90
1927(c)(2) to provide that the URA determinatio n is based on the greater of the Standard URA calculated under section 1927 of the Act w ithout regard to the alternative rebate calculation provided in the Affo rdable 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 liste d drug. We recognize that there are multiple issues when it comes to tracking the line exte nsion back to the ini tial brand name drug, such as when the line extension drug and th e initial brand name listed drug are marketed by two different manufacturers or when th e initial brand name listed drug has been terminated from the Medicaid drug rebate pr ogram. However, in accordance with the statute, manufacturers are responsible for cal culating the A lternative URA for their line extension drugs. We propose that when the initial brand na me 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 th e Medicaid drug rebate program to calculate the Alternative URA. We propose that we w ould 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 w ith the current process, manufacturers are responsible for calculating and making rebate payments to each St ate Medicaid Agency. Therefore, manufacturers ar e responsible for ensuring th at all necessary product and pricing data, whether such information is for the initial brand name listed drug or the lineCMS-2345-P 91
extension drug, are exchanged between the manuf acturer of the initial brand name listed drug and the manufacturer of the line extensi on drug to accurately calculate the URA for the line extension drug and provide reba tes in accordance with the statute. As provided in §447.509(a)(5), section 2501(e) of the Affordable Care Act added section 1927(c)(2) of th e Act to cap the URA at 100 per cent 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 a ny 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 calculati ng the URA for a line extension drug. Baseline AMP (line extension) = 100.00 AMP (line extension) = 300.00CMS-2345-P 92
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 re sults (69.30 or 50.00) is 69.30 Basic Rebate Amount for th e 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] fr om the quarterly AMP to determine the additional URA. If the [(Baseline AMP/Baseli ne 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) = 300.00CMS-2345-P 93

AMP (initial brand name lis ted drug) strength A = 280.00 AMP (initial brand name lis ted drug) strength B = 275.00 AMP (initial brand name lis ted 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 (cal culated as a percentage of AMP) for any strength of the initial brand name listed drug = 0.7143

Alternative URA = Product of the AMP of th e 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 orCMS-2345-P 94
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

<HD3>3. Rebates for Drugs Dispense d Through Medicaid Managed Care Organizations (MCOs) (§447.509(b)) From the inception of the MDR program, section 1927(j)(1) of the Act exempted participating manufacturers from paying drug re bates 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 amende d by section 2501(c) of the Affordable Care Act requires manufacturers that participat e in the drug rebate program to pay rebates for drugs dispensed to individuals enroll ed with a Medicaid MCO if the MCO is responsible for coverage of such drugs. Th e 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 a ssure 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 manufacturer s as well as report it in their quarterly utilization reports to CMS. This data reporting will also have other quality-relatedCMS-2345-P 95

benefits for States and the Me dicaid program in terms of pr oviding timely information on drug utilization. Section 2501(c) of the Affordable Ca re 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 se ction 1927 of the Act;

● MCO capitation rates will be based on actual cost experience related to rebates and subject to Federal regulations at §438.6 re garding actuarial soundness of capitation payments; and

● The MCO must report to the State info rmation 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 conformi ng 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 requi rements if such drugs are both dispensed by health maintenance organizations (HMOs), incl uding Medicaid MCOs that contract under section 1903(m), and are subject to discounts under section 340B of the Public Health Service Act. In accordance with these revisions to sections 1927 and 1903 of the Act, we propose a new §447.509(b). In §447.509(b)(1), we propose to require participating manufacturers to pay rebates for covered outpatient drugs dispen sed to individuals enrolled in Medicaid MCOs if the MCO is responsible for payment for such drugs. InCMS-2345-P 96
§447.509(b)(2), we propose that manufacturer s are exempt from the requirement in paragraph (b)(1) if such drugs are dispen sed by health maintenance organizations, including MCOs that contract under section 1903(m) of the Act, and subject to discounts under section 340B of the PHS Act. In §447.509(b)(3), we propose that a Medicaid MCO that is responsible for covered outpatien t 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 w ith providing timely utili zation data to meet the State reporting requirements. <HD3>4. Federal offset of rebates (§447.509(c)) Section 2501(a)(2) of the Affordable Care Act added section 1927(b)(1)(C) of the Act, which provides that, effective January 1, 2010, the amount of the savings resulting from the increases in the rebate percenta ges described above will be remitted to the Federal government. These offset amounts ar e in addition to the amounts applied as a reduction under section 1 927(b)(1)(B) of the Act. We propose to calculate the offset as described below. For single source or inn ovator 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, th en we propose to offset the difference between 23.1 percent of AMP and AMP minus best price.CMS-2345-P 97

● If the difference between AMP and best price is greater th an or equal to 23.1 percent of AMP, then we propose to not take any offset amount. For single source or innovato r multiple source drugs that are blood clotting factors and drugs approved by the FDA exclusively for pe diatric indications th at 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, th en 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 th an or equal to 17.1 percent of AMP, then we propose to not take any o ffset amount. In the September 28, 2010 State Medicai d 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 o ffset calculation as de scribed above to the basic rebate. Further, we pla nned to offset only the differenc e in the additi onal rebate of the reformulated drug based on the calcula tion methodology of the additional rebate for the drug preceding the requirements of the Af fordable 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 th e additional rebate amount in ac cordance 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 .)CMS-2345-P 98
However, after further review of the offset provisions in section 2501 of the Affordable Care Act, we have decided to reconsider our instru ctions regarding the calculation of the offset provi sions 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 Affordab le Care Act and the calculation of the URA for the line extension drug, if greater, in acco rdance with the Affordable Care Act. If there is no difference between the URA fo r the line extension drug based on the Affordable Care Act and URA calculation base d on the applicable re bate 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 w ill 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 di spensed to Medicaid MCO enrollees, we propose to offset the non-Federal share lim ited to the difference between the rebate percentages in effect outside of the MC O 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-Feder al 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.CMS-2345-P 99
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 UR OA will be provided to States in a manner similar to how States currently receive the UR A every quarter. States will then match the UROA with the number of units of the dr ug for which they receive payment from a manufacturer to determine the Quarterly Reba te Offset amount (QR OA) 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 th e UROA will be treated as prior period adjustments (PPAs) and will be reported to th e States the same way that URA PPAs are currently transmitted. Please note that the offset provision woul d also apply to the Territories that participate in the MDR program. <HD2>H. Requirements for manufacturers (§447.510) In the Medicaid Program; Withdrawal of Determination of Average Manufacturer Price, Multiple Source Drug Definition, and Upper Limits for Multiple Source Drugs final rule published in the November 15, 2010 Federal Register (75 FR 69591), we made conforming amendments to delete re ferences to §447.504 “Determination of AMP” from §447.510 “Requirements for Manufacturer s”. In this proposed rule, we are proposing conforming regulatory amendments to add regulatory text to §447.510. Specifically, those references that will be added are at §447.510(a )(1), §447.510(c)(2)(i), and §447.510(d)(2).CMS-2345-P 100
We are also proposing a conforming amen dment to §447.510(g) to clarify that the electronic format in which the product and pr icing data is submitted to CMS must be submitted in a format designated by CMS. <HD3>1. Failure to report quarterly AMP (§447.510(a)(5)) In an effort to better ensure timely quarterly AMP reporting at the end of each rebate period, in accordance with the statute at section 1927(b), a manufacturer that fails to submit and certify a quarterly AMP to CMS for a product by the 30 th 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/alertsa ndbulletins/2010/SpAdvBulletin_AMP_ASP.pdf

. Additionally, we are considering adding regulatory guidanc e on suspension and termination for manufacturers that do not report quarterly AMP on a timely basis or are otherwise out of compliance with rebate requi rements. We have c onsidered 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 consideri ng the appropriate terms and procedures for suspension and termination and, therefore, we invite comments from the public. <HD3>2. Reporting Revised Monthly and Qu arterly AMP, best price, customary prompt pay discounts, or nominal prices (§447.510(b)) In this proposed rule, we propose to re vise the 12-quarter rule filing limitation currently in place for manufacturer s to report revisions to their quarterly AMP, best price,CMS-2345-P 101
customary prompt pay discounts, or nominal pr ices. 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 with in which manufacturer s are responsible for reporting revisions to pricing da ta in part to decrease associ ated administrative burdens on manufacturers and States. Despite the e ffective date of January 1, 2004 for the 12- quarter rule, we are still rece iving requests from manufacturer s to make revisions to the pricing data that fall outside of the 12-quarter period. Th erefore, 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 cat egory 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 s ubmit pricing data to reenter the program.

● The change is due to a technical correc tion (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 addre ss specific underpayments to St ates, or potential liability regarding those underpayments, as required by CM S, applicable law or regulations, or an OIG or DOJ investigation. We propose that §447.510(b)(1) be revise d to clarify that a manufacturer is required to report to CMS any revisions to co rrect AMP, best price, customary prompt pay discounts, or nominal prices for a peri od 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 forCMS-2345-P 102
any revision. Any revision request, except fo r those falling within the exceptions noted above, must be made within this 12-quarter time period. We propose to add to §447.510(b) that any revision request that falls outside of the 12-quart er time limit will not be considered by CMS, unless it falls under the above five criteria. We also propose to revise timeframe for re porting revised monthly AMP in §447.510(d)(3) to clarify that the only exceptions to the 36-month lim it for reporting monthly AMP would be considered by CMS if it falls under the same five criteria. We are contemplating whether to allow ma nufacturers that have revisions to their pricing data beyond the 12-quarter limit that meet the five crit eria 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 outsi de 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 shoul d allow manufacturers to make revisions to their pricing data if their request m eets 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 re quired 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. <HD3>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 manuf acturer to revise its methodology forCMS-2345-P 103
calculating AMP and best price. Our regulations at §447.510 (b) specify that manufacturers have a 12-quart er time limit to report price revisions. Manufacturers are responsible for reporting any re visions to AMP or best price within the 12 quarter limit, which begins with the quarter in which the da ta 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 au thorized government agency determines or reveals that adjustments or revisions are necessary irre spective of the quarter, the manufacturer is responsible unde r the statute to comply with that determination. Based on questions from manufacturers often as a result of False Cl aims Act concerns, we have considered allowing manufactur ers 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 th eir pricing data due to a recalculation of the methodology for calculating AMP and best pr ice outside of the 12-quarter time limit to address underpayments and potential liabi lity regarding those underpayments that may extend outside of that 12-qua rter period. We are consid ering proposing a “good cause” option to extend the time limit for filing a reca lculation request, similar to that used in Medicare. We invite comments fr om the public on this option. <HD3>4. Base Date AMP (§447.510(c)(1) to §447.510 (c)(4)) In the 2007 AMP final rule, we allowed ma nufacturers 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 belo w, we propose to revise §447.510(c)(1) and §447.510(c)(2) by inserting “DRA” before base date AMP where it occurs. We alsoCMS-2345-P 104
propose to remove the notation “[OFR: insert publication date of the final rule]” and replace it with “July 17, 2007” in §447.510(c)(1). The Affordable Care Act significantly revi sed the definition of AMP to mean for a covered outpatient drug (inc luding those sold under secti on 505(c) of the FFDCA), the average price paid to the manufacturer for th e drug in the United States by wholesalers for drugs distributed to retail community pharmacies and retail community pharmacies that purchase drugs directly from the manufact urer. To reflect the changes to AMP as set forth in the Affordable Care Act, we propose to allow manufacturers to recalculate base AMP in accordance with the definition of AMP in §447.504 of this subpart. Base AMP is used in the calculation of the additional rebate describe d 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 AM P 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 pr opose giving manufacturers the option to report a recalculated base date AMP based on the A ffordable Care Act. We propose to allow manufacturers the option to decide whether th ey will recalculate and report to CMS an Affordable Care Act base date AMP in light of the revised definiti on 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 administ rative burden to be more costly than the savings gained. We propose to provide ma nufacturers with the option to report the recalculated Affordable Care Act base date AMP for a period of four full calendar quarters beginning with the firs t full quarter after the publi cation of the final rule. <HD3>5. Calculation of Monthly AMP (§447.510(d)(2))CMS-2345-P 105
Section 1927(e)(5) of the Act specifies that the Secretary is to implement a smoothing process for AMP, which shall be similar to the smoothing process used in determining the average sales price (ASP) of a drug or biological under Medicare Part B. The Medicare Part B regulations at §414.804( a)(3) specify that the ASP methodology for smoothing lagged price concession s requires that manufacturers calculate the total lagged price concessions for the previous 12-mont h period and convert the dollar amount to a percentage of sales over that same 12-month pe riod. This percentage is then applied to the current quarter’s sales to estimate the lagged price concessions for that quarter. Therefore, we are proposing manufacturer s would be required to use a 12-month rolling percentage to estimate the value of la gged price concessions in their calculations of the monthly and quarterly AMPs. Specifically, we are proposing that a manufacturer’s monthl y 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 manufac turer 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 stat ute or regulations. The drug un it is the lowest identifiable amount (for example, tablet or capsule for so lid dosage forms, milliliter for liquid forms, gram for ointments or creams) as reported by the manufacturer. Monthly AMP should be calculated cons istent with this methodology, based on the best data available to the manuf acturer at the time of submission. In calculating monthly AMP, a manufacturer should estimate the impact of its lagged price concessions using a 12-month roll ing percentage to es timate the value of those discounts. Following is an exampl e of how manufacturers would calculate theCMS-2345-P 106
monthly AMP by using a 12-month rolling pe rcentage 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 manufacturer s subtract from their total sales for that month to estimate lagge d price concessions for that month.

● Current month sales = $50,000.

● $50,000 x 25 percent (estimated percenta ge of lagged price concessions) = $12,500 estimated lagged price concessions for the current month.

● $50,000 - $12,500 = $37,500 (net total sales af ter 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 pr ocess will be applied on a monthly basis and by statutory definition, the ASP calcula tion includes more sales than in the AMP calculation. We believe this process will re sult in more stable AMP calculations on a month to month basis, because the estimate d lagged price concessi ons will increase as sales increase, and lik ewise as sales decrease. In addition, it meets the statutoryCMS-2345-P 107
requirement that the AMP smoothing process be similar to the smoothing process used in determining the ASP. <HD3>6. Manufacturer Reporte d AMP Units (§447.510(d)(6)) Section 2503(b) of the Affordable Care Act requires manufacturers to submit to CMS on a monthly basis the total number of units that are us ed 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 ca lculate the monthly AMP to be reported to CMS. Additionally, in order to be consistent and to implemen t the rebate and FUL provisions, the monthly units should be of the unit t ype 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. <HD3>7. Failure To Report Monthl y AMP and AMP Units (§447.510(d)(7)) Currently a manufacturer must submit a monthly AMP to CMS no later than 30 days after the last day of the prior month. Under the Affordab le 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 timel y to CMS, a manufacturer that fails to submit and certify monthly AMP and the AMP Units for a product to CMS by the 30 th 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 AMPCMS-2345-P 108
timely, http://oig.hhs.gov/fraud/docs/alertsa ndbulletins/2010/SpAdvBulletin_AMP_ASP.pdf

. Additionally, we are considering adding regulatory guidanc e 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. <HD2>I. Requirements for States (§447.511) Section 1927(b)(2)(A) of the Act specifies th at States are required to report to each manufacturer, not la ter than 60 days after the end of each rebate period, information on the total number of units of each dosage fo rm and strength and package size of each covered outpatient drug dispensed, and to prom ptly 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 St ate include in those reports, the information reported by each Medicaid MCO. We propose a new §447.511 to clarify the requirements for States. In §447.511(a), we propose to list the data that the State must provide to participating drug manufacturers. We further pr opose that States must submit this data within 60 days after the end of each quarter. In §447.511(b), we propose that the States report drug utilizati on data as defined in §447.511(a) to CMS on a quarterly basis. In §447.511(c), we propose that a State th at has participating Medicaid MCOs, which includes covered outpatient drugs in its capitated arrangements with the MCOs, report data listed in §§447.511(a) for covered outpatient drugs disp ensed to individualsCMS-2345-P 109
eligible for medical assistance who are enroll ed 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 pertai ning 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 ultimate ly 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 requireme nts discussed in this secti on would not be effective for the territories until one year af ter the first day of the first full quarter after the publication of the final rule. <HD2>J. Drugs: Aggregate upper limits of payment (§447.512) In the “Medicaid Program; Withdraw al of Determination of Average Manufacturer Price, Multiple Source Drug Definition, and Upper Limits for Multiple Source Drugs” final rule that we published in the November 15, 2010 Federal Register (75 FR 69591), we made conforming amendments to remove references to § 447.514 “Upper limits for multiple source drugs” from § 447.512 “Drugs: Aggregate upper limits of payment”. We are proposing regulatory amen dments to add those references back into the regulatory text of § 447.512. Currently, §447.512(b) establishes guidelines for payment levels that the agency has determined to be appropriate. At §447.512( b)(1), we propose to replace the term “EAC” with the term “AAC” as we have previously proposed to replace “estimated acquisition cost” with “actual acquisition cost”. Further, we propose to add the word “professional” to the description of dispensing fee in this section.CMS-2345-P 110
We are proposing these changes in termi nology in part because we believe that using the AAC in determining the drug ingr edient 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 refere nce price as the basis for Medicaid pharmacy reimbursement has been problema tic 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 necessar ily reflective of a pharmacy’s actual purchase price for a drug. (OIG Audit reports - A-06-00-00023, A- 06-01-00053, A-06-02-00041) 3

. Further, AWP raises other concerns wh en 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 ch arged by wholesalers to providers (such as pharmacies and doctors ) and it does not nece ssarily bear any relationship to any pri ces actually charged in the marketplace.”)

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.htmCMS-2345-P 111
At this time the commercial compendium, First DataBank, Inc. has reported that it is scheduled to cease the publication of AW P as of September 2011. While other drug pricing compendia may publish both AWPs a nd WACs, we have concerns, based on the previously referenced OIG reports, that these prices will not be ba sed on actual costs or reflect actual prices that provide rs pay for these drugs. Certain States, in order to calculate mo re 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 pha rmacy providers will assist States in determining valid reference prices from whic h to develop drug ingr edient reimbursement. Section 447.518 of this proposed regulation prov ides further discussion about how States can develop and justify their AAC. <HD2>K. Upper limits for multiple source drugs (§447.514) Section 2503(a) of the Affordable Care Act revises the definition of “multiple source drug” established in se ction 1927(k)(7)(A)(i) of the Act to mean, for a rebate period, a covered outpatient drug for which ther e 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 bioequiva lent, as determined by the FDA; and is sold or marketed in the United States duri ng the period. We propose this definition be included in §447.502 “Definitions.” In accordance with these statutory requirements, we also propose that at least two th erapeutically 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.

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/Ore gon/OR%20Communications%20Plan.pdf )CMS-2345-P 112
Also, section 2503(a) of the Affordable Care Act revised se ction 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 pr oducts therapeutically and pharmaceutically equivalent, to three or more products, regard less of other formulations. In accordance with this statutory requirement, we are proposing in §447.514(a )(1) that a FUL be established for each multiple source drug for which the FDA has rated three or more products therapeutically and pharmaceutically equivalent. We propose that the FUL will be calculated, in accordance with secti on 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 identifi ed 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 equi valents and if they can be expected to have the same clinical effect a nd safety profile when administered to patients under the conditions specified in the la beling. Drug products are considered pharmaceutical equivalents if they contain the same active ingr edient(s), are of the same dosage form, route of administra tion and are identical in stre ngth or concentration. In general, with limitations that may apply to particular patients, the FDA believes that products classified as therapeutically e quivalent can be substituted with the fullCMS-2345-P 113
expectation that the substituted product will pr oduce the same clinical effect and safety profile as the prescribed product. 5 “B” rated drugs are drugs that FDA does not consider therapeutically equivalent to other pharmaceutically equivalent products . Per the FDA Orange Book, drug products designated with a "B" code fall und er one of three main policies:

● The drug products contai n active ingredients or ar e manufactured in dosage forms that have been identified by FDA as having documented bioequivalence problems or a significant potential for such prob lems and for which no adequate studies demonstrating bioequivalence have been submitted to FDA; or

● The quality standards are inadequate or the FDA has an insufficient basis to determine therapeutic equivalence; or

● The drug products are under regulatory review. 6 Therefore, we propose that any altern ative 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 onl y 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 referen ce listed drug; however, we are inviting comments on the issue of the FUL being applie d 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 fo r pharmaceutically and therapeutically equivalent multiple source drug products. We plan to determine the weighted average on

5 http://www.fda.gov/downloads/Drugs/Deve lopmentApprovalProcess/UCM071436.pdf 6 Id., vii.CMS-2345-P 114

the basis of manufacturer submitted utiliza tion of the most recently reported monthly AMPs for all therapeutically equivalent innovator (I) and non- innovator (N) multiple source drug products that, by defi nition elsewhere in this pro posed rule, are available for purchase by retail commun ity pharmacies on a nationwide basis. In computing the FUL, we would use the monthly AMP and the monthly utilization data submitted by the manufactur er. Using the monthly AMP data will provide for the timeliest pricing data and a llow revisions to the FUL list on a monthly basis. In addition, the statut e requires us to use the recen tly 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 calc ulation first be reported for October 2010 data, CMS received these revised monthly AMPs and ut ilization data beginning in November 2010. While the law required manufacturers to ch ange their calculati on 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 ba sed their AMP calculation on prior AMP regulations that were in effect until December 15, 2010.CMS-2345-P 115
In the interim, CMS has been reviewing monthly pricing data submitted and continues to work towards increasing labele r compliance of reporting data timely. When establishing a FUL, we propose to disreg ard the AMP of an NDC which has been terminated. We note that we have published f our sets of draft FUL files on our Web site. We invited comments from stakeholders and we have posted several of those comments and our responses to those comments at http://www.medicaid.gov/Medicaid-CHIPProgram-Information/By-Topics/Benefits/P rescription-Drugs/Federal-Upper-Limits- .html

. In calculating the FUL, we propose to eliminate covered outpatient drugs designated as single source (S) drugs from th e 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 multip le source drugs, and should be reported according to the statute. We note here that there should be no instan ces of an (S) drug in a FUL group, as labelers should be reporting dr ugs that are therapeutically equivalent drug products as (I) drugs, and statutory provi sions 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 us ed 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 ha s 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 categ ory from (S) to (I) has no prior approval requirement from CMS, and that these ch anges can and should be made timely by the labeler via the Drug Data Reporting for Medi caid system. See Manufacturer ReleasesCMS-2345-P 116
No. 80 and No. 82 (issued on January 5, 2010 and November 1, 2010, respectively). Accordingly, we propose to include pharm aceutically and therapeu tically 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 imp lementation of section 1927 of the Act, we believe that when a drug product has at le ast one other FDA-approved, pharmaceutically and therapeutically equivalent drug product, th e drug is generally sold or marketed on a nationwide basis. Further, we believe thatwhen a drug product has at least two FDAapproved, pharmaceutically and th erapeutically equivalent dr ug products, that all retail community pharmacies would be able to purc hase 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 whol esaler, chain warehouse, group purchasing organization, or directly from the drug manuf acturer. We do not believe it is necessary that each retail community pharmacy have the ability to purchase every supplier’s pharmaceutically and therapeutically equivale nt 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 i ssue of national availability in the context of the FUL requirements and request comments regarding specific instances where such drug products are not available for purcha se by retail community pharmacies on a nationwide basis. Further, as noted prev iously, we will not be using the AMP of a terminated NDC to set the FUL beginning w ith 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.CMS-2345-P 117
We further propose to establish the uppe r 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 A llowable 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 mu ltiplied by the DRA AMP-based FUL, the pre-DRA FUL, the weighted AMP FUL, th e weighted AMP multiplied by 175 percent FUL, and IN’s SMAC to get the aggregat e limit for each drug group based on each formula used to calculate the FUL. We chos e 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 Me dicaid Policy and Planning reviews the SMAC rates on an ongoing basis, and adjusts the rate s as necessary to reflect prevailing market conditions and ensure reasonable access by provide rs to drugs at or below the applicable SMAC rate. Currently, IN adjusts their av erage 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 FU L is generated on a monthly basis, the estimated aggregate lim it is calculated for each month using the quarterly utilization data aver aged out by the 3 months. Th is calculation was done for all four quarters of fiscal year 2009, which was th en aggregated to get the fiscal year 2009CMS-2345-P 118
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 equivale nt drug products.

<PHOTO>CMS-2345-P 119CMS-2345-P 120</PHOTO>Footnotes:1. Each FUL group is established based onthe DRA criteria that if all formulations ofa multiple source drug are identified asA-rated in the FDA’s most current edition of“Approved Drug Products with Therapeutic Equivalence Evaluations” (including supplements or in successor publications), then there must be at least 2 A-rated versionsof the drug.2. I is for innovator multiple source drug and N is for noninnovator multiple source drug.3. Calculations excluded drug products that were not therapeutically equivalent, had NDCs with AMP not reported, and NDCs withzero utilization. Additionally,calculation of each formula is based on theavailability of three or more suppliers atthe NDC-9 level andtwo different product codes are considered as two differentsuppliers.4 DRA AMP-based FUL is based on the DRA criteria to calculate FUL, which included the availability of two suppliers and included a 40% outlier.5. Pre-DRA FUL is based on FUL issued by CMS on September 25, 2009.6. States' utilization data are used to calculate weighted AMP(WAMP) and the estimated aggregate limit: FY 1Q09 = 3Q08 Utilization, FY 2Q09 = 4Q08 Utilization, FY3Q 2Q09 = 1Q09 Utilization, and FY 4Q09 = 2Q09 Utilization. AnNDC is excluded if there is no utilization on that NDC.7. Indiana State Maximum Allowable Cost effective as of October 23, 2009 was obtained from Indiana Pharmacy website,http://www.indianamedicaid.com/ihcp/PharmacyServices/list.asp. Please note that when making the determination for their State MAC, IN does not use innovatormultiple source drugs.CMS-2345-P 121

In a recent report issued by the Gove rnment Accountability Office (GAO) “Medicaid Outpatient Prescription Drugs: Es timated Changes to Federal Upper Limits Using the Formula under the Patient Protec tion and Affordable Care Act” (GAO-11- 141R), the GAO found that Affordable Care Ac t FULs were higher than the undiscounted average retail pharmacy acquisiti on 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 expenditu res on these drugs by 60 percent. Furthermore, the GAO stated that the Af fordable 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 repor t. The GAO stated that the acquisition cost data the GAO us ed do not include rebates pa id by manufacturers to retail pharmacies. If included, any applicable reba tes would have reduced the average retail acquisition costs for the drugs in the 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 ac quisition costs by even greater than 35 percent. Therefore, based in part on the finding s 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.CMS-2345-P 122

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 describe d above, we have decided to calculate the FUL at 175 percent. Using any percentage gr eater 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 reimbur sement that is just slightly higher than Indiana’s SMAC which is based on actual pha rmacy acquisition data and is consistent with the GAO’s findings that thes e levels are generally in ex cess of the actual acquisition cost of the drug. Because it is virtually im possible 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 reimburseme nt 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 re mains under the aggregate upper limit. Thus, using a factor of 175 percent of weighted monthly AMPs should yield adequate reimbursement for pharmacy provide rs, while achieving cost savings for the Medicaid program compared to pre-DRA FULs. <HD2>L. FULs Smoothing Process As discussed previously, s ection 2503(a) of the Afford able 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 be ing utilized by manufact urers is uniform and consistent with statutory requirements, as was discussed in Manufacturer Release #83, aCMS-2345-P 123
manufacturer should estimate the impact of its lagged price concessions using a 12-month rolling percentage to estimate the value of t hose discounts. This guidance is restated in the preamble language of this proposed ru le and would be codified in proposed regulatory text at §447.510(d)(2). We also considered whether to implem ent a further smoothing process applicable to the FUL calculation. While the statute re quires 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 website, 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 recentl y 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 per cent 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 th e result by 175 percent to calculate the FUL;

● After calculating the FUL as the wei ghted average of monthly AMPs in a FUL product group, calculate the mean of the FU Ls for each product group over a specificCMS-2345-P 124
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 per cent change is greater than a certain percentage when compared to the last ma nufacturer reported and certified monthly AMP;

● Increasing the calculated FUL by a certain percentage if the FUL is less than a certain percentage fr om the last FUL;

● Calculating the FUL using only m onthly 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 weight ed average of AMPs for an entire FUL Product Group over a specific pe riod of time; for example, three months; and/or,

● Excluding monthly AMPs that are higher or lower th an the standard deviation of the mean of all the monthly AM Ps 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 exampl e, it could require that for the entire averaging period, all manufact urers have timely reported monthly AMP and AMP units or that we look at alternatives to that. Furt her, it would require us to look at how to add newly available generic drugs or other change s 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,CMS-2345-P 125
it could cause a FUL for a particular FUL gr oup to be lower than if we use only one month of AMP data in the calculation depe nding on the reported and certified monthly AMP and AMP units over the averaging pe riod. As such, it may not capture price increases in a drug or refl ect 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 ha ve 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 distri buted to retail comm unity pharmacies and by retail community pharmacies that purchase dr ugs directly from th e manufacturer, they are subject to some fluctuations and vari ances in the generic drug market, which may result in fluctuations in the AMP-based FU L 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 manuf acturers are presently using for AMP calculations. As previously mentioned, pric e changes can occur as a result of product shortages, manufacturing disruptions, seas onal supply and demand, and products with a short shelf life. We are inviting comments on this issue, including th e benefit of such a process, the options we considered, options we have not considered, and whether a smoothing process is necessary. <HD2>M. State plan requirements, findings, and assurances (§447.518) In the Medicaid Program; Withdrawal of Determination of Average Manufacturer Price, Multiple Source Drug Definition, and Upper Limits for Multiple Source Drugs final rule published in the November 15, 2010 Federal Register (75 FR 69591), we made conforming amendments which delete d references to §447.514 “Upper limits forCMS-2345-P 126
multiple source drugs” from §447.518 “State plan requirements, findings and assurances”. We are propos ing conforming regulatory amendments to those references and are adding them in the regulatory text of §447.518. In addition, to conform with the change from “estim ated acquisition cost” to “actual acquisition cost”, we propose in §447.518(c) to require all States to provide data to adequately support proposed changes in reimbursement using AAC. This supporting data could include, but is not limited to, a national survey, to create a database of actual acquisition costs that States may use as a ba sis 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 acqui re 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 de velop an appropriate ingredient cost reimbursement is reasonable. Alternatively, th e 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, whic h covers the cost of distribution and other service charges by the wholesaler, to determ ine a reasonable reimbursement that would appropriately compensate pharmacies for these costs. We are inviting comments on the practical ity 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 reim bursement rates they propose in their SPA, including the use of acquisi tion cost averaging, AMPs as a basis for reimbursement,CMS-2345-P 127
including the applicat ion of an appropriate markup factor or other methods of determining the ingredient cost. Although we considered various alternativ es 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 Pr ogram and the Federal Supply Schedule (FSS) we are not proposing specific methodologies. Through these programs, certain Federal grantees and others can purchase drugs at si gnificant discounts, and these drugs will then be reimbursed through the State Medicaid progr am for Medicaid beneficiaries. Under current HRSA policy, participating covered entities are permitted to dispense drugs purchased outside of 340B authority for thei r 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 disc ounts under the 340B Drug Pricing Program and a Medicaid rebate in order to protect drug manufacturers fr om paying a Medicaid rebate on drugs that are already subject to a Fe deral discount. This “duplicate discount” prohibition in the Medicaid statute only a pplies to drugs purchased through the 340B Drug Pricing Program and does not apply to drugs carved out for Me dicaid patients and billed to the Me dicaid program. In a recent OIG report, “State Medicaid Po licies and Oversight Activities Related to 340B-Purchased Drugs”, OEI-05-00321, the OIG reported that many State Medicaid agencies have written policies that direct cove red 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 dire cting covered entities to refer to States’CMS-2345-P 128
policies). We believe that paying 340B pr oviders at cost for these 340B drugs would meet the AAC requirements but seek furt her comments on what other methodologies would meet the AAC requirements. IHS, tribal and urban Indian organiza tion pharmacies may purchase drugs through the FSS or the 340B program and are oftentim es paid the Medicaid reimbursement rates established in State plans. In turn, States are reimbursed at 100 percent Federal medical assistance percentage for services pr ovided 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 th ese facilities. In addition, pursuant to E.O. 13175 and the HHS Tribal Consultation Policy (Decembe r 2010), the CMS will consult with Tribal officials prior to the formal pr omulgation of this regulation. We propose that States that do not have specific methodologies develop such methodologies for these providers consistent w ith our proposed shift from EAC to AAC. In addition, we propose to add a new requireme nt at §447.518(a) that the State plan must describe the agency’s payment methodology for drugs dispensed by a covered entity participating in the 340B Drug Pricing Program or by a contract pharmacy under contract with a participati ng covered entity. In addition, States would be required to submit a SPA through the formal review process, as well as comply with all Fede ral requirements incl uding consultation with tribal governments and IHS, tr ibal and urban Indian program s pursuant to s ection 5006 of the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5), when submitting a request to change their prof essional dispensing fee. As is true for the drug ingredient reimbursement, we do not intend to mandate a specific formula or methodology whichCMS-2345-P 129
the States must use to determine their disp ensing fee, however, as is consistent with current policy, States would still be require d to substantiate how their dispensing fee reimbursement to pharmacy providers reasonabl y 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 warrant ed for these entities. One component of the reimbursement formula should not be re vised 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 part icipate in the Medicaid Program are already required to submit changes to their Stat e 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 Dist rict of Columbia. <HD2>N. Optional coverage of investigational drugs and other drugs not subject to rebate (§447.522) Investigational drugs, also referred to as experimental drugs, do not fall within the definition of covered outpatient drugs set fort h 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 s ection 1903(i) of the Act and §440.120.CMS-2345-P 130
There are a number of other items that may also be covered as prescribed drugs or products under section 1905(a)(12) of th e Act, such as whole blood products. We propose to add §447.522 to clarify th at States providing coverage of investigational drugs may only pay for and r eceive FFP for these drugs when they are billed for in accordance with the FDA fina l rules 21 CFR Part 312 and 316, as amended by the final rules publishe d in the August 13, 2009 Federal Register (“Charging for Investigational Drugs Under and Investiga tional 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 fo rth 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 provis ion to allow for the coverage of other non-covered outpatient drugs. <HD1>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 collecti on and its usefulness in carrying out the proper functions of our agency.

● The accuracy of our estimate of the information collection burden.CMS-2345-P 131

● The quality, utility, and clarity of the information to be collected.

● Recommendations to minimize the information collection burden on the affected public, including auto mated 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): <HD2>A. ICR's Regarding Medicaid Drug Rebates (§447.509) As discussed earlier in the preamble, sect ion 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 disp ensed to individuals eligible for medical assistance under Title XIX of the Act who ar e enrolled with a Medicaid MCO shall be subject to the same rebate required by the rebate agreement authorized under section 1927 of the Act. Proposed §447.509(b) adds requir ements for States to collect necessary drug utilization data from Medicaid MCOs in order to include MCO da ta in the quarterly rebate requests. We estimate that these requirements would affect the 51 State Medicaid Programs, as well as the territories. The burde n associated with the inclusion of Medicaid MCOs in the Drug Rebate Program is the ti me and effort it would take for the State Medicaid Program to gather the drug utiliz ation 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 th e invoice and State utilization data reporting within the MD R 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.CMS-2345-P 132
As referenced in §447.509(b) and §447.511, we believe the collection of drug utilization data from MCOs and the subseque nt inclusion of said data in the State’s quarterly rebate request to the manufacturer s will add a total 678 hours per quarter or 2,712 hours annually to the current reporting burden for the Stat es (which include the 50 States, District of Columbia, and the territo ries). Therefore, the total new reporting burden, as a result of this proposed rule requesting additional requirements to collect drug utilization data from MCOs, will be 2,712 hours annually at a total estimated cost of $98,744. The aforementioned burden estimates will be submitted for OMB review and approval as a revision to the information collection request currently approved under OMB control number 0938-0582. Proposed §447.509(c) would also require States to remit to the Federal government the amount of the savings resul ting from the increases in the rebate percentages. The reporting pr ocess is similar to the curr ent reporting process for drug expenditures and rebates onto the CMS-64 Form . In addition to reporting onto the CMS64 Form the quarterly amount for prescribed drug expenditures, Federal rebates, and rebates under State side bar agreements, States will report the total quart erly rebate offset amount that they are remitting to the Federa l 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 in formation collection requirements and burden associated with CMS–64 are already appr oved by OMB through April 30, 2014, and have been assigned OMB control number 0938–0067. Th is proposed rule does not impose any new or revised burden or reporting or r ecordkeeping requirements concerning CMS–64. <HD2>B. ICR's Regarding Requirements for Manufacturers (§447.510)CMS-2345-P 133
Manufacturers must report, electroni cally, product and quarterly pricing information to CMS not later than 30 days after the end of the re bate 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 th e definitions of AMP and best price and, therefore, would require the manufacturers to reconfigure their pricing systems to correctly calculate AMP and be st price. In addition, manuf acturers must submit the total number of units that are us ed to calculate the monthly AMP. Therefore, the burden associated with these new requirements is th e time and effort it would take for a drug manufacturer to reconfigure it s 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 manufact urers in the Medicaid Rebate Program. We believe the changes to the AMP and best price definitions will require 240 hours 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 pr icing 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 manu facturer must submit evidence demonstrating that the product is otherwise a covered outpatient drug. CMS shall refer to this evidence of demonstration as covered outpatien t drug status, or COD status. This information should not be difficult for the manufacturer to determine since the manufacturer should alrea dy know the FDA application nu mber of the product when it was approved by FDA, or the reason it qualifie s as a covered outpati ent drug, if there isCMS-2345-P 134
no application number. We estimate that these requirements would affect approximately 600 drug manufacturers that participate in the Me dicaid Drug Rebate Program. The burden associated with the reporting of the FDA a pplication 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 applicati on number and the COD status will require a one-time total of 3,000 hours at a one-time tota l estimated burden cost of $180,000. Manufacturers will also be required to id entify drugs that are approved by the FDA exclusively for pediatric indications. These drugs will be referred by CMS as “Exclusively Pediatric” drugs. This informa tion should not be diffi cult for manufacturers to determine and therefore would not a dd any significant hou rly burden since the exclusively for pediatric indications will be provided by the FDA upon approval of these drugs. Additionally, manufacturers wi ll need to consider certain requirements when it comes to the calculation of their AMP for i nhalation, infusion, instilled, implanted, and injectable drugs (5i), when not generally di spensed 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 manufactur ers 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 dr ug 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 propos ed earlier in this rule. However,CMS-2345-P 135
it is our understanding that each drug manufacturer should have some knowledge as to which drug is a 5i based on the approval info rmation the manufacturer received from the FDA as well as the FDA Route of Administra tion 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 ba sis, to determine which of those drugs are not generally dispensed through a retail community pharmac y. Therefore, we be lieve 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 estim ated burden cost of $90,000. In addition, on both a monthly and quarter ly basis (12 months, plus 4 quarters, for a total of 16 times per year) the manufact urer will be required to determine whether the percentage of sales for the 5i drugs ha s 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 re sponses per year for each manufacturer to identify which 5i drugs are not genera lly dispensed through a retail community pharmacy. This equates to a total estima te of 320 additional hours annually per manufacturer. The total annual burde n hours for the 600 drug manufacturers participating in the Medicaid Rebate Progr am is estimated to be 192,000 hours with a total cost of $11,520,000. Furthermore, manufacturers participati ng in the rebate program that have reformulated drugs are now required to calcu late an alternative rebate calculation for certain drugs. In order to calculate the alte rnative 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 identifie d. Although CMS will be identifying both the initial brand name listed drug and the line exte nsion drug for the initial three quarters forCMS-2345-P 136
manufacturers, they will be responsible for identifying the initial brand name listed drug and the line extension drug afte r 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 Me dicaid 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 fo r 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 we ll as the Chemical Type that CMS has identified as a line extension drug and the in itial brand name listed drug. Therefore, we believe that the new reporti ng requirements to identify the initial brand name listed drug and the line extension drug would add 20 addi tional hours per quarter, per manufacturer; or 48,000 total hours annually to the drug manu facturers 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 us ual and customary business practice as defined in 5 CFR 1320.3(b)(2) and, therefore, the asso ciated 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. <HD2>C. ICR's Regarding Requi rements for States (§447.511)CMS-2345-P 137

The definition of the term “States” would be revised to include the territories: the Commonwealth of Puerto Rico, the Virgin Is lands, Guam, the Northern Mariana Islands and American Samoa, in addition to the 50 St ates and the District of Columbia. The territories will able to receive manufactur er rebates through the MDR program in the same manner that the 50 States and the Dist rict of Columbia are currently receiving rebates. In order for territories to be able to begin collecting rebates from the manufacturers, the territories will be requi red to come into compliance with the MDR program because the systems that the territori es currently have are not setup for the MDR program. As a result, these territories will like ly have to utilize contractors in order to ensure that their systems are in place to begin to collect rebates from manufacturers. We are unsure what the time, effort and cost w ould 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 bur den associated with CMS–64 are already approved by OMB through April 30, 2014, and ha ve 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.CMS-2345-P 138TABLE 5: Annual Recordkeeping and Reporting RequirementsRegulationSection(s)OMBControlNo.Respondents ResponsesBurdenperResponse(hours)TotalAnnualBurden(hours)HourlyLaborCost ofReporting($)TotalLaborCost ofReporting($)TotalCapital/MaintenanceCosts ($)Total Cost($)§447.509(b),§447.5110938-0582* 56 224 12.12,71236.4198,744098,744§447.510 0938-0578* 600 600 240144,000608,640,00008,640,000§447.510 0938-0578* 600 600 5 3,000 60 180,000 0 180,000§447.510 0938-0578* 600 600 2.5 1,500 60 90,000 0 90,000§447.510 0938-0578* 600 9600 20 192,000 60 11,520,000 0 11,520,000§447.510 0938-0578* 600 2400 20 48,000 60 2,880,000 0 2,880,000Total 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 OMBcontrol numbers listed. The table does not display the currently approved burden for the listed OMB control numbers.CMS-2345-P 139 We have submitted a copy of this proposed rule to the OMB for its review of information collection and recordkeeping. Thes e requirements are not effective until they have been approved by the OMB. If you comment on these information colle ction 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 <HD1>IV. Response to Comments Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowle dge or respond to them individually. We will consider all comments we receive by th e date and time specified in the "DATES" section of this preamble, and, when we pr oceed with a subsequent document, we will respond to the comments in the preamble to that document. <HD1>V. Economic Analyses <HD2>A. Regulatory Impact Analysis <HD3>1. Introduction We have examined the impacts of this rule as required by Executive Order 12866CMS-2345-P 140 on Regulatory Planning and Review (Sep tember 30, 1993), Executive Order 13563 on Improving Regulation and Re gulatory 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 Re form 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 agenci es to assess all costs and benefits of available regulatory alterna tives and, if regulation is n ecessary, to select regulatory approaches that maximize net benefits (inc luding potential economi c, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both co sts and benefits, of reducing costs, of harmonizing rules, and of promoting flexibil ity. This rule has been designated an "economically" significant rule, under s ection 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. <HD3>2. Statement of Need This proposed rule would implement cha nges 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 250 1, 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 andCMS-2345-P 141 Education Reconciliation Act of 2010 (H CERA) (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 cert ain regulatory provision s presently codified at 42 CFR part 447, subpart I and make other changes. <HD3>3. Overall Impacts Overall, we estimate this rule would sa ve approximately $17.7 billion for Federal Fiscal Years (FFYs) 2010 through 2014, reflect ing $13.7 billion in Fe deral savings and $4.0 billion in State savings, as shown in th e Table 6. These impact estimates represent the increased percentages of rebates on generic and brand na me drugs, the treatment of new formulations, the change in the maximu m rebate amounts, the extension of rebate collection for Medicaid managed care organiza tions, and provides for adequate pharmacy reimbursement. Lastly, we estimate costs to MCOs, drug manufacturer s, 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.CMS-2345-P 142Table 6: STATE AND FEDERAL SAVINGS (-) OR COSTS (+)(FFYs 2010-2014)[In $Millions]7Affordable Care Act Section and Provision20102011201220132014Total2010-2014Section 2501 (a)(1) - Increaseminimum rebate percentages forbrand name drugsFederalState-$350$0-$730$0-$765$0-$810$0-$865$0-$3,520$0Section 2501(a)(2)-Recapture oftotal savingsFederalStateIncluded with affected provisionsSection 2501 (b) - Increaserebate percentages for genericdrugsFederalState-$30$0-$50$0-$55$-0-$55$0-$65$0-$255$0Section 2501 (c) - extension ofcollection of rebates for MCOsFederalState-$580-$280-$720-$490-$720-$560-$770-$580-$820-$620-$3,610-$2,530Section 2501 (d) - Rebates newformulation drugsFederalState-$160$0-$345$0-$360$0-$380$0-$400$0-$1,645$0Section 2501(e) –Maximumrebate amountFederalState$30$20$40$30$40$30$40$30$50$30$200$140*Section 2503 - Providingadequate pharmacyFederalState$0$0-$351-$234-$702-$468-$702-$468-$702-$468-$2,457-$1,638**InteractionsFederalState-$310$0-$420$0-$440$0-$510$0-$700-$5-$2,380-$5Total Impact FederalState-$1,400-$260-$2,576-$694-$3,002-$998-$3,187-$1,018-$3,502-$1,063-$13,667-$4,033Total Federal & State Impacts-$1,660-$3,270-$4,000-$4,205-$4,565-$17,7007 Except as noted below, savings estimates were developed by the Office of the Actuary (OACT) and the Center for Medicaid, CHIPand Survey & Certification(CMCS) at CMS and are consistent withthe President’s FY 2012 budget baseline.CMS-2345-P 143(*The estimates for section 2503 were developed by CMS. An alternative methodology discussed below produces a 5-year cost toStates and Federalgovernment of $1.7 billion explained in the alternativesconsidered section of the Regulatory Impact Analysis).)(** These are interactions among drug provisions and the interaction of drug provisions with Medicaid expansion)TABLE 7: Costs to MCOs, Drug Manufacturers, and States(FFYs 2010-2014)(In $Millions)TotalProvision(s)RegulationSection(s)2010 2011 2012 2013 2014(FFYs 2010-2014)Drug Rebates forMedicaid MCOs§447.509(b),§447.511$0.1 $0.1 $0.1 $0.1 $0.1 $0.49Requirements formanufacturers§447.510 $23.3 $14.4 $14.4 $14.4 $14.4 $80.91Total Costs$23.4 $14.5 $14.5 $14.5 $14.5 $81.4CMS-2345-P 144
<HD3>4. Detailed Economic Analysis All savings estimates provided were de veloped by the Office of the Actuary (OACT) and the Center for Medicaid, CHIP and Survey & Certification (CMCS) at CMS. We note that the Congressional B udget Office (CBO), in its estimates of the budgetary effects of these provisions of th e 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 Fe deral 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 Affo rdable Care Act reflect increased rebate percentages for generic and br and 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 us ed to reflect each provision’s savings estimates. The estimates for section 2501(a)(1) of th e Affordable Care were derived from baseline Medicaid prescription drug rebates developed for th e mid-session review (MSR) of the FY 2010 budget. Data from the MDR sy stem 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 w ith and without the 15.1 percent minimum. The dist ribution was then used to calculate the mean rebate

8 http://www.cbo.gov/ftpdocs/113 xx/doc11379/AmendReconProp.pdfCMS-2345-P 145
percentage taking into account the new minimums specified in section 2501(a) of the Affordable Care Act. These percentages we re 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 th e part of manufacturers to minimize the impact of the higher rebate pa yments (for example, by raising prices). The estimate for section 2501(a)(2) of the Af fordable 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 savi ngs of those subsections. The impact of section 2501(b) of the A ffordable Care Act was estimated using MDR data to estimate the share of baselin e Medicaid drug rebates attributable to non-innovator, multiple source drugs. Incr easing 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 pr emiums were developed as part of the MSR 2010 Medicaid baseline. The estimated imp act represents two different effects of this section. First, curre nt prescription drug spending by Medicaid managed care plans would receive additional rebates. Estimates for (1) the portion of managed care plan expenditures going to rebates and (2) the le vel of additional reba tes 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) theCMS-2345-P 146

increased administrative cost s by including additional expe nditures under managed care plans. It was also assumed that 10 percen t of current fee-for-service drug spending would eventually shift to Me dicaid managed care plans. About 75 percent of the savings to the Fe deral 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 prescripti on drug spending into managed care plans. The impact for section 2501(d) of the A ffordable Care Act utilized MDR data and focused on new formulations that are extende d-release forms of the initial brand name listed drug. The analysis concluded that by ca lculating the additional rebate, based on the initial brand name listed drug, Medicaid reba tes would increase by about 5 percent. A behavioral offset of 15 percent wa s applied to thes e 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 pe rcent of total Medicaid rebates. The estimate for FULs under section 2503 wa s developed by calculating the FUL based on weighted AMP times 175 percent, including (I) innovator and (N) noninnovator drugs, for the purpose of savings and providing adequate reimbursement to pharmacy providers. a. Anticipated Effects on Drug Manufacturers As previously indicated in the Collecti on of Information there are approximately 600 drug manufacturers that participate in the Medicaid Drug Rebate program. The rule would require all drug manufacturers to prov ide an increased rebate percentage forCMS-2345-P 147
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 prev iously 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 Statisti cs (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 th e product does not currently have an FDA application number, the manuf acturer must provide a dem onstration 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 a nd 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 th e 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 ofCMS-2345-P 148
1,500 burden hours to identify thes e 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. Furthermor e, we believe that it will require all manufacturers to spend 192,000 total hours annua lly in identifying which drugs fall into the 5i category. The estimated cost to the la belers for this addition is $11.5 million. This is also based on the average BLS wage rate of $60 an hour for this function. More information on manufacturer requirements can be found in §447.510 of this proposed rule. Lastly, we believe that the initial identification of the initial brand name listed drug and the line extension would also add an additional 48,000 annual hours to identify which drugs with the extension qualify. The estimated additiona l cost to labelers for this addition is also $2.9 million. This figure is al so based on the average BLS wage rate of $60 an hour for this function. Additional information can be found in section §447.510 of this proposed rule. b. Anticipated Effects on Retail Community Pharmacies Retail community pharmacies would be aff ected by this regulation, as the law will result in FULs that are closer to the acqui sition 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 reimburseme nt 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 preDRA highly inflated FULs and, thereby, redu ce Medicaid payment for drugs subject to the limits. However, we note that since St ates had the option to reimburse at theirCMS-2345-P 149
SMAC, instead of the pre-DRA FUL, the ac tual reimbursement to the pharmacies under the Affordable Care Act FUL may be more co mpared to that SMAC reimbursement. An example of this is exemplified in compari ng the pre-DRA FUL, the Affordable Care Act FUL and Indiana’s SMAC, as explained the pr eamble of §447.514 of this proposed rule. However, other than the comparison ch art provided in §447.514 of this proposed rule, we have not analyzed how each Stat e’s MAC program would impact the total savings under the new Affordable Care Ac t 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 reimbu rsement for retail community pharmacies. Although there are savings to the Medicaid pr ogram 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 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 in creased rebate amounts under the Affordable Care Act. State administ rative 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 rebateCMS-2345-P 150
agreement, manufacturers may reduce rebates they pay to States through supplemental rebate agreements. While this potential lo ss of supplemental rebates is not a direct consequence of this proposed rule, we recognize that this may occur. The interactions of the drug provisions with the Medicaid expansion in the Affordable Care Act will provide States a savings of $5 million in FFY 2014. More information can be found in §447.509(c) and §447.511 of this proposed rule. d. Anticipated Effects on U.S. Territories The definition of the term “States” would be revised to include the territories: the Commonwealth of Puerto Rico, the Virgin Is lands, Guam, the Northern Mariana Islands and American Samoa, in addition to the 50 St ates and the District of Columbia. The territories will be able to receive manufact urer rebates through the MDR program in the same manner that the 50 States and the Dist rict of Columbia ar e currently receiving rebates. In order for territories to be able to begin collecting rebates from the manufacturers, the territories will be requi red to come into compliance with the MDR program because the systems that the territori es currently have are not setup for the MDR program. As a result, these territories will like ly 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 comp liance process to be completed and solicit comment specific to this issue. <HD3>5. Alternatives Considered We considered a number of different policies and approaches during the development of this proposed rule. As mentioned in the Determination of AMP §447.504, the goal of the AffordableCMS-2345-P 151
Care Act is to capture the AMP for those dr ugs that would be difficult for manufacturers to calculate an AMP based on only retail co mmunity pharmacy sales. Therefore, to eliminate any problems that may result from a manufacturer not able to determine an AMP for a particular drug, Congress amende d 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 th e five aforementioned. Also, we looked at Medicare Part B drugs and considered usi ng their list to define these drugs. Though, when speaking with our counterparts in Me dicare Part B, the ASP NDC-HCPCS covered drugs that are usually not self administered we re not all inclusive. In addition to using the Medicare Part B list, we also consider ed whether CMS or ma nufacturers would be responsible for defining which drugs would fall into this category. Additionally, we considered using the FDAs dosage forms a nd 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 woul d identify which drugs would fall within the parameters of the five aforementioned drugs . Then, they would need to determine if the drug is “not generally dispensed” through a retail community pharmacy. (See §447.504 to learn more about the alternatives considered in developing AMP policy). With regard to the offset of the increas ed 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 a nd 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 be st price. However, after carefulCMS-2345-P 152
consideration of the provisi on in 2501 of the Affordable Care Act, we propose to calculate the offset amount to reflect re bates 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 th e new alternative rebate calculation is more aligned the statute. We also considered determining whethe r 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 pri ce, 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 percen t of total Medicaid drug spending) was applied to projected Me dicaid prescription drug spending developed for the mid-session review of the FY 2010 Budg et, resulting in a fi ve year Federal and State cost of $1.7 billion for the Affordable Care Act FULs compared to the DRA FULs. However, this alternative doe s not take into account a St ate’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 unpublis hed FULs and not repr esentative of actual reimbursement. We solicit comment on the Alternatives Considered section. <HD3>6. Accounting Statement and TableCMS-2345-P 153
As required by OMB’s Circul ar A-4 (available at http://www.whitehouse.gov/om b/circulars/a004/a-4.pdf ), in the Table 8 we have prepared an accounting statement showing the classificat ion 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 incr ease 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, Dr ug Manufacturers, and States.CMS-2345-P 154

Table 8: Accounting Statement: Classi fication 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% Primary Estimate -$2,667.5 -$2,704.8 FFYs 2010- 2014
From/To Reduction in transfers from the Fede ral Government to State Governments. Category TRANSFERS Year Dollar Discount Rate Period Covered
2011 7% 3% Annualized Monetized Transfers Primary Estimate -$780.0 -$795.1 FFYs 2010- 2014

From/To Reduction in transfers from the State G overnments to Retail Pharmacies and increased transfers from Drug Manuf acturers to State Governments.

Category COSTS Year Dollar Units Discount Rate Period Covered 2011 7% 3% Annualized Monetized Transfers Primary Estimate $16.5 $16.4 FFYs 2010-2014 Costs to MCOs, Drug Manufacturers, and States

<HD3>7. Conclusion We estimate savings from this regula tion of $17.7 billion over 5 years, $13.7 billion to the Federal government and $4.0 billi on to the States. Mo st of these savings result from the increased rebate percentage s on brand name drugs and the offsets of the total savings of the increased rebate percen tage, treatment of new formulations, and from the collection of rebates from enrollees of MCOs. Lastly, we estimate costs to MCOs,CMS-2345-P 155
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. <HD2>B. Regulatory Flexibility Act Analysis The RFA requires agencies to analyze options for regulatory relief of small entities, if a rule has a signi ficant impact on a substantial nu mber of small entities. For purposes of the RFA, small entities include small businesses, non-profit organizations, and small governmental jurisdictions. Indivi duals 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 manufacturer s participating in the Medicaid Drug Rebate Program, and small Medicaid mana ged care organizations (MCOs). More detailed analysis on the impact of these en tities is provided in the Detailed Economic Analysis section (V.A.4) above. The great ma jority of hospitals and most other health care providers and suppliers are small entitie s, either by being nonpr ofit organizations or by meeting the Small Business Administrati on’s (SBA) definition of a small business (having revenues of less than $7.0 million to $34.5 million in any one year).CMS-2345-P 156
TABLE 9: Impact on Small Entities Small Entity Type Number of Entities Impact (FFYs 2010-2014)
Pharmaceutical Manufacturers in Medicaid Drug Rebate Program 600 Decrease in revenue of $5.4 billion as a result of higher rebates over 5 years. Small Retail Community Pharmacies 17,069 Minimal impact Small Rural Hospitals 700 Minimal impact Small (HMOs/MCOs) Health Maintenance Organizations/Managed care organizations *118 Decrease in revenue of $6.1 billion over 5 years

(*Figure may reflect overestimation relative to overall MCOs.)
For purposes of the RFA, most of the retail pharmacies are considered small businesses according to the SBA’s size stan dards with total revenues of $25.5 million or less in any 1 year ( http://ecfr.gpoaccess.gov/cgi/t/text/textidx?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. Thes e pharmacies would be affected by this regulation as the law will result in lower FU Ls for most drugs subject to the payment limits, thus reducing Medicaid payments to ph armacies 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 li mits. The savings for section 2503 of the Affordable Care Act reflect this statut ory change. Beginning September 2011, the publication of AWP by First Da tabank would in all likeli hood cease; therefore, CMS proposes to replace the term “estimated acqui sition 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 prov iders with a comparable dispensing fee as mentioned in §447.502 of this proposed rule. Th ere will be a savings for States and theCMS-2345-P 157
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, dr ug manufacturers are considered small businesses if they have fewer than 750 employees ( http://ecfr.gpoaccess .gov/cgi/t/text/textidx?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 Pr ogram. We believe mo st manufacturers are small businesses. We anticipate this ru le 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 manufactur ers participating in the Medicaid Drug Rebate program to increase the rebate pe rcentages that they are currently paying. Manufacturers are required by the Affordable Ca re Act to pay the increased percentages. The savings for sections 2501( a)(1), 2501(b) and 2501(d) refl ect 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 milli on or less in any one year ( http://ecfr.gpoaccess.gov/cgi/t/text/textidx?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 th is threshold. Because of limited data available, we are unable to quantify how ma ny MCOs fall within the HMO standard and meet the $10 million threshold. We do conte nd that only a small portion of the small MCOs meet this standard. We request any information that may help us better estimateCMS-2345-P 158
the portion of MCOs that meet the SBA sta ndard. The small Medicaid MCOs may be affected by this rule if manufacturers reduce re bate payments to them to any extent that these rebates are paid to the States but thes e 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 nu mber 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 remainde r 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 opera tions 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 th e Act, we define a small rural hospital as a hospital that is located outside of a metr opolitan 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 fr om MCOs including NDCs for physician administered drugs. The national cost of this provision would be estimated at $580 million for FY 2010. However, the imp act on these entities would be minimal because there would be no other requirem ent 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 s ubstantial 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 areCMS-2345-P 159
high concentrations of Medicaid beneficiaries. We request any information that may help us better asses those effects before we make final decisions. <HD2>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 i ssuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. In 2011, that threshol d is approximately $136 million. We expect this proposed rule would impose additional costs to manufacturer s, whereas it would likely increase savings for States and the Fe deral 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 ru le will have tribal implications, and in accordance with E.O. 13175 and the HHS Trib al 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 manu facturers. 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 manufacturer s, total over $11.2 bill ion dollars over the next 5 years. <HD1>VI. Federalism Analysis Executive Order 13132 establishes certain requ irements that an agency must meet when it promulgates a proposed rule (and subseq uent final rule) that imposes substantial direct requirement costs on State and local gov ernments, preempts State law, or otherwise has Federalism implications. This proposed rule does not impose substantial direct requirement costs on State or local governme nts, preempts State law, or otherwise has Federalism implications.CMS-2345-P 160
<LSTSUB><HED>List of Subjects in 42 CFR Part 447 Accounting, Administrative practice a nd procedure, Drugs, Grant programshealth, Health facilities, Health profe ssions, Medicaid, Reporting and recordkeeping requirements, Rural areas. </LSTSUB>CMS-2345-P 161
For the reasons set forth in the prea mble, the Centers for Medicare & Medicaid Services proposes to amend 42 CFR chapter IV as set forth below:
<PART><HED>PART 447—PAYMENTS FOR SERVICES 1. The authority citation for part 447 continues to read as follows:
<AUTH><HED> Authority :<P> Sec. 1102 of the Social Security Act (42 U.S.C. 1302). 2. Subpart I is revised to read as follows: <CONTENTS><SUBPART><HED>Subpa rt 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.CMS-2345-P 162
447.522 Optional coverage of investigational drugs and other drugs not subject to rebate.</CONTENTS> <SUBPART><HED>Subpart I—-Payment for Drugs §447.500 Basis and purpose. (a) Basis . This subpart-- (1) Interprets those provisions of section 1927 of the Act that set forth requirements for drug manufacturers’ calcu lating and reporting average manufacturer prices (AMPs) and best pri ces 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 expenditure s for certain physician-administered drugs. (3) Implements section 1902(a)(54) of th e Act with regard to a State plan that provides covered outpatient drugs. (4) Implements section 1903(m)(2)(A)(xii i) 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 w ho are enrolled in Me dicaid 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 re quirements in the Social Security Act, including changes from the Affordable Care Act and other requirements pertaining to Medicaid payment for drugs. §447.502 Definitions. For the purpose of this subpart, the following definitions apply:CMS-2345-P 163
5i drug means an inhalation, infusion, instille d, implanted, or injectable drug that is not generally dispensed th rough a retail community pharmacy. Actual acquisition cost (AAC) means the agency’s determination of the pharmacy providers’ actual prices paid to acquire dr ug 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 manufact urer to wholesalers or retail community pharmacies; that represents fair ma rket value for a bona fide, itemized service actually performed on behalf of the manufacturer that the manufacturer would otherwise perform (or contract for) in th e absence of the service arrangement; and that is not passed on in whole or in part to a clie nt or customer of an entity, whether or not the entity takes title to the drug. The fee in cludes, but is not limited t o, distribution service fees, inventory management fees, product stocking allowances, an d fees associated with administrative service agreements and pa tient 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 regardle ss of physical packaging under which the rebate, discount, or other price concession is conditi oned upon the purchase of the same drug, drugs of different types (tha t is, at the nine-dig it National Drug CodeCMS-2345-P 164
(NDC) level) or another produc t or some other performance requirement (for example, the achievement of market sh are, inclusion or tier placement on a formulary), or where the resulting discounts or other price conce ssions are greater than those which would have been available had the bundled drugs b een purchased separately or outside the bundled arrangement. (1) The discounts in a bundled sale, incl uding 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 so ld under the bundled arrangement. (2) For bundled sales where multiple drugs are discounted, the aggregate value of all the discounts in the bundl ed arrangement must be propor tionally 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 th e Act and which is included on a list of such factors specified and updated regular ly 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:CMS-2345-P 165
(i) Is approved for safety and effect iveness 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 manufact urer 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, si milar, 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 th e 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 meani ng 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 an opportunity for a hearing under secti on 505(e) of the FFDCA. This provision specifies a proposed order of th e Secretary to withdraw appr oval of an application for such drug under section 505(e) of the FFDCA because the Secr etary 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 license d under section 351 of the PHSA to produce such product; or (v) Is insulin certified unde r section 506 of the FFDCA.CMS-2345-P 166
(2) A covered outpatient drug does not include any drug, biologic product, or insulin provided as part of or incident to a nd in the same setting as, any of the following services (and for which payment is made as pa rt of that service instead of as a direct reimbursement for the drug): (i) Inpatient Services; (ii) Hospice Services; (iii) Dental Services, except that drugs fo r which the State plan authorizes direct reimbursement to the dispensing de ntist 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 an d x-ray services; or (viii) Renal dialysis. (3) A covered outpatient drug does not include: (i) Any drug product, prescription or OT C, for which an NDC number is not required by the FDA; (ii) Any drug product that is not li sted electronically with the FDA; (iii) Any drug product for which a ma nufacturer has not submitted to CMS evidence to demonstrate that the drug product sa tisfies 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 produc ts that are not drugs.CMS-2345-P 167
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 timefram e 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 F DA, 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), produc t license approval (P LA), establishment license approval (ELA) or an tibiotic 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 a pproval 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 a pproved 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 sa lt, 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--CMS-2345-P 168
(1) Is engaged in the producti on, 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 chem ical synthesis; or (2) Is engaged in the packaging, repack aging, labeling, relabe ling, or distribution of covered outpatient drug products and is nota wholesale distributor of drugs or a retail pharmacy licensed under State law. (3) For authorized generic products, the te rm “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 on e 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 Un ited 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 p ackage code. For purposes of this subpart,CMS-2345-P 169
the NDC is considered to be an 11-digit code , unless otherwise specif ied 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 Secretar y or his or her design ee 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 mark eted under an abbreviated NDA or an abbreviated antibiotic drug application; (3) A covered outpatient drug that entere d the market before 1962 that was not originally marketed under an NDA; (4) Any drug that has not gone through an FDA approva l process, but otherwise meet the definition of covered outpatient drug; or (5) Any noninnovator drug th at is not therapeutically equivalent. (6) If any of the drug products listed in this definition of a noninnovator multiple source drug subsequently receives a ne w NDA or ANDA approval from the FDA, the manufacturer must change the reporting of th e 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 w ith the FDA regulation at 21 CFR 206.3 that defines solid oral dosage form.CMS-2345-P 170
Over-the-counter drug means a drug that is appropr iate 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. 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 Usag e” section of the FDA approved labeling. Professional dispensing fee means the professional fee which-- (1) Is incurred at the point of sale or se rvice and pays for costs in excess of the ingredient cost of a cove red 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 Me dicaid beneficiary. Pharmacy costs include, but are not limite d 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 lis t review activities, measurement or mixing of the covered outpatient drug, filling the c ontainer, beneficiary counseling, physically providing the completed prescription to the Medicaid beneficiar y, delivery, special packaging, and overhead associated with maintaining the facility and equipment necessary to operate the pharmacy; and (3) Does not include administ rative 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.CMS-2345-P 171
Single source drug means a covered outpatient drug th at 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 include s a covered outpatient drug approved under a biological license applicati on (BLA), product license appr oval (PLA), establishment license approval (ELA), or an tibiotic 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 a pproval 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 Is lands, 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 Vi rgin Islands, Guam, the Northern Mariana Islands and America Samoa). Wholesaler means a drug wholesaler that is e ngaged in wholesale distribution of prescription drugs to retail community pha rmacies, including but not limited to manufacturers, repackers, dist ributors, own-label di stributors, private- label distributors, jobbers, brokers, warehouses (including manufacturer’s a nd distributor’s warehouses, chain drug warehouses, and wholesale drug wa rehouses), independent wholesale drug traders, and retail community pharmacies that conduct wholesale distributions. §447.504 Determination of Average Manufacturer Price. (a) Definitions . For the purpose of this section, the following definitions apply:CMS-2345-P 172
Average Manufacturer Price (AMP) means, with respect to a covered outpatient drug of a manufacturer (inc luding 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 Stat es by wholesalers for drugs distributed to retail community pharmacies and retail co mmunity 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 w holesalers, and all other price reductions (other than rebates under s ection 1927 of the Act or pr ice reductions specifically excluded by statute or regulation) which re duce 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 medi cations to the general public at retail prices. Such term does not include a pharmacy that dispenses prescription medications to patients primarily through the mail, nursi ng home pharmacies, long-term care facilityCMS-2345-P 173
pharmacies, hospital pharmacies, clinics, ch aritable or not-for-profit pharmacies, government pharmacies, or pharmacy benefit managers. (b) Sales, nominal price sale s, discounts, rebates, paym ents, or other transactions included in AMP . Except for those sales, nominal price sales, rebates, discounts and other financial transactions identified in pa ragraph (c) of this section, AMP for covered outpatient drugs includes the following sa les, 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 sectio n 1927 of the Act or as otherwise specified in regul ations), payments, or other fi nancial transactions that are received by, paid by, or passed thro ugh to retail community pharmacies. (4) Sales, discounts, rebates (other th an rebates under sectio n 1927 of the Act or as otherwise specified in regul ations), payments, or other fi nancial transactions that are received by, paid by, or passed through to entities that condu ct 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 sale s, rebates, discounts, or other transactions excluded from AMP . AMP excludes the following sales, no minal 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 Af fairs (DVA), a State home receiving funds under 38 U.S.C. 1741, the Department of Defense (DoD), the P ublic Health Service (PHS), or a coveredCMS-2345-P 174
entity described in section 1927( a)(5)(B) of the Act (including inpatient prices charged to hospitals described in secti on 340B(a)(4)(L) of the PHSA). (2) Any prices charged under the Federa l 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. (5) Direct and indirect sales to hospitals. (6) Sales to health maintenance organi zations (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 facilitie s, contract pharmacies for the nursing facility where these sales can be identifi ed with adequate documentation, and other entities where the drugs are dispensed th rough a nursing facility pharmacy, such as assisted living facilities. (8) Sales to mail order pharmacies. (9) Sales to clinics and outpatient fac ilities (for example, surgical centers, ambulatory care centers, dialysis cen ters, 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 conce ssions paid directly to insurers.CMS-2345-P 175
(14) Bona fide service fees paid by manufacturers to wholesalers, retail community pharmacies, or any other entity th at conducts business as a wholesaler or a retail community pharmacy, including but not limited to inventory management fees, product stocking allowances, and fees associat ed 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 disc ounts extended to wholesalers. (16) Reimbursement by the manufactur er for recalled, damaged, expired, or otherwise unsalable returned goods, including (but not limite d to) reimbursement for the cost of the goods and any reimbursement of costs associated with return goods handling and processing, reverse logistics, and drug dest ruction but only to th e extent that such payment covers only those costs. (17) Associated discounts, rebates, or other price concession s provided under the Medicare Coverage Gap Discount Program under section 1860D-14A of the Act. (18) Sales to PBMs, including thei r mail order pharmacy’s purchases. (19) Rebates under the national rebate agreement or a CMS-authorized State supplemental rebate agreement paid to St ate Medicaid Agencies under section 1927 of the Act. (20) Sales to hospices (i npatient 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.CMS-2345-P 176
(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 c oupon is passed on to the consumer and the pharmacy, agent, or other entity does not rece ive any price concession. (26) Manufacturer vouchers. (27) Prices negotiated under Manufac turer-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 Manufactur er copayment assistance programs and patient assistance programs. (d) Sales and associated discounts, reba tes, payments, or other transactions included in AMP for inhalation, infusion, inst illed, implanted, or in jectable drugs (5i drugs) not generally dispensed th rough a retail community pharmacy. AMP for 5i covered outpatient drugs indentified in accordance with §447.507 of this subpart shall include sales and associated di scounts, 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 orga nizations (HMOs), including managed care organizations (MCOs).CMS-2345-P 177
(4) Sales, discounts, or rebates paid dire ctly to insurers (e xcept for rebates under section 1927 of the Ac t and this subpart). (5) Sales to hospitals. (6) Sales to clinics and outpatient fa cilities (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 facilitie s, contract pharmacies for the nursing facility where these sales can be identifi ed with adequate documentation, and other entities where the drugs are dispensed th rough a nursing facility pharmacy, such as assisted living facilities. (9) Sales to hospices. (10) Sales to other manufacturers who c onduct business as a whol esaler or retail community pharmacy. (e) Further clarificat ion of AMP calculation

. (1) AMP includes cash discounts except customary prompt pay discounts extended to wholesalers, free goods that ar e 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 tran sactions, other than rebates un der section 1927 of the Act, which reduce the price received by the manuf acturer for drugs distributed to retail community pharmacies. (2) Quarterly AMP is calculated as a wei ghted average of monthly AMPs in that quarter.CMS-2345-P 178
(3) The manufacturer must adjust the AMP for a rebate period if cumulative discounts, rebates, or other arrangements subseq uently adjust the pri ces actually realized, to the extent that such cumulative discounts, rebates, or other arrangements are not excluded from the determination of AMP by statute or regulation. § 447.505 Determination of best price. (a) Definitions . For the purpose of this section, the following definitions apply: Best price means, for a single source drug or innovator multiple source drug of a manufacturer(including the lowe st price available to any entity for any such drug of a manufacturer that is sold under an NDA a pproved under section 505(c) of the FFDCA), the lowest price available from the manuf acturer during the reba te period to any wholesaler, retailer, provid er, health maintenance orga nization, 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 pr ice for covered outpatient dr ugs includes all prices and associated rebates, discounts, or other transactions that adju st prices either directly or indirectly. (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.CMS-2345-P 179
(i) Prices charged under th e 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 descri bed 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 designate d 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 nego tiated by a prescrip tion drug plan under Part D of title XVIII, by any MA-PD plan unde r Part C of such ti tle with respect to covered Part D drugs, or by a Qualified Re tiree Prescription Drug Plan (as defined in section 1860D-22(a)(2) of the Act) for such drugs on behalf of i ndividuals 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 1860D14A of the Act. (7) Rebates under the national rebate agreement or a CMS-authorized supplemental rebate agreement paid to St ate 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; bu t only to the extent that the full value of the c oupon is passed on to the consumer and the pharmacy, agent, or other entity does not rece ive any price concession.CMS-2345-P 180
(10) Goods provided free of charge under Manufactur er 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 manufactur er 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 dest ruction but only to the extent that it only covers these costs. (15) Nominal prices to ce rtain entities as set forth in §447.508 of this subpart. (16) Bona fide service fees paid by manufacturers to wholesalers, retail community pharmacies, or any other entity th at conducts business as a wholesaler or a retail community pharmacy, including but not limited to inventory management fees, product stocking allowances, and fees associat ed 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 pr ices at the retail or provider level. (18) Sales outside the United States. (d) Further clarificat ion of best price

.CMS-2345-P 181
(1) Best price is net of cash discounts, free goods that are contingent on any purchase requirement, volume discounts, cust omary prompt pay discounts, chargebacks, returns, incentives, promotional fees, administ rative fees, service f ees, distribution fees, and any other discounts or pric e reductions and rebates, ot her than rebates under section 1927 of the Act, which reduce the pri ce available from the manufacturer. (2) Best price must be determined on a un it 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 subs equently adjust the prices available from the manufacturer. §447.506 Authorized generic drugs. (a) Definitions . For the purpose of this section, the following definitions apply: Primary manufacturer means a manufacturer that hol ds 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 licen sed to a secondary manufacturer, acting as a wholesaler, or when the primary manufactur er 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 pr ice for an innovator multiple source drug duringCMS-2345-P 182
a rebate period to any manufacturer, wholes aler, 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 au thorized generic drug must provide a rebate based on its sales of authorized generi cs, and must calculate AMP and best price, consistent with the requirements specifi ed in §447.504 and §447.505 of this subpart. §447.507 Identification of 5i drugs. A manufacturer must identify each covered out patient 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 th rough a retail community pharmacy. A manufacturer must determine if the 5i dr ug is not generally di spensed 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 dispen sed through a retail community pharmacy if 90 percent or more of the sales of the 5i dr ug, during the reporting pe riod, were to entities other than retail community pharmacies or w holesalers for drugs di stributed 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.CMS-2345-P 183
§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 pri ces are excluded from best price when purchased by the following entities: (1) A covered entity as described in section 340B(a)(4 ) of the PHSA. (2) An ICF/MR providing services as set forth in §440.150 of this chapter. (3) A State-owned or operated nursing facili ty providing services as set forth in §440.150 of this chapter. (4) A public or non-profit entity or faci lity 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 se ction 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 unde r 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 regulat ory prohibition on services for an ent ity described paragraph (a) of this section, including the prohibition set forth in section 1008 of the PHSA. §447.509 Medicaid drug rebates.CMS-2345-P 184
(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 un its 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 excl usively 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 so urce and innovator multiple source drugs . In addition to the basic rebate described in pa ragraph (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 un its 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:CMS-2345-P 185
(B) The base date AMP for such dosag e form and strength, increased by the percentage by which the consumer price in dex for all urban consumers (United States city average) for the month before the mont h 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 produc t 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 si ngle source drug or innovator multiple source drug. (C) The total number of units of each dos age 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, w ith respect to a drug, a new formulation of the drug, such as an extended release product. (iii) Identification of line extension drugs

.CMS-2345-P 186
(A) The FDA’s list of Chemical Types, lis ted 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 ent ity, 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 noninnovato r multiple source drug will be equal to the product of-- (i) The total number of un its 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 st rength for the rebate period multiplied by 13 percent. (b) Rebates for drugs dispensed thro ugh Medicaid managed care organizations (MCOs)

. (1) Manufacturers participating in the Medicaid drug rebate program will pay rebates for covered outpatient dr ugs dispensed to individuals enrolled in Medicaid MCOs if the MCO is contractually re quired to provide such drugs. (2) Manufacturers are exempt from the requirement in paragraph (b)(1) of this section if such drugs are:CMS-2345-P 187
(i) Dispensed by health maintenance orga nizations 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 qua rter, 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 pedi atric 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 be tween 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 am ount is the difference between AMP times 23.1 percent and AMP minus best price.CMS-2345-P 188
(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 factors and drugs approved by the FDA exclusively for pe diatric indications th at 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 be tween 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 am ount 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 extensio n 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 base d on the applicable re bate percentage in section 1927 of the Act prior to the Affordab le Care Act and the calculation of the URA for the line extension drug, if greater, in accordance with the Affordable Care Act. (4) For noninnovator multiple source drugs, the offset amount is equal to 2 percent of the AMP (the difference between 13 percent of AMP and 11 percent of AMP). §447.510 Requirements for manufacturers. (a) Quarterly reports . A manufacturer must report product and pricing information for covered outpatient drugs to CM S not later than 30 days after the end of the rebate period. The quarterly pric ing report must include the following:CMS-2345-P 189
(1) AMP, calculated in accordan ce with §447.504 of this subpart. (2) Best price, calculated in accordance with §447.505 of this subpart. (3) Customary prompt pay discounts, whic h 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 pr ice exclusion, which are reported as an aggregate dollar amount and include all sales of single source and innovator multiple source drugs to the entities listed in §447.508(a) of this s ubpart for the rebate period. (5) A manufacturer that fails to subm it 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 CM S any revision to AMP, best price, customary prompt pay discounts, or nominal pr ices 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, exce pt 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 ad justments from such transactions.CMS-2345-P 190
(v) The change is to a ddress specific underpayment s to States, or potential liability regarding t hose underpayments, as required by CM S 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 th e DRA base date AMP must only reflect the revisions to AMP as provided for in §447.504 of this subpart. (ii) A manufacturer may choose to re calculate 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 Afford able 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 [ p ub l i c a t i o n d a t e o f t h e f i n a l r u l e]. (4) Recalculation of the Afford able Care Act base date AMP

.CMS-2345-P 191
(i) A manufacturer’s recalculation of th e Affordable Care Act base date AMP must only reflect the revisions to AMP as provided for in §447.504 of this subpart. (ii) A manufacturer may choose to recalcu late the Affordable Care Act base date AMP on a product-by-product basis. (iii) A manufacturer must us e actual and verifiable pric ing records in recalculating the Affordable Care Act base date AMP. (d) Monthly AMP

. (1) Definition . Monthly AMP means the AMP th at is calculated on a monthly basis. A manufacturer must submit a monthl y AMP to CMS not later than 30 days after the last day of each prior month. (2) Calculation of monthly AMP . Monthly AMP is calculated based on §447.504 of this subpart, except the period covered is based on monthly, as opposed to quarterly, sales. (i) The monthly AMP is calculated based on the weighted average of prices for all the manufacturer’s package sizes of each covered outpatient drug sold by the manufacturer during a month. (ii) It is calculated as net sales divided by number of units sold, excluding goods or any other items specifically excluded in the statute or regulations. Monthly AMP is calculated based on the best data available to the manufacturer at the time of submission. (iii) In calculating monthly AMP, a manuf acturer must estimate the impact of its lagged price concessions using a 12-month roll ing percentage to es timate the value of those discounts.CMS-2345-P 192
(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 a llowed in paragraph (b)(1) of this section. (4) Exception . A manufacturer must report revi sions 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 mont h after the expiration da te 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 to CMS not later than 30 days after the last day of each month. (7) Failure to report product info rmation, monthly AMP and AMP units. A manufacturer that fails to submit a monthly AMP and the to tal number of un its 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 sectio n 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 CF O, who has authority equivalent to a CEO or a CFO; orCMS-2345-P 193
(4) An individual with the directly delegated authority to perform the certification on behalf of an individual described in paragr aphs (e)(1) through (e)(3 ) of this section. (f) Recordkeeping requirements

. (1) A manufacturer must retain records (w ritten 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 re vised pricing data subsequently submitted to
CMS. (2) A manufacturer must retain record s beyond the 10-year period if all of the following circumstances exist: (i) The records are th e subject of an audit, or of a government investigation related to pricing data that are used in AMP, best price, customar y prompt pay discounts, or nominal prices of which the manufacturer is aware. (ii) The audit findings or investigation re lated 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 submitte d to CMS in an electronic format designated by CMS. §447.511 Requirements for States.CMS-2345-P 194
(a) Invoices submitted to participating drug manufacturers . Within 60 days of the end of each quarter, the State must bill part icipating 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 Medica id Managed Care Organizations (MCO) . A State that has participati ng Medicaid Managed Care Or ganizations (MCO), which includes covered outpatient drugs in its co ntracts with the MCOs, must report data described in paragraph (a) of this secti on for covered outpatient drugs dispensed to individuals eligible for medical assistance w ho are enrolled with the MCO and for which the MCO is required under contract for cove rage of such drugs under section 1903 of theCMS-2345-P 195
Act. This data must be identified separately from the data pertai ning to drugs that the State reimburses on a fee-for-service basis. §447.512 Drugs: Aggregate upper limits of payment. (a) Multiple source drugs

. Except for brand name drugs that are certified in accordance with paragraph (c) of this secti on, 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 establishe d in accordance with §447.514 of this subpart. If a specific limit has not been established under §447.514 of this subpa rt, then the rule for “other drugs” set forth in paragr aph (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 establis hed under §447.514 of this subpart must not exceed, in the aggregate, payment levels that the agency has determined by applying the lower of the following: (1) AAC plus a professional dispensi ng fee established by the agency; or (2) Providers' usual and customary charges to the general public. (c) Certification of brand name drugs

. (1) The upper limit for payment for multiple source drugs for which a specific limit has been established under §447.514 of th is 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 medica lly necessary for a particular beneficiary. (2) The agency must decide what certi fication form and procedure are used. (3) A check off box on a form is not acceptable but a notation like “brand necessary” is allowable.CMS-2345-P 196
(4) The agency may allow providers to k eep the certification forms if the forms will be available for inspection by the agency or HHS. §447.514 Upper limits for multiple source drugs. (a) Establishment and issuance of a listing

. (1) CMS will establish and issue listings that identify and set upper limits for multiple source drugs available for purchase by retail community pharmacies on a nationwide basis that the FDA has rated at least three drug products as pharmaceutically and therapeutically equivalent in its most current edition of “Approved Drug Products with Therapeutic Equivalence Evaluations” (including supplements or in successor publications). Only pharmaceutically and therapeutically equivalent formulations will be used to determine such limit, and such limit will only be applied to those therapeutically equivalent drug products (2) CMS publishes the list of multiple source drugs for which upper limits have been established and any revisions to th e 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 applic ation 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 averag e 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:CMS-2345-P 197
(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 m onth after the termination date reported by the manufacturer to CMS. (2) The monthly AMP units data will be us ed to calculate the weighted average of monthly AMPs for all multiple sour ce drugs to establish the FUL. (d) The FUL will be applied as an aggregate upper limit. §447.516 Upper limits for drugs furnis hed as part of services. The upper limits for payment for prescribed drugs in this subpart also apply to payment for drugs provided as part of skilled nursing facility services and intermediate care facility services and under prepaid capitation arrangements. §447.518 State plan requirements, findings, and assurances. (a) State plan

. The State plan must describe comprehensively the agency's payment methodology for prescription dr ugs, 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 followi ng separate and distinct findings:CMS-2345-P 198
(i) In the aggregate, its Medicaid expenditures for multiple source drugs, identified and listed in accordance with §447.514(a) of this subpart , are in accordance with the upper limits specified in §447.514(b) of this subpart. (ii) In the aggregate, it s Medicaid expenditures fo r all other drugs are in accordance with §447.512 of this subpart. (2) Assurances

. The agency must make assurances satisfactory to CMS that the requirements set forth in §447.512 and §447.514 of this subpart concerning upper limits and in paragraph (b)(1) of this sec tion 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 a ny proposed change in ingredient cost reimbursement. States must submit to CMS the proposed change in reimbursement and the supporting data through a St ate plan amendment through the formal review process. § 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 manuf acturer for rebates.CMS-2345-P 199
(1) As of January 1, 2006, a State must require providers to submit claims for single source, physician-administered dr ugs using Healthcare Common Procedure Coding System codes or NDC nu mbers 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 Progr am using NDC numbers to secure rebates. (c) A State that requires a dditional time to comply with the requirements of this section may apply to the S ecretary for an extension. §447.522 Optional coverage of investigationa l drugs and other drugs not subject to
rebate. (a) Medicaid coverage of investigationa l drugs may be provided at State option under section 1905(a)(12) of the Act when su ch drug has been indicated by the FDA for human trials. (b) A State agency electing to provide c overage 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 c overed outpatient drugs or fail to be listed electroni cally with the FDA.CMS-2345-P 200
(e) Investigational drugs and other drugs ar e 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.CMS-2345-P
<AUTH><HED>Authority: <P> (Catalog of Federal Domestic Assistance Program No. 93.778, Medical Assistance Program)

<SIG><DATED>Dated: March 16, 2011.

_______________________________ <NAME>Donald M. Berwick, <TITLE>Administrator, Centers for Medicare & Medicaid Services.

<DATED>Approved: August 16, 2011

.

__________________________________ <NAME>Kathleen Sebelius, <TITLE>Secretary.</SIG>

<FRDOC> [FR Doc. 2012–2014 File d 1–27–12; 11:15 am]
<BILCOD>BILLING CODE 4120–01–PCMS-2345-P 202

[FR Doc. 2012-2014 Filed 01/27/2012 at 4: 15 pm; Publication Date: 02/02/2012]