<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 pertaining to Medicaid 

reimbursement for covered outpatient drugs to implement provisions of the Patient 

Protection and Affordable Care Act of 2010, as amended by the Health Care and 

Education Reconciliation Act of 2010 (collectively known as the Affordable Care Act). 

This proposed rule would also revise other requirements related to covered outpatient 

drugs, including key aspects of Medicaid coverage, payment, and the drug rebate 

program. Therefore, we are proposing to amend 42 CFR part 447, subpart I to 

implement specific provisions of the Affordable Care Act.

DATES: To be assured consideration, comments must be received at one of the 

addresses provided below, no later than 5 p.m. on April 2, 2012. 

ADDRESSES: In commenting, please refer to file code CMS-2345-P. Because of staff 

and resource limitations, we cannot accept comments by facsimile (FAX) transmission. 

 You may submit comments in one of four ways (please choose only one of the 

ways listed): 
CMS-2345-P 2 

1. Electronically. You may submit electronic comments on this regulation to 

http://www.regulations.gov. Follow the instructions under the "More Search Options" 

tab. 

 2. By regular mail. You may mail written comments to the following address 

ONLY: 

 Centers for Medicare & Medicaid Services, 

Department of Health and Human Services, 

Attention: CMS-2345-P, 

P.O. Box 8016, 

Baltimore, MD 21244-8016. 

Please allow sufficient time for mailed comments to be received before the close 

of the comment period. 

3. By express or overnight mail. You may send written comments to the 

following address ONLY: 

 Centers for Medicare & Medicaid Services, 

 Department of Health and Human Services, 

 Attention: CMS-2345-P, 

 Mail Stop C4-26-05, 

 7500 Security Boulevard, 

 Baltimore, MD 21244-1850.

4. By hand or courier. If you prefer, you may deliver (by hand or courier) your 

written comments before the close of the comment period to either of the following 

addresses: a. For delivery in Washington, DC-- 
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 Hubert H. Humphrey Building is not readily 

available to persons without Federal government identification, commenters must leave 

their comments in the CMS drop slots located in the main lobby of the building. A 

stamp-in clock is available for persons wishing to retain a proof of filing by stamping in 

and retaining an extra copy of the comments being filed. The comments delivered must 

also be stamped in to verify timeliness of submission.) 

b. For delivery in Baltimore, MD-- 

 Centers for Medicare & Medicaid Services, 

Department of Health and Human Services, 

7500 Security Boulevard, 

Baltimore, MD 21244-1850. 

If you intend to deliver your comments to the Baltimore address, please call 

telephone number (410) 786-7195 in advance to schedule your arrival with one of our 

staff members. 

 Comments mailed to the addresses indicated as appropriate for hand or courier 

delivery may be delayed and if received after the comment period closes may not be 

considered. 
CMS-2345-P 4 

Submission of comments on paperwork requirements. You may submit 

comments on this document's paperwork requirements by following the instructions at 

the end of the "Collection of Information Requirements" section in this document. 

For information on viewing public comments, see the beginning of the <E 

T='02'>SUPPLEMENTARY INFORMATION</E> section. 

FOR FURTHER INFORMATION CONTACT: 

Angel Davis, (410)786-4693, and Meagan Khau, (410)786-1357, for issues related to 

rebates for line extensions. 

Lisa Ferrandi, (410)786-5445, for issues related to the Collection of Information 

Requirements. 

Joseph Fine, (410)786-2128, for issues related to the determination of Best Price, 

definition of covered outpatient drug and rebates for drugs dispensed by Medicaid 

managed care organizations. 

Christine Hinds, (410) 786-4578, Kimberly Howell, (410)786-6762, Terry Simananda, 

(410)786-8144, or Wendy Tuttle, (410)786-8690, for issues related to the determination 

of Average Manufacturer Price (AMP). 

Meagan Khau, (410)786-1357, for issues related to the offset of rebates. 

Madlyn Kruh, (410)786-3239, for issues related to authorized generics, nominal price, 

investigational drugs, and the coverage of tobacco cessation drugs under the Medicaid 

State Plan. 

Bernadette Leeds, (410) 786-9463, for issues related to drug rebates. 

Gail Sexton, (410)786-4583, for issues related to Federal upper limits.

Marge Watchorn, (410)786-4361, for issues related to the Regulatory Impact Analysis. 

Wendy Tuttle, (410)786-8690, for all other inquiries.
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 personally identifiable or 

confidential business information that is included in a comment. We post all comments 

received before the close of the comment period on the following Web site as soon as 

possible after they have been received: http://www.regulations.gov. Follow the search 

instructions on that Web site to view public comments. 

 Comments received timely will also be available for public inspection as they are 

received, generally beginning approximately 3 weeks after publication of a document, at 

the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security 

Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-

3951. 

<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 Federal financial participation (FFP) in State 

expenditures for these drugs. In general, in order for payment to be made available under 

section 1903 for covered outpatient drugs, manufacturers must enter into a Medicaid drug 

rebate agreement as set forth in section 1927(a) 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 changes to section 1927 of the Act made by 

sections 2501, 2503, and 3301(d)(2) of the Patient Protection and Affordable Care Act of 

2010 (Pub. L. 111-148, enacted on March 23, 2010), and sections 1101(c) and 1206 of 

the Health Care and Education Reconciliation Act of 2010 (HCERA) (Pub. L. 111-152, 

enacted on March 30, 2010), (collectively known as the Affordable Care Act). It would 

also implement changes to section 1927 of the Act as set forth in section 202 of Pub. L. 

111-226, enacted on August 10, 2010 (referred to as the Education Jobs and Medicaid 

Funding Act). This proposed rule would implement other miscellaneous provisions 

pertaining to covered outpatient drugs. It would implement changes to section 1927 of 

the Act as set forth in section 221 of Division F, Title II, of the Omnibus Appropriations 

Act, 2009, (Pub. L. 111-8, enacted on March 11, 2009). It would also codify other 

requirements in section 1927 of the Act pertaining to the Medicaid drug rebate (MDR) 

program and revise certain regulatory provisions presently codified at 42 CFR part 447, 

subpart I and make other changes concerning rebate requirements. As discussed below, 

these proposed revisions are consistent with the Secretary's authority set forth in section 

1102 of the Act to publish regulations that are necessary to the efficient administration of 

the Medicaid program. 

<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 percentage for most single source and innovator 

multiple source drugs from 15.1 percent of the average manufacturer price (AMP) to 23.1 

percent of AMP. Section 2501(a) of the Affordable Care Act also amended section 

1927(c) of the Act by establishing a minimum rebate percentage of 17.1 percent of AMP 

for certain single source and innovator multiple source clotting factors and single source 
CMS-2345-P 7 

and innovator multiple source drugs approved by the Food and Drug Administration 

(FDA) exclusively for pediatric indications. Section 2501(a) of the Affordable Care Act 

also added section 1927(b)(1)(C) to the Act to make changes to the non-Federal share of 

rebates by specifying that the amounts attributable to the increased rebate percentages be 

remitted to the Federal government. The amendments made by section 2501(a) of the 

Affordable Care Act were effective January 1, 2010. 

 Section 2501(b) of the Affordable Care Act amended section 1927(c) of the Act 

by increasing the rebate percentage for noninnovator multiple source drugs from 

11 percent of AMP to 13 percent of AMP, effective January 1, 2010. 

 Section 2501(c) of the Affordable Care Act amended section 1903(m) of the Act 

by specifying new conditions for managed care organization (MCO) contracts, including 

that covered outpatient drugs dispensed to individuals eligible for medical assistance 

under Title XIX of the Act who are enrolled with a Medicaid MCO shall be subject to the 

same rebate required by the rebate agreement authorized under section 1927 of the Act. 

The Affordable Care Act also amended section 1903(m) of the Act to establish that MCO 

capitation rates shall be based on actual cost experience related to rebates and subject to 

Federal regulations at §438.6 regarding actuarial soundness of capitation payments. The 

legislation also provided that MCOs are responsible for reporting to the State certain 

utilization data and such other data as the Secretary determines necessary for the State to 

access the rebates authorized by this provision. 

 Section 2501(c) of the Affordable Care Act also made conforming amendments to 

section 1927(b) of the Act by requiring manufacturers that participate in the MDR 

program to provide rebates for drugs dispensed to individuals enrolled with a MCO, if the 

MCO is responsible for coverage of such drugs. It also amended section 1927(b) of the 
CMS-2345-P 8 

Act by requiring States to include information on drugs paid for by Medicaid MCOs 

under the State plan during the rebate period when requesting rebates from 

manufacturers. Finally, section 2501(c) modified section 1927(j)(1) of the Act to specify 

that covered outpatient drugs are not subject to the rebate requirements if such drugs are 

both subject to discounts under section 340B of the Public Health Service Act (PHSA) 

and dispensed by health maintenance organizations (HMOs), including Medicaid MCOs. 

The amendments made by section 2501(c) were effective March 23, 2010. 

Section 2501(d) of the Affordable Care Act, as revised by section 1206(a) of 

HCERA, added a new subparagraph (C) to section 1927(c)(2) of the Act, effective for 

drugs paid for by a State on or after January 1, 2010. This provision modifies the unit 

rebate amount (URA) calculation for a drug that is a line extension (new formulation) of 

a single source or innovator multiple source drug that is an oral solid dosage form. 

 Section 2501(e) of the Affordable Care Act amended section 1927(c)(2) of the 

Act by adding a new subparagraph (D) and establishing a maximum on the total rebate 

amount for each single source or innovator multiple source drug at 100 percent of AMP, 

effective January 1, 2010. 

 Section 2501(f) of the Affordable Care Act made conforming amendments to 

section 340B of the Public Health Service Act, which are not addressed in this proposed 

rule. 

Section 2503(a) of the Affordable Care Act amended section 1927(e) of the Act 

by revising the Federal upper reimbursement limit to be no less than 175 percent of the 

weighted average (determined on the basis of utilization) of the most recently reported 

monthly AMPs for pharmaceutically and therapeutically equivalent multiple source drug 

products that are available for purchase by retail community pharmacies on a nationwide 
CMS-2345-P 9 

basis. Additionally, it specifies that the Secretary shall implement a smoothing process 

for AMP which shall be similar to the smoothing process used in determining the average 

sales price (ASP) of a drug or biological under Medicare Part B. It amended section 

1927(k) of the Act by revising the definition of AMP to mean the average price paid to 

the manufacturer for the drug in the United States by wholesalers for drugs distributed to 

retail community pharmacies and retail community pharmacies that purchase drugs 

directly from the manufacturer. 

 It also amended the definition of multiple source drug to specify, in part, that a 

covered outpatient drug qualifies as a multiple source drug if at least one other 

therapeutically equivalent drug product is sold or marketed in the United States, as 

opposed to in a State, during the rebate period. It added to section 1927(k) of the Act 

definitions of retail community pharmacy and wholesaler for purposes of section 1927 of 

the Act. 

 Section 2503(b) of the Affordable Care Act amended section 1927(b) of the Act 

by establishing a requirement that manufacturers report, not later than 30 days after the 

last day of each month of a rebate period under the agreement, on the manufacturer’s 

total number of units that are used to calculate the monthly AMP for each covered 

outpatient drug. It also amended the preexisting requirement that the Secretary disclose 

AMPs to instead require the Secretary to post, on a Web site accessible to the public, the 

weighted average of the most recently reported monthly AMPs and the average retail 

survey price determined for each multiple source drug in accordance with section 1927(f) 

of the Act. 
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 Act were effective October 1, 2010. Section 

2503(d) of the Affordable Care Act further specified that the amendments made by 

section 2503 shall take effect without regard to whether final regulations to carry out such 

amendments have been issued by October 1, 2010. 

 Section 3301(d)(2) of the Affordable Care Act included a conforming amendment 

to the definition of “best price” under Medicaid at section 1927(c)(1)(C) of the Act. This 

amendment provides that any discounts provided by manufacturers under the Medicare 

coverage gap discount program under section 1860D-14A of the Act are exempt from a 

manufacturer’s best price calculation, effective for drugs dispensed on or after July 1, 

2010. 

 Section 7101(a) of the Affordable Care Act expanded the drug discount program 

under section 340B of the Public Health Service Act (PHSA) to include certain children’s 

hospitals, freestanding cancer hospitals, critical access hospitals, rural referral centers and 

sole community hospitals. 

 Section 204 of the Medicare and Medicaid Extenders Act of 2010 (Pub. L. 111-

309) revised section 340B of the PHSA by removing children’s hospitals from the orphan 

drug exclusion described in section 2302 of HCERA. 

 Section 1101(c) of HCERA also includes a conforming amendment to the 

definition of AMP under Medicaid at section 1927(k) of the Act by providing that 

discounts provided by manufacturers under the Medicare coverage gap discount program 
CMS-2345-P 11 

under section 1860D-14A of the Act are excluded from a manufacturer’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 support of, and raising concerns with, the 

AMP and FUL provisions. However, we note that these regulatory provisions were 

withdrawn through the final rule published in the November 15, 2010 Federal Register

(75 FR 69591). Accordingly, we will not be considering the comments received on the 

July 17, 2007, rule in this rulemaking document. Further, because the Affordable Care 

Act made substantial changes to the AMP and FUL provisions in section 1927 of the Act, 

we no longer expect to publish that final rule and we do not expect to address those 

comments in subsequent rulemaking. 

<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 inclusion of territories in the MDR program. 

These changes are described in greater detail 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 regulations concerning the MDR program, set 

forth at section 1927 of the Act. It implements, consistent with our general rulemaking 

authority, sections 2501, 2503, and 3301(d)(2) of the Affordable Care Act and sections 

1101(c) and 1206 of HCERA, which revise requirements concerning the rebate program 

and payments for prescription drugs under the Medicaid program. The specific 

provisions we propose are described in detail below. 

<HD2>A. Basis and Purpose (§447.500)

 Section 2501(c) of the Affordable Care Act established new requirements for 

manufacturers that participate in the MDR program to pay rebates for drugs dispensed to 

individuals enrolled with a Medicaid MCO if the MCO is responsible for coverage of 

such drugs. We propose to add §447.500(a)(4) which would specify sections 

1903(m)(2)(A)(xiii) and 1927(b) of the Act as the basis for rebates for covered outpatient 

drugs dispensed to individuals eligible for medical assistance who are enrolled in 

Medicaid MCOs. We propose to add §447.500(a)(5) which would add 

section 1902(a)(30)(A) as an additional basis for calculating payments for covered 

outpatient drugs. 

<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 beneficiaries based on a two-part formula, which 

addresses the ingredient cost of a drug and a reasonable dispensing fee. Each State has 

the flexibility to determine the amount it will reimburse for each component of the 

formula based on the agency’s best estimate of the price generally and currently paid by 
CMS-2345-P 13 

providers for a drug marketed or sold by a particular drug labeler and the cost associated 

with ensuring that possession of the appropriate covered outpatient drug is transferred to 

a Medicaid beneficiary. These reimbursement formulas are subject to review and 

approval by CMS through the State plan amendment (SPA) process. 

In general, States currently reimburse for the covered outpatient drug based, in 

part, on the estimated acquisition cost (EAC). The EAC, as currently defined in Federal 

regulations at §447.502 is the agency’s best estimate of the price generally and currently 

paid by providers for a drug marketed or sold by a particular manufacturer or labeler in 

the package size of drug most frequently purchased by providers. We are proposing to 

both rename and revise this definition in this proposed rule. 

Section 1902(a)(30)(A) of the Act requires, in part, that States have methods and 

procedures to assure that payment for Medicaid care and services is consistent with 

efficiency, economy, and quality of care. In accordance with these provisions and in 

light of the OIG reports concerning published prices (OIG Audit reports – A-06-00-

00023, A-06-01-00053, A-06-02-00041)1

, we believe it is necessary for States to have a 

more accurate reference price to base reimbursement for prescription drugs. Therefore, 

we propose to replace the term, “estimated acquisition cost” with “actual acquisition 

cost” (AAC). We believe that changing this definition for the drug ingredient component 

of the reimbursement formula to AAC will be more reflective of actual prices paid, as 

opposed to estimates based on unreliable published compendia pricing. While we 

recognize that States may not be able to determine the actual price of each individual 

drug, payment based on an average of the actual acquisition costs from a number of 

 

1 http://oig.hhs.gov/oas/reports/region6/60000023.htm

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

http://oig.hhs.gov/oas/reports/region6/60200041.htm
CMS-2345-P 14 

representative pharmacies would still fit within this definition, as data used in the 

calculation of the average acquisition cost would be reflective of actual purchase prices 

for pharmacy providers. Within this framework, States can develop payment 

methodologies consistent with this regulatory definition for their Medicaid pharmacy 

reimbursement. Therefore, in §447.502, we propose to define actual acquisition cost as 

the agency’s determination of the actual prices paid by pharmacy providers to acquire 

drug products marketed or sold by specific manufacturers. This issue and its possible 

effects on ingredient cost reimbursement is discussed further in both §447.512 Drugs: 

Aggregate upper limits of payment and §447.518 State plan requirements, findings, and 

assurances. 

<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 “Payment for Drugs.” Therefore, 

we propose to remove the definition of “Authorized generic drug” from §447.506 and 

move this definition to §447.502. We would continue to define the term “Authorized 

generics drugs” as any drug sold, licensed or marketed under an NDA approved by the 

FDA under section 505(c) of the Federal Food Drug and Cosmetic Act (FFDCA) that is 

marketed, sold or distributed under a different labeler code, product code, trade name, 

trademark, or packaging (other than repackaging the listed drug for use in institutions) 

than the listed brand drug. 

For purposes of the MDR Program, an authorized generic is any drug product 

marketed under the innovator or brand manufacturer’s New Drug Application (NDA) 

approved under section 505(c) of the FFDCA, but labeled with a different NDC than the 
CMS-2345-P 15 

innovator or brand product. Authorized generics 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 represent fair market value for a bona fide, 

itemized service actually performed on behalf of the manufacturer that the manufacturer 

would otherwise perform (or contract for) in the absence of the service arrangement and 

that are not passed on in whole or in part to a client or customer of an entity, whether or 

not the entity takes title to the drug. The Affordable Care Act specifies that the AMP 

shall exclude bona fide service fees paid by manufacturers to wholesalers or retail 

community pharmacies including, but are not limited to, distribution service fees, 

inventory management fees, product stocking allowances, and fees associated with 

administrative service agreements and patient care programs (such as medication 

compliance programs and patient education programs). 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 physical packaging, under which the rebate, discount, or other 

price concession is conditioned upon the purchase of the same drug, drugs of different 

types (that is, at the nine-digit National Drug Code (NDC) level) or another product or 

some other performance requirement (for example, the achievement of market share, 

inclusion or tier placement on a formulary), or where the resulting discounts or other 

price concessions are greater than those which would have been available had the 
CMS-2345-P 16 

bundled drugs been purchased separately or outside the bundled arrangement. For 

bundled sales, the discounts are allocated proportionally to the total dollar value of the 

units of all drugs sold under the bundled arrangement. For bundled sales where multiple 

drugs are discounted, the aggregate value of all the discounts in the bundled arrangement 

must be proportionally allocated across all the drugs in the bundle. In response to 

manufacturer questions regarding whether a discount and resulting price for each product 

in a single customer contract that is independent and not contingent on the discount or 

pricing of any other product in the contract should be applied across all products; we 

stated previously that where a discount or price concession is established independently 

and not conditioned upon any other purchase or performance requirement (for example 

the achievement of market share, inclusion or tier placement on a formulary), or where 

the discount is not greater than if purchased outside of multi-product arrangement, there 

is no bundle within the meaning described in §447.502. Though this is not addressed in 

the Affordable Care Act, we continue to agree with our response to this issue and thus 

have decided to include it in this discussion in order to further clarify the bundled sale 

definition. Therefore, we propose to add the following clarifying statement to the 

definition of bundled sale: The discounts in a bundled sale, including but not limited to 

those discounts resulting from a contingent arrangement, are allocated proportionally to 

the total dollar value of the units of all drugs sold under the bundled arrangement. 

<HD3>5. Clotting Factor 

 The Affordable Care Act established a minimum rebate percentage of 17.1 

percent of AMP for a single source drug or an innovator multiple source drug that is a 

clotting factor for which a separate furnishing payment is authorized under section 

1842(o)(5) of the Act and which is included on a list of such factors specified and 
CMS-2345-P 17 

updated regularly by the Secretary. Consistent with these provisions, we propose to 

define clotting factors as those drugs or products for which a separate furnishing payment 

is authorized under section 1842(o)(5) of the Act and which are included on a list of such 

factors specified and updated quarterly by CMS. 

<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 responsible for paying rebates to States for their 

covered outpatient drugs for which payment has been made under the state plan. 

Manufacturers are responsible for submitting required drug product data, including each 

drug’s NDC. This NDC information is placed on the MDR file and used for assuring 

compliance with the statutory requirements. 

There have been products identified in the drug product data file that do not meet 

the definition of a covered outpatient drug. Therefore, we believe it is necessary to 

provide clarification regarding the definition of a covered outpatient drug in section 

1927(k)(2) of the Act and the limiting definition at section 1927(k)(3) of the Act. 

Accordingly, we propose to add a definition of covered outpatient drug to §447.502. 

We propose that a drug is considered a covered outpatient drug when the drug 

may be dispensed only upon prescription (except as discussed below with respect to 

certain non-prescription drugs), and it meets the following criteria as described in 

section 1927(k)(2) of the Act: 

● The drug has been approved for safety and effectiveness as a prescription drug 

by the FDA under section 505 or 507 of the FFDCA where the manufacturer has obtained 

a NDA or under section 505(j) of the FFDCA where the manufacturer has obtained an 

Abbreviated New Drug Application (ANDA); 
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 Secretary that it is a “new drug” (within the 

meaning of section 201(p) of the Federal Food, Drug, and Cosmetic Act) or an action 

brought by the Secretary under section 301, 302(a), or 304(a) of such Act to enforce 

section 502(f) or 505(a) of such Act; 

● The drug is one which is described in section 107(c)(3) of the Drug 

Amendments of 1962 and for which the Secretary has determined there is a compelling 

justification for its medical need or is identical, similar, or related to such a drug and for 

which the Secretary has not issued a notice for an opportunity for a hearing under section 

505(e) of the FFDCA on a proposed order of the Secretary to withdraw approval of an 

application for such drug under the FFDCA because the Secretary has determined that the 

drug is less than effective for some or all conditions of use prescribed, recommended or 

suggested in its labeling; 

● The drug is a biologic product, other than a vaccine which –- 

(1) May only be dispensed upon prescription, 

(2) Is licensed under section 351 of the Public Health Service Act, and 

(3) Is produced at an establishment licensed under such section to produce such 

product; or 

● The drug is insulin certified under section 506 of the FFDCA. 

Consistent with section 1927(k)(3) of the Act, we propose that, except as 

discussed below, a drug, biological product, or insulin would not be considered a covered 
CMS-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 following services: 

● Inpatient Hospital Services; 

● Hospice Services; 

● Dental Services, except that drugs for which the State plan authorizes direct 

reimbursement to the dispensing dentist are covered outpatient drugs; 

● Physician services; 

● Outpatient hospital services; 

● Nursing facility and services provided by an intermediate care facility for the 

mentally retarded; 

● Other laboratory and x-ray services; or 

● Renal dialysis. 

We further propose that the above exemptions to the definition of covered 

outpatient drug for combined services would not apply if the drug is carved out and billed 

separately from the service (for example, an infusion drug and x-ray are billed separately, 

not as a composite radiology service; therefore, the infusion drug is a covered outpatient 

drug). 

Additionally, section 1927(k)(3) of the Act provides that the definition of covered 

outpatient drug does not include any such drug or product for which a NDC number is 

not required by the FDA or a drug or biological used for a medical indication which is 

not a medically accepted indication. We note that for the purposes of the MDR we use an 

NDC format at either the NDC-9, which includes the labeler code and product code, to 

identify the product information, or the NDC-11, which includes the labeler code, 

product code, and the package code, to identify the product’s package information. We 
CMS-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 the current NDC format of NDC-9, which 

includes the labeler code and the product code, to identify the product information and 

NDC-11, which includes the labeler code, product code, and package code, to identify the 

product’s package information. However, if there is change to the current NDC format as 

a result of FDA action, then we will issue guidance, as necessary, to notify the public as 

well as to explain its impact on the MDR program. 

We are not involved with and do not have oversight for the designation of the 

NDC. The FDA requires NDCs for drugs that must be listed with the FDA in accordance 

with Federal Food, Drug, and Cosmetics Act (FFDCA), as amended by the Food and 

Drug Administration Amendments Act of 2007 (FDAAA) (Pub. L. 110-85). (21 CFR 

207.25(b)(8)). The FDAAA amended section 510(p) of the FFDCA (21 U.S.C 360) to 

explicitly require that registration and listing information (including the submission of 

updated information) required under section 510 of the FFDCA, which includes 

information from both domestic and foreign establishments, be submitted by electronic 

means, unless the Secretary of Health and Human Services grants a request for waiver of 

this requirement because use of electronic means is not reasonable for the person 

requesting the waiver. 

Section 1927(k)(3) of the Act provides that a covered outpatient drug does not 

include any such drug or product for which an NDC number is not required by the FDA. 

However, in accordance with section 1927(k)(2), and the requirements of section 510 of 

the FFDCA, we propose that a drug, whether prescription or over-the-counter (OTC), 

would only be treated as a covered outpatient drug if the drug is both required to have an 
CMS-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 provisions, FDA approval 

provisions, and the NDC listing provisions. Furthermore, this proposal is necessary in 

order for us to assure compliance with the drug rebate submission requirements, for CMS 

to verify State utilization data and manufacturer product data, and to assure the correct 

calculation of the offset amounts mandated by the Affordable Care Act. Additionally, 

this proposal aligns with a proposal submitted as part of the fiscal year (FY) 2012 

President’s Budget to require drugs to be properly listed electronically with the FDA as a 

requirement to be covered under Medicaid. 

Therefore, if a manufacturer is required to list all of its NDCs electronically with 

the FDA, this would ensure that all the products in the MDR program meet the definition 

of section 1927(k)(3) of the Act. In addition, it would permit us to verify State and 

manufacturer submissions by referencing the FDA’s electronic drug listing information. 

Manufacturers are required to update their registration and listing information 

electronically in accordance with FDA’s current registration and listing requirements. 

Additionally, in order for us to fully implement these provisions, we are requiring 

that manufacturers submit any relevant approved FDA application numbers. When a 

product is listed with the FDA, the manufacturer is required to provide to the FDA the 

NDC and the application number, if any, for the product (21 C.F.R. 207.25(b)). An 

application number will help CMS find information on the approval status to market a 

drug. See http://www.fda.gov/Drugs/InformationOnDrugs/ucm079436.htm. The 

application number assists CMS in obtaining information from FDA as to whether a drug 

has been approved under a NDA under section 505 of FFDCA or an ANDA under 

section 505(j) of FFDCA. This information is critical to the definition of a covered 
CMS-2345-P 22 

outpatient drug under section 1927(k)(2) of the Act. Under the MDR program reporting 

requirements, drug manufacturers are required to report to CMS a drug category for each 

NDC. The drug category represents whether an NDC is classified as a brand name drug 

(single source drug (S) or innovator multiple source drug (I)) or a generic drug 

(noninnovator multiple source drug (N)). We use these drug category indications to 

determine the appropriate rebate percentage to calculate the unit rebate amounts, as well 

as the offset amounts under the Affordable Care Act. 

We are also aware that some products that do not have an approved application 

number may be covered outpatient drugs. For example, we believe that certain products, 

such as prenatal prescription vitamins, potassium chloride, codeine sulfate, and 

hydrocortisone acetate may fall into this category. If a product does not have an FDA 

application number, in order to be considered a covered outpatient drug, the manufacturer 

must provide evidence demonstrating that its products meet the statutory definition of a 

covered outpatient drug under section 1927(k)(2) to 1927(k)(4). We will refer to this 

evidence of demonstration as covered outpatient drug status, or COD status. We are 

seeking public comments on this requirement, and in particular, comments identifying 

drugs or classes of drugs that do not have approved applications but should be deemed 

covered outpatient drugs. 

This submission of data would provide critical information needed to calculate 

and verify the accuracy of such drug information. 

Therefore, we propose that manufacturers report to CMS the number of an 

approved FDA application for a product or otherwise show that the product meets the 

statutory definition of a covered outpatient drug under sections 1927(k)(2) and (3) of the 

Act, in order for CMS to calculate the offset amounts and validate product data to ensure 
CMS-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, critical 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 application of such discounts among manufacturers when calculating 

AMP. Therefore, we propose to define customary prompt pay discounts as any discount 

off of the purchase price of a drug routinely offered by the manufacturer to a wholesaler 

for prompt payment of purchased drugs within a timeframe that is consistent with its 

customary business practices for payment. 

<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 marketed under an original new drug application 

(NDA) approved by the FDA, including an authorized generic drug. It also includes a 

drug product marketed by any cross-licensed producers, labelers, or distributors operating 

under the NDA and a covered outpatient drug approved under a product license approval 

(PLA), establishment license approval (ELA), or antibiotic drug approval (ADA). In this 

rule, we propose to add multiple source drugs originally marketed under a BLA as the 

BLA approval process is a successor to the PLA and ELA and drugs sold under a BLA 

are explicitly referenced in the definition of single source drug. To ensure that the correct 

drug category is reported for an innovator multiple source drug, as was discussed in 

Manufacturer Release #82, we wish to remind manufacturers, as is consistent with 

current policy, that an innovator multiple source (I) drug should be reported to CMS for a 
CMS-2345-P 24 

brand name drug that has therapeutic equivalents available. To determine if therapeutic 

equivalents are available for a brand name drug or not, you can access the FDA’s 

Drugs@FDA at 

http://www.accessdata.fda.gov/scripts/cder/drugsatfda/index.cfm?fuseaction=Search.Add

lsearch_drug_name and search by the Application Number. If therapeutic equivalents are 

available, then you will see the link to “Therapeutic Equivalents” in the “Drugs Details” 

page. If there are therapeutic equivalents available for the NDA or BLA, then the brand 

name drug should be reported as an innovator multiple source drug (I) to CMS. 

Additionally, over the course of the MDR program, questions have arisen 

regarding whether an “original NDA” is the same as an NDA and whether the drug 

category may be different if a drug is approved under an NDA. We are proposing to 

clarify that, for purposes of the MDR program, an original NDA is equivalent to an NDA 

filed by the manufacturer for approval under section 505 of the FFDCA for purposes of 

approval by the FDA for safety and effectiveness. In light of this definition, we are also 

proposing to use the term “NDA” when addressing such application types for brand name 

drugs and not use the term “original NDA” when referring to such drugs throughout this 

proposed rule. 

<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 solid 
CMS-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 represents a new version of the previously 

approved listed drug, such as a new ester, a new salt or other noncovalent derivative; a 

new formulation of a previously approved drug; a new combination of two or more 

drugs; or a new indication for an already marketed drug. We propose that regardless of 

whether the drug is approved under an NDA or a supplemental NDA, if the change to the 

drug is assigned to one of the above changes, it will be considered a line extension drug. 

These modifications to the initial brand name listed drug are often approved under 

section 505(b)(2) of the FFDCA. A section 505(b)(2) application is a new drug 

application submitted under section 505(b)(1) and approved under section 505(c) of the 

FFDCA. A section 505(b)(2) application is one for which one or more of the 

investigations relied upon by the applicant to show whether a drug is safe and effective 

were not conducted by or for the applicant and for which the applicant has not obtained a 

right of reference or use from the person by or for whom the investigations were 

conducted. Section 505(b)(2), as described in FDA regulations at 21 CFR 314.54, may 

be used in certain circumstances to seek approval of a drug product that represents a 

modification to a listed drug product. Examples of drugs that have been approved under 

the 505(b)(2) application include drugs with a new formulation, dosing regimen, change 

in active ingredient (such as a different salt or ester, combination product), and/or new 

drug indication. These types of drugs are assigned a Chemical Type by the FDA for the 

new drug application. A section 505(b)(2) application may be granted 3 years of 

exclusivity, may be eligible for orphan drug exclusivity or pediatric exclusivity. We have 
CMS-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 propose to clarify our current definition of 

manufacturer by revising it to state that a “manufacturer means any entity that holds the 

NDC for a covered outpatient drug or biological product”. This change in terminology is 

not intended change the scope of the definition. 

<HD3>11. Multiple Source Drug 

 On November 15, 2010, we published the “Medicaid Program; Withdrawal of 

Determination of Average Manufacturer Price, Multiple Source Drug Definition, and 

Upper Limits for Multiple Source Drugs” final rule in the Federal Register (75 FR 

69591). That final rule withdrew the regulatory definition of multiple source drug. As 

previously noted, section 2503(a)(3) of the Affordable Care Act amended the definition 

of multiple source drug set forth in section 1927(k)(7) of the Act. 

 Therefore, in accordance with section 1927(k)(7) of the Act, as revised, we 

propose to define multiple source drug in §447.502 as a covered outpatient drug for 

which there is at least one other drug product which-- 

 (1) Is rated as therapeutically equivalent. For the list of drug products rated as 

therapeutically equivalent, we will use the FDA's most recent publication of ”Approved 

Drug Products with Therapeutic Equivalence Evaluations” which is currently available at 

http://www.fda.gov/cder/orange/default.htm or which can be viewed at the FDA's 

Freedom of Information Public Reading Room at 5600 Fishers Lane, rm. 12A-30, 

Rockville, MD 20857; 
CMS-2345-P 27 

 (2) Is pharmaceutically equivalent and bioequivalent, as determined by the FDA; 

and 

 (3) Is sold or marketed in the United States during the rebate period. 

<HD3>12. National Drug Code 

 The Drug Listing Act of 1972 requires each registered drug establishment to 

provide the FDA with a current list of all drugs manufactured, prepared, propagated, 

compounded, or processed by it for commercial distribution. (See section 510 of the 

FFDCA (21 U.S.C. 360)). Drug products are identified and listed with FDA using a 

unique identifier called the National Drug Code (NDC). Under FDA regulations in 21 

CFR part 207, the NDC is identified as a 10-digit, 3-segment number. The first segment, 

the labeler code, is assigned by the FDA. A labeler is a firm that manufactures the drug, 

including a repacker or relabeler, or a firm that distributes the drug under its own trade 

name or label. The second segment, the product code, identifies a specific strength, 

dosage form, and formulation for a particular firm. The third segment, the package code, 

identifies the trade package size and type. Both the product and package codes are 

assigned by the firm. The NDC will be in one of the following configurations: 4-4-2, 5-

3-2, or 5-4-1. 

In this proposed rule, we clarify that even though FDA currently uses a unique 

10-digit NDC, for the purposes of the MDR program and this subpart we will continue to 

use an NDC format with the NDC-9, which includes the labeler code and the product 

code, to identify the product information and the NDC-11, which includes the labeler 

code, product code, and package code, to identify the product’s package information. 

Manufacturers may include a leading zero in the product code or the package code 
CMS-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 marketed under an abbreviated NDA (ANDA) or 

an abbreviated antibiotic drug application, and (3) a drug that entered the market before 

1962 that was not originally marketed under an NDA. 

 In addition to a noninnovator multiple source drug as described, currently, there 

are other drugs on the market that have not gone through the FDA approval process, 

including but not limited to certain prescription pre-natal vitamins. 

 Therefore, we propose to amend the definition of a noninnovator multiple 

source drug to also include these other drugs that have not gone through FDA approval 

process but otherwise meet the definition of “covered outpatient drug”. However, if any 

of the drug products listed in this amended definition of a noninnovator multiple source 

drug subsequently receives a new NDA or ANDA approval from the FDA, the 

manufacturer must change the reporting of the product’s drug category to correlate with 

the new product application type and furnish the appropriate information. 

 We also propose to amend the definition of noninnovator multiple source drug 

to clarify that for purposes of Medicaid payment and rebate calculations, the term shall 

include noninnovator drugs that are not therapeutically equivalent. 

<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 solid oral dosage form to mean capsules, 
CMS-2345-P 29 

tablets, or similar drug products intended for oral use. We also clarify that although FDA 

regulations at 21 CFR 206.3 uses the term “solid oral dosage form,” section 

1927(c)(2)(C) specifically used the term “oral solid dosage form” in reference to the 

treatment of new formulations. Therefore, CMS will treat the term “oral solid dosage 

form” to mean the same as FDA’s “solid oral dosage form.” 

 CMS proposes to further interpret an oral route of administration as any drug that 

is intended to be taken by mouth. In accordance with these provisions, CMS is providing 

manufacturers with guidance in order to assist them in determining which drugs should 

be considered as oral solid dosage forms (please see Table 1). This list will be updated 

based on any changes to the FDA’s definition of solid dosage forms. 

TABLE 1: List of Oral Solid Dosage Forms 

Bar, Chewable Capsule 

Capsule (Immediate/Complete Release) 

(Hard Or Soft Gelatin, Chewable Or 

Perle) 

Capsule, Coated 

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

Capsule, Coated, Extended Release Capsule, Delayed Action (Hard Or 

Gelatin, Coated, Enteric Coated) 

Capsule, Delayed Release Pellets Capsule, Enteric Coated Pellets 

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

Capsule, Film Coated, Extended Release Capsule, Gelatin Coated 

Capsule, Hard Gelatin Capsule, Liquid Filled 

Capsule, Repeat Action Capsule, Soft Gelatin 

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

Gelatin, Coated, Film Coated 

Dispersible Tablet 

Granule, Delayed Release Granule, Enteric Coated 

Gum (Chewing, Medicated) Lollipop 

Lozenge Pellet, Coated, Extended Release 

Tablet Tablet (Immediate/Complete Release) 

(Coated, Film Coated, Sugar Coated, 

Multilayer, Uncoated, Buccal, Chewable) 

Tablet, Chewable Tablet, Coated 

Tablet, Coated Particles Tablet, Controlled Release 

Tablet, Delayed Action (Coated, Enteric 

Coated) 

Tablet, Delayed Release 

Tablet, Delayed Release Particles Tablet, Dispersible 
CMS-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 Disintegrating, Delayed 

Release 

Tablet, Orally Disintegrating 

Tablet, Repeat Action (Coated) Tablet, Soluble 

Tablet, Sugar Coated Tablet, Sustained Action (Coated, Film 

Coated, Multilayer, Uncoated) 

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

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

Tablet, Sustained Action, Membrane 

Controlled 

Pastille 

Troche/Lozenge Wafer 

CMS would not consider the following as oral solid dosage forms because these 

dosage forms are intended to be made into a liquid or suspension prior to oral 

consumption. 

TABLE 2: List of Other Dosage Forms

Capsule, for Microemulsion Granule, Effervescent, for Solution 

Granule Effervescent Tablet, Effervescent 

Granule, Effervescent, for Solution Tablet, for Solution 

Granule Effervescent, for Suspension Tablet Effervescent for Solution 

Granule, for Oral Suspension Tablet, for Suspension 

<HD3>15. Over-the-Counter (OTC) Drug 

 With the exception of certain tobacco cessation drugs for pregnant women, or an 

EPSDT service, section 1927(d)(2) of the Act currently allows States to exclude from 

coverage or otherwise restrict coverage of OTC drugs. We propose to add a definition of 

OTC drugs in order to clarify which products would be treated as OTC drugs in the 

Medicaid program. This definition is consistent with our current policy and would not 

change how these drugs are treated for purposes of coverage under the Medicaid 

program. We propose to define OTC drugs as drugs that are appropriate for use without 

the supervision of a health care professional such as a physician, and which can be 
CMS-2345-P 31 

purchased by a consumer without a prescription, although for Medicaid coverage a 

prescription continues to be required. OTC drugs may be marketed under an approved 

premarket application (NDA or ANDA) or in many cases, may be marketed under an 

OTC monograph. In some instances, FDA permits these drugs to be marketed under a 

monograph that is not yet final (such as where there is an OTC tentative final 

monograph), as stated in 21 CFR part 330 and FDA guidance. Unlike NDAs which are 

based on premarket approval of specific, finished drug products, monographs specify the 

active ingredients, indications, dosages, and claims that can be made by the OTC drug 

products. 

<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 minimum rebate percentage. In regulations at 

21 CFR 201.57 and 21 CFR 201.80, the FDA defines pediatric use for most drug labeling 

to mean use for pediatric populations and pediatric patients, that is, “the pediatric age 

group, from birth to 16 years, including age groups often called neo-nates, infants, 

children, and adolescents.” Accordingly, given the statutory amendments, we propose to 

define “a drug approved by the Food and Drug Administration exclusively for pediatric 

indications” to mean a drug product approved by the FDA exclusively with indications 

for pediatric use, with the pediatric age group defined from birth to 16 years. Drugs that 

are not approved and labeled exclusively for pediatric use, that merely reference use in 

children in any part of the labeling, or that receive a supplemental indication for pediatric 

use, will not qualify for the minimum rebate of 17.1 percent of AMP as specified in 
CMS-2345-P 32 

section 1927(c)(1)(B)(iii) of the Act. In accordance with the statute, we propose to apply 

this definition only to drug products whose FDA-approved labeling includes only 

indications for children from birth to 16 years of age. Drugs without this explicit age 

labeling will not satisfy the requirement that the drug be approved exclusively for 

pediatric use and will not qualify for the minimum rebate of 17.1 percent of AMP. We 

are proposing to apply such a definition only when this specific pediatric age cohort 

appears in the “Indication and Usage” section of the FDA-approved labeling. 

<HD3>17. Professional Dispensing Fee 

The definition of dispensing fee will remain unchanged as it already enumerates 

those costs to dispense a drug that the pharmacy incurs. However, we propose to replace 

the term “dispensing fee” with “professional dispensing fee” as drug ingredient cost is 

only one component of the two-part formula that States generally use to reimburse 

pharmacies for prescribed drugs dispensed to Medicaid beneficiaries; and, we feel that 

this change from “dispensing fee” to “professional dispensing fee” reinforces our position 

that once the reimbursement for the drug is properly determined, the dispensing fee 

should reflect the pharmacist’s professional services and costs associated with ensuring 

that possession of the appropriate covered outpatient drug is transferred to a Medicaid 

beneficiary. Therefore, as States change their payment for ingredient cost, we also 

propose to require States to reconsider the dispensing fee methodology consistent with 

the revised requirements. 

<HD3>18. Single Source Drug 

As currently defined in §447.502, a single source drug means a covered outpatient 

drug that is produced or distributed under an NDA approved by the FDA, including a 

drug product marketed by any cross-licensed producers or distributors operating under 
CMS-2345-P 33 

the NDA. It also includes a covered outpatient drug approved under a BLA, PLA, ELA, 

or ADA. 

As previously stated in the discussion of the proposed changes to the definition of 

innovator multiple source drug, for purposes of the MDR program, we have defined an 

original NDA as an NDA filed by the manufacturer with the FDA for purposes of 

approval for safety and effectiveness. Further, we wish to remind a manufacturer that as 

long as it has an approved NDA number issued by the FDA, a drug is considered to be a 

single source drug and is required to be reported with as an “S” drug category to CMS 

under the MDR program unless there are FDA approved therapeutic equivalents. To 

determine if therapeutic equivalents are available, you can access the FDA’s 

Drugs@FDA and search by the Application Number. If therapeutic equivalents are 

available for the NDA, then you will see the link to “Therapeutic Equivalents” in the 

“Drugs Details” page. If there are no therapeutic equivalents available for the NDA, then 

the brand name drug should be reported as an “S” to CMS. 

<HD3>19. States 

Currently, for purposes of this subpart, the term “States” is defined as the 50 

States and the District of Columbia. However, excluding the territories from this 

definition of States prevents them from receiving manufacturer rebates through the MDR 

program. We recognize that the territories have, over the years, expressed an interest in 

participating in the MDR program and that such rebates would in part offset the costs of 

providing Medicaid drugs. We have decided, in accordance with section 1101(a)(1) of 

the Act, to propose revising the definition of States to include the 50 States, the District 

of Columbia, and the territories (the Commonwealth of Puerto Rico, the Virgin Islands, 

Guam, the Northern Mariana Islands and American Samoa). Therefore, for drug rebates, 
CMS-2345-P 34 

we believe it is in the best interests of the Medicaid program to include the territories in 

the definition of States so that they may achieve the savings that drug rebates provide and 

we propose that the definition of States should be revised accordingly. We also 

acknowledge that there may be concerns with the territories participating in the MDR 

program; therefore, we request comments regarding the inclusion of the territories in the 

definition of States. 

<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 accordance with this definition, we think it is 

reasonable to conclude that in this context, the term is used in the geographical sense in 

that it contemplates the sales of drugs in any of the States. (Please see section II. K. 

Upper limits for multiple source drugs (§447.514) of the preamble for further discussion 

on the sale of drugs on a nationwide basis.) Therefore, for the purposes of this subpart, 

we propose, in accordance with section 1101(a) of the Act, to define the “United States” 

to mean the 50 States plus the District of Columbia and the territories as described above. 

<HD3>21. Wholesaler 

 The Affordable Care Act added a definition of the term “wholesaler” at section 

1927(k)(11) of the Act. We propose to adopt that definition and define wholesaler to 

mean a drug wholesaler that is engaged in wholesale distribution of prescription drugs to 

retail community pharmacies, including (but not limited to) manufacturers, repackers, 

distributors, own-label distributors, private-label distributors, jobbers, brokers, 
CMS-2345-P 35 

warehouses (including manufacturer’s and distributor’s warehouses, chain drug 

warehouses, and wholesale drug warehouses), independent wholesale drug traders, and 

retail community pharmacies that conduct wholesale distributions. 

 We are not proposing that a wholesaler be licensed by the State inasmuch as that 

is not a requirement of the Act, in comparison to the definition of retail community 

pharmacy, where State licensing is required. In considering how to clarify this term, we 

reviewed the definition of “wholesale distributor,” that appears in section 510(g) of the 

FFDCA, and regulations at 21 CFR 807.3(s), which provide that “the term "wholesale 

distributor" means “any person (other than the manufacturer or the initial importer) who 

distributes a device from the original place of manufacture to the person who makes the 

final delivery or sale of the device to the ultimate consumer or user.” While this 

definition is helpful, it does not provide additional clarity to the definition in the Act. 

Therefore, we are proposing to define wholesaler as set forth in the Act, but are 

specifically seeking comment on further data sources or definitions we could apply here 

that would help to further clarify the term wholesaler. 

<HD2>C. Determination of Average Manufacturer Price (§447.504)

<HD3>1. AMP Historical Background 

 The Omnibus Budget Reconciliation Act of 1990 (OBRA '90) (Pub. L. 101-508) 

added section 1927 to the Act, which became effective on January 1, 1991. OBRA '90 

established the MDR program and defined the AMP with respect to a covered outpatient 

drug of a manufacturer for a rebate period as the average unit price paid to the 

manufacturer for the drug in the United States by wholesalers for drugs distributed to the 

retail pharmacy class of trade. Manufacturers who entered into and had in effect a rebate 

agreement with CMS were required to report AMP on a quarterly basis. The AMP was 
CMS-2345-P 36 

used to calculate the rebates paid by manufacturers to the States 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 outpatient drug of a manufacturer for a calendar quarter, the average 

price paid to the manufacturer for the drug in the United States by wholesalers for drugs 

distributed to the retail pharmacy class of trade. 

 Section 6001(c)(3) of the DRA required the Office of Inspector General (OIG) to 

review the requirements for and manner in which AMP was to be determined and 

recommend changes to the Secretary by June 1, 2006. Section 6001(c)(3) of the DRA 

also required the Secretary to clarify the requirements for and the manner in which AMPs 

are determined by promulgating a regulation no later than July 1, 2007, taking into 

consideration the OIG’s recommendation. 

 In May 2006, the OIG issued a report, “Determining Average Manufacturer 

Prices for Prescription Drugs under the Deficit Reduction Act of 2005”. In this report the 

OIG recommended that CMS: 

● Clarify the requirements in regards to the definition of retail pharmacy class of 

trade and treatment of pharmacy benefit manager (PBM) rebates and Medicaid sales; and 

● Consider addressing issues raised by industry groups, such as: 

+ Administrative and service fees, 

+ Lagged price concessions for returned goods, 

+ The frequency of AMP reporting, 
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 there had been concerns expressed by the OIG 

and GAO in several prior reports regarding AMP because of inconsistencies in the way 

manufacturers determine AMP, changes in the marketplace, and the introduction of 

newer business practices such as payment of services fees. We also realized that, in light 

of the DRA amendments, AMP would serve two distinct purposes: determining rebates, 

and serving as the basis for establishing the FUL for multiple source drugs. As a result of 

a preliminary injunction that had been entered in a lawsuit challenging the definition of 

AMP, CMS had never used the AMP final rule as a basis for calculating FULs. 

 Following the enactment of the Affordable Care Act, in the November 15, 2010 

Federal Register (75 FR 69591), “Withdrawal of Determination of Average 

Manufacturer Price, Multiple Source Drug Definition, and Upper Limits for Multiple 

Source Drugs”, we withdrew §447.504 “Determination of AMP” from the AMP final rule 

following a period of notice and comment on the proposed withdrawal. 

<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 revised the definition of AMP. The Affordable 
CMS-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 Affordable Care Act revises the definition in 

section 1927(k) of the Act to eliminate the term “retail pharmacy class of trade” and adds 

a definition of the term “retail community pharmacy”, as well as wholesaler. It identifies 

specific entities drug manufacturers are to include and exclude from the determination of 

AMP and (as amended by Pub. L. 111-226) clarifies exceptions to the excluded entities 

for inhalation, infusion, instilled, implanted, or injectable drugs that are not generally 

dispensed through a retail community pharmacy. 

 In this proposed rule, we propose a new §447.504 “Determination of AMP,” 

which would be based on section 1927(k)(1) of the Act as amended by the Affordable 

Care Act. Below we provide a detailed discussion of the proposed definition of retail 

community pharmacy, other terms used in the determination of AMP, the entities 

proposed for inclusion and exclusion from AMP, and our proposed policy regarding the 

treatment of inhalation, infusion, instilled, implanted, or injectable drugs (also referred to 

as 5i drugs, defined in proposed §447.507), that are not generally dispensed through a 

retail community pharmacy in the determination of AMP. 

 These provisions of the Affordable Care Act became effective on October 1, 2010 

without regard to whether final regulations to carry out the provisions have been 

promulgated. Section 2503(a)(2) of the Affordable Care Act revised the definition of 

AMP to mean, for a covered outpatient drug of a manufacturer for a rebate period, the 

average price paid to the manufacturer for the drug in the United States by wholesalers 

for drugs distributed to retail community pharmacies, and by retail community 

pharmacies that purchase drugs directly from the manufacturer. 
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 discounts extended to wholesalers; 

● Bona fide service fees paid by manufacturers to wholesalers or retail 

community pharmacies, including (but not limited to) distribution service fees, inventory 

management fees, product stocking allowances, and fees associated with administrative 

services agreements and patient care programs (such as medication compliance programs 

and patient education programs); 

● Reimbursement by manufacturers for recalled, damaged, expired, or otherwise 

unsalable returned goods, including (but not limited to) reimbursement for the cost of 

goods and any reimbursement of costs associated with return goods handling and 

processing, reverse logistics, and drug destruction; 

● Payments received from, and rebates or discounts provided to, PBMs, managed 

care organizations, health maintenance organizations, insurers, hospitals, clinics, mail 

order pharmacies, long term care providers, manufacturers, or any other entity that does 

not conduct business as a wholesaler or retail community pharmacy, unless the drug is an 

inhalation, infusion, instilled, implanted, or injectable drug that is not generally dispensed 

through a retail community pharmacy. 

● Discounts provided by manufacturers under the Medicare Coverage Gap 

Discount Program (section 1860D-14A of the Act). 

 Section 1927(k)(1)(B)(ii) of the Act specifies that, notwithstanding section 

1927(k)(1)(B)(i) of the Act, manufacturers are to include in the determination of AMP for 

a covered outpatient drug any other discounts, rebates, payments, or other financial 
CMS-2345-P 40 

transactions that are received by, paid by, or passed through to retail community 

pharmacies. 

 How AMP is defined and what sales are included in the determination of AMP 

affects manufacturers, pharmacy groups, the Federal and State governments and 

Medicaid beneficiaries, and often there are competing interests at play. The provisions of 

the Affordable Care Act regarding AMP serve two distinct purposes: determining rebates 

and determining the basis for the FUL for multiple source drugs. 

 There is a direct relationship between which entities are to be included and 

excluded from AMP calculations and the basis for determining the FUL for multiple 

source drugs. The Affordable Care Act defines AMP to include prices paid to 

manufacturers by wholesalers for drugs distributed to retail community pharmacies and 

by retail community pharmacies that purchase drugs directly from the manufacturer. 

These sales are typically at higher prices than those of the specifically excluded entities 

such as the pharmacy benefit managers, managed care organizations, health maintenance 

organizations, insurers, hospitals, clinics, mail order pharmacies, long term care 

providers, and manufacturers. AMP calculations based on those sales to retail 

community pharmacies, as opposed to other pharmacies (such as mail order pharmacies), 

would likely result in a higher AMP value, given that AMP would be limited to higher 

priced sales. This higher AMP value would benefit the retail pharmacy industry because 

it is likely that the FUL, based on those AMPs, would be higher and in turn the maximum 

pharmacy reimbursement, based on those FULs, would be higher. On the other hand, a 

higher AMP would, in all likelihood, result in higher rebate payments from 

manufacturers. A broader definition of AMP, which would include sales to entities that 
CMS-2345-P 41 

purchase drugs at lower prices, would likely lower the AMP value, which in turn would 

lower drug manufacturer rebate liabilities. 

 AMP values also have an impact on States and potentially beneficiaries. 

Increasing AMP values and associated rebate payments would have a direct impact on 

State expenditures. However, increasing the FULs would also have a direct impact on 

State payments. On the other hand, if pharmacy reimbursement rates are too low, then it 

is conceivable that some pharmacies may elect not to participate in the Medicaid 

program, which could impact beneficiary access to pharmacy services. Similarly, States 

and the Federal government have an interest in assuring an appropriate level of rebates 

and beneficiaries’ access to care. 

<HD3>3. Definitions 

 Following is a detailed discussion of the specific terms associated with AMP 

calculations that we propose to define at §447.504(a). 

a. Average Unit Price 

 We propose to define average unit price to mean a manufacturer’s quarterly sales 

included in AMP less all required adjustments divided by the total units sold and included 

in AMP by the manufacturer in a quarter. The quarterly sales figure used in this 

definition represent sales of the drug unit in the lowest identifiable amount (for example, 

tablet or capsule for solid dosage forms, milliliter for liquid forms, gram for ointments or 

creams) as reported by the manufacturer. 

b. Charitable and not-for-profit pharmacies 

 For the purposes of this subpart, we propose to define charitable and not-for-profit 

pharmacies as organizations described in section 501(c)(3) of the Internal 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 insurers” to clarify the inclusion of self-insured plans, 

managed care organizations, PBMs, or other parties that are by statute, contract, or 

agreement, legally responsible for payment of a claim for a health care item or service. 

Although, the DRA clarified “third parties”, the Affordable Care Act referenced the term 

“insurer” in section 1927(k)(1)(B)(IV) of the Act and provided that payments received 

from many of these third party organizations (for example, pharmacy benefit managers, 

managed care organizations, health maintenance organizations, insurers) be excluded 

from the AMP calculation. 

 For the purposes of this subpart, we propose to define insurers as entities that are 

responsible for the payment of drugs but do not directly purchase drugs from 

manufacturers and are not in the supply chain to receive delivery of these drugs. Instead, 

insurers are responsible for payment to pharmacies for drugs dispensed to their members, 

and do not take actual possession of these drugs. 

d. Net Sales 

We propose to define net sales to mean quarterly gross sales revenue to 

wholesalers for drugs distributed to retail community pharmacies and retail community 

pharmacies that purchase drugs directly from manufacturers less cash discounts allowed, 

and other price reductions (other than rebates under section 1927 of the Act or price 

reductions specifically excluded by section 1927 of the Act, or regulations under this 

subpart) which reduce the amount received by the manufacturer. 

e. Retail community pharmacy 
CMS-2345-P 43 

 The Affordable Care Act eliminated the term “retail pharmacy class of trade” 

from the definition of AMP, and added section 1927(k)(10) of the Act to include a 

definition of the term “retail community pharmacy.” This change significantly narrows 

the entities previously included in the definition of retail pharmacy class of trade. In 

accordance with the Act, we propose to define retail community pharmacy to mean an 

independent pharmacy, a chain pharmacy, a supermarket pharmacy, or a mass 

merchandiser pharmacy that is licensed as a pharmacy by the State and that dispenses 

medications to the general public at retail prices. We further propose to incorporate the 

requirement set forth in section 1927(k)(10) of the Act that such term does not include a 

pharmacy that dispenses prescription medications to patients primarily through the mail, 

nursing home pharmacies, long-term care facility pharmacies, hospital pharmacies, 

clinics, charitable or not-for-profit pharmacies, government pharmacies, or pharmacy 

benefit managers. 

 Section 1927(k)(1) of the Act as amended by the Affordable Care Act specifies 

that manufacturers are responsible for reporting the AMP based upon their sales to retail 

community pharmacies or wholesalers for drugs dispensed to retail community 

pharmacies. 

In addition, the statutory provision for the determination of AMP suggests there 

are entities (for example, specialty pharmacies, home infusion pharmacies, and home 

health care providers), which are conducting business as wholesalers or retail community 

pharmacies which could be included in the determination of AMP. 

Section 1927(k)(1)(B)(i)(IV) of the Act excludes from the determination of AMP 

“payments received from and rebates or discounts provided to...any other entity that does 

not conduct business as a wholesaler or a retail community pharmacy...”. We believe 
CMS-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 business as a wholesaler 

or retail community pharmacy. This interpretation gives meaning to this broad exclusion, 

and provides for a calculation of AMP consistent with our reading of the statute. If an 

entity that does not conduct business as a wholesaler or retail community pharmacy is to 

be excluded from the determination of AMP, we considered whether or not it would be 

reasonable to conclude that payments received from and rebates or discounts provided to 

an entity that conducts business as a wholesaler or retail community pharmacy should be 

included in the determination of AMP. Based upon our understanding of the program, 

certain covered outpatient drugs may only be dispensed through such entities that are 

conducting business as wholesalers or retail community pharmacies, such as certain oral 

covered outpatient drugs approved by the FDA requiring a Risk Evaluation and 

Mitigation Strategy (REMS), to ensure that the benefits of a drug or biological product 

outweigh its risks. A list of REMS drugs is publically accessible on the FDA Web site at 

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

roviders/ucm111350.htm. 

Some REMS drugs are required to be dispensed by specially certified pharmacies, 

resulting in certain manufacturers utilizing a restricted network of certified specialty and 

home infusion pharmacies, which are not specifically included in the definition of retail 

community pharmacy at section 1927(k)(10) of the Act. In addition, certain oral covered 

outpatient drugs are dispensed solely through these specialty and home infusion 

pharmacies. Therefore, if these entities were to be excluded from AMP calculations, an 

AMP would not be available for these oral covered outpatient drugs. As a result, 

manufacturers would not be able to calculate rebates for these products and the statutory 
CMS-2345-P 45 

provisions requiring rebates for such drugs would, in essence, be rendered meaningless. 

We do not believe that the law should be read to create such a result. Section 1927(b)(1) 

of the Act requires that manufacturers must provide rebates for all of their covered 

outpatient drugs for which payment was made under the State plan. These provisions 

were not amended by the Affordable Care Act. Therefore, we believe in light of the 

provisions of section 1927(k)(1)(B)(i) of the Act, there is a basis for allowing sales, 

rebates, and discounts provided to entities conducting business as wholesalers or retail 

community pharmacies to be included in the determination of AMP for those drugs for 

which an AMP could not otherwise be calculated. Such an interpretation continues to 

give meaning to the rebate responsibilities of manufacturers in section 1927(b) of the Act. 

Therefore, we propose to include in the determination of AMP payments received from 

and rebates or discounts provided to an entity that conducts business as a wholesaler or 

retail community pharmacy, such as specialty and home infusion pharmacies, and home 

healthcare providers, since these entities dispense medications to segments of the general 

public at retail prices. We specifically invite comments on this part of the proposed rule. 

 Manufacturers contend that there is an administrative burden and difficulty in 

obtaining records assuring that their sales to wholesalers are distributed to retail 

community pharmacies. We took their concerns into consideration and considered 

whether or not to propose that the sales which cannot be definitely identified as sales to 

retail community pharmacies or wholesalers for drugs dispensed to retail community 

pharmacies would be eligible for inclusion in the sales that manufacturers use for AMP 

calculations. We received comments during the comment period for the Proposed Rule 

“Withdrawal of Determination of Average Manufacturer Price, Multiple Source Drug 

Definition, and Upper Limits for Multiple Source Drugs” published in the Federal 
CMS-2345-P 46 

Register on September 3, 2010 (75 FR 54073) that raised issues regarding the 

implementation of the new definition of AMP. As these comments were outside the 

scope of that proposed rule, these comments were not specifically addressed as part of 

final rule published on November 15, 2010 (75 FR 69591). However, these comments do 

provide insight into issues of concern for the various stakeholders, especially in regards 

to the implementation of the new proposed definition of AMP. 

 One of the issues raised was whether manufacturers should be allowed to presume 

that sales of drugs are distributed to retail community pharmacies when those sales of 

drugs are to wholesalers that do not further differentiate their sales among end 

purchasers. 

 Based on information provided from these comments it is our understanding that 

wholesalers generally resell either to manufacturer-contracted customers (which would 

generate a chargeback or similar record), or to other purchasers with no contract discount 

arrangement with the manufacturer. In the case of sales to wholesalers where no 

chargeback record is generated, manufacturers contend that they have minimal to no 

verifiable information regarding the final transactions on this category of wholesaler resales. Manufacturers have expressed concern that they would not have adequate data 

regarding the wholesaler’s actual purchaser to accurately determine if the drug was 

ultimately sold to retail community pharmacies. Therefore, we considered proposing a 

so-called "presumed inclusion" policy, where the manufacturer could (absent 

documentation to the contrary) presume that sales to wholesalers are for drugs distributed 

to retail community pharmacies, without data concerning that actual distribution. Based 

upon the comments we received from manufacturers we believe such a policy would be 

consistent with the market based on the typical chargeback arrangements that 
CMS-2345-P 47 

manufacturers have in place for institutional and other non-retail community pharmacy 

purchasers. The presumed inclusion policy would not require manufacturers to obtain 

data regarding the actual distribution to retail community pharmacies. Through the 

presumed inclusion policy, in the absence of chargeback or other verifiable data, 

manufacturers would be able to presume that the sales of drugs to wholesalers are for 

drugs that are distributed to retail community pharmacies. 

However, we recognize that there could be concerns with respect to whether 

manufacturers should be permitted to presume, in the absence of adequate documentation 

to the contrary, that prices paid by wholesalers are for drugs that are actually distributed 

to retail community pharmacies. Allowing this practice of presumptive inclusion could 

affect the calculation of the FULs for multiple source drugs because it arguably would 

permit the inclusion of lower AMPs in that calculation based on sales that may not have 

been actually distributed to retail community pharmacies. It could be argued that if 

manufacturers are allowed to presume that all drug sales are distributed to retail 

community pharmacies, AMP would be lower because it could include sales to entities 

(for example, mail order pharmacies and hospitals) that are able to buy the drugs at lower 

prices than retail community pharmacies. On the other hand, it could also be argued that, 

despite these concerns, there would be no adverse consequences to the FULs if 

manufacturers could presume sales distribution to retail community pharmacies because 

the sales that would be captured using the presumptive inclusion policy are those sales 

that do not generate chargebacks. In comments we received during the comment period 

for the Proposed Rule, “Withdrawal of Determination of Average Manufacturer Price, 

Multiple Source Drug Definition, and Upper Limits for Multiple Source Drugs” 

published in the Federal Register on September 3, 2010 (75 FR 54073), manufacturers 
CMS-2345-P 48 

claim that allowing the presumed inclusion policy would not create any adverse 

consequences concerning pharmacy payments. They believe that these sales would, in all 

likelihood, have a higher net price than institutional or chargeback-generating sales. 

Additionally, they contend that the volume of AMP-eligible sales used in calculating the 

FUL could be increased because the additional sales to wholesalers without chargeback 

data would be added to the volume calculation for determining the weighted average of 

monthly AMPs. Therefore, they argue that calculating AMPs utilizing the presumptive 

inclusion policy could result in higher AMPs than AMPs based on actual data and those 

higher AMPs would be weighted more heavily in the FULs calculation. 

We also considered instances where manufacturers are only including in their 

calculation of AMP those sales where there is adequate verifiable documentation 

showing that the drug was actually distributed to a retail community pharmacy, whether 

directly or through a wholesaler. However, we recognize that in this approach there may 

be instances where the wholesaler actually re-sells the drug to the retail community 

pharmacies but the manufacturer does not have documentation regarding that actual sale 

to the retail community pharmacy. Therefore, in contravention of the statute, those sales 

would not be included in the AMP calculation since the manufacturer does not have 

adequate documentation. 

While we recognize such concerns, we have decided to propose that 

manufacturers report the AMP based upon their actual sales to retail community 

pharmacies or wholesalers for drugs distributed to retail community pharmacies. 

Although we are not proposing a presumed inclusion policy, we did consider both 

approaches and recognize that there are obstacles with each. We acknowledge that a 

reasonable alternate approach would be one of presumed inclusion because the statute 
CMS-2345-P 49 

provides a more structured definition of what is to be included and excluded from AMP. 

However, we have concerns that a presumed inclusion policy would lead to the inclusion 

of sales by a manufacturer to entities not contemplated in the statutory definition. 

Accordingly, for purposes of this proposed rule, we are proposing that manufacturers 

must calculate AMP based on sales: (1) To wholesalers for drugs distributed to retail 

community pharmacies, or (2) to retail community pharmacies. We seek comments 

regarding this section and request information concerning distribution data, specifically 

data concerning wholesaler sales to the retail community pharmacies so that we can 

further consider this policy decision. 

<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 transactions that we propose to include in the 

determination of AMP at §447.504(b). 

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

The definition of AMP in section 1927(k)(1) of the Act, as amended by the 

Affordable Care Act, specifies that AMP is to be calculated, in part, based on the prices 

paid by wholesalers for drugs dispensed through retail community pharmacies. 

Therefore, we propose that sales to wholesalers for drugs distributed to retail community 

pharmacies are to be included in the determination of AMP. 

b. Sales to other manufacturers (§447.504(b)(2)) 

We propose that sales to other manufacturers who act as wholesalers are to be 

included in the determination of AMP to the extent that such sales are for drugs 

distributed to retail community pharmacies. This provision should be read in concert 

with the definition of wholesaler found in section 1927(k)(11) of the Act. 
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 are to include in the determination of AMP, discounts, 

rebates, payments or other financial transactions that are received by, paid by, or passed 

through to, retail community pharmacies, as defined earlier in this section. Therefore, we 

propose to include in the determination of AMP, notwithstanding those price reductions 

specifically excluded by statute or this regulation, discounts, rebates, payments, or other 

financial transactions that are received by, paid by, or passed through to, retail 

community pharmacies. Again, we are unsure to what extent the manufacturer knows 

that such transactions occur. However, in accordance with our reading of the statute, the 

manufacturer must include such discounts where it has evidence or documentation 

demonstrating that such discounts have been passed through to the pharmacy. 

d. Entities conducting business as retail community pharmacies or wholesalers, 

including but not limited to Specialty Pharmacies, Home Infusion Pharmacies and Home 

Healthcare Providers (§447.504(b)(4)) 

As discussed earlier, we believe in light of the provisions of section 

1927(k)(1)(B)(i) of the Act, there is a basis for allowing sales, rebates, and discounts 

provided to entities conducting business as wholesalers or retail community pharmacies 

to be included in the determination of AMP for those drugs for which an AMP could not 

otherwise be calculated. It is our understanding that certain covered outpatient drugs are 

dispensed primarily, if not solely, through such entities as specialty pharmacies, home 

infusion pharmacies, or home healthcare providers. We propose that these pharmacies be 

considered entities that are conducting business as wholesalers or retail community 

pharmacies. While not specifically identified in the statutory definition of retail 
CMS-2345-P 51 

community pharmacy, these pharmacies do conduct business as a retail community 

pharmacy inasmuch as they dispense medications to the general public at retail prices and 

are licensed by the State as a pharmacy. While they may be serving a specific part of the 

general public based on a certain medical condition, the drugs dispensed by these 

pharmacies are sold in the retail marketplace and are available to any member of the 

general public who has one of these medical conditions. Therefore, we propose that 

manufacturers are to include in the determination of AMP the sales of covered outpatient 

drugs that are dispensed through entities conducting business as wholesalers or retail 

community pharmacies, which include but are not limited to specialty pharmacies, home 

infusion pharmacies, and home healthcare providers. 

<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 from the determination of AMP at §447.504(c). 

a. Prices to other Federal Programs including TRICARE – (§447.504(c)(1)-

§447.504(c)(3)) 

Manufacturers that participate in the MDR program can also participate in other 

Federal programs which set the prices and/or discounts for drugs, and these prices are not 

generally available to retail community pharmacies. We propose that in light of section 

1927(k) of the Act, prices to Federal programs should be excluded from AMP. These 

Federal programs include the Indian Health Service (IHS), the DVA, a State home 

receiving funds under section 1741 of title 38, United States Code, the Department of 

Defense (DoD), the Public Health Service (PHS), a covered entity described in section 

1927(a)(5)(B) of the Act (including inpatient prices charged to hospitals described in 

section 340B (a)(4)(L) of the PHSA), the Federal Supply Schedule (FSS) of the General 
CMS-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 TRICARE Retail Pharmacy Program in Federal 

Procurement of Pharmaceuticals (74 FR 11279). That regulation implements section 703 

of the National Defense Authorization Act for fiscal year 2008 (NDAA, Pub. L. 110-181) 

which states that for any prescription filled on or after the date of enactment of the 

NDAA, the TRICARE Retail Pharmacy Program will be treated as an element of the 

DoD for purposes of procurement of drugs by Federal agencies under section 8126 of 

title 38, United States Code (U.S.C.). In accordance with that provision as well as the 

revised definition of AMP in section 1927(k)(1) of the Act, we propose that TRICARE 

Retail Pharmacy Program prices should be treated as prices to DoD and therefore 

excluded from the calculation of AMP. 

b. Sales outside the 50 States, the District of Columbia and Territories 

(§447.504(c)(4)) 

 The proposed definition of “United States” in §447.502 would define “United 

States” to mean the 50 States, the District of Columbia and the territories. We, therefore, 

propose that sales to entities outside the 50 States, the District of Columbia and the 

territories are not within the scope of the definition of sales to retail community 

pharmacy, and that drugs sold to these entities would not be considered eligible sales 

within the definition of AMP. Therefore, we propose that sales to entities not within the 

50 States, the District of Columbia or the territories be excluded from the manufacturers’ 

determination of AMP. 
CMS-2345-P 53 

c. Hospitals and Hospital pharmacy sales (§447.504(c)(5)) 

Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that 

sales to hospitals are excluded from the determination of AMP. Further, the term “retail 

community pharmacy” excludes hospital pharmacies. Therefore, we propose to clarify 

that sales to hospitals, including direct and indirect sales where the drug is used in either 

the inpatient setting or the outpatient pharmacy for outpatient hospital use are excluded 

from the determination of AMP. 

d. Sales to health maintenance organizations (HMOs) (including managed care 

organizations (MCOs)) (§447.504(c)(6)) 

Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that 

sales to HMOs and MCOs are excluded from the determination of AMP. The Affordable 

Care Act does not specifically address HMO/MCO operated pharmacies. However, 

given the broad reference in the statute to HMOs and MCOs, we propose to clarify that 

sales and associated rebates and discounts to HMO/MCO operated pharmacies are 

excluded from the determination of AMP. 

e. Long-term care facility pharmacies (§447.504(c)(7)) 

Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that 

sales and associated rebates and discounts to long-term care providers are excluded from 

the determination of AMP. Further, the term retail community pharmacy excludes 

nursing home pharmacies and long-term care facility pharmacies. Therefore, we propose 

to clarify that sales and associated rebates and discounts to long-term care providers, 

including nursing facility pharmacies, nursing home pharmacies, long-term care facilities, 

long-term care facilities pharmacies, contract pharmacies for the nursing facility where 

these sales can be identified, and other entities where the drugs are dispensed through a 
CMS-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 clarify that sales to mail order pharmacies are 

excluded from the determination of AMP. 

g. Clinics and other outpatient facilities (§447.504(c)(9)) 

 Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that 

sales to clinics are excluded from the determination of AMP. In 42 CFR 440.90, clinic 

services is defined as preventative, diagnostic, therapeutic, rehabilitative, or palliative 

services that are furnished by a facility that is not part of a hospital but is organized and 

operated to provide medical care to outpatients. The term includes the following services 

furnished to outpatients: (a) Services furnished at the clinic by or under the direction of a 

physician or dentist, and (b) Services furnished outside the clinic by clinic personnel 

under the direction of a physician to an eligible individual who does not reside in a 

permanent dwelling or does not have a fixed home or mailing address. 

 Although the Affordable Care Act did not specifically address the treatment of 

outpatient facilities in the determination of AMP, we believe that in accordance with the 

definition of AMP in section 1927(k)(1) of the Act, as well as the definition of clinic in 

42 CFR 440.90, sales to outpatient facilities such as surgical centers, ambulatory care 

centers, dialysis centers, End-Stage Renal Disease clinics, outpatient hospital clinics and 

mental health centers should be excluded from the AMP. Therefore, we propose to 
CMS-2345-P 55 

exclude sales and associated rebates and discounts to clinics and outpatient facilities from 

the determination of AMP. 

h. Government pharmacies (§447.504(c)(10)) 

 Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that 

the definition of retail community pharmacy does not include government pharmacies. 

We propose to define government pharmacies as pharmacies operated or owned by 

Federal, state, county, and municipal governments. We also propose that sales to 

government pharmacies are excluded from the determination of AMP. 

i. Sales to charitable and not-for-profit pharmacies (§447.504(c)(11)- 

§447.504(c)(12)) 

 Section 1927(k) of the Act, as revised by the Affordable Care Act specifies that 

the definition of retail community pharmacy does not include charitable or not-for-profit 

pharmacies. We propose to define charitable or not-for-profit pharmacies as section 

501(c) organizations. Section 501(c) organizations are those described in the Internal 

Revenue Code and are tax-exempt, nonprofit corporations or associations. We propose 

that sales to these not-for-profit and charitable pharmacies be excluded from the 

determination of AMP. 

j. Insurers §447.504(c)(13)) 

 The Affordable Care Act defined AMP by specifying that payments received 

from, and rebates or discounts provided to insurers are to be excluded from the 

determination of AMP. Therefore, we propose to exclude from the determination of 

AMP payments received from, and any rebates, discounts, or payments that are provided 

directly to insurers and that are not passed on to retail community pharmacies. 
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 manufacturers to wholesalers or retail community pharmacies. 

In accordance with our reading of the statute, the sales to wholesalers for drugs 

distributed to retail community pharmacies and retail community pharmacies would be 

included in AMP calculations, regardless of how the drug is ultimately reimbursed when 

provided to the beneficiary. 

k. Administrative Fees, including bona fide service fees, as well as the treatment of 

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

 As described earlier, we propose to revise the definition of bona fide service fees 

in §447.502 to include fees provided as specific examples of bona fide service fees in the 

Affordable Care Act. The Affordable Care Act specifies that bona fide service fees paid 

by manufacturers to wholesalers or retail community pharmacies include, but are not 

limited to, distribution service fees, inventory management fees, product stocking 

allowances, and fees associated with administrative service agreements and patient care 

programs (such as medication compliance programs and patient education programs). 

 The current regulations define bona fide service fees, in part, to mean fees paid by 

a manufacturer to an entity that represent fair market value for a bona fide, itemized 

service. We continue to be concerned that these fees could be used as a vehicle to 

provide discounts, as opposed to fees at "fair market value" for bona fide services. Thus, 

to avoid potential fraud concerns, we are retaining our definition, but we have chosen not 

to define "fair market value" at this time. Due to the rapidly changing market in which 

new types of arrangements arise, we believe that manufacturers should appropriately 
CMS-2345-P 57 

determine fair market value and make reasonable assumptions consistent with adequate 

documentation that will support their payment for these services at fair market rates 

sufficient that an outside party can determine the basis for the fair market value 

determination. This is consistent with the 2007 AMP Final Rule (72 FR 39184) and the 

ASP reporting rule (71 FR 69667). 

 In accordance with the statute, we propose that bona fide service fees should be 

excluded from the calculation of AMP. We further propose that, in light of the statutory 

definition, administrative fees and other fees which are not specifically excluded by the 

Affordable Care Act, but which meet the definition of bona fide service fees, should also 

be excluded from the determination of AMP. We are not proposing to further define the 

type of fees used as examples in the definition of bona fide service fees because we 

believe that these terms can be read in concert with the current definition of bona fide 

service fee. As noted previously, they provide specific examples of what could qualify as 

a bona fide service fee. We note however that retroactive price adjustments, sometimes 

also known as price appreciation credits, do not meet the definition of a bona fide service 

fee as they do not reflect any service or offset of a bona fide service performed on behalf 

of the manufacturer. 

 The statute does not specifically exclude GPO fees from the AMP calculation. To 

the extent that bona fide service fees, including, but not limited to distribution service 

fees, inventory management fees, product stocking allowances, and fees associated with 

administrative service agreements and patient care programs (such as medication 

compliance programs and patient education programs) and other fees to GPOs meet the 

definition of “bona fide service fee”, we propose that such fees should be excluded from 

the determination of AMP and are not considered price concessions. However, as 
CMS-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 wholesaler or retail community pharmacy, the fees 

would not qualify as bona fide service fees. To the extent this occurs, such fees cannot 

be considered bona fide service fees and, in accordance with section 1927(k)(1)(B)(ii) of 

the Act, should be included in AMP. 

<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 extended to wholesalers are to be excluded from 

the determination of AMP. Therefore, we are proposing that customary prompt pay 

discounts extended to wholesalers be excluded from the determination of AMP. 

m. Returned Goods (§447.504(c)(16)) 

Section 1927(k) of the Act, as revised by the Affordable Care Act, specifies that 

reimbursement by manufacturers for recalled, damaged, expired, or otherwise unsalable 

returned goods, including (but not limited to) reimbursement for the cost of goods, and 

any reimbursement of costs associated with return goods handling and processing, 

reverse logistics, and drug destruction are excluded from the determination of AMP. We 

propose to incorporate this definition into this rule, but note that it is applicable only to 

the extent that payment for these returned goods covers the cost of returns and does not 

otherwise serve as payment to the pharmacy as a price concession. In addition, we 

propose to exclude the value of returned goods themselves from the determination of 

AMP when returned in good faith. 

We are not proposing to define the terms recalled, damaged, and expired as we 

believe they are self-explanatory within the standard industry practice. We likewise are 

not defining unsalable, but would also base it on standard industry practice to determine 
CMS-2345-P 59 

under what conditions and/or circumstances drugs would be considered unsalable. We 

are requesting comments regarding whether we should define these terms or further 

define how these industry standards should be set. We also request examples of what 

would qualify as unsalable. 

n. Medicare Coverage Gap Discount (§447.504(c)(17)) 

Section 3301 of the Affordable Care Act established the Medicare Coverage Gap 

Discount Program under sections 1860D-43 and 1860D-14A of the Act. Section 1101(c) 

of the Affordable Care Act further specified that discounts provided by manufacturers 

under the Medicare coverage gap discount program will be excluded from AMP. 

Therefore, we propose that discounts under the Medicare coverage gap discount program 

should be excluded from AMP. 

o. PBM Price Concessions (§447.504(c)(18)) 

Section 1927(k)(1)(B) of the Act, as revised by the Affordable Care Act, revised 

the definition of AMP by excluding payments received from, and rebates or discounts 

provided to, pharmacy benefit managers (PBMs) and mail order pharmacies. Therefore, 

we propose to exclude from the calculation of AMP, payments received from and rebates 

or discounts provided to PBMs, including their mail order pharmacy’s purchases to the 

extent that no part of the rebates, discounts or payments are received by, paid by, or 

passed through to retail community pharmacies. 

p. Treatment of Medicaid Rebates in AMP (§447.504(c)(19)) 

We propose to exclude rebates under the national rebate agreement or a CMSauthorized State supplemental rebate agreement paid to State Medicaid Agencies from 

the determination of AMP. We are doing so in light of the definition of section 
CMS-2345-P 60 

1927(k)(1) of the Act, because these rebates affect the manufacturer and the State, and 

there is no direct effect on the sale price of these drugs to retail community pharmacies. 

Entities not specifically addressed in the statute. 

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

 The Affordable Care Act did not specifically address the treatment of sales to 

hospices in the determination of AMP. We propose, in light of the revisions in sections 

1927(k)(1)(A) and 1927(k)(10) of the Act, to exclude hospice sales from the definition of 

AMP. Hospice pharmacies are outside the scope of the definition of retail community 

pharmacy. Further, these pharmacies serve a defined population and do not dispense 

medications to the general public at retail prices. 

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

 We propose that the sales to prisons are outside the scope of the definition of 

retail community pharmacy; drugs sold to these entities serve a defined population in that 

facility and are not available to the general public. 

s. Direct sales to physicians (§447.504(c)(22) and §447.504(d)(1)) 

 Except for the sale of inhalation, infusion, instilled, implanted and injectable 

drugs (also referred to as the 5i drugs, and which are discussed in detail later in this 

section) we do not believe, in light of the definition of retail community pharmacy in 

section 1927(k)(10) of the Act, that physicians meet the definition of a retail community 

pharmacy. However, in light of the specific revisions to section 1927(k)(1)(B)(i)(IV) by 

section 202 of the Education Jobs and Medicaid Funding Act (Pub. L. 111-226), we 

believe that certain sales to physicians should be included in AMP. Since we have 

defined the 5i drugs as those which are primarily physician-administered, we believe in 

light of the statutory amendments, the case can be made that the sale (and associated 
CMS-2345-P 61 

discounts) of these 5i drugs to physicians should be included in the determination of 

AMP. Therefore, we propose in §447.504(d)(1) that for 5i drugs, sales (and associated 

rebates or discounts) to physicians are included in the determination of AMP. However, 

in the case of non-5i drugs, we propose at §447.504(c)(26) that direct sales to physicians 

be excluded from the determination of AMP. 

t. Direct sales to patients (§447.504(c)(23)) 

 We propose that direct sales to patients be excluded from AMP as these sales are 

outside the scope of the definition of retail community pharmacy in section 1927 (k)(10) 

of the Act. 

u. Free Goods (§447.504(c)(24)) 

We propose that where a drug or any other item is given away, but not contingent 

on any purchase requirement, there is no sale and, therefore, that transaction would be 

excluded from the determination of AMP. 

v. Manufacturer Coupons (§447.504(c)(25)) 

 We propose in light of the revised definition of AMP that manufacturer coupons 

to a consumer redeemed by the manufacturer, agent, or another entity acting on behalf of 

the manufacturer should be excluded from AMP, but only to the extent that the full value 

of the coupon is passed on to the consumer and the retail community pharmacy does not 

receive any discount, rebate or price concessions in connection with the manufacturer 

coupons. 

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

 We propose that manufacturer vouchers would be excluded from the 

determination of AMP because the benefits of such vouchers are passed onto the patient 

and the retail community pharmacy does not receive any discount, rebate or price 
CMS-2345-P 62 

concessions in connection with the manufacturer voucher programs. However, to the 

extent that the retail community pharmacy receives a discount, rebate, or other price 

concession, in accordance with section 1927(k)(1)(B)(ii) of the Act, it shall be included 

in AMP. 

x. Manufacturer-sponsored Drug Discount Card Programs (§447.504(c)(27)) 

We propose in light of the revised definition of AMP that prices negotiated under 

a manufacturer-sponsored drug discount program would be excluded from the 

determination of AMP, provided the discount is passed on to the patient and the retail 

community pharmacy does not receive any discount, rebate or price concessions in 

connection with the manufacturer-sponsored drug discount card program. 

y. Manufacturer-sponsored patient refund/rebate programs (§447.504(c)(28)) 

The Affordable Care Act did not explicitly address the treatment of prices 

negotiated under a manufacturer-sponsored patient refund or rebate program. To the 

extent the manufacturer provides a full or partial refund or rebate to the patient for outof–pocket costs and the retail community pharmacy does not realize any discounts or 

rebates or receive any price concession in connection with the manufacturer-sponsored 

patient refund/rebate programs, we propose in light of the revised definition of AMP that 

prices negotiated under a manufacturer sponsored patient refund or rebate program would 

be excluded from the determination of AMP. 

z. Copayment and Patient Assistance Programs (§447.504(c)(29)) 

The Affordable Care Act did not address the treatment of patient assistance 

programs, including copayment assistance programs. We believe in light of the revised 

definition of AMP that patient assistance programs, including copayment assistance 

programs that provide free goods that are not contingent on future purchases to patients 
CMS-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, instilled, implanted, and injectable Drugs 

(§447.504(d) and §447.507) 

In accordance to section 1927(k)(1)(B)(i)(IV) of the Act, manufacturers are to 

exclude from the determination of AMP for a covered outpatient drug for a rebate period, 

any payments received from, and other discounts or rebates, that are provided to any 

other entity that does not conduct business as a wholesaler or retail community pharmacy. 

Certain specialty covered outpatient drugs are not generally dispensed through retail 

community pharmacies and in those instances manufacturers would be unable to generate 

an AMP which would prevent rebate calculations for those drugs. Section 202 of the 

Education, Jobs and Medicaid Funding Act (Pub. L. 111-226), enacted August 10, 2010, 

amended the Affordable Care Act definition of AMP at section 1927(k)(1) of the Act to 

include sales for the 5i drugs that are not generally dispensed through retail community 

pharmacies. This provision was added to ensure that an AMP could be calculated and 

Medicaid rebates could be collected from manufacturers for the 5i drugs that are not 

generally sold at retail community pharmacies. (See 156 Cong. Rec. S6766 (Aug. 5, 

2010)). 
CMS-2345-P 64 

This provision went into effect on October 1, 2010 and revises a manufacturer’s 

AMP calculation for the 5i drugs to include entities other than retail community 

pharmacies that dispense such drugs. 

While the enactment of this legislation addressed the need to ensure that rebates 

would be collected for these 5i drugs that are “not generally dispensed through retail 

community pharmacies,” it also raised additional issues that were not directly addressed 

in the statute. Based upon section 1927(k)(1)(B)(i)(IV) of the Act, we have identified the 

following issues that would require further clarification: (1) Identification of 5i drugs, (2) 

clarification of the term "not generally dispensed," (3) determination of sales, discounts 

and rebates included in the 5i calculation, and (4) identification of other entities included 

in the definition. 

We also received requests from manufacturers and pharmacies requesting 

guidance on this provision; specifically regarding how to interpret “not generally 

dispensed through a retail community pharmacy” and how to identify these 5i drugs. 

We considered issuing a list identifying the specific 5i drugs that are to be 

included in this category. Second, we considered how to define the term “not generally 

dispensed.” Finally, we considered clarifying which sales, discounts, and other financial 

transactions would be included in the determination of AMP for these drugs. 

Based on our understanding of the market as well as other Federal programs, we 

believe most 5i drugs are administered parenterally or through an item of durable medical 

equipment (DME) and often require physician supervision during administration. We 

considered defining each type of administration route; however, we believe that it is not 

necessary to define the terms because the terms are essentially self explanatory. We are 

seeking comments on this decision. 
CMS-2345-P 65 

We considered using the Medicare Part B standards to identify 5i drugs, given 

that Medicare Part B covers a limited number of outpatient prescription drugs that are not 

usually self-administered, such as those given in a hospital outpatient department or 

doctor’s office. In addition, Medicare Part B covers outpatient prescription drugs 

provided through an item of durable medical equipment, such as an infusion pump or 

nebulizer, and injectable drugs administered by a licensed medical practitioner, if 

considered reasonable and necessary. 

Medicare Part B does not have a comprehensive, all inclusive list of covered 

inhalation, infusion, injectable, instilled, or implanted drugs. However, it already has a 

publicly available reference which lists drugs that are “not usually self-administered” and 

could be considered for coverage under Medicare Part B. In addition, the Medicare Part 

B ASP NDC-HCPCS Crosswalk file identifies drugs that could be considered for 

coverage under Medicare Part B; it is publically accessible on the CMS Web site at 

http://www.cms.gov/McrPartBDrugAvgSalesPrice/01a19_2010aspfiles.asp and is 

updated on a quarterly basis. The Medicare Part B ASP NDC-HCPCS Crosswalk file 

also includes drugs which do not meet the 5i criteria, specifically those oral drugs 

covered by Part B following a transplant as well as Part B oral anti-emetics and oral 

cancer drugs. We considered using the Medicare Part B ASP NDC-HCPCS Crosswalk 

file to identify 5i drugs. However, we believe it would not be optimal because it is not an 

all inclusive list of inhalation, infusion, instilled, implanted and injectable drugs and 

therefore would likely miscategorize some 5i drugs. 

We also considered whether CMS or the manufacturers should determine which 

drugs qualify as a 5i drug. In doing so, we considered whether or not it would be difficult 

for manufacturers to determine which drugs should be classified as an inhalation, 
CMS-2345-P 66 

infusion, instilled, implanted, or injectable drugs for the determination of AMP using the 

route of administration approved by the FDA or based upon the drug’s NDC. 

We also considered if we should identify the 5i drugs based upon their NDC 

number. If we were to identify the 5i drugs, we determined it would not provide reliable 

data and still require us to make available, as well as continuously update, a set of 

guidelines that would likely require an outside data source. In addition to the nuances of 

identifying existing drugs, it would be a continuous challenge to maintain a reliable list 

due to an evolving marketplace with the introduction of new drugs and removal of 

existing drugs. 

 Although we determined it would not be practical for CMS to provide a list 

identifying the 5i drugs, we considered providing a list of routes of administration as 

identified by the FDA that we believe would be applicable for 5i drugs. We believe this 

list would serve as a guide that manufacturers would use to determine if a drug could be 

considered as a 5i drug. We are proposing to add §447.507 Identification of 5i drugs to 

indicate how 5i drugs are to be identified. In §447.507(a) we propose to use the FDA’s 

Routes of Administration as a guide to identify 5i drugs. Below is a list of FDA routes of 

administration that we are proposing manufacturers use to identify 5i drugs. It includes, 

but is not limited to, the routes of administration listed in Table 3. This list comes from 

the FDA Structured Product Labeling, Route of Administration data standards located at

http://www.fda.gov/ForIndustry/DataStandards/StructuredProductLabeling/ucm162034.h

tm. 

TABLE 3: ROUTES OF ADMINISTRATION FOR 5i IDENTIFICATION

Auricular (Otic) 

Conjunctival 

Endocervical 

Endosinusial 
CMS-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 

Percutaneous 
CMS-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 route of administration, manufacturers will 

be readily able to identify products which are inhaled, infused, instilled, implanted, and 

injected as the information is readily available. However, manufacturers would need to 

determine if those products identified as 5i drugs are “not generally dispensed through a 

retail community pharmacy”. Therefore, we also considered how to establish a standard 

by which manufacturers would determine when a drug is “not generally dispensed 

through a retail community pharmacy.” 

We considered adopting the Medicare Part B guidelines used to determine if a 

drug is to be classified as self-administered as a way to determine when a drug is “not 

generally dispensed” through a retail community pharmacy. In accordance with section 

1861(s)(2)(A) and 1861(s)(2)(B) of the Act, the Medicare Benefit Policy Manual, 

Chapter 15 – Covered Medical and Other Services, §50.2(C) provides guidance regarding 
CMS-2345-P 69 

the term “usually.” Specifically, it provides that the term is used to mean more than 50 

percent of the time in determining when a drug is to be classified as self-administered. In 

light of this guidance, we believe that if a drug can be self administered, it is reasonable 

to assume that it is usually dispensed through a retail community pharmacy; however, for 

physician-administered drugs, we believe it is reasonable to conclude that the drug may 

be provided by physicians or other licensed practitioner in a variety of entities (such as 

clinics and physician’s offices), and given the nature of the drugs, are usually not 

dispensed by a retail community pharmacy. 

If we were to adopt a similar 50 percent methodology for determining when a 

drug is not generally dispensed through a retail community pharmacy, it would mean that 

a drug would be classified as “not generally dispensed” through a retail community 

pharmacy if more than 50 percent of the sales were to an entity other than a wholesaler 

for distribution to retail community pharmacies or retail community pharmacies that 

purchase drugs directly from the manufacturer. We believe that if we were to adopt a 

50 percent methodology, some 5i drugs which are self-administered and generally 

dispensed through retail community pharmacies would be included in the alternate 5i 

AMP calculation due to the breadth of the percentage allowed in this calculation 

methodology. 

We also considered whether we could use the methodology commonly used by 

manufacturers to calculate the Department of Veterans Affairs (DVA) non-Federal 

Average Manufacturer Price (non-FAMP). This methodology is described in the draft 

“Amended Master Agreement”2

, between the Secretary of Veterans Affairs and the 

 

2 While the Amended Master Agreement (9/7/00 draft) between the Secretary of Veterans Affairs and the 

Manufacturer Identified in Section VIII of this Agreement has not been finalized and is therefore not an 

official DVA document, it is our understanding that it is still utilized by those in the industry when 

determining non-FAMP.
CMS-2345-P 70 

Manufacturer in section VII of this Agreement. Manufacturers, manufacturer 

associations, pharmacies and pharmacy associations have repeatedly referred to this draft 

“Amended Master Agreement” when requesting guidance from CMS on the issue of 

defining “not generally dispensed”. According to the definition of Wholesaler found in 

the draft “Amended Master Agreement,” manufacturers are to consider a buyer to be a 

wholesaler when drugs with unit sales of 90 percent or greater are to retailers, other 

merchants, industrial, institutional or commercial users. Manufacturers are responsible 

for using this 90 percent principle as a guideline to determine when their sales are to 

wholesalers in their determination of non-FAMP. We considered whether it would be 

reasonable to apply the same principle to 5i drug determinations as to when a drug is “not 

generally dispensed” through a retail community pharmacy. We considered adopting a 

similar 90 percent principle because the definition of AMP, as specified in 

section 1927(k)(1)(B) of the Act, as revised by the Affordable Care Act, reflects sales to 

wholesalers for drugs distributed to retail community pharmacies (and retail community 

pharmacies that purchase drugs directly from the manufacturer). Therefore, for 5i drugs, 

our understanding of the 90 percent principle would be that if 90 percent or more of the 

manufacturer’s sales for the respective drug were to an entity other than a wholesaler for 

distribution to retail community pharmacies or retail community pharmacies that 

purchase drugs directly from the manufacturer, then the drug would be classified as “not 

generally dispensed” through a retail community pharmacy. 

We believe providing a quantitative method to determine when a drug is “not 

generally dispensed” through a retail community pharmacy would be preferable to a more 

qualitative drug specific approach as it provides a more definitive meaning to the term 

“not generally dispensed” through a retail community pharmacy. Therefore, in this 
CMS-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 regarding whether the 90 percent 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 percentage of sales required to classify a 

drug as “not generally dispensed through a retail community pharmacy” may be too high. 

Manufacturers that enter into and have in effect a Medicaid drug rebate agreement, as set 

forth in section 1927(a) of the Act, are responsible for reporting AMP on a monthly and 

quarterly basis. Therefore, we propose at §447.507(b)(2) that the determination of a 5i 

drug’s status as “not generally dispensed” through a retail community pharmacy will 

need to be evaluated on a monthly and quarterly basis. We invite comments on this 

approach, including comments indicating if we should consider other quantitative options 

(for example, 75 percent, or 50 percent) to identify if a 5i drug is “not generally 

dispensed” through a retail community pharmacy and reasons as to why those options 

would be appropriate. We also invite comments on whether manufacturers should 

evaluate the status of a 5i drug’s status as “not generally dispensed” through a retail 

community pharmacy on a monthly or quarterly basis. 

We further propose at §447.504(d) that, in light of section 1927(k)(1)(B)(i)(IV) of 

the Act, AMP for these drugs will include all sales, rebates, discounts, or other financial 

transactions already proposed for inclusion in the determination of AMP as well as the 

sales, rebates, discounts, or other transactions concerning these drugs, that are provided to 

the following non-retail community pharmacy entities: 

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

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

purchases. 

● Sales to HMOs, including MCOs. 

● Sales, discounts, or rebates paid directly to insurers. 

● Sales to hospitals. 

● Sales to clinics and outpatient facilities. 

● Sales to mail order pharmacies. 

● Sales to long-term care providers, including nursing facility pharmacies, 

nursing home pharmacies, long-term care facilities, contract pharmacies for the nursing 

facility where these sales can be identified with adequate documentation, and other 

entities where the drugs are dispensed through a nursing facility pharmacy, such as 

assisted living facilities. 

● Sales to hospices. 

● Sales to other manufacturers who conduct business as wholesalers or retail 

community pharmacies. 

<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 included in the calculation of AMP, except 

for those chargebacks provided to any of the entities that are excluded from the 

determination of AMP. Inasmuch as we believe chargebacks are based on identified 

sales to a specific entity, a manufacturer cannot make assumptions regarding these 

chargebacks and must identify them to included or excluded AMP sales. Additionally, 

we propose that AMP is to include cash discounts except customary prompt pay 

discounts extended to wholesalers, free goods that are contingent on any purchase 
CMS-2345-P 73 

requirement, volume discounts, incentives, administrative fees, service fees (other than 

bona fide service fees), distribution fees, and any other rebates, discounts or other 

financial transaction, other than rebates under section 1927 of the Act, which reduce the 

price received by the manufacturer for drugs distributed to retail community pharmacies. 

b. Quarterly AMP (§447.504(e)(2)) 

Based on prior experience and on the MDR program submissions we believe that 

the quarterly AMP should be calculated as a weighted average of the monthly AMPs in 

the quarter. We believe that, based on our prior experience and the similarities of both 

calculations, this approach will minimize discrepancies between the monthly and the 

quarterly AMPs. Therefore, we propose that quarterly AMP is to be calculated as a 

weighted average of monthly AMPs in the quarter. 

c. Manufacturer adjustments (§447.504(e)(3)) 

To account for discounts, rebates or other price concessions that may not be 

available during the rebate reporting period, we propose that the manufacturer must 

adjust the AMP for the applicable rebate period if cumulative discounts, rebates, or other 

arrangements subsequently adjust the prices actually realized, to the extent that these 

discounts, rebates or arrangements are not excluded from the determination of AMP by 

statute or regulation. 

<HD2>D. Determination of Best Price (§447.505)

<HD3>1. Definitions of Best Price and Providers 

 We are proposing re-codifying the terms “best price” and “Providers” under 

newly proposed §447.505(a). Additionally, we are proposing to revise the definition of 

the term “best price” at newly proposed §447.505(a) so that it is consistent with the 

definition of best price found in section 1927(c)(1)(C) of the Act. 
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 statute provides sufficient detail as to which prices are to be 

included in the determination of best price. Therefore, we further propose the “Prices 

included in best price,” currently located in regulations at §447.505(c)(1)-(11), be 

redesignated to §447.505(b) and that it would be revised to remove the list of prices 

included in best price. Instead, the paragraph would read as follows: “Except for those 

prices identified in paragraph (c) of this section, best price for covered outpatient drugs 

includes all prices and associated rebates, discounts, or other transactions that adjust 

prices either directly or indirectly.” 

<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 accomplished by making the following revisions to the 

prices exempt from best price section. We propose the “Prices excluded from best price,” 

currently located in regulations at §447.505(d)(1)-(13), be redesignated to 

§447.505(c)(1)-(18). The current list of prices excluded from best price would be 

expanded to include three new price exclusions not currently identified in regulations. 

They are (1) manufacturer vouchers, (2) manufacturer-sponsored patient refund/rebate 

programs and (3) sales outside of the United States. These terms have been discussed 

earlier in the Determination of AMP section and the addition of them to the prices 

excluded from best price serves to align best price and AMP. We also propose to revise 

the phrasing of several of the existing prices listed in the “prices excluded from best 

price” section so they are consistent with the phrasing of the same items listed in the 
CMS-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, where 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 Affordable Care Act, we are proposing to 

clarify how manufacturers are to treat orphan drugs sold to new covered entities 

described in sections 340B(a)(4)(M), (N) and (O) of the PHSA for best price. The 

Affordable Care Act expanded the list of entities eligible to enroll in the 340B drug 

pricing program to include certain children’s hospitals, freestanding cancer hospitals, 

critical access hospitals, rural referral centers, and sole community hospitals. 

Additionally, the Affordable Care Act amended the PHSA by excluding certain orphan 

drugs from being considered covered outpatient drugs for these newly covered entities. 

Section 204 of the Medicare and Medicaid Extenders Act of 2010 (Pub. L. 111-309) 

excludes certain children’s hospitals from this exclusion, effective as if included in the 

enactment of section 2302 of the HCERA of 2010. In accordance with sections 

1927(a)(5)(B) and 1927(c) of the Act, we propose that manufacturers can exclude only 

drugs purchased under the 340B Drug Pricing program from their best price calculation 

where the covered entities meet the conditions set by PHSA. We believe there may be 

circumstances in which covered entities purchase drugs outside of the 340B program, 

such as instances when drugs are purchased for inpatient use, drugs that have both 

inpatient and outpatient uses, and when a covered entity purchases drugs outside the 

340B program to dispense to its Medicaid patients. In order to better understand the 

purchasing practices of covered entities and the scope of our proposed policy on best 

price, we invite comments regarding other circumstances in which covered entities 
CMS-2345-P 76 

purchase drugs outside of the 340B program. We believe that this position is consistent 

with our reading of these provisions and as a result strengthens the integrity of the MDR 

program because covered entities are prohibited from diverting drugs purchased under 

340B authority to anyone who is not a patient of the covered entity. These requirements 

are proposed in a new regulation at §447.505(c)(2)(i) and (ii). 

<HD3>5. Medicare Coverage Gap Discount Program (The Discount Program) 

The Affordable Care Act established the Discount Program under sections 

1860D-43 and 1860D-14A of the Act. The Discount Program makes manufacturer 

discounts available to applicable Medicare beneficiaries receiving applicable covered 

Part D drugs while in the coverage gap. 

In general, the discount on each applicable covered Part D drug is 50 percent of 

an amount that is equal to the negotiated price. In accordance with the Affordable Care 

Act, manufacturer discounts attributed to the Discount Program will be excluded from the 

determination of best price as defined in §447.505(c)(6). 

<HD2>E. Authorized generics drugs (§447.506) 

We propose to remove the definition of “Authorized generic drugs” from 

§447.506(a), as discussed in section II.B.1 of this regulation. In §447.506(a), we propose 

to define the term “Primary manufacturer” to mean a manufacturer that holds the NDA of 

the authorized generic drug. We also propose to define the term “Secondary 

manufacturer of an authorized generic drug” to mean a manufacturer that is authorized by 

the primary manufacturer to sell the drug, but does not hold the NDA. In §447.506(b), 

we propose to revise the existing paragraph to specify that sales of an authorized generic 

drug must be included in the AMP calculation of the manufacturer holding the NDA, 

referred to in this discussion as the primary manufacturer, when such drugs are being sold 
CMS-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 primary manufacturer of an authorized generic, 

include in its calculation of AMP all sales of its authorized generic drug product sold or 

licensed to a secondary manufacturer, including transfer prices and fees paid by the 

secondary manufacturer to the primary manufacturer, when the secondary manufacturer 

is acting as a wholesaler, as set forth in section 1927(k)(11) of the Act. Additionally, the 

primary manufacturer holding the NDA must also include those sales in its AMP 

calculation that it makes directly to wholesalers including other manufacturers acting as 

wholesalers. 

In §447.506(c), we propose to revise the existing paragraph to specify that a 

primary manufacturer holding the NDA must include the best price of an authorized 

generic drug in its computation of best price for a single source or innovator multiple 

source drug during a rebate period to any manufacturer, wholesaler, retailer, provider, 

HMO, non-profit entity, or governmental entity in the United States, when such drugs are 

being sold by the primary manufacturer holding the NDA. 

Further, we propose to add a new §447.506(d) to specify that the secondary 

manufacturer of an authorized generic drug must also provide a rebate based on its sales 

of authorized generic drugs, and must calculate AMP and best price consistent with the 

requirements specified at §447.504 and §447.505 respectively. 

<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 manufacturer’s best price calculation only when made to 340B 

covered entities as defined in section 340B(a)(4) of the PHSA, ICFs/MR, State-owned or 
CMS-2345-P 78 

operated nursing facilities and safety net providers or facilities/entities which the 

Secretary determines to be eligible. 

 Previously, the Secretary did not exercise the authority to add other safety net 

providers for which sales at nominal prices are excluded from best price. Section 221 of 

the Omnibus Appropriations Act, 2009, Public Law 111-8, enacted on March 11, 2009, 

revised section 1927(c)(1)(D) of the Act by expanding the definition of nominal priced 

sales to include sales of covered outpatient drugs to two new categories of entities. The 

expansion allows public or nonprofit entities (as defined by the Internal Revenue Service 

(IRS)), or State-owned or operated facilities providing the same services to the same 

populations as 340B(a)(4) entities of the PHSA but not funded as such and in compliance 

with the prohibition on abortion services as set forth in section 1008 of the PHS Act or 

academic health care centers providing family planning services to be eligible for the 

nominal priced sales. 

We propose to revise §447.508(a) to include the additional entities to which 

manufacturers may have nominal price sales excluded from best price. To qualify for the 

exception, entities must meet the criteria set forth below for either of the two new 

categories: 

● Category 1 criteria: 

+ The entity is an exempt organization as defined by section 501(c)(3) of the 

Internal Revenue Code of 1986; and exempt from tax under section 501(a) of such Act, 

or is 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 public or nonprofit entity or an entity based 

at an institution of higher learning, whose primary purpose is to provide health care 

services to students of that institution, that provides a service or services as described 

under section 1001(a) of the PHS Act, 42 U.S.C. 300. 

The legislation further provides that nothing in section 1927(c)(1)(D) of the Act 

should be construed to alter any existing statutory or regulatory prohibition on services 

for Category 1 entities, including the prohibition set forth in section 1008 of the PHSA. 

Because these additions appear to address those nominal price sales that are not 

related to a manufacturer’s attempt to influence market share or for other marketing 

reasons, we are again choosing not to identify any further entities for which manufacturer 

nominally priced sales would be exempt from best price. 

<HD2>G. Medicaid drug rebates (§447.509)

<HD3>1. Determination of rebate amount (§447.509(a)) 

 Manufacturers that participate in the MDR program are required to pay rebates for 

covered outpatient drugs that are dispensed to Medicaid patients. The rebates are 

calculated based on formulas described in section 1927(c) of the Act. As described in the 

“Background” section above, the Affordable Care Act made several revisions to the 

statutory rebate formulas. In light of these revisions, we propose to incorporate the rebate 

formulas into Federal regulations. 

 We propose in §447.509(a)(1) that the basic rebate, for each dosage form and 

strength of a single source drug or an innovator multiple source drug, will be equal to the 

total number of units of each dosage form and strength paid for under the State plan in 

the rebate period multiplied by the greater of the difference between the AMP and best 

price of the drug or the AMP multiplied by: 
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 source drugs and innovator multiple source 

drugs. 

 We note that all clotting factors would not qualify for the minimum rebate 

percentage of 17.1 percent of AMP. Only those clotting factors for which a separate 

furnishing payment is made under section 1842(o)(5) of the Act would qualify as defined 

under the definition of clotting factors. Similarly, all drugs with pediatric indications 

would not qualify for the minimum rebate percentage of 17.1 percent of AMP. Only 

those drugs approved by the FDA exclusively for pediatric indications, in accordance 

with our proposed definition in §447.502, would qualify. 

We propose in §447.509(a)(2) that the additional rebate for single source and 

innovator multiple source drugs will be equal to the number of units for such dosage 

form and strength paid for under the State plan in the rebate period multiplied by the 

amount, if any, by which the AMP for the dosage form and strength of the drug for the 

period exceeds the base date AMP for such dosage form and strength, increased by the 

percentage by which the CPI-U for the month before the month in which the rebate 

period begins exceeds such index. 

We propose in §447.509(a)(3) that the total rebate amount for single source drugs 

and innovator multiple source drugs will be equal to the basic rebate amount plus the 

additional rebate amount, if any. We also propose at §447.509(a)(5) that in no case will 

the total rebate amount exceed 100 percent of the AMP of the drug. 
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 extension of a single source drug or an innovator 

multiple source drug that is an oral solid dosage form. For such a line extension drug, the 

rebate amount will be the amount calculated under section 1927 of the Act or, if greater, 

the product of the AMP for the line extension drug, the highest additional rebate 

(calculated as a percentage of AMP) under section 1927 for any strength of the original 

single source or innovator multiple source drug, and the total number of units of each 

dosage form and strength of the line extension drug paid for under the State plan in the 

rebate period (as reported by the State). We propose to incorporate this calculation in 

§447.509(a)(4). 

The statute defines a line extension for purposes of the rebate calculation as a new 

formulation of a drug such as an extended release formulation. However, the statute did 

not provide further specificity as to how line extensions should be defined. Therefore, as 

previously described in the definition of a line extension, we will define line extension at 

§447.502. CMS plans to define a line extension drug as a single source or innovator 

multiple source drug that is an oral solid dosage form that has been approved by the FDA 

as a change to the initial brand name listed drug in that it represents a new version of the 

previously approved drug, such as a new ester, a new salt, or other noncovalent 

derivative; a new formulation of a previously approved drug; a new combination of two 

or more drugs; or a new indication for an already marketed drug. Single source or 

innovator multiple source drugs that receive exclusivity are not proposed to be excluded 

from the definition of a line extension drug. For the purpose of calculating the unit rebate 

amount under the Affordable Care Act, we propose that both the initial brand name drug 
CMS-2345-P 82 

and the line extension drug have to be an oral solid dosage form drug. We also propose 

to exclude a new strength of the initial brand name drug from the definition of a line 

extension drug. We have adopted this policy in order to capture all new formulations 

(including extended release formulations) and potential line extensions of single source 

or innovator multiple source drugs. Further, we believe this policy is consistent with our 

understanding of the line extension provisions in the Affordable Care Act. We invite 

comments from the public on this proposed policy. 

We do not plan to exclude reformulations of existing products that incorporate 

abuse deterrent technologies from the definition of line extension drugs. The goal of 

these new formulations are to mitigate the risk of abuse – as opposed to the outright 

elimination of abuse – by preventing alternate routes of administration, or employing

physical barriers that resist common methods of tampering, thus abuse deterrent 

formulations (ADFs) have the potential to decrease abuse of prescription drugs and 

improve patient and public safety. Some examples of abuse deterrent strategies that are 

under development include combination oral formulation products with an opioid agonist 

and opioid antagonist, formulations with other aversive characteristics, prodrugs, 

physically impenetrable formulations, and drug-device combinations with patient 

recognition capability. However, the statute does not exclude reformulated drugs 

incorporating abuse deterrent technologies from the definition of a line extension drug 

and thus we do not plan to exclude drugs with this labeling from the definition. The types 

of drugs that we are considering as line extension drugs include these reformulated 

products. 

FDA draft guidance on the assessment of abuse potential of drugs can be found at 

http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guid
CMS-2345-P 83 

ances/UCM198650.pdf

We are soliciting feedback from the industry, the public, and other stakeholders 

regarding whether existing or future reformulated products incorporating an abuse 

deterrent technology should be subject to the additional rebate formula under the 

Affordable Care Act. 

We have determined that we do not have the ability to identify the line extension 

of the initial brand name listed drug based on manufacturer rebate submissions. We 

consulted with the FDA to determine if the FDA currently keeps a list of line extension 

drugs as we have defined the term, and the FDA does not. Thus, we reviewed the drug 

information and data files publicly available at the FDA and propose to use the FDA’s 

list of Chemical Types to identify the line extension drug as well as the initial brand name 

listed drug of the line extension drug. 

The FDA classification is given to nonbiologic products during the review 

process and is finalized when the NDA is approved. This classification consists of 

Chemical Type classification, which classifies these drugs according to the type of 

change made to the initial brand name product. Chemical Type represents the newness of 

a drug formulation or a new indication for an existing drug formulation, as noted in 

http://www.fda.gov/Drugs/informationondrugs/ucm079436.htm. The FDA classifies all 

NDAs based on Chemical Type. One measure of innovation is the newness of the listed 

drug or the drug’s active ingredient. The Chemical Type may identify the drug as new, 

or as related to the active ingredient of another drug that has already been approved. 

Based on the analysis of the FDA’s drug information and data files, we propose to 

use Chemical Types 2, 3, 4, and 6 on the FDA’s list of Chemical Types below as an 

indicator for line extension drugs as shown in Table 4. 
CMS-2345-P 84 

TABLE 4: New Drug Application Chemical Types 

Number Meaning 

1 New molecular entity (NME) 

2 New ester, new salt, or other noncovalent derivative 

3 New formulation 

4 New combination 

5 New manufacturer 

6 New indication 

7 Drug already marketed, but without an approved NDA 

8 OTC (over-the-counter) switch 

 

 Chemical Type 2 (new ester, new salt, or other noncovalent derivative) represents 

the incorporation of different salts or esters, or other noncovalent derivatives (such as a 

complex, chelate, or clathrate) of the molecule, responsible for the physiological or 

pharmacological action of the drug substance of an approved pharmaceutical ingredient 

into a marketed dosage form which represents a change to the listed drug (21 CFR 

314.108(a)). We propose to identify this Chemical Type as a line extension because it 

describes a new version of the initial brand name listed drug. 

Chemical Type 3 (new formulation of a previously approved drug) (not a new salt 

or new molecular entity) represents a change in the inactive ingredients (excipients) in a 

drug but no change in the amount of active ingredient. A new formulation may be a 

dosage form that contains the same active ingredient as was previously approved in a 

different dosage form as the initial brand name listed. Chemical Type 4 (new 

combination) represents a drug comprised of two or more components that are physically, 

chemically, or otherwise combined or mixed to produce a single drug product. We 

propose to identify this Chemical Type as a line extension because the new combination 

of the initial brand name listed drug of two or more active ingredients represents a new 

formulation of the initial brand name listed drugs that are combined to form one drug 

product. 
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 disease or condition. According 

to the National Institute for Health Care Management, research performed on drugs that 

are already on the market may reveal that they provide safe and effective treatments for 

diseases or conditions other than the indication(s) for which the product was originally 

approved. We propose to identify this Chemical Type as a line extension because there is 

an approval for a new indication that represents a change to the initial brand name listed 

drug. 

 Chemical Type 1 (new molecular entity) represents an active ingredient that has 

never before been marketed in the United States in any form. CMS proposes to use this 

Chemical Type to identify the initial brand name listed drug of a line extension. 

Chemical Type 5 (new manufacturer) is assigned to an already marketed drug 

when it has: (1) A new manufacturer, or (2) a product that duplicates another 

manufacturer’s already marketed drug product. We do not propose to consider this 

Chemical Type as a line extension because the change is a non drug-related change; 

rather, it is simply a transfer of the application from one manufacturer to another. 

Chemical Type 7 (drug already marketed, but without an approved new drug 

application (NDA)) represents drugs that have not been approved by the FDA. We do 

not propose to consider this Chemical Type as a line extension because these drugs have 

not been approved by the FDA. 

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

transferring FDA-approved prescription medications to nonprescription, OTC status. We 
CMS-2345-P 86 

do not propose to consider this Chemical Type as a line extension because there is no 

new formulation of the initial brand name listed drug. 

We plan to identify line extension drugs by using drug information that is publicly 

available on the FDA web sites. As stated, CMS currently does not have the ability to 

identify whether a drug is a line extension and which drug is the initial brand name listed 

drug of the line extension drug based on manufacturers' MDRP submissions. Therefore, 

we plan to rely on drug information obtained from the FDA. In order for us to identify 

the line extension drugs using the FDA’s drug information to calculate the additional 

rebate, there are essentially five criteria that we believe must be met. First, the line 

extension drug should be a single source drug or innovator multiple source drug. 

Manufacturers are already required to report to CMS if their nine-digit NDC drug is a 

single source drug, innovator multiple source drug, or non-innovator multiple source 

drug; therefore, we have the information to make this determination. 

Second, the line extension drug has to be an oral solid dosage form of a single 

source drug or innovator multiple source drug in accordance with the definition of an oral 

solid dosage form previously provided. 

Third, the line extension is identified based on Drugs@FDA’s application file. 

Since we currently do not have the ability to identify whether the drug is the actual line 

extension of the initial brand name listed drug based on manufacturers' submissions, we 

propose to rely on the FDA’s list of Chemical Types to identify which drug is a line 

extension drug, as described above. Because we do not approve new drugs or changes to 

a drug, using the Chemical Types would permit us to identify line extension drugs based 

on FDA data, since the FDA currently has an identifier for the Chemical Types in their 

Drugs@FDA’s application file. 
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 use Chemical Type 1 to assist us in tracking 

back to the initial brand name listed drug of the line extension drug. Chemical Type 1 is 

assigned to an active ingredient that has not been marketed in the United States in any 

form; therefore, we have decided that this can be used as the initial brand name listed 

drug identifier. An active ingredient that has never been marketed in the United States 

would be approved by the FDA under a new NDA with no therapeutic equivalents, which 

would meet our definition of a single source drug. If there are therapeutic equivalents for 

the single source drug, then the drug category would change to an innovator multiple 

source drug in accordance with the rebate definition of an innovator multiple source drug. 

However, the innovator multiple source drug would retain the same NDA that was 

assigned to the single source drug that was first approved by the FDA. Additionally, the 

initial brand name listed drug has to be an oral solid dosage form per our definition of an 

oral solid dosage form. 

Lastly, CMS currently collects drug product and pricing information by NDC, not 

by active ingredient. However, the FDA information is mainly available by active 

ingredient. Therefore, we need to identify the line extension drugs by NDC. In order for 

CMS to translate the active ingredient into NDC, a manual matching process has to be 

done to match the Drugs@FDA’s application file against the FDA’s Orange Book’s 

product file: (1) To extract the Chemical Type and the application number, (2) to identify 

the oral solid dosage form, and (3) to obtain the FDA approval date for each drug. This 

file will then be matched with the FDA’s NDC Directory’s application and listing files to 

identify the NDC of each active ingredient to compile a master list of all initial brand 
CMS-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 line extension drugs. 

Since NDCs enter and exit the MDRP frequently, we propose to update the master 

list based on the FDA’s drug information on a quarterly basis and then match the master 

file against CMS’ drug product file to identify new initial brand name listed drugs and 

new line extension drugs for the initial three quarters. Following these initial three 

updates, manufacturers will be responsible for identifying and reporting to CMS which of 

their NDCs is the initial brand name listed drug and which is the line extension drug. 

This is necessary to effectuate the line extension provisions of the Affordable Care Act. 

Additionally, as mentioned in the definition of a line extension drug, we propose that a 

new strength of the initial brand name listed drug would not qualify as a line extension 

drug. Furthermore, if we were to consider a new strength to be a line extension, it 

would be difficult to identify the first strength of the initial brand name listed drug 

because multiple strengths are often launched simultaneously and CMS would not be able 

to track back to the first strength of the initial brand name listed drug. We invite 

comments from the public on all aspects of this proposed policy. 

We also do not plan to exclude a single source or innovator multiple source drug 

that receives 3-year exclusivity, pediatric exclusivity, or 7-year orphan drug exclusivity 

from the definition of a line extension drug. Drug manufacturers may separately obtain a 

3-year exclusivity or a pediatric exclusivity. Drug manufacturers can reformulate a drug 

before it goes off patent by developing a new formulation such as a time-release version 

or by combining it with another existing drug, marketing it for another illness, or 

claiming a patent on an inactive ingredient. The 3-year exclusivity protection as 
CMS-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, when the application contains reports of new 

clinical investigations (other than bioavailability studies) conducted or sponsored by the 

sponsor that were essential to approval of the application. This exclusivity requires 

conducting new clinical studies that are judged to be essential for approval of the change. 

Changes to a drug that qualify for this exclusivity are changes that we are considering for 

the definition of a line extension drug. 

According to section 505A of FFDCA (Food and Drug Administration 

Modernization Act (FDAMA) and Best Pharmaceuticals for Children Act (BPCA), drug 

manufacturers can also apply for a pediatric exclusivity, which permits certain applicants 

to obtain an additional 6-month period of exclusivity on the use of a drug moiety in 

pediatric patients. We do not plan to exclude drugs that have this exclusivity from the 

definition of line extension drugs. 

According to sections 526-527 of FFDCA and regulations at 21 CFR 316, drug 

manufacturers can apply for a 7-year orphan drug exclusivity. Orphan drug exclusivity 

promotes research and marketing for the development of drugs to treat rare diseases, 

defined as a disease affecting 200,000 or fewer patients in the United States, by granting 

a 7-year protection against competition for the designated orphan indication. We do not 

plan to exclude drugs that have this exclusivity from the definition of line extension 

drugs. 

For the purpose of calculating the unit rebate amount (URA) for the line extension 

drug, the highest additional rebate as added by the Affordable Care Act for a line 

extension shall be referred to as the Alternative URA. We propose to interpret section 
CMS-2345-P 90 

1927(c)(2) to provide that the URA determination is based on the greater of the Standard 

URA calculated under section 1927 of the Act without regard to the alternative rebate 

calculation provided in the Affordable Care Act, or the Alternative URA for the line 

extension drug under the Affordable Care Act. As previously stated, to effectuate the line 

extension provisions of the Affordable Care Act, we propose that both the initial brand 

name listed drug and the line extension drug are reported to CMS under the MDR 

program for the purpose of calculating the URA for a line extension drug. 

Additionally, to calculate the Alternative URA, the line extension drug should be 

tracked back to the initial brand name listed drug. We recognize that there are multiple 

issues when it comes to tracking the line extension back to the initial brand name drug, 

such as when the line extension drug and the initial brand name listed drug are marketed 

by two different manufacturers or when the initial brand name listed drug has been 

terminated from the Medicaid drug rebate program. However, in accordance with the 

statute, manufacturers are responsible for calculating the Alternative URA for their line 

extension drugs. 

We propose that when the initial brand name listed drug has been terminated that 

manufacturers should not be responsible for calculating the Alternative URA. The initial 

brand name listed drug must be active in the Medicaid drug rebate program to calculate 

the Alternative URA. We propose that we would calculate the URA for line extension 

drugs and will provide this amount to States on the quarterly rebate tape as in the current 

rebate process. However, in accordance with the current process, manufacturers are 

responsible for calculating and making rebate payments to each State Medicaid Agency. 

Therefore, manufacturers are responsible for ensuring that all necessary product and 

pricing data, whether such information is for the initial brand name listed drug or the line 
CMS-2345-P 91 

extension drug, are exchanged between the manufacturer of the initial brand name listed 

drug and the manufacturer of the line extension drug to accurately calculate the URA for 

the line extension drug and provide rebates in accordance with the statute. 

 As provided in §447.509(a)(5), section 2501(e) of the Affordable Care Act added 

section 1927(c)(2) of the Act to cap the URA at 100 percent of AMP for all brand name 

drugs. Therefore, this cap will also apply to the URA calculation for the line extension 

drugs as well. 

 Below are the proposed steps outlining how we plan to calculate the URA for a 

line extension drug. For clarification purposes, the highest additional rebate as added by 

the Affordable Care Act for a line extension shall be referred to as the “Alternative URA” 

and the URA calculation based on section 1927 of the Act (without regard to the 

alternative rebate calculation provided in the Affordable Care Act) shall be referred to as 

“Standard URA.” 

Step 1 – Standard URA = Basic Rebate Amount + Additional Rebate Amount 

Step 2 – The Alternative URA is calculated as the product of the AMP of the line 

extension that is an oral solid dosage form and the highest additional rebate (calculated 

as a percentage of AMP) for any strength of the original drug. 

Step 3 – URA = The greater of (1)Standard URA or (2)the Alternative URA 

Step 4 – Determine if the URA is greater than 100 percent of AMP. 

a. If the URA is greater than 100 percent of AMP, then the URA = AMP 

b. If the URA is less than 100 percent of AMP, then use the calculated URA 

Below is an example of calculating the URA for a line extension drug. 

Baseline AMP (line extension) = 100.00 

AMP (line extension) = 300.00 
CMS-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 results (69.30 or 50.00) is 69.30 

Basic Rebate Amount for the line extension drug = 69.30 

Additional Rebate Amount calculated under section 1927 of the Act Formula: If the 

[(Baseline AMP/Baseline CPI-U) x CPI-U] is less than the quarterly AMP, subtract 

[(Baseline AMP/Baseline CPI-U) x CPI] from the quarterly AMP to determine the 

additional URA. If the [(Baseline AMP/Baseline CPI-U) x CPI] is equal to or greater 

than the quarterly AMP, the additional URA is equal to zero. 

[(Baseline AMP/Baseline CPI-U) x CPI-U] = 100/170 x 200 = 0.5882 x 200 = 

117.65 

117.65 is less than 300.00; then, 117.65 is subtracted from 300.00, 

300.00 – 117.65 = 182.35 

Additional Rebate Amount under section 1927 = 182.35 

Standard URA = 69.30 + 182.35 = 251.65 

Step 2 – Calculate the Alternative URA 

AMP (line extension) = 300.00 
CMS-2345-P 93 

AMP (initial brand name listed drug) strength A = 280.00 

AMP (initial brand name listed drug) strength B = 275.00 

AMP (initial brand name listed drug) strength C = 270.00 

Additional Rebate Amount (initial brand name listed drug) strength A = 200.00 

Additional Rebate Amount (initial brand name listed drug) strength B = 125.00 

Additional Rebate Amount (initial brand name listed drug) strength C = 110.00 

Strength A additional rebate amount ratio = 200/280 = 0.7143 

Strength B additional rebate amount ratio = 125/275 = 0.5636 

Strength C additional rebate amount ratio = 110/270 = 0.4074 

Highest additional rebate (calculated as a percentage of AMP) for any strength of 

the initial brand name listed drug = 0.7143 

Alternative URA = Product of the AMP of the line extension that is an oral solid 

dosage form and the highest additional rebate (calculated as a percentage of 

AMP) for any strength of the original drug 

Alternative URA = 300 x 0.7143 = 214.29 

Step 3 – URA of the line extension drug = the greater of 

1)Standard URA = 251.65 or 
CMS-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 Dispensed Through Medicaid Managed Care 

Organizations (MCOs) (§447.509(b)) 

 From the inception of the MDR program, section 1927(j)(1) of the Act exempted 

participating manufacturers from paying drug rebates for drugs dispensed to individuals 

enrolled in MCOs. The Affordable Care Act eliminated this exemption. Effective March 

23, 2010, section 1927(b) of the Act, as amended by section 2501(c) of the Affordable 

Care Act requires manufacturers that participate in the drug rebate program to pay rebates 

for drugs dispensed to individuals enrolled with a Medicaid MCO if the MCO is 

responsible for coverage of such drugs. The requirement to collect rebates beginning 

March 23, 2010 is irrespective of any existing contracts States may have with MCOs. To 

comply with this section of the law and to assure that States fully collect these increased 

rebates, States must obtain utilization data from each Medicaid MCO in order for States 

to request quarterly rebates from manufacturers as well as report it in their quarterly 

utilization reports to CMS. This data reporting will also have other quality-related 
CMS-2345-P 95 

benefits for States and the Medicaid program in terms of providing timely information on 

drug utilization. 

 Section 2501(c) of the Affordable Care Act also amended section 1903(m)(2)(A) 

of the Act, effective March 23, 2010, by adding new conditions for Federal financial 

participation for MCO contracts including that: 

● Any covered outpatient drug provided by the MCO is eligible for the rebates 

authorized under section 1927 of the Act; 

● MCO capitation rates will be based on actual cost experience related to rebates 

and subject to Federal regulations at §438.6 regarding actuarial soundness of capitation 

payments; and 

● The MCO must report to the State information on the total number of units of 

each dosage form, strength and package size by NDC of each covered outpatient drug 

dispensed to Medicaid MCO enrollees and such other data that the Secretary determines 

necessary for the State to access the rebates authorized by this provision. 

 Section 2501(c) also made a conforming amendment to section 1927(j)(1) of the 

Act, effective March 23, 2010, to specify that certain covered outpatient drugs in this 

section are not subject to the rebate requirements if such drugs are both dispensed by 

health maintenance organizations (HMOs), including Medicaid MCOs that contract under 

section 1903(m), and are subject to discounts under section 340B of the Public Health 

Service Act. 

 In accordance with these revisions to sections 1927 and 1903 of the Act, we 

propose a new §447.509(b). In §447.509(b)(1), we propose to require participating 

manufacturers to pay rebates for covered outpatient drugs dispensed to individuals 

enrolled in Medicaid MCOs if the MCO is responsible for payment for such drugs. In 
CMS-2345-P 96 

§447.509(b)(2), we propose that manufacturers are exempt from the requirement in 

paragraph (b)(1) if such drugs are dispensed by health maintenance organizations, 

including MCOs that contract under section 1903(m) of the Act, and subject to discounts 

under section 340B of the PHS Act. In §447.509(b)(3), we propose that a Medicaid 

MCO that is responsible for covered outpatient drugs dispensed to Medicaid beneficiaries 

must submit a report to the State within thirty days of the end of each quarter. We also 

propose the specific data that MCOs must include in such reports. It is expected that the 

States will ensure that the MCOs comply with providing timely utilization data to meet 

the State reporting requirements. 

<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 percentages described above will be remitted to the 

Federal government. These offset amounts are in addition to the amounts applied as a 

reduction under section 1927(b)(1)(B) of the Act. 

We propose to calculate the offset as described below. 

 For single source or innovator multiple source drugs that are subject to a 

minimum rebate percentage of 23.1 percent of AMP: 

● If the difference between AMP and best price is less than or equal to 15.1 

percent of AMP, then we propose to offset the full 8 percent of AMP (the difference 

between 23.1 percent of AMP and 15.1 percent of AMP). 

● If the difference between AMP and best price is greater than 15.1 percent of 

AMP but less than 23.1 percent of AMP, then we propose to offset the difference 

between 23.1 percent of AMP and AMP minus best price. 
CMS-2345-P 97 

● If the difference between AMP and best price is greater than or equal to 23.1 

percent of AMP, then we propose to not take any offset amount. 

For single source or innovator multiple source drugs that are blood clotting factors 

and drugs approved by the FDA exclusively for pediatric indications that are subject to a 

rebate percentage of 17.1 percent of AMP: 

● If the difference between AMP and best price is less than or equal to 15.1 

percent of AMP, then we propose to offset the full 2 percent of AMP (the difference 

between 17.1 percent of AMP and 15.1 percent of AMP). 

● If the difference between AMP and best price is greater than 15.1 percent of 

AMP but less than 17.1 percent OF AMP, then we propose to offset the difference 

between 17.1 percent of AMP and AMP minus best price. 

● If the difference between AMP and best price is greater than or equal to 17.1 

percent of AMP, then we propose to not take any offset amount. 

 In the September 28, 2010 State Medicaid Director (SMD) letter, #10-019, we 

stated that for a drug that is a line extension of a brand name drug that is an oral solid 

dosage form, we planned to apply the same offset calculation as described above to the 

basic rebate. Further, we planned to offset only the difference in the additional rebate of 

the reformulated drug based on the calculation methodology of the additional rebate for 

the drug preceding the requirements of the Affordable Care Act and the calculation of 

rebates for the reformulated drug, if greater, in accordance with the Affordable Care Act. 

If there is no difference in the additional rebate amount in accordance with the Affordable 

Care Act, then we do not plan to take any offset amount. (A copy of the SMD letter can 

be found at http://www.cms.gov/smdl/downloads/SMD10019.pdf.) 
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 instructions regarding the 

calculation of the offset provisions for line extension drugs to reflect the difference 

between the URA for the drug calculated based on the applicable rebate percentage in 

section 1927 of the Act prior to the Affordable Care Act and the calculation of the URA 

for the line extension drug, if greater, in accordance with the Affordable Care Act. If 

there is no difference between the URA for the line extension drug based on the 

Affordable Care Act and URA calculation based on the applicable rebate percentage in 

section 1927 prior to the Affordable Care Act, then we do not plan to take any offset 

amount. If there is a difference then we will offset the amount of that difference. 

 For noninnovator multiple source drugs, we plan to offset an amount equal to 2 

percent of the AMP (the difference between 13 percent of AMP and 11 percent of AMP) 

since these drugs are unaffected by best price. 

For covered outpatient drugs that are dispensed to Medicaid MCO enrollees, we 

propose to offset the non-Federal share limited to the difference between the rebate 

percentages in effect outside of the MCO context on December 31, 2009 and the rebate 

percentages in effect on January 1, 2010, as described previously. Specifically, we 

planned for States to retain the non-Federal share of rebates below the 15.1 percent rebate 

percentage for single source or innovator multiple source drugs and 11 percent for 

noninnovator multiple source drugs as in effect on December 31, 2009. In addition, we 

planned for States to retain the non-Federal share of the amount above the revised 

minimum rebates for brand name drugs. 

Additionally, we do not plan to offset the non-Federal share of any supplemental rebate 

States may receive above the increased Federal rebate percentages. 
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 UROA will be provided to States in a manner 

similar to how States currently receive the URA every quarter. States will then match the 

UROA with the number of units of the drug for which they receive payment from a 

manufacturer to determine the Quarterly Rebate Offset amount (QROA) for that drug. 

All QROAs for all drugs of all manufacturers will then be added together to determine 

the Total QROA. This then will be the amount that States offset on the Quarterly 

Expenditure reports. Adjustments to the UROA will be treated as prior period 

adjustments (PPAs) and will be reported to the States the same way that URA PPAs are 

currently transmitted. 

Please note that the offset provision would also apply to the Territories that 

participate in the MDR program. 

<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 references to §447.504 “Determination of AMP” 

from §447.510 “Requirements for Manufacturers”. In this proposed rule, we are 

proposing conforming regulatory amendments to add regulatory text to §447.510. 

Specifically, those references that will be added are at §447.510(a)(1), §447.510(c)(2)(i), 

and §447.510(d)(2). 
CMS-2345-P 100 

We are also proposing a conforming amendment to §447.510(g) to clarify that the 

electronic format in which the product and pricing data is submitted to CMS must be 

submitted in a format designated by CMS. 

<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 30th day after the end 

of each quarter will be reported to the OIG. We propose, in accordance with the statutory 

requirements at section 1927(b)(3)(C)(i), that manufacturer will be subject to a civil 

monetary penalty for each product not reported on the thirty-first day. Please see the 

OIG’s Special Advisory Bulletin issued in September 2010 regarding reporting AMP 

timely, 

http://oig.hhs.gov/fraud/docs/alertsandbulletins/2010/SpAdvBulletin_AMP_ASP.pdf. 

Additionally, we are considering adding regulatory guidance on suspension and 

termination for manufacturers that do not report quarterly AMP on a timely basis or are 

otherwise out of compliance with rebate requirements. We have considered a number of 

formal and informal administrative procedures similar to those set forth in 42 CFR part 

498 or 42 CFR 430.18, which would permit an opportunity for reconsideration and 

administrative appeals. We are considering the appropriate terms and procedures for 

suspension and termination and, therefore, we invite comments from the public. 

<HD3>2. Reporting Revised Monthly and Quarterly AMP, best price, customary 

prompt pay discounts, or nominal prices (§447.510(b)) 

 In this proposed rule, we propose to revise the 12-quarter rule filing limitation 

currently in place for manufacturers to report revisions to their quarterly AMP, best price, 
CMS-2345-P 101 

customary prompt pay discounts, or nominal prices. We initially established a time limit 

of 12 quarters for manufacturers to report revisions to their quarterly pricing data. The 

12-quarter period established a time limit within which manufacturers are responsible for 

reporting revisions to pricing data in part to decrease associated administrative burdens 

on manufacturers and States. Despite the effective date of January 1, 2004 for the 12-

quarter rule, we are still receiving requests from manufacturers to make revisions to the 

pricing data that fall outside of the 12-quarter period. Therefore, we propose that any 

request from manufacturers submitted to CMS to revise the monthly and quarterly AMP, 

best price, customary prompt pay discounts, or nominal prices that are outside of the 12-

quarter filing deadline will be considered, only if it falls within one of the following 

categories: 

● The change is a result of the drug category change or a market date change. 

● The change is an initial submission for a product. 

● The change is due to termination of a manufacturer from the MDR Program for 

failure to submit pricing data and must submit pricing data to reenter the program. 

● The change is due to a technical correction (such as a keying error), that is, not 

based on any changes in sales transactions or pricing adjustments from such transactions. 

● The change is to address specific underpayments to States, or potential liability 

regarding those underpayments, as required by CMS, applicable law or regulations, or an 

OIG or DOJ investigation. 

 We propose that §447.510(b)(1) be revised to clarify that a manufacturer is 

required to report to CMS any revisions to correct AMP, best price, customary prompt 

pay discounts, or nominal prices for a period not to exceed 12-quarters from the quarter 

in which the data were due. The 12-quarter limit is meant to be a specific time limit for 
CMS-2345-P 102 

any revision. Any revision request, except for those falling within the exceptions noted 

above, must be made within this 12-quarter time period. We propose to add to 

§447.510(b) that any revision request that falls outside of the 12-quarter time limit will 

not be considered by CMS, unless it falls under the above five criteria. We also propose 

to revise timeframe for reporting revised monthly AMP in §447.510(d)(3) to clarify that 

the only exceptions to the 36-month limit for reporting monthly AMP would be 

considered by CMS if it falls under the same five criteria. 

 We are contemplating whether to allow manufacturers that have revisions to their 

pricing data beyond the 12-quarter limit that meet the five criteria above to revise their 

pricing data on a retroactive basis: (1) Without any time limits back to beginning of the 

program, 1991, or (2) with some time limits outside of the 12-quarter restrictions. In 

other words, we are considering whether we should impose a timeframe as to how far 

back we should allow manufacturers to make this revision. We invite public comments 

on suggestions as to how far back we should allow manufacturers to make revisions to 

their pricing data if their request meets one of the above five exceptions. 

 Additionally, to ensure that any revision to pricing data is consistent across the 

monthly and the quarterly AMP data, if a revision request is submitted for monthly AMP 

and AMP units, then a revision request is also required for quarterly AMP. In addition, if 

a revision request is submitted for quarterly AMP, then a revision request is also required 

for monthly AMP and AMP units. 

<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 manufacturer to revise its methodology for 
CMS-2345-P 103 

calculating AMP and best price. Our regulations at §447.510(b) specify that 

manufacturers have a 12-quarter time limit to report price revisions. Manufacturers are 

responsible for reporting any revisions to AMP or best price within the 12 quarter limit, 

which begins with the quarter in which the data was due. As is the case with all pricing 

data submitted under the MDR program, if a subsequent review of the manufacturers’ 

pricing data by CMS, the OIG, or another authorized government agency determines or 

reveals that adjustments or revisions are necessary irrespective of the quarter, the 

manufacturer is responsible under the statute to comply with that determination. Based 

on questions from manufacturers often as a result of False Claims Act concerns, we have 

considered allowing manufacturers to submit recalculations of AMP and best price 

outside of the twelve quarter time limit due to good cause. We plan to establish a good 

cause option to allow manufacturers to submit their pricing data due to a recalculation of 

the methodology for calculating AMP and best price outside of the 12-quarter time limit 

to address underpayments and potential liability regarding those underpayments that may 

extend outside of that 12-quarter period. We are considering proposing a “good cause” 

option to extend the time limit for filing a recalculation request, similar to that used in 

Medicare. We invite comments from the public on this option. 

<HD3>4. Base Date AMP (§447.510(c)(1) to §447.510 (c)(4)) 

In the 2007 AMP final rule, we allowed manufacturers to report a revised base 

date AMP to CMS within the first four full calendar quarters following the publication 

date of the final rule. To differentiate between the timeframe when manufacturers were 

allowed to report revised base date AMPs in accordance with the DRA-based definition 

of AMP and the timeframe described below, we propose to revise §447.510(c)(1) and 

§447.510(c)(2) by inserting “DRA” before base date AMP where it occurs. We also 
CMS-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 revised the definition of AMP to mean for 

a covered outpatient drug (including those sold under section 505(c) of the FFDCA), the 

average price paid to the manufacturer for the drug in the United States by wholesalers 

for drugs distributed to retail community pharmacies and retail community pharmacies 

that purchase drugs directly from the manufacturer. To reflect the changes to AMP as set 

forth in the Affordable Care Act, we propose to allow manufacturers to recalculate base 

AMP in accordance with the definition of AMP in §447.504 of this subpart. Base AMP 

is used in the calculation of the additional rebate described in section 1927(c)(2) of the 

Act. This additional rebate is defined as the difference between the current quarterly 

AMP reported to CMS and the base date AMP trended forward using the CPI-U. We 

propose this revision so that the additional rebate would not increase solely due to the 

changes in the definition of AMP. We propose giving manufacturers the option to report 

a recalculated base date AMP based on the Affordable Care Act. We propose to allow 

manufacturers the option to decide whether they will recalculate and report to CMS an 

Affordable Care Act base date AMP in light of the revised definition of AMP or continue 

to use their existing base AMP. We propose to give manufacturers this option because 

we are aware that some manufacturers may not have the actual data needed to recalculate 

their base date AMP or may find the administrative burden to be more costly than the 

savings gained. We propose to provide manufacturers with the option to report the 

recalculated Affordable Care Act base date AMP for a period of four full calendar 

quarters beginning with the first full quarter after the publication of the final rule. 

<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 concessions requires that manufacturers calculate the total lagged 

price concessions for the previous 12-month period and convert the dollar amount to a 

percentage of sales over that same 12-month period. This percentage is then applied to 

the current quarter’s sales to estimate the lagged price concessions for that quarter. 

Therefore, we are proposing manufacturers would be required to use a 12-month 

rolling percentage to estimate the value of lagged price concessions in their calculations 

of the monthly and quarterly AMPs. 

Specifically, we are proposing that a manufacturer’s monthly AMP is to be calculated 

based on the weighted average of the prices for all the manufacturer’s package sizes of 

each covered outpatient drug sold by the manufacturer during a month. It is calculated as 

net sales divided by number of units of the drug sold, excluding goods or any other items 

specifically excluded in the statute or regulations. The drug unit is the lowest identifiable 

amount (for example, tablet or capsule for solid dosage forms, milliliter for liquid forms, 

gram for ointments or creams) as reported by the manufacturer. 

Monthly AMP should be calculated consistent with this methodology, based on 

the best data available to the manufacturer at the time of submission. 

In calculating monthly AMP, a manufacturer should estimate the impact of its 

lagged price concessions using a 12-month rolling percentage to estimate the value of 

those discounts. Following is an example of how manufacturers would calculate the 
CMS-2345-P 106 

monthly AMP by using a 12-month rolling percentage to estimate the lagged price 

concessions: 

● Total lagged price concessions over the most recent 12-month period = 

$150,000. 

● Total sales subject to AMP reporting for the most recent 12-month period = 

$600,000. 

● $150,000/$600,000 = 0.25 (or 25 percent). 

● The result (25 percent) is the percentage manufacturers subtract from their total 

sales for that month to estimate lagged price concessions for that month. 

● Current month sales = $50,000. 

● $50,000 x 25 percent (estimated percentage of lagged price concessions) = 

$12,500 estimated lagged price concessions for the current month. 

● $50,000 - $12,500 = $37,500 (net total sales after subtracting estimated lagged 

price concessions for the current month). 

● Units sold during current month = 10,000 units. 

● $37,500/10,000 units = $3.75 AMP. 

The only differences between the proposed AMP smoothing process methodology and 

the ASP smoothing process methodology is that the ASP smoothing process is applied on 

a quarterly basis whereas the AMP smoothing process will be applied on a monthly basis 

and by statutory definition, the ASP calculation includes more sales than in the AMP 

calculation. We believe this process will result in more stable AMP calculations on a 

month to month basis, because the estimated lagged price concessions will increase as 

sales increase, and likewise as sales decrease. In addition, it meets the statutory 
CMS-2345-P 107 

requirement that the AMP smoothing process be similar to the smoothing process used in 

determining the ASP. 

<HD3>6. Manufacturer Reported AMP Units (§447.510(d)(6)) 

 Section 2503(b) of the Affordable Care Act requires manufacturers to submit to 

CMS on a monthly basis the total number of units that are used to calculate the monthly 

AMP for each covered outpatient drug no later than 30 days after the last day of each 

prior month. We propose that the manufacturer report monthly AMP units as the number 

of units that are used to calculate the monthly AMP to be reported to CMS. Additionally, 

in order to be consistent and to implement the rebate and FUL provisions, the monthly 

units should be of the unit type that is reported as part of the product data and the unit 

type used in the quarterly and monthly AMP calculation for each NDC to ensure 

consistency in the calculation as well as the reporting of the monthly and quarterly AMP 

and the AMP units. 

<HD3>7. Failure To Report Monthly AMP and AMP Units (§447.510(d)(7)) 

Currently a manufacturer must submit a monthly AMP to CMS no later than 30 

days after the last day of the prior month. Under the Affordable Care Act, a manufacturer 

will be required to submit the total number of units that are used to calculate the monthly 

AMP no later than 30 days after the last day of the prior month. To ensure that each 

manufacturer is reporting timely to CMS, a manufacturer that fails to submit and certify 

monthly AMP and the AMP Units for a product to CMS by the 30th day after the end of 

each month will be reported to the OIG. We propose, in accordance with the statutory 

requirements at section 1927(b)(3)(C)(i), that the manufacturer will be subject to civil 

monetary penalty for each product not reported on the thirty-first day. Please see the 

OIG’s Special Advisory Bulletin issued in September 2010 regarding reporting AMP 
CMS-2345-P 108 

timely, 

http://oig.hhs.gov/fraud/docs/alertsandbulletins/2010/SpAdvBulletin_AMP_ASP.pdf. 

Additionally, we are considering adding regulatory guidance on suspension and 

termination for manufacturers that do not report 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 that States are required to report to 

each manufacturer, not later than 60 days after the end of each rebate period, information 

on the total number of units of each dosage form and strength and package size of each 

covered outpatient drug dispensed, and to promptly transmit a copy of such report to the 

Secretary. Effective March 23, 2010, the Affordable Care Act amended section 

1927(b)(2)(A) of the Act to require that the State include in those reports, the information 

reported by each Medicaid MCO. 

We propose a new §447.511 to clarify the requirements for States. In 

§447.511(a), we propose to list the data that the State must provide to participating drug 

manufacturers. We further propose that States must submit this data within 60 days after 

the end of each quarter. 

 In §447.511(b), we propose that the States report drug utilization data as defined 

in §447.511(a) to CMS on a quarterly basis. 

In §447.511(c), we propose that a State that has participating Medicaid MCOs, 

which includes covered outpatient drugs in its capitated arrangements with the MCOs, 

report data listed in §§447.511(a) for covered outpatient drugs dispensed to individuals 
CMS-2345-P 109 

eligible for medical assistance who are enrolled with the MCO and for which the MCO is 

responsible for coverage of such drugs under section 1903 of the Act. We further 

propose that this data be identified separately from the data pertaining to drugs that the 

State reimburses on a fee-for-service basis. 

With the proposed change in the definition of “State” to include the territories, we 

recognize that these requirements would ultimately be applicable to the territories. We 

are also aware that it will take the territories time in order to upgrade their computer 

systems and come into compliance with the MDR program requirements. Therefore, we 

are proposing that the requirements discussed in this section would not be effective for 

the territories until one year after the first day of the first full quarter after the publication 

of the final rule. 

<HD2>J. Drugs: Aggregate upper limits of payment (§447.512)

In the “Medicaid Program; Withdrawal of Determination of Average 

Manufacturer Price, Multiple Source Drug Definition, and Upper Limits for Multiple 

Source Drugs” final rule that we published in the November 15, 2010 Federal Register

(75 FR 69591), we made conforming amendments to remove references to §447.514 

“Upper limits for multiple source drugs” from §447.512 “Drugs: Aggregate upper limits 

of payment”. We are proposing regulatory amendments to add those references back into 

the regulatory text of §447.512. 

 Currently, §447.512(b) establishes guidelines for payment levels that the agency 

has determined to be appropriate. At §447.512(b)(1), we propose to replace the term 

“EAC” with the term “AAC” as we have previously proposed to replace “estimated 

acquisition cost” with “actual acquisition cost”. Further, we propose to add the word 

“professional” to the description of dispensing fee in this section. 
CMS-2345-P 110 

We are proposing these changes in terminology in part because we believe that 

using the AAC in determining the drug ingredient component of the reimbursement 

formula will be more reflective of actual prices paid, as opposed to unreliable published 

compendia pricing. 

Currently, States usually determine EAC for single source drugs and drugs other 

than multiple source drugs for which either a specific Federal Upper Limit (FUL) or State 

maximum allowable cost (SMAC) has been established by paying the lower of: 

● A percentage decrease applied to a commercially published reference price 

such as average wholesale price (AWP) or a percentage increase to wholesale acquisition 

cost (WAC), or 

● The pharmacy’s usual and customary charge to the public. 

Using a commercially published reference price as the basis for Medicaid 

pharmacy reimbursement has been problematic for both the States and the Federal 

government. Several reports issued by the OIG have shown that AWP is often a 

significantly inflated price, and not necessarily reflective of a pharmacy’s actual purchase 

price for a drug. (OIG Audit reports - A-06-00-00023, A-06-01-00053, A-06-02-00041)3. 

Further, AWP raises other concerns when used as a basis for payment, as 

evidenced by litigation relating to its use. See New England Carpenters Health Benefits 

Fund v. First DataBank, 602 F.Supp.2d 277, 279 (D.Mass. 2009) (in which the Court 

stated that “despite its name, AWP is not an average of prices charged by wholesalers to 

providers (such as pharmacies and doctors) and it does not necessarily bear any 

relationship to any prices actually charged in the marketplace.”) 

 

3 http://oig.hhs.gov/oas/reports/region6/60000023.htm

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

http://oig.hhs.gov/oas/reports/region6/60200041.htm
CMS-2345-P 111 

At this time the commercial compendium, First DataBank, Inc. has reported that it 

is scheduled to cease the publication of AWP as of September 2011. While other drug 

pricing compendia may publish both AWPs and WACs, we have concerns, based on the 

previously referenced OIG reports, that these prices will not be based on actual costs or 

reflect actual prices that providers pay for these drugs. 

Certain States, in order to calculate more accurate payment rates, have already 

begun to base some of their drug prices on survey data based on pharmacy invoice 

prices.4 We believe that these surveys of pharmacy providers will assist States in 

determining valid reference prices from which to develop drug ingredient reimbursement. 

Section 447.518 of this proposed regulation provides further discussion about how States 

can develop and justify their AAC. 

<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 section 1927(k)(7)(A)(i) of the Act to mean, for a rebate 

period, a covered outpatient drug for which there is at least one other drug product which 

is rated as therapeutically equivalent (under the FDA's most recent publication of the 

Orange Book), is pharmaceutically and bioequivalent, as determined by the FDA; and is 

sold or marketed in the United States during the period. We propose this definition be 

included in §447.502 “Definitions.” In accordance with these statutory requirements, we 

also propose that at least two therapeutically equivalent (“A” rated) formulations must be 

listed in the FDA’s Orange Book in order for the drug to be defined as a multiple source 

drug. 

 

4 Alabama-10-008, effective date September 22, 2010 (Alabama AAC Survey information available at 

http://al.mslc.com/Faqs.aspx) and Oregon-10-13, effective date January 1, 2011 (Oregon AAC Survey 

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

http://or.mslc.com/uploadedFiles/Oregon/OR%20Communications%20Plan.pdf) 
CMS-2345-P 112 

 Also, section 2503(a) of the Affordable Care Act revised section 1927(e) of the 

Act to change the requirement for a FUL to be established for each multiple source drug 

for which the FDA has rated two or more products therapeutically and pharmaceutically 

equivalent, to three or more products, regardless of other formulations. In accordance 

with this statutory requirement, we are proposing in §447.514(a)(1) that a FUL be 

established for each multiple source drug for which the FDA has rated three or more 

products therapeutically and pharmaceutically equivalent. We propose that the FUL will 

be calculated, in accordance with section 1927(e)(4) of the Act, using only 

therapeutically and pharmaceutically equivalent drugs. Any other formulations of the 

drug listed in the FDA Orange Book that are not therapeutically and pharmaceutically 

equivalent to the reference listed drug, for example, “B” rated drugs, will not be used in 

the calculation of the FUL. 

For purposes of applying this rule, we consider drug products to be 

therapeutically equivalent if they are identified as A-rated in the current edition of FDA’s 

Orange book. Per the FDA’s Orange Book, drug products are considered to be 

therapeutic equivalents only if they are pharmaceutical equivalents and if they can be 

expected to have the same clinical effect and safety profile when administered to patients 

under the conditions specified in the labeling. Drug products are considered 

pharmaceutical equivalents if they contain the same active ingredient(s), are of the same 

dosage form, route of administration and are identical in strength or concentration. In 

general, with limitations that may apply to particular patients, the FDA believes that 

products classified as therapeutically equivalent can be substituted with the full 
CMS-2345-P 113 

expectation that the substituted product will produce the same clinical effect and safety 

profile as the prescribed product.5

 

 “B” rated drugs are drugs that FDA does not consider therapeutically equivalent 

to other pharmaceutically equivalent products. Per the FDA Orange Book, drug products 

designated with a "B" code fall under one of three main policies: 

● The drug products contain active ingredients or are manufactured in dosage 

forms that have been identified by FDA as having documented bioequivalence problems 

or a significant potential for such problems and for which no adequate studies 

demonstrating bioequivalence have been submitted to FDA; or 

● The quality standards are inadequate or the FDA has an insufficient basis to 

determine therapeutic equivalence; or 

● The drug products are under regulatory review.6

 

 Therefore, we propose that any alternative formulations not therapeutically 

equivalent to the reference listed product in FDA’s Orange Book will not be subject to 

the FUL. We propose that the FUL will only be applied to those drugs that are 

therapeutically equivalent to the reference listed drug, that is, “A” rated drugs that are 

pharmaceutically equivalent to the reference listed drug; however, we are inviting 

comments on the issue of the FUL being applied to drugs that are not therapeutically 

equivalent to the reference listed drug. 

 In accordance with section 2503(a) of the Affordable Care Act, we are proposing 

that the FUL will be calculated as no less than 175 percent of the weighted average of the 

most recently reported monthly AMPs for pharmaceutically and therapeutically 

equivalent multiple source drug products. We plan to determine the weighted average on 

 

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

6 Id., vii.
CMS-2345-P 114 

the basis of manufacturer submitted utilization of the most recently reported monthly 

AMPs for all therapeutically equivalent innovator (I) and non-innovator (N) multiple 

source drug products that, by definition elsewhere in this proposed rule, are available for 

purchase by retail community pharmacies on a nationwide basis. 

 In computing the FUL, we would use the monthly AMP and the monthly 

utilization data submitted by the manufacturer. Using the monthly AMP data will 

provide for the timeliest pricing data and allow revisions to the FUL list on a monthly 

basis. In addition, the statute requires us to use the recently reported monthly AMPs to 

calculate the FUL. It will also permit us to update the FULs on a timely basis in 

accordance with the provisions of section 1927(f)(1)(B) of the Act. 

 The currently reported AMP is based on the nine-digit NDC and is specific to the 

product code, combining all package sizes of the drug into the same computation of 

AMP. Inasmuch as this computation is used to determine the AMP that is currently 

reported by manufacturers, we propose to use this AMP for the FUL calculation. 

Section 2503(a) of the Affordable Care Act redefines AMP, effective October 1, 

2010. Due to this change in the determination of AMP, and the requirement that the 

monthly AMP under this calculation first be reported for October 2010 data, CMS 

received these revised monthly AMPs and utilization data beginning in November 2010. 

While the law required manufacturers to change their calculation of AMP effective 

October 1, 2010, we did not issue FULs based on this data. Further, we decided to not 

use data submitted before December 15, 2010 to calculate the FULs, as there was some 

concern within the industry that manufacturers may have based their AMP calculation on 

prior AMP regulations that were in effect until December 15, 2010. 
CMS-2345-P 115 

In the interim, CMS has been reviewing monthly pricing data submitted and 

continues to work towards increasing labeler compliance of reporting data timely. When 

establishing a FUL, we propose to disregard the AMP of an NDC which has been 

terminated. We note that we have published four sets of draft FUL files on our Web site. 

We invited comments from stakeholders and we have posted several of those comments 

and our responses to those comments at http://www.medicaid.gov/Medicaid-CHIPProgram-Information/By-Topics/Benefits/Prescription-Drugs/Federal-Upper-Limits-

.html. 

 In calculating the FUL, we propose to eliminate covered outpatient drugs 

designated as single source (S) drugs from the FUL calculation because the FUL in the 

statute, is based on the weighted average of AMPs for multiple source drugs, and, single 

source drugs are, by definition, not multiple source drugs, and should be reported 

according to the statute. We note here that there should be no instances of an (S) drug in 

a FUL group, as labelers should be reporting drugs that are therapeutically equivalent 

drug products as (I) drugs, and statutory provisions require us to use only multiple source 

drugs when calculating the FUL. We propose to rely on manufacturer submitted data in 

determining if a drug product is used in the calculation of the FUL, that is, if it is an (I) or 

an (N) drug. CMS has issued guidance previously, and more recently, requested drug 

labelers to review the drug category for which their NDC is reported, and if they 

determine that an incorrect drug category has been reported to CMS for a product, they 

are required to request a drug category change for the product. We have also recently 

reminded labelers that changing a drug category from (S) to (I) has no prior approval 

requirement from CMS, and that these changes can and should be made timely by the 

labeler via the Drug Data Reporting for Medicaid system. See Manufacturer Releases 
CMS-2345-P 116 

No. 80 and No. 82 (issued on January 5, 2010 and November 1, 2010, respectively). 

Accordingly, we propose to include pharmaceutically and therapeutically equivalent 

innovator multiple source and non-innovator multiple source drugs when calculating the 

weighted average of monthly AMPs. 

 In light of our experience with the implementation of section 1927 of the Act, we 

believe that when a drug product has at least one other FDA-approved, pharmaceutically 

and therapeutically equivalent drug product, the drug is generally sold or marketed on a 

nationwide basis. Further, we believe that when a drug product has at least two FDAapproved, pharmaceutically and therapeutically equivalent drug products, that all retail 

community pharmacies would be able to purchase at least one of the drug products 

through a pharmaceutical market channel of distribution, including, but not limited to, a 

national, regional, or specialty drug wholesaler, chain warehouse, group purchasing 

organization, or directly from the drug manufacturer. We do not believe it is necessary 

that each retail community pharmacy have the ability to purchase every supplier’s 

pharmaceutically and therapeutically equivalent drug in order for the Secretary to 

calculate the FUL for pharmaceutically and therapeutically equivalent multiple source 

drug products, provided the retail community pharmacy is able to purchase at least one of 

the drug products. We invite comments on the issue of national availability in the context 

of the FUL requirements and request comments regarding specific instances where such 

drug products are not available for purchase by retail community pharmacies on a 

nationwide basis. Further, as noted previously, we will not be using the AMP of a 

terminated NDC to set the FUL beginning with the first day of the month after the 

termination date reported by the manufacturer to CMS, and a weighted average, using the 

monthly AMP unit data, will be used to calculate the FUL. 
CMS-2345-P 117 

 We further propose to establish the upper limit reimbursement at 175 percent of 

the weighted average of monthly AMPs in the aggregate. 

 We analyzed the FUL and determined that the weighted AMP multiplied by 175 

percent including (I) and (N) drugs would be an adequate reimbursement methodology, 

per the below chart that shows the analysis of the fiscal year 2009 estimated aggregate 

expenditures, comparing reimbursement using the DRA AMP-based FUL methodology 

to the pre-DRA FUL methodology, weighted AMP FUL, weighted AMP multiplied by 

175 percent, and Indiana’s State Maximum Allowable Cost (IN’s SMAC). Utilization 

data provided to CMS by States were used to calculate the total number of units 

reimbursed for each drug group and was multiplied by the DRA AMP-based FUL, the 

pre-DRA FUL, the weighted AMP FUL, the weighted AMP multiplied by 175 percent 

FUL, and IN’s SMAC to get the aggregate limit for each drug group based on each 

formula used to calculate the FUL. We chose IN’s SMAC as one of the formulas in our 

comparative analysis because IN’s SMAC, in accordance with its State plan, is developed 

by using pharmacy invoices, and is equal to the average AAC per drug adjusted by a 

multiplier of at least 1.0. IN’s Office of Medicaid Policy and Planning reviews the SMAC 

rates on an ongoing basis, and adjusts the rates as necessary to reflect prevailing market 

conditions and ensure reasonable access by providers to drugs at or below the applicable 

SMAC rate. Currently, IN adjusts their average AAC using a multiplier of 1.2. There are 

approximately 550 drug groups reflected in this estimated analysis. Because utilization 

data are reported on a quarterly basis while the DRA AMP-based FUL is generated on a 

monthly basis, the estimated aggregate limit is calculated for each month using the 

quarterly utilization data averaged out by the 3 months. This calculation was done for all 

four quarters of fiscal year 2009, which was then aggregated to get the fiscal year 2009 
CMS-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 equivalent drug products. 

<PHOTO>
CMS-2345-P 119 
CMS-2345-P 120 

</PHOTO> Footnotes: 1. Each FUL group is established based on the DRA criteria that if all formulations of a multiple source drug are identified as A-rated in the FDA“Approved Drug Products with Therapeutic Equivalence Evaluations” (including supplements or in successor publications), then there must be aof 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 with zero utilizatcalculation of each formula is based on the availability of three or more suppliers at the NDC-9 level and two different product codes are consid

suppliers. 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% out5. 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 2Q03Q 2Q09 = 1Q09 Utilization, and FY 4Q09 = 2Q09 Utilization. An NDC 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 doemultiple source drugs. 
CMS-2345-P 121 

In a recent report issued by the Government Accountability Office (GAO) 

“Medicaid Outpatient Prescription Drugs: Estimated Changes to Federal Upper Limits 

Using the Formula under the Patient Protection and Affordable Care Act” (GAO-11-

141R), the GAO found that Affordable Care Act FULs were higher than the undiscounted 

average retail pharmacy acquisition costs for 34 of the 40 drugs in the sample and was 35 

percent higher than the sum total of the undiscounted pharmacy acquisition costs for 

these drugs, which would have also lowered the Medicaid expenditures on these drugs by 

60 percent. 

Furthermore, the GAO stated that the Affordable Care Act FULs could further 

exceed the retail pharmacy acquisition costs if the GAO was to take into consideration 

factors that were not used in the analysis of this report. The GAO stated that the 

acquisition cost data the GAO used do not include rebates paid by manufacturers to retail 

pharmacies. If included, any applicable rebates would have reduced the average retail 

acquisition costs for the drugs in the sample; thus, the Affordable Care Act FULs would 

exceed the retail pharmacy acquisition costs by more than 35 percent. Additionally, if the 

Affordable Care Act FULs were to be calculated using the new AMPs based on the 

revised definition under the Affordable Care Act, then the Affordable Care Act FULs 

would have exceeded the retail pharmacy acquisition costs by even greater than 35 

percent. 

Therefore, based in part on the findings from the GAO report, we believe that 

calculating the Affordable Care Act FULs at weighted AMP times 175 percent would be 

a more than adequate reimbursement to the pharmacies. 
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 described above, we have decided to calculate the 

FUL at 175 percent. Using any percentage greater than 175 percent would further inflate 

the aggregate expenditures depicted on our chart. As provided in the chart above, 

calculating the FUL as 175 percent of the weighted AMP, including multiple source 

drugs, that is, I and N drugs, yields a reimbursement that is just slightly higher than 

Indiana’s SMAC which is based on actual pharmacy acquisition data and is consistent 

with the GAO’s findings that these levels are generally in excess of the actual acquisition 

cost of the drug. Because it is virtually impossible to price each drug at its actual 

acquisition cost to each pharmacy and reflect the changes in the marketplace at the same 

time they occur, the upper limit reimbursement continues to be established in the 

aggregate. States maintain their right to adjust reimbursement on a drug by drug basis to 

the extent that the State’s reimbursement remains under the aggregate upper limit. 

Thus, using a factor of 175 percent of weighted monthly AMPs should yield 

adequate reimbursement for pharmacy providers, while achieving cost savings for the 

Medicaid program compared to pre-DRA FULs. 

<HD2>L. FULs Smoothing Process

 As discussed previously, section 2503(a) of the Affordable Care Act amended the 

FUL provision at section 1927(e)(5) of the Act to specify that the Secretary shall 

implement a smoothing process for AMPs which shall be similar to the smoothing 

process used in determining the ASP of a drug or biological under Medicare Part B. In 

order to ensure that the smoothing process being utilized by manufacturers is uniform and 

consistent with statutory requirements, as was discussed in Manufacturer Release #83, a 
CMS-2345-P 123 

manufacturer should estimate the impact of its lagged price concessions using a 12-month 

rolling percentage to estimate the value of those discounts. This guidance is restated in 

the preamble language of this proposed rule and would be codified in proposed 

regulatory text at §447.510(d)(2). 

 We also considered whether to implement a further smoothing process applicable 

to the FUL calculation. While the statute requires us to use the most recently reported 

monthly AMPs to calculate the FUL, it did not address smoothing the FULs themselves. 

However, after reviewing the first months of the draft FULs, which we posted on our 

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 recently reported monthly AMPs over a specific 

period of time; for example, three months, to minimize the variability of the monthly 

AMPs before weighting the monthly AMPs and multiplying the result by 175 percent to 

calculate the FUL; 

● Using the median of the most recently reported monthly AMPs over a specific 

period of time; for example, three months, before weighting the monthly AMPs and 

multiplying the result by 175 percent to calculate the FUL; 

● Weighting the most recently reported monthly AMPs over a specific period of 

time; for example, three months, to minimize the variability of the monthly AMPs before 

weighting the monthly AMPs and multiplying the result by 175 percent to calculate the 

FUL; 

● After calculating the FUL as the weighted average of monthly AMPs in a FUL 

product group, calculate the mean of the FULs for each product group over a specific 
CMS-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 percent change is greater than a certain 

percentage when compared to the last manufacturer reported and certified monthly AMP; 

● Increasing the calculated FUL by a certain percentage if the FUL is less than a 

certain percentage from the last FUL; 

● Calculating the FUL using only monthly weighted AMPs within a FUL 

Product Group that have a certain percentage of the market share based on the monthly 

AMP units reported to us by drug manufacturers. 

● Using the mean of the monthly weighted average of AMPs for an entire FUL 

Product Group over a specific period of time; for example, three months; and/or, 

● Excluding monthly AMPs that are higher or lower than the standard deviation 

of the mean of all the monthly AMPs in a specific FUL Product Group. 

 Smoothing the pricing data using one of these methodologies would prevent some 

month-to-month fluctuations in the FULs. However, implementing any of the smoothing 

methods would have limitations. For example, it could require that for the entire 

averaging period, all manufacturers have timely reported monthly AMP and AMP units 

or that we look at alternatives to that. Further, it would require us to look at how to add 

newly available generic drugs or other changes in circumstances that affect these FULs. 

We are concerned that this could skew a resultant FUL so that it would be less 

representative of the price at which the pharmacy could purchase that drug. For example, 
CMS-2345-P 125 

it could cause a FUL for a particular FUL group to be lower than if we use only one 

month of AMP data in the calculation depending on the reported and certified monthly 

AMP and AMP units over the averaging period. As such, it may not capture price 

increases in a drug or reflect changes in price caused by a shortage of the drug. 

Conversely, it could overstate the price of drugs where more manufacturers are coming 

into the marketplace and the price of the drug was decreasing over time. 

 After careful consideration, we have decided not to propose a specific 

methodology to smooth the FULs at this time. Because AMPs are based on prices paid to 

manufacturers by wholesalers for drugs distributed to retail community pharmacies and 

by retail community pharmacies that purchase drugs directly from the manufacturer, they 

are subject to some fluctuations and variances in the generic drug market, which may 

result in fluctuations in the AMP-based FUL from month to month. Furthermore, these 

changes may be present even if we decide to implement a smoothing process over and 

above the smoothing process that manufacturers are presently using for AMP 

calculations. As previously mentioned, price changes can occur as a result of product 

shortages, manufacturing disruptions, seasonal supply and demand, and products with a 

short shelf life. We are inviting comments on this issue, including the benefit of such a 

process, the options we considered, options we have not considered, and whether a 

smoothing process is necessary. 

<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 deleted references to §447.514 “Upper limits for 
CMS-2345-P 126 

multiple source drugs” from §447.518 “State plan requirements, findings and 

assurances”. We are proposing conforming regulatory amendments to those references 

and are adding them in the regulatory text of §447.518. 

In addition, to conform with the change from “estimated acquisition cost” to 

“actual acquisition cost”, we propose in §447.518(c) to require all States to provide data 

to adequately support proposed changes in reimbursement using AAC. This supporting 

data could include, but is not limited to, a national survey, to create a database of actual 

acquisition costs that States may use as a basis for determining State-specific rates. 

Additionally, a State survey of retail pharmacy providers or other reliable data which 

reflects the pharmacy provider’s price to acquire a drug could be used as a basis to 

support proposed changes in reimbursement. We believe that surveying pharmacy 

providers for acquisition costs or using other reliable data, based on actual sales 

transactions, as a base from which to develop an appropriate ingredient cost 

reimbursement is reasonable. Alternatively, the use of an AMP, which is based on actual 

sales data and reported and certified by drug manufacturers, could be considered as a 

reimbursement metric. The State can also determine the relationship of the AMP to 

factors such as the wholesaler markup, which covers the cost of distribution and other 

service charges by the wholesaler, to determine a reasonable reimbursement that would 

appropriately compensate pharmacies for these costs. 

We are inviting comments on the practicality of requiring each State to conduct a 

survey, the frequency of such a survey, and how closely we would expect the State to 

conform to the survey results in the reimbursement rates they propose in their SPA, 

including the use of acquisition cost averaging, AMPs as a basis for reimbursement, 
CMS-2345-P 127 

including the application of an appropriate markup factor or other methods of 

determining the ingredient cost. 

Although we considered various alternatives for how AAC will apply in the case 

of reimbursement for covered outpatient drugs purchased under other Federal drug 

programs such as the 340B Drug Pricing Program and the Federal Supply Schedule (FSS) 

we are not proposing specific methodologies. Through these programs, certain Federal 

grantees and others can purchase drugs at significant discounts, and these drugs will then 

be reimbursed through the State Medicaid program for Medicaid beneficiaries. Under 

current HRSA policy, participating covered entities are permitted to dispense drugs 

purchased outside of 340B authority for their Medicaid patients, often referred to as the 

“Medicaid carve out” option. In accordance with section 340B(a)(5) of the PHS Act and 

section 1927(a)(5)(C) of the Act, a covered entity is not permitted to seek Medicaid 

payment for a drug that is subject to discounts under the 340B Drug Pricing Program and 

a Medicaid rebate in order to protect drug manufacturers from paying a Medicaid rebate 

on drugs that are already subject to a Federal discount. This “duplicate discount” 

prohibition in the Medicaid statute only applies to drugs purchased through the 340B 

Drug Pricing Program and does not apply to drugs carved out for Medicaid patients and 

billed to the Medicaid program. 

In a recent OIG report, “State Medicaid Policies and Oversight Activities Related 

to 340B-Purchased Drugs”, OEI-05-00321, the OIG reported that many State Medicaid 

agencies have written policies that direct covered entities to bill at cost for the ingredient 

cost of 340B purchased drugs or relied on HRSA’s 1993 guidance directing covered 

entities to bill States at AAC (although that guidance is no longer in effect and was 

superseded by subsequent HRSA guidance directing covered entities to refer to States’ 
CMS-2345-P 128 

policies). We believe that paying 340B providers at cost for these 340B drugs would 

meet the AAC requirements but seek further comments on what other methodologies 

would meet the AAC requirements. 

IHS, tribal and urban Indian organization pharmacies may purchase drugs through 

the FSS or the 340B program and are oftentimes paid the Medicaid reimbursement rates 

established in State plans. In turn, States are reimbursed at 100 percent Federal medical 

assistance percentage for services provided in IHS and tribal pharmacies. While we have 

considered alternatives for payment methodologies for IHS, tribal and urban Indian 

pharmacies, we are proposing no specific methodologies and invite public comment on 

Medicaid payment levels for these facilities. In addition, pursuant to E.O. 13175 and the 

HHS Tribal Consultation Policy (December 2010), the CMS will consult with Tribal 

officials prior to the formal promulgation of this regulation. 

We propose that States that do not have specific methodologies develop such 

methodologies for these providers consistent with our proposed shift from EAC to AAC. 

In addition, we propose to add a new requirement at §447.518(a) that the State plan must 

describe the agency’s payment methodology for drugs dispensed by a covered entity 

participating in the 340B Drug Pricing Program or by a contract pharmacy under contract 

with a participating covered entity. 

In addition, States would be required to submit a SPA through the formal review 

process, as well as comply with all Federal requirements including consultation with 

tribal governments and IHS, tribal and urban Indian programs pursuant to section 5006 of 

the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5), when submitting 

a request to change their professional dispensing fee. As is true for the drug ingredient 

reimbursement, we do not intend to mandate a specific formula or methodology which 
CMS-2345-P 129 

the States must use to determine their dispensing fee, however, as is consistent with 

current policy, States would still be required to substantiate how their dispensing fee 

reimbursement to pharmacy providers reasonably reflects the cost of dispensing a drug 

and will ensure access for these drugs to Medicaid beneficiaries. Where the professional 

dispensing fee might differ because of unique circumstances for 340B covered entities or 

IHS and tribal pharmacies, the State should look at these circumstances to determine if a 

different professional dispensing fee is warranted for these entities. One component of 

the reimbursement formula should not be revised without appropriately evaluating the 

other part. 

With the proposed change in the definition of “State” to include the territories, we 

acknowledge that these same requirements could ultimately be applicable to the 

territories. Since the territories that participate in the Medicaid Program are already 

required to submit changes to their State Plans through the State Plan Amendment 

process, we are proposing that the requirements discussed in this section would be 

effective for the territories in the same manner in which they would be effective for the 

50 States and the District of Columbia. 

<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 forth in section 1927(k) of the Act; therefore, 

these drugs are not subject to rebate. However, Medicaid coverage may be provided 

under section 1905(a)(12) of the Act at the State’s option, and FFP is available to the 

extent it is consistent with section 1903(i) of the Act and §440.120. 
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 the Act, such as whole blood products. 

We propose to add §447.522 to clarify that States providing coverage of 

investigational drugs may only pay for and receive FFP for these drugs when they are 

billed for in accordance with the FDA final rules 21 CFR Part 312 and 316, as amended 

by the final rules published in the August 13, 2009 Federal Register (“Charging for 

Investigational Drugs Under and Investigational New Drug Application” (74 FR 40872) 

and “Expanded Access to Investigational Drugs for Treatment Use” (74 FR 40900)). 

These regulations clarify the circumstances under which charging for an investigational 

drug in a clinical trial is appropriate, set forth criteria for charging for an investigational 

drug for the different types of expanded access for treatment, and clarify what costs can 

be recovered. 

We are also adding a provision to allow for the coverage of other 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 collection 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 automated collection techniques. 

We are soliciting public comment on each of these issues for the following 

sections of this document that contain information collection requirements (ICRs): 

<HD2>A. ICR's Regarding Medicaid Drug Rebates (§447.509) 

As discussed earlier in the preamble, section 2501(c) of the Affordable Care Act 

amended section 1903(m) of the Act by specifying new conditions for MCO contracts, 

including that covered outpatient drugs dispensed to individuals eligible for medical 

assistance under Title XIX of the Act who are enrolled with a Medicaid MCO shall be 

subject to the same rebate required by the rebate agreement authorized under section 

1927 of the Act. Proposed §447.509(b) adds requirements for States to collect necessary 

drug utilization data from Medicaid MCOs in order to include MCO data in the quarterly 

rebate requests. 

We estimate that these requirements would affect the 51 State Medicaid 

Programs, as well as the territories. The burden associated with the inclusion of Medicaid 

MCOs in the Drug Rebate Program is the time and effort it would take for the State 

Medicaid Program to gather the drug utilization information from the Medicaid MCOs 

and the subsequent inclusion of said data in the State’s quarterly rebate request to 

manufacturers. Our current reporting hour burden, specific to the invoice and State 

utilization data reporting within the MDR Program, for the current State Medicaid 

Programs is 2,346 hours per quarter or 9,384 hours annually, at a total estimated cost of 

$302,165. 
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 subsequent inclusion of said data in the State’s 

quarterly rebate request to the manufacturers will add a total 678 hours per quarter or 

2,712 hours annually to the current reporting burden for the States (which include the 50 

States, District of Columbia, and the territories). Therefore, the total new reporting 

burden, as a result of this proposed rule requesting additional requirements to collect 

drug utilization data from MCOs, will be 2,712 hours annually at a total estimated cost of 

$98,744. 

 The aforementioned burden estimates will be submitted for OMB review and 

approval as a revision to the information collection request currently approved under 

OMB control number 0938-0582. 

 Proposed §447.509(c) would also require States to remit to the Federal 

government the amount of the savings resulting from the increases in the rebate 

percentages. The reporting process is similar to the current reporting process for drug 

expenditures and rebates onto the CMS-64 Form. In addition to reporting onto the CMS64 Form the quarterly amount for prescribed drug expenditures, Federal rebates, and 

rebates under State side bar agreements, States will report the total quarterly rebate offset 

amount that they are remitting to the Federal government for the fee-for-service rebates 

they currently receive from drug manufacturers and for the MCO rebates they will 

receive from drug manufacturers. The information collection requirements and burden 

associated with CMS–64 are already approved by OMB through April 30, 2014, and have 

been assigned OMB control number 0938–0067. This proposed rule does not impose any 

new or revised burden or reporting or recordkeeping requirements concerning CMS–64. 

<HD2>B. ICR's Regarding Requirements for Manufacturers (§447.510)
CMS-2345-P 133 

 Manufacturers must report, electronically, product and quarterly pricing 

information to CMS not later than 30 days after the end of the rebate period. Monthly 

pricing and units are due no later than 30 days after the end of the month. In addition, 

customary prompt pay discounts and nominal prices must be reported quarterly. The 

proposed rule would significantly revise the definitions of AMP and best price and, 

therefore, would require the manufacturers to reconfigure their pricing systems to 

correctly calculate AMP and best price. In addition, manufacturers must submit the total 

number of units that are used to calculate the monthly AMP. Therefore, the burden 

associated with these new requirements is the time and effort it would take for a drug 

manufacturer to reconfigure its pricing systems to correctly calculate AMP and best price 

before it can submit the required data to CMS. We estimate that these requirements 

would affect the approximately 600 drug manufacturers in the Medicaid Rebate Program. 

We believe the changes to the AMP and best price definitions will require 240 hours per 

manufacturer, for a one-time total of 144,000 burden hours with a one-time total 

estimated burden cost of $8,640,000. Once the pricing systems have been reconfigured, 

there should be no additional burden in time or effort than that which already exists. 

 Manufacturers will be required to submit the FDA application number issued by 

FDA when the product is approved. If the product does not currently have an FDA 

application number, the manufacturer must submit evidence demonstrating that the 

product is otherwise a covered outpatient drug. CMS shall refer to this evidence of 

demonstration as covered outpatient drug status, or COD status. 

 This information should not be difficult for the manufacturer to determine since 

the manufacturer should already know the FDA application number of the product when 

it was approved by FDA, or the reason it qualifies as a covered outpatient drug, if there is 
CMS-2345-P 134 

no application number. 

 We estimate that these requirements would affect approximately 600 drug 

manufacturers that participate in the Medicaid Drug Rebate Program. The burden 

associated with the reporting of the FDA application number or the COD status is the 

time and the effort it would take for each drug manufacturer to retrieve this information 

from their records and submit it to CMS. Therefore, we believe that the new 

requirements to report the FDA application number and the COD status will require a 

one-time total of 3,000 hours at a one-time total estimated burden cost of $180,000. 

Manufacturers will also be required to identify drugs that are approved by the 

FDA exclusively for pediatric indications. These drugs will be referred by CMS as 

“Exclusively Pediatric” drugs. This information should not be difficult for manufacturers 

to determine and therefore would not add any significant hourly burden since the 

exclusively for pediatric indications will be provided by the FDA upon approval of these 

drugs. 

 Additionally, manufacturers will need to consider certain requirements when it 

comes to the calculation of their AMP for inhalation, infusion, instilled, implanted, and 

injectable drugs (5i), when not generally dispensed through retail community pharmacies. 

Using the methodology proposed earlier in this rule, a manufacturer would be required to 

identify and determine the AMP of these drugs. It is our estimate that these requirements 

would affect approximately 600 drug manufacturers that participate in the Medicaid Drug 

Rebate Program. The burden associated with the initial reporting of the 5i drugs is the 

time and the effort it would take for each drug manufacturer to identify these drugs and 

then to determine which of the 5i drugs are not generally dispensed through a retail 

community pharmacy by using the methodology proposed earlier in this rule. However, 
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 information the manufacturer received from the 

FDA as well as the FDA Route of Administration list that CMS has identified. Once the 

manufacturer has established its initial list of 5i drugs, it would then be required on both a 

monthly, as well as quarterly basis, to determine which of those drugs are not generally 

dispensed through a retail community pharmacy. Therefore, we believe that the new 

reporting requirements will require a one-time total of 1,500 burden hours for 

manufacturers to identify the 5i drugs at a one-time total estimated burden cost of 

$90,000. In addition, on both a monthly and quarterly basis (12 months, plus 4 quarters, 

for a total of 16 times per year) the manufacturer will be required to determine whether 

the percentage of sales for the 5i drugs has met the threshold to be considered not 

generally dispensed through a retail community pharmacy. Specifically, we estimate that 

it will add 20 hours per response with 16 responses per year for each manufacturer to 

identify which 5i drugs are not generally dispensed through a retail community 

pharmacy. This equates to a total estimate of 320 additional hours annually per 

manufacturer. The total annual burden hours for the 600 drug manufacturers 

participating in the Medicaid Rebate Program is estimated to be 192,000 hours with a 

total cost of $11,520,000. 

 Furthermore, manufacturers participating in the rebate program that have 

reformulated drugs are now required to calculate an alternative rebate calculation for 

certain drugs. In order to calculate the alternative rebate calculation for a line extension 

drug of a brand name in an oral solid dosage form, the line extension drug and the initial 

brand name listed drug need to be identified. Although CMS will be identifying both the 

initial brand name listed drug and the line extension drug for the initial three quarters for 
CMS-2345-P 136 

manufacturers, they will be responsible for identifying the initial brand name listed drug 

and the line extension drug after the initial three quarters. Manufacturers are responsible 

for calculating the unit rebate amount for the line extension drug. 

We estimate that these requirements would affect approximately 600 drug 

manufacturers that participate in the Medicaid Drug Rebate Program. The burden 

associated with the reporting of the initial brand name listed drug and the line extension 

drug is the time and the effort it would take for each drug manufacturer to identify these 

drugs. However, it is our understanding that each drug manufacturer should have some 

knowledge on which drug is the line extension based on the approval information that the 

manufacturer received from the FDA as well as the Chemical Type that CMS has 

identified as a line extension drug and the initial brand name listed drug. Therefore, we 

believe that the new reporting requirements to identify the initial brand name listed drug 

and the line extension drug would add 20 additional hours per quarter, per manufacturer; 

or 48,000 total hours annually to the drug manufacturers at a total estimated cost of 

$2,880,000. 

Finally, a manufacturer is required to retain records for 10 years from the date the 

manufacturer reports data to CMS for that rebate period. While this requirement is 

subject to the PRA, we believe this is a usual and customary business practice as defined 

in 5 CFR 1320.3(b)(2) and, therefore, the associated burden is exempt from the PRA. 

 The aforementioned burden estimates will be submitted for OMB review and 

approval as a revision to the information collection request currently approved under 

OMB control number 0938-0578. 

<HD2>C. ICR's Regarding Requirements 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 Islands, Guam, the Northern Mariana Islands 

and American Samoa, in addition to the 50 States and the District of Columbia. The 

territories will able to receive manufacturer rebates through the MDR program in the 

same manner that the 50 States and the District of Columbia are currently receiving 

rebates. 

In order for territories to be able to begin collecting rebates from the 

manufacturers, the territories will be required to come into compliance with the MDR 

program because the systems that the territories currently have are not setup for the MDR 

program. As a result, these territories will likely have to utilize contractors in order to 

ensure that their systems are in place to begin to collect rebates from manufacturers. We 

are unsure what the time, effort and cost would be for this compliance process to be 

completed and seek comments specific to this issue. 

States will have to report the total MCO rebates they receive from manufacturers 

onto the MBES CMS-64 Form and submit this data to CMS on a quarterly basis. The 

information collection requirements and burden associated with CMS–64 are already 

approved by OMB through April 30, 2014, and have been assigned OMB control number 

0938–0067. This proposed rule does not impose any new or revised burden or reporting 

or recordkeeping requirements concerning CMS–64.
CMS-2345-P 138 

TABLE 5: Annual Recordkeeping and Reporting Requirements

Regulation 

Section(s) 

OMB 

Control 

No. 

Respondents Responses 

Burden 

per 

Response 

(hours) 

Total 

Annual 

Burden 

(hours) 

Hourly 

Labor 

Cost of 

Reporting 

($) 

Total 

Labor 

Cost of 

Reporting 

($) 

Total 

Capital/ 

Maintenance 

Costs ($) 

§447.509(b), 

§447.511 0938-0582* 56 224 12.1 2,712 36.41 98,744 0 

§447.510 0938-0578* 600 600 240 144,000 60 8,640,000 0 §447.510 0938-0578* 600 600 5 3,000 60 180,000 0 §447.510 0938-0578* 600 600 2.5 1,500 60 90,000 0 §447.510 0938-0578* 600 9600 20 192,000 60 11,520,000 0 §447.510 0938-0578* 600 2400 20 48,000 60 2,880,000 0 

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

* The data contained in the table reflects the burden associated with the proposed revisions to the information collection requests appro

control 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. These requirements are not effective until they 

have been approved by the OMB. 

If you comment on these information collection and recordkeeping requirements, 

please do either of the following: 

 1. Submit your comments electronically as specified in the ADDRESSES section 

of this proposed rule; or 

 2. Submit your comments to the Office of Information and Regulatory Affairs, 

Office of Management and Budget, 

 Attention: CMS Desk Officer, [CMS-2345-P] 

 Fax: (202) 395-6974; or 

 Email: OIRA_submission@omb.eop.gov 

<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 acknowledge or respond to them individually. 

We will consider all comments we receive by the date and time specified in the "DATES" 

section of this preamble, and, when we proceed with a subsequent document, we will 

respond to the comments in the preamble to that document.

<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 12866 
CMS-2345-P 140 

on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on 

Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory 

Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Act, 

section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 1995, Pub. L. 

104-4), Executive Order 13132 on Federalism (August 4, 1999), and the Congressional 

Review Act (5 U.S.C. 804(2)). 

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits 

of available regulatory alternatives and, if regulation is necessary, to select regulatory 

approaches that maximize net benefits (including potential economic, environmental, 

public health and safety effects, distributive impacts, and equity). Executive Order 13563 

emphasizes the importance of quantifying both costs and benefits, of reducing costs, of 

harmonizing rules, and of promoting flexibility. This rule has been designated an 

"economically" significant rule, under section 3(f)(1) of Executive Order 12866. 

Accordingly, the rule has been reviewed by the Office of Management and Budget. 

We solicit comment on the entire Economic Analyses section. 

<HD3>2. Statement of Need 

This proposed rule would implement changes to section 1927 of the Act as set 

forth in section 221 of Division F, Title II, of the Omnibus Appropriations Act, 2009 

(Pub. L. 111-8, enacted on March 11, 2009). This includes changes to, (1) section 1927 

of the Act as set forth in sections 2501, 2503, and 3301(d)(2) of the Patient Protection 

and Affordable Care Act of 2010 (Pub. L. 111-148, enacted on March 23, 2010), (2) 

section 1927 of the Act as set forth in sections 1101(c) and 1206 of the Health Care and 
CMS-2345-P 141 

Education Reconciliation Act of 2010 (HCERA) (Pub. L. 111-152, enacted on March 30, 

2010), and (3) section 1927 of the Act as set forth in section 202 of the Education Jobs 

and Medicaid Funding Act (Pub. L. 111-226, enacted on August 10, 2010). It also 

proposes to codify other requirements in section 1927 of the Act pertaining to the 

Medicaid drug rebate program and revise certain regulatory provisions presently codified 

at 42 CFR part 447, subpart I and make other changes. 

<HD3>3. Overall Impacts 

Overall, we estimate this rule would save approximately $17.7 billion for Federal 

Fiscal Years (FFYs) 2010 through 2014, reflecting $13.7 billion in Federal savings and 

$4.0 billion in State savings, as shown in the Table 6. These impact estimates represent 

the increased percentages of rebates on generic and brand name drugs, the treatment of 

new formulations, the change in the maximum rebate amounts, the extension of rebate 

collection for Medicaid managed care organizations, and provides for adequate pharmacy 

reimbursement. Lastly, we estimate costs to MCOs, drug manufacturers, and States in 

the amount of $81.4 million for FFYs 2010 through 2014 which includes administrative 

and infrastructure expenses necessary to implement the required systems changes. 
CMS-2345-P 142 

Table 6: STATE AND FEDERAL SAVINGS (-) OR COSTS (+)(FFYs 2010-201

[In $Millions]7

Affordable Care Act Section and Provision 2010 2011 2012 2013 2014 

Section 2501 (a)(1) - Increase minimum rebate percentages for brand name drugs 

Federal 

State 

-$350 

$0 

-$730 

$0 

-$765 

$0 

-$810 

$0 

-$865 

$0 

Section 2501(a)(2)-Recapture of total savings 

Federal 

State

 Included with affected provisions 

Section 2501 (b) - Increase rebate percentages for generic drugs 

Federal 

State 

-$30 

$0 

-$50 

$0 

-$55 

$-0 

-$55 

$0 

-$65 

$0 

Section 2501 (c) - extension of collection of rebates for MCOs 

Federal 

State 

-$580 -$280 

-$720 -$490 

-$720 -$560 

-$770 -$580 

-$820 -$620 

Section 2501 (d) - Rebates new formulation drugs 

Federal 

State 

-$160 

$0 

-$345 

$0 

-$360 

$0 

-$380 

$0 

-$400 

$0 

Section 2501(e) –Maximum rebate amount 

Federal 

State 

$30 $20 

$40 $30 

$40 $30 

$40 $30 

$50 $30 

*Section 2503 - Providing adequate pharmacy 

Federal 

State 

$0 $0 

-$351 -$234 

-$702 -$468 

-$702 -$468 

-$702 -$468 

**Interactions Federal 

State 

-$310 

$0 

-$420 

$0 

-$440 

$0 

-$510 

$0 

-$700 

-$5 

Total Impact Federal 

State 

-$1,400 

-$260 

-$2,576 

-$694 

-$3,002 

-$998 

-$3,187 -$1,018 

-$3,502 -$1,063 

Total Federal & State Impacts -$1,660 -$3,270 -$4,000 -$4,205 -$4,565 

7 Except as noted below, savings estimates were developed by the Office of the Actuary (OACT) and the Center for Medicaid, CHIP an(CMCS) at CMS and are consistent with the 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 to Stagovernment of $1.7 billion explained in the alternatives considered section of the Regulatory Impact Analysis).) (** These are interactions among drug provisions and the interaction of drug provisions with Medicaid expansion) 

TABLE 7: Costs to MCOs, Drug Manufacturers, and States 

(FFYs 2010-2014)

(In $Millions) Total 

Provision(s) Regulation Section(s) 

2010 2011 2012 2013 2014 (FFYs 2010- 2014) 

Drug Rebates for 

Medicaid MCOs 

§447.509(b), 

§447.511 $0.1 $0.1 $0.1 $0.1 $0.1 $0.49 

Requirements for 

manufacturers §447.510 $23.3 $14.4 $14.4 $14.4 $14.4 $80.91 

Total Costs $23.4 $14.5 $14.5 $14.5 $14.5 $81.4 
CMS-2345-P 144 

<HD3>4. Detailed Economic Analysis 

All savings estimates provided were developed by the Office of the Actuary 

(OACT) and the Center for Medicaid, CHIP and Survey & Certification (CMCS) at 

CMS. We note that the Congressional Budget Office (CBO), in its estimates of the 

budgetary effects of these provisions of the Affordable Care Act, reached similar 

aggregate estimates with a $600 million difference between CMS and CBO total 

estimates. The report can be seen at the following link 

(http://www.cbo.gov/ftpdocs/113xx/doc11379/AmendReconProp.pdf). CBO reached an 

estimated savings of $13.1 billion in Federal outlay reduction for FFY 2010-2014 

compared to CMS’ estimates of $13.7 billion for that same time period8. Savings 

estimates for sections 2501 and 2503 of the Affordable Care Act reflect increased rebate 

percentages for generic and brand name drugs, treatment of new formulations, revised 

FULs, and extended collection of rebates to MCOs. As well as a cost estimate for 

provision of section 2501(e) of Affordable Care Act for maximum rebate amount. The 

following analysis describes the methodology used to reflect each provision’s savings 

estimates. 

The estimates for section 2501(a)(1) of the Affordable Care were derived from 

baseline Medicaid prescription drug rebates developed for the mid-session review (MSR) 

of the FY 2010 budget. Data from the MDR system was used to estimate the share of 

rebates attributable to single source and innovator multiple source drugs. Using this data, 

we developed a model to estimate the effect of raising the minimum rebate by fitting a 

distribution to data on brand drug rebates as a percent of AMP with and without the 

15.1 percent minimum. The distribution was then used to calculate the mean rebate 

 

8 http://www.cbo.gov/ftpdocs/113xx/doc11379/AmendReconProp.pdf 
CMS-2345-P 145 

percentage taking into account the new minimums specified in section 2501(a) of the 

Affordable Care Act. These percentages were applied to baseline brand drug rebates to 

estimate potential savings from the provision. A behavioral offset of 40 percent was 

applied to the potential savings to account for actions on the part of manufacturers to 

minimize the impact of the higher rebate payments (for example, by raising prices). 

The estimate for section 2501(a)(2) of the Affordable Care Act represents the State 

share of savings projected for subsections (a)(1),(b), and (d) of section 2501 and is 

included in the Federal savings of those subsections. 

The impact of section 2501(b) of the Affordable Care Act was estimated using 

MDR data to estimate the share of baseline Medicaid drug rebates attributable to 

non-innovator, multiple source drugs. Increasing the rebate from 11 percent to 13 

percent of AMP results in additional rebates of 2 percent of AMP, or about 18 percent 

(2/11) of projected generic drug rebates. 

 For section 2501(c) of the Affordable Care Act, current projections of Medicaid 

prescription drug spending and managed care premiums were developed as part of the 

MSR 2010 Medicaid baseline. The estimated impact represents two different effects of 

this section. First, current prescription drug spending by Medicaid managed care plans 

would receive additional rebates. Estimates for (1) the portion of managed care plan 

expenditures going to rebates and (2) the level of additional rebates that could be 

obtained by the managed care plans were developed to calculate this impact. 

Second, it is anticipated that some fee-for-service prescription drug spending that 

is currently carved out of Medicaid managed care plans would be included in future 

managed care contracts. To develop this estimate, estimates were made for (1) the 

increased efficiency of managed care plans in managing prescription drug use, and (2) the 
CMS-2345-P 146 

increased administrative costs by including additional expenditures under managed care 

plans. It was also assumed that 10 percent of current fee-for-service drug spending 

would eventually shift to Medicaid managed care plans. 

About 75 percent of the savings to the Federal government from this section are 

estimated to come from the impact of additional rebates for managed care plan 

expenditures on prescription drugs, and about 25 percent are estimates to come from the 

impact of moving fee-for-service prescription drug spending into managed care plans. 

The impact for section 2501(d) of the Affordable Care Act utilized MDR data and 

focused on new formulations that are extended-release forms of the initial brand name 

listed drug. The analysis concluded that by calculating the additional rebate, based on the 

initial brand name listed drug, Medicaid rebates would increase by about 5 percent. A 

behavioral offset of 15 percent was applied to these potential savings. 

The estimates for section 2501(e) of the Affordable Act were derived from an 

analysis of MDR data for single source and innovator multiple source drugs for which the 

unit rebate amount exceeds the AMP. The amount of rebates in excess of AMP was 

found to account for approximately one percent of total Medicaid rebates. 

The estimate for FULs under section 2503 was developed by calculating the FUL 

based on weighted AMP times 175 percent, including (I) innovator and (N) 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 Collection of Information there are approximately 

600 drug manufacturers that participate in the Medicaid Drug Rebate program. The rule 

would require all drug manufacturers to provide an increased rebate percentage for 
CMS-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 previously there are approximately 600 drug 

manufacturers who will have to provide reporting drug information to CMS. We believe 

each manufacturer will spend a one-time annual burden of approximately 144,000 total 

hours in complying with these requirements. The estimated one-time cost to labelers is 

$8.6 million. This information is required for the new base AMP and the new best price. 

This is based on the Bureau of Labor Statistics (BLS) average rate of $60.00 an hour for a 

computer systems analyst. 

Manufacturers also will be required to submit the FDA application number issued 

by FDA when the product is approved. If the product does not currently have an FDA 

application number, the manufacturer must provide a demonstration that product is a 

covered outpatient drug, or a COD status. We estimate that these requirements would 

affect approximately 600 drug manufacturers that participate in the Medicaid Drug 

Rebate Program. The burden associated with the reporting of the FDA application 

number or the COD status is the time and the effort it would take for each drug 

manufacturer to retrieve this information from their records and submit it to CMS. 

Therefore, we believe that the new requirements to report the FDA application number or 

the COD status will require a total one-time burden of 3,000 hours at an estimated cost of 

$180,000. This is based on the BLS average rate of $60.00 an hour for a computer 

systems analyst. 

In addition, we believe that it will take time for manufacturers to identify the 

drugs that fall into 5i drugs category. We estimate they will spend a one-time total of 
CMS-2345-P 148 

1,500 burden hours to identify these drugs. This translates to a one-time cost for 

manufacturers to identify the 5i drugs of $90,000, utilizing the average BLS wage rate of 

$60 an hour for this function. Furthermore, we believe that it will require all 

manufacturers to spend 192,000 total hours annually in identifying which drugs fall into 

the 5i category. The estimated cost to the labelers for this addition is $11.5 million. This 

is also based on the average BLS wage rate of $60 an hour for this function. More 

information on manufacturer requirements can be found in §447.510 of this proposed 

rule. 

Lastly, we believe that the initial identification of the initial brand name listed 

drug and the line extension would also add an additional 48,000 annual hours to identify 

which drugs with the extension qualify. The estimated additional cost to labelers for this 

addition is also $2.9 million. This figure is also based on the average BLS wage rate of 

$60 an hour for this function. Additional information can be found in section §447.510 

of this proposed rule. 

b. Anticipated Effects on Retail Community Pharmacies 

Retail community pharmacies would be affected by this regulation, as the law will 

result in FULs that are closer to the acquisition cost of the drug. In a 2009 OIG report 

titled “A Comparison of Medicaid Federal Upper Limit Amounts to Acquisition Costs, 

Medicare Payment Amounts, and Retail Prices,” the OIG found that for the fourth quarter 

of FY 2007 the pre-DRA FUL reimbursement was more than double the average 

pharmacy acquisition cost for 46 of the 50 highest- expenditure FUL drugs. The 

Affordable Care Act FULs would generally reduce those limits in comparison to the preDRA highly inflated FULs and, thereby, reduce Medicaid payment for drugs subject to 

the limits. However, we note that since States had the option to reimburse at their 
CMS-2345-P 149 

SMAC, instead of the pre-DRA FUL, the actual reimbursement to the pharmacies under 

the Affordable Care Act FUL may be more compared to that SMAC reimbursement. An 

example of this is exemplified in comparing the pre-DRA FUL, the Affordable Care Act 

FUL and Indiana’s SMAC, as explained the preamble of §447.514 of this proposed rule. 

However, other than the comparison chart provided in §447.514 of this proposed 

rule, we have not analyzed how each State’s MAC program would impact the total 

savings under the new Affordable Care Act FUL methodology. Therefore, we invite 

public comments on this impact. The Federal savings in section 2503 of the Affordable 

Care Act reflect this change in reimbursement for retail community pharmacies. 

Although there are savings to the Medicaid program largely realized because of lower 

payment to pharmacies, pharmacies may receive a higher reimbursement under the 

Affordable Care Act FUL than they would when compared to what States currently 

reimburse pharmacies. 

c. Anticipated Effects on State Medicaid Programs 

States share in the savings from this rule. As noted in the Table 6, we estimate a 

5-year State savings of over $4.0 billion. We also note States would be impacted by the 

provisions of this regulation that offset the States’ share of the increased rebate amounts 

under the Affordable Care Act. State administrative costs associated with this regulation 

are minor; as States currently pay based on a FUL, have already determined their drug 

reimbursement rates, and currently collect claims information on physician administered 

drugs. 

The States will have added reporting data for the MCOs to CMS and we believe 

that this will require a total of 2,712 hours annually costing the States $98,744. 

Also, as a result of the increased rebate amounts under the national rebate 
CMS-2345-P 150 

agreement, manufacturers may reduce rebates they pay to States through supplemental 

rebate agreements. While this potential loss of supplemental rebates is not a direct 

consequence of this proposed rule, we recognize that this may occur. 

The interactions of the drug provisions with the Medicaid expansion in the 

Affordable Care Act will provide States a savings of $5 million in FFY 2014. More 

information can be found in §447.509(c) and §447.511 of this proposed rule. 

d. Anticipated Effects on U.S. Territories 

 The definition of the term “States” would be revised to include the territories: the 

Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands 

and American Samoa, in addition to the 50 States and the District of Columbia. The 

territories will be able to receive manufacturer rebates through the MDR program in the 

same manner that the 50 States and the District of Columbia are currently receiving 

rebates. 

In order for territories to be able to begin collecting rebates from the 

manufacturers, the territories will be required to come into compliance with the MDR 

program because the systems that the territories currently have are not setup for the MDR 

program. As a result, these territories will likely have to utilize contractors in order to 

ensure that their systems are in place to begin to collect rebates from manufacturers. We 

do not have cost estimates for this compliance process to be completed and solicit 

comment specific to this issue. 

<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 Affordable 
CMS-2345-P 151 

Care Act is to capture the AMP for those drugs that would be difficult for manufacturers 

to calculate an AMP based on only retail community pharmacy sales. Therefore, to 

eliminate any problems that may result from a manufacturer not able to determine an 

AMP for a particular drug, Congress amended the Affordable Care Act to include 

inhalation, infusion, instilled, implanted, or injectable drugs that are not generally 

dispensed through retail community pharmacies. We considered whether we need to 

define and determine which drugs constitute the five aforementioned. Also, we looked at 

Medicare Part B drugs and considered using their list to define these drugs. Though, 

when speaking with our counterparts in Medicare Part B, the ASP NDC-HCPCS covered 

drugs that are usually not self administered were not all inclusive. In addition to using 

the Medicare Part B list, we also considered whether CMS or manufacturers would be 

responsible for defining which drugs would fall into this category. Additionally, we 

considered using the FDAs dosage forms and route of administrations to assist 

manufacturers in determining which drugs meet this requirement. 

We propose to use a multistep process to identify if the drug is not generally 

dispensed. To recap, first manufacturers would identify which drugs would fall within 

the parameters of the five aforementioned drugs. Then, they would need to determine if 

the drug is “not generally dispensed” through a retail community pharmacy. (See 

§447.504 to learn more about the alternatives considered in developing AMP policy). 

With regard to the offset of the increased rebate percentages, we did consider 

offsetting the non-Federal share of the entire difference between the minimum rebate 

percentages in effect on December 31, 2009 and the new minimum rebate percentages in 

effect under Affordable Care Act, regardless of whether States received a rebate amount 

based on the difference between AMP and best price. However, after careful 
CMS-2345-P 152 

consideration of the provision in 2501 of the Affordable Care Act, we propose to 

calculate the offset amount to reflect rebates based on the difference between AMP and 

best price. 

We also considered a different interpretation when calculating the offset for line 

extension drugs. However, we believe that the new alternative rebate calculation is more 

aligned the statute. 

 We also considered determining whether there would be a cost or savings in 

implementing the Affordable Care Act FUL by comparing simulations of the DRA FUL 

and new Affordable Care Act FUL, using price, utilization, and reimbursement data from 

the MDR system combined with generic group codes from First Data Bank. The 

difference in savings from these simulations (expressed as a percent of total Medicaid 

drug spending) was applied to projected Medicaid prescription drug spending developed 

for the mid-session review of the FY 2010 Budget, resulting in a five year Federal and 

State cost of $1.7 billion for the Affordable Care Act FULs compared to the DRA FULs. 

However, this alternative does not take into account a State’s ability to choose to 

reimburse at the SMACs, which may be lower than the FUL for a drug. As a result, this 

alternative/methodology yields a cost to the States and Federal government, when in 

actuality it should reflect a savings as many States have implemented their own SMAC 

and reimburse below the FUL. In addition, the DRA FUL was never implemented and 

therefore this alternative is based on unpublished FULs and not representative of actual 

reimbursement. 

We solicit comment on the Alternatives Considered section. 

<HD3>6. Accounting Statement and Table 
CMS-2345-P 153 

As required by OMB’s Circular A-4 (available at 

http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in the Table 8 we have prepared 

an accounting statement showing the classification of the transfers and costs associated 

with the provisions of this proposed rule. Table 9 provides our best estimate of the 

decreases in Medicaid payments and increase in drug rebates under sections 2501(a), 

2501(b), 2501(c), 2501(d), 2501(e), and 2503 of the Affordable Care Act. All transfers 

to the Federal and State Medicaid program are from retail pharmacies and drug 

manufacturers. Lastly, we present the costs to MCOs, Drug Manufacturers, and States. 
CMS-2345-P 154 

Table 8: Accounting Statement: Classification of Estimated Transfers and 

Costs, 

from FFYs 2010 to 2014 (in $Millions)

Category TRANSFERS 

Annualized 

Monetized 

Transfers 

Year Dollar Discount Rate Period 

Covered 

 2011 7% 3% 

 Primary 

Estimate -$2,667.5 -$2,704.8

FFYs 2010-

2014 

From/To Reduction in transfers from the Federal 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 Governments to Retail Pharmacies and 

increased transfers from Drug Manufacturers 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 regulation of $17.7 billion over 5 years, $13.7 

billion to the Federal government and $4.0 billion to the States. Most of these savings 

result from the increased rebate percentages on brand name drugs and the offsets of the 

total savings of the increased rebate percentage, treatment of new formulations, and from 

the collection of rebates from enrollees of MCOs. Lastly, we estimate costs to MCOs, 
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 significant impact on a substantial number of small entities. For 

purposes of the RFA, small entities include small businesses, non-profit organizations, 

and small governmental jurisdictions. Individuals and States are not included in the 

definition of a small entity. For purposes of the RFA, three types of small businesses are 

potentially impacted by this proposed rule. These include small retail community 

pharmacies, small pharmaceutical manufacturers participating in the Medicaid Drug 

Rebate Program, and small Medicaid managed care organizations (MCOs). More 

detailed analysis on the impact of these entities is provided in the Detailed Economic 

Analysis section (V.A.4) above. The great majority of hospitals and most other health 

care providers and suppliers are small entities, either by being nonprofit organizations or 

by meeting the Small Business Administration’s (SBA) definition of a small business 

(having revenues of less than $7.0 million to $34.5 million in any one year). 
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 standards 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. These pharmacies would be affected by this 

regulation as the law will result in lower FULs for most drugs subject to the payment 

limits, thus reducing Medicaid payments to pharmacies for generic drugs. The revision 

to the FULs would generally reduce those limits and, thereby reduce Medicaid payments 

for drugs that are subject to the payment limits. The savings for section 2503 of the 

Affordable Care Act reflect this statutory change. Beginning September 2011, the 

publication of AWP by First Databank would in all likelihood cease; therefore, CMS 

proposes to replace the term “estimated acquisition cost” with Actual Acquisition Cost 

(AAC) and require States to begin paying pharmacy providers based on the AAC of the 

drug. Additionally States will reimburse providers with a comparable dispensing fee as 

mentioned in §447.502 of this proposed rule. There will be a savings for States and the 
CMS-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, drug 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 Program. We believe most manufacturers are 

small businesses. We anticipate this rule would have an impact on small drug 

manufacturers. We believe there will be an impact on these entities and solicit comments 

on this analysis. 

The rule would require all drug manufacturers participating in the Medicaid Drug 

Rebate program to increase the rebate percentages that they are currently paying. 

Manufacturers are required by the Affordable Care Act to pay the increased percentages. 

The savings for sections 2501(a)(1), 2501(b) and 2501(d) reflect this statutory change. 

According to the SBA’s size standards, an HMO, of which we have included 

MCOs, is considered a small business if it has revenues of $10 million or less in any one 

year (http://ecfr.gpoaccess.gov/cgi/t/text/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 this threshold. Because of limited data 

available, we are unable to quantify how many MCOs fall within the HMO standard and 

meet the $10 million threshold. We do contend that only a small portion of the small 

MCOs meet this standard. We request any information that may help us better estimate 
CMS-2345-P 158 

the portion of MCOs that meet the SBA standard. The small Medicaid MCOs may be 

affected by this rule if manufacturers reduce rebate payments to them to any extent that 

these rebates are paid to the States but these costs would likely be mitigated because it is 

likely that the MCOs rates would be adjusted. 

Therefore, the Secretary has determined that this proposed rule would have a 

significant economic impact on a substantial number of small entities. We offer an 

analysis of the alternatives considered in section V.A.5 of this proposed rule. The 

analysis above, together with the remainder of this preamble, constitutes the initial 

regulatory flexibility analysis. We solicit comment on the RFA analysis. 

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact 

analysis if a rule may have a significant impact on the operations of a substantial number 

of small rural hospitals. This analysis must conform to the provisions of section 603 of 

the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as 

a hospital that is located outside of a metropolitan statistical area and has fewer than 100 

beds. There are approximately 700 small rural hospitals that meet this definition. We do 

not expect this rule to have a significant impact on small rural hospitals although States 

are now required to furnish rebates from MCOs including NDCs for physician 

administered drugs. The national cost of this provision would be estimated at 

$580 million for FY 2010. However, the impact on these entities would be minimal 

because there would be no other requirement except for providing NDC numbers for 

physician administered drugs. Therefore, the Secretary has determined that this proposed 

rule would not have a significant impact on the operations of a substantial number of 

small rural hospitals. At this time, we are unable to specifically estimate quantitative 

effects on small retail pharmacies, particularly those in low income areas where there are 
CMS-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 issuing any rule whose 

mandates require spending in any 1 year of $100 million in 1995 dollars, updated 

annually for inflation. In 2011, that threshold is approximately $136 million. We expect 

this proposed rule would impose additional costs to manufacturers, whereas it would 

likely increase savings for States and the Federal government. A detailed discussion on 

costs is offered below. We believe the rule would not impose additional costs to States 

and local governments. This proposed rule will have tribal implications, and in 

accordance with E.O. 13175 and the HHS Tribal Consultation Policy (December 2010), 

CMS will consult with Tribal officials prior to the formal promulgation of this regulation. 

There would be additional costs for drug manufacturers. This occurs as a result of 

the increased rebate percentages for generic and brand name drugs, and the treatment of 

new formulation drugs which for manufacturers, total over $11.2 billion dollars over the 

next 5 years.

<HD1>VI. Federalism Analysis 

Executive Order 13132 establishes certain requirements that an agency must meet 

when it promulgates a proposed rule (and subsequent final rule) that imposes substantial 

direct requirement costs on State and local governments, preempts State law, or otherwise 

has Federalism implications. This proposed rule does not impose substantial direct 

requirement costs on State or local governments, preempts State law, or otherwise has 

Federalism implications.
CMS-2345-P 160 

<LSTSUB><HED>List of Subjects in 42 CFR Part 447

Accounting, Administrative practice and procedure, Drugs, Grant programshealth, Health facilities, Health professions, Medicaid, Reporting and recordkeeping 

requirements, Rural areas. </LSTSUB> 
CMS-2345-P 161 

 For the reasons set forth in the preamble, 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>Subpart I—Payment for Drugs 

Secs. 

447.500 Basis and purpose. 

447.502 Definitions. 

447.504 Determination of Average Manufacturer Price. 

447.505 Determination of best price. 

447.506 Authorized generic drugs. 

447.507 Identification of 5i drugs. 

447.508 Exclusion from best price of certain sales at a nominal price. 

447.509 Medicaid drug rebates. 

447.510 Requirements for manufacturers. 

447.511 Requirements for States. 

447.512 Drugs: Aggregate upper limits of payment. 

447.514 Upper limits for multiple source drugs. 

447.516 Upper limits for drugs furnished as part of services. 

447.518 State plan requirements, findings, and assurances. 

447.520 FFP: Conditions relating to physician-administered drugs. 
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’ calculating and reporting average manufacturer 

prices (AMPs) and best prices and that set upper payment limits for covered outpatient 

drugs. 

 (2) Implements section 1903(i)(10) of the Act with regard to the denial of Federal 

financial participation (FFP) in expenditures for certain physician-administered drugs. 

 (3) Implements section 1902(a)(54) of the Act with regard to a State plan that 

provides covered outpatient drugs. 

 (4) Implements section 1903(m)(2)(A)(xiii) of the Act, in part, and section 

1927(b) of the Act with regard to rebates for covered outpatient drugs dispensed to 

individuals eligible for medical assistance who are enrolled in Medicaid Managed Care 

Organizations (MCOs). 

 (5) Implements section 1902(a)(30)(A) of the Act with regard to the efficiency, 

economy, and quality of care in the context of payments for covered outpatient drugs. 

(b) Purpose. This subpart specifies certain requirements in the Social Security 

Act, including changes from the Affordable Care Act and other requirements pertaining 

to Medicaid payment for drugs. 

§447.502 Definitions.

For the purpose of this subpart, the following definitions apply: 
CMS-2345-P 163 

5i drug means an inhalation, infusion, instilled, implanted, or injectable drug that 

is not generally dispensed through a retail community pharmacy. 

Actual acquisition cost (AAC) means the agency’s determination of the pharmacy 

providers’ actual prices paid to acquire drug products marketed or sold by specific 

manufacturers. 

 Authorized generic drug means any drug sold, licensed, or marketed under a new 

drug application (NDA) approved by the Food and Drug Administration (FDA) under 

section 505(c) of the Federal Food, Drug and Cosmetic Act (FFDCA) that is marketed, 

sold or distributed under a different labeler code, product code, trade name, trademark, or 

packaging (other than repackaging the listed drug for use in institutions) than the brand 

name drug. 

 Bona fide service fee means a fee paid by a manufacturer to wholesalers or retail 

community pharmacies; that represents fair market value for a bona fide, itemized service 

actually performed on behalf of the manufacturer that the manufacturer would otherwise 

perform (or contract for) in the absence of the service arrangement; and that is not passed 

on in whole or in part to a client or customer of an entity, whether or not the entity takes 

title to the drug. The fee includes, but is not limited to, distribution service fees, 

inventory management fees, product stocking allowances, and fees associated with 

administrative service agreements and patient care programs (such as medication 

compliance programs and patient education programs). 

Brand name drug means a single source or innovator multiple source drug. 

Bundled sale means any arrangement regardless of physical packaging under 

which the rebate, discount, or other price concession is conditioned upon the purchase of 

the same drug, drugs of different types (that is, at the nine-digit National Drug Code 
CMS-2345-P 164 

(NDC) level) or another product or some other performance requirement (for example, 

the achievement of market share, inclusion or tier placement on a formulary), or where 

the resulting discounts or other price concessions are greater than those which would 

have been available had the bundled drugs been purchased separately or outside the 

bundled arrangement. 

(1) The discounts in a bundled sale, including but not limited to those discounts 

resulting from a contingent arrangement, are allocated proportionally to the total dollar 

value of the units of all drugs sold under the bundled arrangement. 

(2) For bundled sales where multiple drugs are discounted, the aggregate value of 

all the discounts in the bundled arrangement must be proportionally allocated across all 

the drugs in the bundle. 

 Clotting factor means a hemophilia clotting factor for which a separate furnishing 

payment is made under section 1842(o)(5) of the Act and which is included on a list of 

such factors specified and updated regularly by the CMS and posted on the CMS web 

site. 

Consumer Price Index - Urban (CPI-U) means the index of consumer prices 

developed and updated by the U.S. Department of Labor. It is the CPI for all urban 

consumers (U.S. average) for the month before the beginning of the calendar quarter for 

which the rebate is paid. 

Covered outpatient drug means of those drugs which are treated as a prescribed 

drug for the purposes of section 1905(a)(12) of the Act, a drug which may be dispensed 

only upon a prescription (except as provided in paragraphs (2) and (3) of this definition). 

(1) A drug can only be considered a covered outpatient drug if it: 
CMS-2345-P 165 

(i) Is approved for safety and effectiveness as a prescription drug by the FDA 

under section 505 or 507 of the FFDCA where the manufacturer has obtained a NDA and 

also under section 505(j) of the FFDCA where the manufacturer has obtained an ANDA; 

(ii) Was commercially sold in the United States before the enactment of the Drug 

Amendments of 1962 or which is identical, similar, or related (within the meaning 

described in FDA regulations at 21 CFR 310.6(b)(1)) to such a drug, and which has not 

been the subject of a final determination by the Secretary that it is a “new drug” (within 

the meaning of section 201(p) of the FFDCA) or an action brought by the Secretary under 

sections 301, 302(a), or 304(a) of FFDCA to enforce section 502(f) or 505(a) of the 

FFDCA; 

(iii) Is described in section 107(c)(3) of the Drug Amendments of 1962 and for 

which the Secretary has determined there is a compelling justification for its medical 

need or is identical, similar, or related (within the meaning described in FDA regulations 

at 21 CFR 310.6(b)(1)) to such a drug or for which the Secretary has not issued a notice 

for an opportunity for a hearing under section 505(e) of the FFDCA. This provision 

specifies a proposed order of the Secretary to withdraw approval of an application for 

such drug under section 505(e) of the FFDCA because the Secretary has determined that 

the drug is less than effective for some or all conditions of use prescribed, recommended 

or suggested in its labeling; 

(iv) Is a biologic product other than a vaccine that may only be dispensed upon a 

prescription and is licensed under section 351 of the Public Health Service Act (PHSA) 

and is produced at an establishment licensed under section 351 of the PHSA to produce 

such product; or 

(v) Is insulin certified under section 506 of the FFDCA. 
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 and in the same setting as, any of the following 

services (and for which payment is made as part of that service instead of as a direct 

reimbursement for the drug): 

(i) Inpatient Services; 

(ii) Hospice Services; 

(iii) Dental Services, except that drugs for which the State plan authorizes direct 

reimbursement to the dispensing dentist are covered outpatient drugs; 

(iv) Physician services; 

(v) Outpatient hospital services; 

(vi) Nursing facility and services provided by an intermediate care facility for the 

mentally retarded; 

(vii) Other laboratory and x-ray services; or 

(viii) Renal dialysis. 

(3) A covered outpatient drug does not include: 

(i) Any drug product, prescription or OTC, for which an NDC number is not 

required by the FDA; 

(ii) Any drug product that is not listed electronically with the FDA; 

(iii) Any drug product for which a manufacturer has not submitted to CMS 

evidence to demonstrate that the drug product satisfies the criteria in paragraph (1) of this 

definition ; 

(iv) Any drug product or biological used for a medical indication which is not a 

medically accepted indication; or 

(v) Over-the-counter products that are not drugs. 
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 timeframe and consistent with customary business 

practices for payment. 

 Innovator multiple source drug means a multiple source drug marketed under a 

new drug application (NDA) approved by the FDA, including an authorized generic drug. 

It includes a drug product marketed by any cross-licensed producers, labelers, or 

distributors operating under the NDA and a covered outpatient drug approved under a 

biologic license application (BLA), product license approval (PLA), establishment 

license approval (ELA) or antibiotic drug approval (ADA). For purposes of the MDR 

program, an original NDA is equivalent to an NDA filed by the manufacturer for 

approval under section 505 of the FFDCA for purposes of approval by the FDA for safety 

and effectiveness.

 Lagged price concession means any discount or rebate that is realized after the 

sale of the drug, but does not include customary prompt pay discounts. 

Line extension means a single source or innovator multiple source drug that is in 

an oral solid dosage form that has been approved by the FDA as a change to the initial 

brand name listed drug in that it represents a new version of the previously approved 

listed drug, such as a new ester, a new salt, or other noncovalent derivative; a new 

formulation of a previously approved drug; a new combination of two or more drugs; or a 

new indication for an already marketed drug. 

Manufacturer means any entity that holds the NDC for a covered outpatient drug 

or biological product and-- 
CMS-2345-P 168 

 (1) Is engaged in the production, preparation, propagation, compounding, 

conversion, or processing of covered outpatient drug products, either directly or 

indirectly by extraction from substances of natural origin, or independently by means of 

chemical synthesis, or by a combination of extraction and chemical synthesis; or 

(2) Is engaged in the packaging, repackaging, labeling, relabeling, or distribution 

of covered outpatient drug products and is not a wholesale distributor of drugs or a retail 

pharmacy licensed under State law. 

(3) For authorized generic products, the term “manufacturer” will also include the 

original holder of the NDA. 

(4) For drugs subject to private labeling arrangements, the term “manufacturer” 

will also include the entity under whose own label or trade name the product will be 

distributed. 

Multiple source drug means, for a rebate period, a covered outpatient drug for 

which there is at least one other drug product which-- 

 (1) Is rated as therapeutically equivalent as reported in the FDA's most recent 

publication of ``Approved Drug Products with Therapeutic Equivalence Evaluations'' 

which is available at http://www.fda.gov or can be viewed at the FDA's Freedom of 

Information Public Reading Room at 5600 Fishers Lane, rm. 12A-30, Rockville, MD 

20857 or successor publications and Web sites; 

 (2) Is pharmaceutically equivalent and bioequivalent, as determined by the FDA; 

and 

 (3) Is sold or marketed in the United States during the rebate period. 

 National drug code (NDC) means the numerical code maintained by the FDA that 

includes the labeler code, product code, and package code. For purposes of this subpart, 
CMS-2345-P 169 

the NDC is considered to be an 11-digit code, unless otherwise specified in this subpart 

as being without regard to package size (that is, the 9-digit numerical code). 

 National rebate agreement means the rebate agreement developed by CMS and 

entered into by CMS on behalf of the Secretary or his or her designee and a manufacturer 

to implement section 1927 of the Act. 

Nominal price means a price that is less than 10 percent of the AMP in the same 

quarter for which the AMP is computed. 

Noninnovator multiple source drug means-- 

(1) A multiple source drug that is not an innovator multiple source drug or a 

single source drug; 

(2) A multiple source drug that is marketed under an abbreviated NDA or an 

abbreviated antibiotic drug application; 

(3) A covered outpatient drug that entered the market before 1962 that was not 

originally marketed under an NDA; 

(4) Any drug that has not gone through an FDA approval process, but otherwise 

meet the definition of covered outpatient drug; or 

(5) Any noninnovator drug that is not therapeutically equivalent. 

(6) If any of the drug products listed in this definition of a noninnovator multiple 

source drug subsequently receives a new NDA or ANDA approval from the FDA, the 

manufacturer must change the reporting of the product’s drug category to correlate with 

the new product application type and furnish the appropriate information. 

Oral solid dosage form means capsules, tablets, or similar drugs products intended 

for oral use as defined in accordance with the FDA regulation at 21 CFR 206.3 that 

defines solid oral dosage form. 
CMS-2345-P 170 

Over-the-counter drug means a drug that is appropriate for use without the 

supervision of a health care professional such as a physician, and which can be purchased 

by a consumer without a prescription. 

Pediatric indication means a specifically stated indication for use by the pediatric 

age group, meaning from birth through 16 years of age, or a subset of this group, as 

specified in the “Indications and Usage” section of the FDA approved labeling. 

Professional dispensing fee means the professional fee which-- 

(1) Is incurred at the point of sale or service and pays for costs in excess of the 

ingredient cost of a covered outpatient drug each time a covered outpatient drug is 

dispensed; 

(2) Includes only pharmacy costs associated with ensuring that possession of the 

appropriate covered outpatient drug is transferred to a Medicaid beneficiary. Pharmacy 

costs include, but are not limited to, reasonable costs associated with a pharmacist's time 

in checking the computer for information about an individual's coverage, performing 

drug utilization review and preferred drug list review activities, measurement or mixing 

of the covered outpatient drug, filling the container, beneficiary counseling, physically 

providing the completed prescription to the Medicaid beneficiary, delivery, special 

packaging, and overhead associated with maintaining the facility and equipment 

necessary to operate the pharmacy; and 

(3) Does not include administrative costs incurred by the State in the operation of 

the covered outpatient drug benefit including systems costs for interfacing with 

pharmacies. 

Rebate period means a calendar quarter. 
CMS-2345-P 171 

Single source drug means a covered outpatient drug that is produced or distributed 

under an NDA approved by the FDA and has an approved NDA number issued by the 

FDA, including a drug product marketed by any cross-licensed producers or distributors 

operating under the NDA. It also includes a covered outpatient drug approved under a 

biological license application (BLA), product license approval (PLA), establishment 

license approval (ELA), or antibiotic drug approval (ADA). For purposes of the MDR 

program, an original NDA is equivalent to an NDA filed by the manufacturer for 

approval under section 505 of the FFDCA for purposes of approval by the FDA for safety 

and effectiveness. 

 States means the 50 States, the District of Columbia and the territories (the 

Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands 

and America Samoa). 

 United States means the 50 States, the District of Columbia, and the territories 

(the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana 

Islands and America Samoa). 

 Wholesaler means a drug wholesaler that is engaged in wholesale distribution of 

prescription drugs to retail community pharmacies, including but not limited to 

manufacturers, repackers, distributors, own-label distributors, private-label distributors, 

jobbers, brokers, warehouses (including manufacturer’s and distributor’s warehouses, 

chain drug warehouses, and wholesale drug warehouses), independent wholesale drug 

traders, and retail community pharmacies that conduct wholesale distributions. 

§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 (including those sold under an NDA approved under section 

505(c) of the Federal Food, Drug, and Cosmetic Act (FFDCA)), the average price paid to 

the manufacturer for the drug in the United States by wholesalers for drugs distributed to 

retail community pharmacies and retail community pharmacies that purchase drugs 

directly from the manufacturer. 

Average unit price means a manufacturer’s sales included in AMP less all 

required adjustments divided by the total units sold and included in AMP by the 

manufacturer in a quarter. 

Charitable and not-for profit pharmacies means organizations exempt from 

taxation as defined by section 501(c)(3) of the Internal Revenue Code of 1986. 

Insurers means entities that are responsible for payment to pharmacies for drugs 

dispensed to their members, and do not take actual possession of these drugs or pass on 

manufacturer discounts or rebates to pharmacies. 

Net sales means quarterly gross sales revenue less cash discounts allowed, except 

customary prompt pay discounts extended to wholesalers, and all other price reductions 

(other than rebates under section 1927 of the Act or price reductions specifically 

excluded by statute or regulation) which reduce the amount received by the manufacturer. 

Retail community pharmacy means an independent pharmacy, a chain pharmacy, 

a supermarket pharmacy, and a mass merchandiser pharmacy that is licensed as a 

pharmacy by the State and that dispenses medications to the general public at retail 

prices. Such term does not include a pharmacy that dispenses prescription medications to 

patients primarily through the mail, nursing home pharmacies, long-term care facility 
CMS-2345-P 173 

pharmacies, hospital pharmacies, clinics, charitable or not-for-profit pharmacies, 

government pharmacies, or pharmacy benefit managers. 

(b) Sales, nominal price sales, discounts, rebates, payments, or other transactions 

included in AMP. Except for those sales, nominal price sales, rebates, discounts and 

other financial transactions identified in paragraph (c) of this section, AMP for covered 

outpatient drugs includes the following sales, nominal price sales and associated 

discounts, rebates, payments, or other transactions:

(1) Sales to wholesalers for drugs distributed to retail community pharmacies. 

(2) Sales to other manufacturers who act as wholesalers for drugs distributed to 

retail community pharmacies. 

(3) Sales, discounts, rebates (other than rebates under section 1927 of the Act or 

as otherwise specified in regulations), payments, or other financial transactions that are 

received by, paid by, or passed through to retail community pharmacies. 

 (4) Sales, discounts, rebates (other than rebates under section 1927 of the Act or 

as otherwise specified in regulations), payments, or other financial transactions that are 

received by, paid by, or passed through to entities that conduct business as wholesalers or 

retail community pharmacies, which includes but is not limited to specialty pharmacies, 

home infusion pharmacies and home healthcare providers. 

(c) Sales, nominal price sales, rebates, discounts, or other transactions excluded 

from AMP. AMP excludes the following sales, nominal sales, rebates, discounts, or 

other transactions: 

(1) Any prices on or after October 1, 1992, to the Indian Health Service (IHS), the 

Department of Veterans Affairs (DVA), a State home receiving funds under 38 U.S.C. 

1741, the Department of Defense (DoD), the Public Health Service (PHS), or a covered 
CMS-2345-P 174 

entity described in section 1927(a)(5)(B) of the Act (including inpatient prices charged to 

hospitals described in section 340B(a)(4)(L) of the PHSA). 

(2) Any prices charged under the Federal Supply Schedule (FSS) of the General 

Services Administration (GSA). 

(3) Any depot prices (including TRICARE) and single award contract prices, as 

defined by the Secretary, of any agency of the Federal government. 

(4) Sales outside the United States. 

(5) Direct and indirect sales to hospitals. 

(6) Sales to health maintenance organizations (HMOs) (including managed care 

organizations (MCOs)), including HMO or MCO operated pharmacies. 

(7) Sales to long-term care providers, including nursing facility pharmacies, 

nursing home pharmacies, long-term care facilities, contract pharmacies for the nursing 

facility where these sales can be identified with adequate documentation, and other 

entities where the drugs are dispensed through a nursing facility pharmacy, such as 

assisted living facilities. 

(8) Sales to mail order pharmacies. 

(9) Sales to clinics and outpatient facilities (for example, surgical centers, 

ambulatory care centers, dialysis centers, and mental health centers). 

(10) Sales to government pharmacies (for example, a Federal, State, county, or 

municipal-owned pharmacy). 

(11) Sales to charitable pharmacies. 

(12) Sales to not-for-profit pharmacies. 

(13) Sales, associated rebates, discounts, or other price concessions paid directly 

to insurers. 
CMS-2345-P 175 

(14) Bona fide service fees paid by manufacturers to wholesalers, retail 

community pharmacies, or any other entity that conducts business as a wholesaler or a 

retail community pharmacy, including but not limited to inventory management fees, 

product stocking allowances, and fees associated with administrative agreements and 

patient care programs (such as medication compliance programs and patient education 

programs), including bona fide service fees paid to Group Purchasing Organizations. 

(15) Customary prompt pay discounts extended to wholesalers. 

(16) Reimbursement by the manufacturer for recalled, damaged, expired, or 

otherwise unsalable returned goods, including (but not limited to) reimbursement for the 

cost of the goods and any reimbursement of costs associated with return goods handling 

and processing, reverse logistics, and drug destruction but only to the extent that such 

payment covers only those costs. 

(17) Associated discounts, rebates, or other price concessions provided under the 

Medicare Coverage Gap Discount Program under section 1860D-14A of the Act. 

(18) Sales to PBMs, including their mail order pharmacy’s purchases. 

(19) Rebates under the national rebate agreement or a CMS-authorized State 

supplemental rebate agreement paid to State Medicaid Agencies under section 1927 of 

the Act. 

(20) Sales to hospices (inpatient and outpatient). 

(21) Sales to prisons. 

(22) Direct sales to physicians. 

(23) Direct sales to patients. 

(24) Free goods, not contingent upon any purchase requirement. 
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 coupon is passed on to the consumer and the pharmacy, agent, or 

other entity does not receive any price concession. 

(26) Manufacturer vouchers. 

(27) Prices negotiated under Manufacturer-sponsored drug discount card 

programs. 

(28) Goods provided free of charge under Manufacturer-sponsored patient 

refund/rebate programs. 

(29) Goods provided free of charge under Manufacturer copayment assistance 

programs and patient assistance programs. 

(d) Sales and associated discounts, rebates, payments, or other transactions 

included in AMP for inhalation, infusion, instilled, implanted, or injectable drugs (5i 

drugs) not generally dispensed through a retail community pharmacy. AMP for 5i 

covered outpatient drugs indentified in accordance with §447.507 of this subpart shall 

include sales and associated discounts, rebates, payments or other financial transactions 

to all entities as specified in paragraph (b) of this section, as well as the following sales 

and associated discounts, rebates, payments or other transactions: 

(1) Sales to physicians. 

 (2) Sales to pharmacy benefit managers where the PBM is not acting as an 

insurer, including its mail order pharmacy purchases. 

 (3) Sales to health maintenance organizations (HMOs), including managed care 

organizations (MCOs). 
CMS-2345-P 177 

 (4) Sales, discounts, or rebates paid directly to insurers (except for rebates under 

section 1927 of the Act and this subpart). 

 (5) Sales to hospitals. 

 (6) Sales to clinics and outpatient facilities (for example, surgical centers, 

ambulatory care centers, dialysis centers, mental health centers). 

 (7) Sales to mail order pharmacies. 

 (8) Sales to long-term care providers, including nursing facility pharmacies, 

nursing home pharmacies, long-term care facilities, contract pharmacies for the nursing 

facility where these sales can be identified with adequate documentation, and other 

entities where the drugs are dispensed through a nursing facility pharmacy, such as 

assisted living facilities. 

 (9) Sales to hospices. 

 (10) Sales to other manufacturers who conduct business as a wholesaler or retail 

community pharmacy. 

(e) Further clarification of AMP calculation. 

(1) AMP includes cash discounts except customary prompt pay discounts 

extended to wholesalers, free goods that are contingent on any purchase requirement, 

volume discounts, chargebacks that can be identified with adequate documentation, 

incentives, administrative fees, service fees, distribution fees, and any other rebates, 

discounts or other financial transactions, other than rebates under section 1927 of the Act, 

which reduce the price received by the manufacturer for drugs distributed to retail 

community pharmacies. 

(2) Quarterly AMP is calculated as a weighted average of monthly AMPs in that 

quarter. 
CMS-2345-P 178 

(3) The manufacturer must adjust the AMP for a rebate period if cumulative 

discounts, rebates, or other arrangements subsequently adjust the prices actually realized, 

to the extent that such cumulative discounts, rebates, or other arrangements are not 

excluded from the determination of AMP by statute or regulation. 

§447.505 Determination of best price.

(a) Definitions. For the purpose of this section, the following definitions apply: 

Best price means, for a single source drug or innovator multiple source drug of a 

manufacturer(including the lowest price available to any entity for any such drug of a 

manufacturer that is sold under an NDA approved under section 505(c) of the FFDCA), 

the lowest price available from the manufacturer during the rebate period to any 

wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or 

governmental entity in the United States in any pricing structure (including capitated 

payments), in the same quarter for which the AMP is computed. 

Provider means a hospital, HMO, including an MCO, or entity that treats or 

provides coverage or services to individuals for illnesses or injuries or provides services 

or items in the provision of health care. 

(b) Prices included in best price. Except for those prices identified in paragraph 

(c) of this section, best price for covered outpatient drugs includes all prices and 

associated rebates, discounts, or other transactions that adjust prices either directly or 

indirectly. 

(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 the 340B drug pricing program to a covered entity 

described in section 1927(a)(5)(B) of the Act; and 

(ii) Any inpatient prices charged to hospitals described in section 340B(a)(4)(L) 

of the PHSA. 

(3) Any prices charged under the FSS of the GSA. 

(4) Any prices provided to a designated State Pharmacy Assistance Program 

(SPAP). 

(5) Any depot prices (including TRICARE) and single award contract prices, as 

defined by the Secretary, of any agency of the Federal government. 

(6) Any prices charged which are negotiated by a prescription drug plan under 

Part D of title XVIII, by any MA-PD plan under Part C of such title with respect to 

covered Part D drugs, or by a Qualified Retiree Prescription Drug Plan (as defined in 

section 1860D-22(a)(2) of the Act) for such drugs on behalf of individuals entitled to 

benefits under Part A or enrolled under Part B of Medicare, or any discounts provided by 

manufacturers under the Medicare coverage gap discount program under section 1860D14A of the Act. 

(7) Rebates under the national rebate agreement or a CMS-authorized 

supplemental rebate agreement paid to State Medicaid Agencies under section 1927 of 

the Act. 

(8) Prices negotiated under manufacturer-sponsored drug discount card programs. 

(9) Manufacturer coupons to a consumer redeemed by a consumer, agent, 

pharmacy or another entity acting on behalf of the manufacturer; but only to the extent 

that the full value of the coupon is passed on to the consumer and the pharmacy, agent, or 

other entity does not receive any price concession. 
CMS-2345-P 180 

(10) Goods provided free of charge under Manufacturer copayment assistance 

programs and patient assistance programs. 

(11) Goods provided free of charge under Manufacturer-sponsored patient refund 

or rebate programs. 

(12) Manufacturer vouchers. 

(13) Free goods, not contingent upon any purchase requirement. 

(14) Reimbursement by the manufacturer for recalled, damaged, expired, or 

otherwise unsalable returned goods, including, but not limited to, reimbursement for the 

cost of the goods and any reimbursement of costs associated with return goods handling 

and processing, reverse logistics, and drug destruction but only to the extent that it only 

covers these costs. 

(15) Nominal prices to certain entities as set forth in §447.508 of this subpart. 

(16) Bona fide service fees paid by manufacturers to wholesalers, retail 

community pharmacies, or any other entity that conducts business as a wholesaler or a 

retail community pharmacy, including but not limited to inventory management fees, 

product stocking allowances, and fees associated with administrative agreements and 

patient care programs (such as medication compliance programs and patient education 

programs), including bona fide service fees paid to Group Purchasing Organizations. 

(17) PBM rebates, discounts, or other financial transactions except their mail 

order pharmacy’s purchases or where such rebates, discounts, or other financial 

transactions are designed to adjust prices at the retail or provider level. 

(18) Sales outside the United States. 

(d) Further clarification of best price. 
CMS-2345-P 181 

(1) Best price is net of cash discounts, free goods that are contingent on any 

purchase requirement, volume discounts, customary prompt pay discounts, chargebacks, 

returns, incentives, promotional fees, administrative fees, service fees, distribution fees, 

and any other discounts or price reductions and rebates, other than rebates under section 

1927 of the Act, which reduce the price available from the manufacturer. 

(2) Best price must be determined on a unit basis without regard to package size, 

special packaging, labeling or identifiers on the dosage form or product or package. 

(3) The manufacturer must adjust the best price for a rebate period if cumulative 

discounts, rebates, or other arrangements subsequently adjust the prices available from 

the manufacturer. 

§447.506 Authorized generic drugs.

(a) Definitions. For the purpose of this section, the following definitions apply: 

Primary manufacturer means a manufacturer that holds the NDA of the authorized 

generic drug. 

Secondary manufacturer of an authorized generic drug means a manufacturer that 

is authorized by the primary manufacturer to sell the drug but does not hold the NDA. 

(b) Inclusion of authorized generic drugs in AMP by a primary manufacturer. 

The primary manufacturer must include in its calculation of AMP its sales of authorized 

generic drugs that have been sold or licensed to a secondary manufacturer, acting as a 

wholesaler, or when the primary manufacturer holding the NDA sells directly to a 

wholesaler. 

(c) Inclusion of authorized generic drugs in best price by a primary manufacturer. 

A primary manufacturer holding the NDA must include the best price of an authorized 

generic drug in its computation of best price for an innovator multiple source drug during 
CMS-2345-P 182 

a rebate period to any manufacturer, wholesaler, retailer, provider, HMO, non-profit 

entity, or governmental entity in the United States, only when such drugs are being sold 

by the manufacturer holding the NDA. 

(d) Inclusion of authorized generic in AMP and best price by a secondary 

manufacturer. The secondary manufacturer of an authorized generic drug must provide a 

rebate based on its sales of authorized generics, and must calculate AMP and best price, 

consistent with the requirements specified in §447.504 and §447.505 of this subpart. 

§447.507 Identification of 5i drugs.

A manufacturer must identify each covered outpatient drug that is a 5i drug that is 

not generally dispensed through a retail community pharmacy. 

(a) Identification of a 5i drug. A manufacturer must use the list of FDA’s Routes 

of Administration posted on the CMS Web site to identify each covered outpatient drug 

that qualifies as a 5i drug. 

(b) Not generally dispensed through a retail community pharmacy. A 

manufacturer must determine if the 5i drug is not generally dispensed through a retail 

community pharmacy based on the percentage of sales to entities other than retail 

community pharmacies. 

(1) A 5i drug is not generally dispensed through a retail community pharmacy if 

90 percent or more of the sales of the 5i drug, during the reporting period, were to entities 

other than retail community pharmacies or wholesalers for drugs distributed to retail 

community pharmacies. 

(2) A manufacturer is responsible for determining whether a 5i drug is not 

generally dispensed through a retail community pharmacy on a monthly and quarterly 

basis. 
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 prices are excluded from best price when purchased by the 

following entities: 

(1) A covered entity as described in section 340B(a)(4) of the PHSA. 

(2) An ICF/MR providing services as set forth in §440.150 of this chapter. 

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

§440.150 of this chapter. 

 (4) A public or non-profit entity or facility at an institution of higher learning 

whose primary purpose is to provide health care services to students of that institution, 

and provide family planning services described under section of 1001(a) of PHSA, 42 

U.S.C. 300. 

(5) An entity that-- 

(i) Is described in section 501(c)(3) of the Internal Revenue Code of 1986 and 

exempt from tax under section 501(a) of that Act or is State-owned or operated; and 

 (ii) Is providing the same services to the same type of population as a covered 

entity described in section 340B(a)(4) of the PHSA but is not in receipt of grant funds 

under that Act. 

(b) Nonapplication. This restriction does not apply to sales by a manufacturer of 

covered outpatient drugs that are sold under a master agreement under 38, U.S.C. 8126. 

 (c) Rule of construction. Nothing in this subpart is construed to alter any existing 

statutory or regulatory prohibition on services for an entity described paragraph (a) of this 

section, including the prohibition set forth in section 1008 of the PHSA. 

§447.509 Medicaid drug rebates.
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 units of each dosage form and strength paid for under the 

State plan in the rebate period (as reported by the State); and 

 (ii) The greater of-- 

 (A) The difference between the AMP and the best price for the dosage form and 

strength of the drug; or 

 (B) The AMP for the dosage form and strength of the drug multiplied by one of 

the following percentages-- 

 (1) For a clotting factor, 17.1 percent; 

 (2) For a drug approved by the FDA exclusively for pediatric indications, 17.1 

percent; or 

 (3) For all other single source drugs and innovator multiple source drugs, 23.1 

percent. 

 (2) Additional rebate for single source and innovator multiple source drugs. In 

addition to the basic rebate described in paragraph (a)(1) of this section, for each dosage 

form and strength of a single source drug or an innovator multiple source drug, the rebate 

amount will be increased by an amount equal to the product of-- 

 (i) The total number of units of such dosage form and strength paid for under the 

State plan in the rebate period; and 

 (ii) The amount, if any, by which-- 

 (A) The AMP for the dosage form and strength of the drug for the period exceeds: 
CMS-2345-P 185 

 (B) The base date AMP for such dosage form and strength, increased by the 

percentage by which the consumer price index for all urban consumers (United States 

city average) for the month before the month in which the rebate period begins exceeds 

such index associated with the base date AMP of the drug. 

 (3) Total rebate. The total rebate amount for single source drugs and innovator 

multiple source drugs is equal to the basic rebate amount plus the additional rebate 

amount, if any. 

 (4) Treatment of new formulations.

(i) In the case of a drug that is a line extension of a single source drug or an 

innovator multiple source drug that is an oral solid dosage form, the rebate obligation is 

the amount computed under paragraphs (a)(1) through (a)(3) of this section for such new 

drug or, if greater, the product of all of the following: 

(A) The AMP of the line extension of a single source drug or an innovator 

multiple source drug that is an oral solid dosage form. 

(B) The highest additional rebate (calculated as a percentage of AMP) under this 

section for any strength of the original single source drug or innovator multiple source 

drug. 

(C) The total number of units of each dosage form and strength of the line 

extension product paid for under the State plan in the rebate period (as reported by the 

State). 

(ii) The term “line extension” means, with respect to a drug, a new formulation of 

the drug, such as an extended release product. 

(iii) Identification of line extension drugs. 
CMS-2345-P 186 

(A) The FDA’s list of Chemical Types, listed in FDA Drugs in FDA’s database, is 

used to identify the line extension drug and the initial brand name listed drug. 

(B) Chemical Type 2, new ester, new salt, or other noncovalent derivative; 

Chemical Type 3, new formulation; Chemical Type 4, new combination; and Chemical 

Type 6, new indication are determined to be line extension drugs. 

(C) Chemical Type 1, new molecular entity, represents the initial brand name 

listed drug. 

 (5) Limit on rebate. In no case will the total rebate amount exceed 100 percent of 

the AMP of the drug. 

 (6) Rebate for noninnovator multiple source drugs. The amount of the rebate for 

each dosage form and strength of a noninnovator multiple source drug will be equal to 

the product of-- 

 (i) The total number of units of such dosage form and strength for which payment 

was made under the State plan for the rebate period; and 

 (ii) The AMP for the dosage form and strength for the rebate period multiplied by 

13 percent. 

 (b) Rebates for drugs dispensed through Medicaid managed care organizations 

(MCOs). 

 (1) Manufacturers participating in the Medicaid drug rebate program will pay 

rebates for covered outpatient drugs dispensed to individuals enrolled in Medicaid MCOs 

if the MCO is contractually required to provide such drugs. 

 (2) Manufacturers are exempt from the requirement in paragraph (b)(1) of this 

section if such drugs are: 
CMS-2345-P 187 

 (i) Dispensed by health maintenance organizations including MCOs that contract 

under section 1903(m) of the Act. 

 (ii) Discounted under section 340B of the PHSA. 

 (3) Within 30 days of the end of each quarter, a Medicaid MCO that contractually 

provides covered outpatient drugs dispensed to Medicaid beneficiaries must report to the 

State the following data: 

 (i) MCO identifier. 

 (ii) National Drug Code. 

 (iii) Period covered. 

 (iv) Product FDA list name. 

 (v) Total units. 

 (vi) Total number of prescriptions. 

 (vii) Amount reimbursed.

 (c) Federal offset of rebates. States must remit to the Federal government the 

amount of the savings resulting from the increases in the rebate percentages. 

 (1) For single source or innovator multiple source drugs other than blood clotting 

factors and drugs approved by the FDA exclusively for pediatric indications: 

 (i) If AMP minus best price is less than or equal to AMP times 15.1 percent, then 

the offset amount is the full 8 percent of AMP (the difference between 23.1 percent of 

AMP and 15.1 percent of AMP). 

 (ii) If AMP minus best price is greater than AMP times 15.1 percent but less than 

AMP times 23.1 percent, then the offset amount is the difference between AMP times 

23.1 percent and AMP minus best price. 
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 pediatric indications that are subject to a 

rebate percentage of 17.1 percent of AMP: 

 (i) If AMP minus best price is less than or equal to AMP times 15.1 percent, then 

the offset amount is the full 2 percent of AMP (the difference between 17.1 percent of 

AMP and 15.1 percent of AMP). 

 (ii) If AMP minus best price is greater than AMP times 15.1 percent but less than 

AMP times 17.1 percent, then the offset amount is the difference between AMP times 

17.1 percent and AMP minus best price. 

 (iii) If AMP minus best price is equal to or greater than AMP times 17.1 percent, 

then there is no offset amount. 

 (3) For a drug that is a line extension of a single source or innovator multiple 

source drug that is an oral solid dosage form, the offset amount is the difference between 

the URA calculation for the drug calculated based on the applicable rebate percentage in 

section 1927 of the Act prior to the Affordable Care Act and the calculation of the URA 

for the line extension drug, if greater, in accordance with the Affordable Care Act. 

 (4) For noninnovator multiple source drugs, the offset amount is equal to 2 

percent of the AMP (the difference between 13 percent of AMP and 11 percent of AMP). 

§447.510 Requirements for manufacturers.

(a) Quarterly reports. A manufacturer must report product and pricing 

information for covered outpatient drugs to CMS not later than 30 days after the end of 

the rebate period. The quarterly pricing report must include the following: 
CMS-2345-P 189 

(1) AMP, calculated in accordance with §447.504 of this subpart. 

(2) Best price, calculated in accordance with §447.505 of this subpart. 

(3) Customary prompt pay discounts, which are reported as an aggregate dollar 

amount for each covered outpatient drug at the nine-digit NDC level, provided to all 

wholesalers in the rebate period. 

(4) Prices that fall within the nominal price exclusion, which are reported as an 

aggregate dollar amount and include all sales of single source and innovator multiple 

source drugs to the entities listed in §447.508(a) of this subpart for the rebate period. 

(5) A manufacturer that fails to submit a quarterly AMP to CMS for a product by 

the thirtieth day after the end of each rebate period will be subject to civil monetary 

penalties for each product not reported on the thirty-first day of $10,000 per day per drug. 

 (b) Reporting revised quarterly AMP, best price, customary prompt pay discounts, 

or nominal prices. 

 (1) A manufacturer must report to CMS any revision to AMP, best price, 

customary prompt pay discounts, or nominal prices for a period not to exceed 12 quarters 

from the quarter in which the data were due. Any revision request that exceeds 12 

quarters will not be considered, except for the following reasons: 

(i) The change is a result of the drug category change or a market date change. 

(ii) The change is an initial submission for a product. 

(iii) The change is due to termination of a manufacturer from the MDR program 

for failure to submit pricing data and must submit pricing data to reenter the program. 

(iv) The change is due to a technical correction, that is, not based on any changes 

in sales transactions or pricing adjustments from such transactions. 
CMS-2345-P 190 

(v) The change is to address specific underpayments to States, or potential 

liability regarding those underpayments, as required by CMS or court order, or pursuant 

to an internal investigation, or an OIG or DOJ investigation. 

 (2) A manufacturer may report revisions to AMP, best price, customary prompt 

pay discounts, or nominal prices for a period in excess of 12 quarters from the quarter in 

which the data were due based on the approval of CMS for good cause. 

 (3) A manufacturer must report revisions to AMP within the 12-quarter time 

period, except when the revision would be solely as a result of data pertaining to lagged 

price concessions. 

 (c) Base date AMP report. 

(1) Reporting period. A manufacturer may report a revised DRA base date AMP 

to CMS within the first four full calendar quarters following July 17, 2007.

 (2) Recalculation of the DRA base date AMP. 

(i) A manufacturer’s recalculation of the DRA base date AMP must only reflect 

the revisions to AMP as provided for in §447.504 of this subpart. 

 (ii) A manufacturer may choose to recalculate the DRA base date AMP on a 

product-by-product basis. 

 (iii) A manufacturer must use actual and verifiable pricing records in recalculating 

the DRA base date AMP. 

 (3) Reporting a revised Affordable Care Act base date AMP. A manufacturer 

may report a revised Affordable Care Act base date AMP to CMS within the first four 

full calendar quarters following [publication date of the final rule].

(4) Recalculation of the Affordable Care Act base date AMP. 
CMS-2345-P 191 

(i) A manufacturer’s recalculation of the Affordable Care Act base date AMP 

must only reflect the revisions to AMP as provided for in §447.504 of this subpart. 

 (ii) A manufacturer may choose to recalculate the Affordable Care Act base date 

AMP on a product-by-product basis. 

(iii) A manufacturer must use actual and verifiable pricing records in recalculating 

the Affordable Care Act base date AMP. 

(d) Monthly AMP. 

(1) Definition. Monthly AMP means the AMP that is calculated on a monthly 

basis. A manufacturer must submit a monthly AMP to CMS not later than 30 days after 

the last day of each prior month. 

(2) Calculation of monthly AMP. Monthly AMP is calculated based on §447.504 

of this subpart, except the period covered is based on monthly, as opposed to quarterly, 

sales. 

(i) The monthly AMP is calculated based on the weighted average of prices for all 

the manufacturer’s package sizes of each covered outpatient drug sold by the 

manufacturer during a month. 

(ii) It is calculated as net sales divided by number of units sold, excluding goods 

or any other items specifically excluded in the statute or regulations. Monthly AMP is 

calculated based on the best data available to the manufacturer at the time of submission. 

(iii) In calculating monthly AMP, a manufacturer must estimate the impact of its 

lagged price concessions using a 12-month rolling percentage to estimate the value of 

those discounts. 
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 allowed in paragraph (b)(1) of this section. 

 (4) Exception. A manufacturer must report revisions to monthly AMP within the 

36-month time period, except when the revision would be solely as a result of data 

pertaining to lagged price concessions. 

(5) Terminated products. A manufacturer must not report a monthly AMP for a 

terminated product beginning with the first month after the expiration date of the last lot 

sold. 

(6) Monthly AMP units. A manufacturer must report the total number of units that 

are used to calculate the monthly AMP in the same unit type as used to compute the AMP 

to CMS not later than 30 days after the last day of each month. 

(7) Failure to report product information, monthly AMP and AMP units. A 

manufacturer that fails to submit a monthly AMP and the total number of units that are 

used to calculate that monthly AMP to CMS for a product by the thirtieth day after the 

last day of each month will be subject to civil monetary penalty for each product not 

reported on the thirty-first day of $10,000 per drug per day. 

(e) Certification of pricing reports. Each report submitted under paragraphs (a) 

through (d) of this section must be certified by one of the following: 

(1) The manufacturer’s chief executive officer (CEO). 

(2) The manufacturer’s chief financial officer (CFO). 

(3) An individual other than a CEO or CFO, who has authority equivalent to a 

CEO or a CFO; or 
CMS-2345-P 193 

(4) An individual with the directly delegated authority to perform the certification 

on behalf of an individual described in paragraphs (e)(1) through (e)(3) of this section. 

(f) Recordkeeping requirements. 

(1) A manufacturer must retain records (written or electronic) for 10 years from 

the date the manufacturer reports data to CMS for that rebate period. 

(i) The records must include these data and any other materials from which the 

calculations of the AMP, the best price, customary prompt pay discounts, and nominal 

prices are derived, including a record of any assumptions made in the calculations. 

(ii) The 10-year timeframe applies to a manufacturer’s quarterly and monthly 

submissions of pricing data, as well as any revised pricing data subsequently submitted to 

CMS. 

(2) A manufacturer must retain records beyond the 10-year period if all of the 

following circumstances exist: 

(i) The records are the subject of an audit, or of a government investigation 

related to pricing data that are used in AMP, best price, customary prompt pay discounts, 

or nominal prices of which the manufacturer is aware. 

(ii) The audit findings or investigation related to the AMP, best price, customary 

prompt pay discounts, or nominal price have not been resolved. 

(g) Data reporting format. All product and pricing data, whether submitted on a 

quarterly or monthly basis, must be submitted to CMS in an electronic format designated 

by CMS. 

§447.511 Requirements for States.
CMS-2345-P 194 

(a) Invoices submitted to participating drug manufacturers. Within 60 days of the 

end of each quarter, the State must bill participating drug manufacturers an invoice which 

includes, at a minimum, all of the following data: 

 (1) The State code. 

 (2) National Drug Code. 

 (3) Period covered. 

 (4) Product FDA list name. 

 (5) Unit rebate amount. 

 (6) Units reimbursed. 

 (7) Rebate amount claimed. 

(8) Number of prescriptions. 

(9) Medicaid amount reimbursed. 

(10) Non-Medicaid amount reimbursed. 

(11) Total amount reimbursed. 

(b) Data submitted to CMS. On a quarterly basis, the State must submit drug 

utilization data to CMS, which will be the same information as submitted to the 

manufacturers. 

(c) State that has participating Medicaid Managed Care Organizations (MCO). A 

State that has participating Medicaid Managed Care Organizations (MCO), which 

includes covered outpatient drugs in its contracts with the MCOs, must report data 

described in paragraph (a) of this section for covered outpatient drugs dispensed to 

individuals eligible for medical assistance who are enrolled with the MCO and for which 

the MCO is required under contract for coverage of such drugs under section 1903 of the 
CMS-2345-P 195 

Act. This data must be identified separately from the data pertaining 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 section, the agency payment for multiple source 

drugs must not exceed, in the aggregate, the amount that would result from the 

application of the specific limits established in accordance with §447.514 of this subpart. 

If a specific limit has not been established under §447.514 of this subpart, then the rule 

for “other drugs” set forth in paragraph (b) of this section applies. 

(b) Other drugs. The agency payments for brand name drugs certified in 

accordance with paragraph (c) of this section and drugs other than multiple source drugs 

for which a specific limit has been established under §447.514 of this subpart must not 

exceed, in the aggregate, payment levels that the agency has determined by applying the 

lower of the following: 

(1) AAC plus a professional dispensing fee established by the agency; or 

(2) Providers' usual and customary charges to the general public. 

(c) Certification of brand name drugs. 

(1) The upper limit for payment for multiple source drugs for which a specific 

limit has been established under §447.514 of this subpart does not apply if a physician 

certifies in his or her own handwriting (or by an electronic alternative means approved by 

the Secretary) that a specific brand is medically necessary for a particular beneficiary. 

(2) The agency must decide what certification form and procedure are used. 

(3) A check off box on a form is not acceptable but a notation like “brand 

necessary” is allowable. 
CMS-2345-P 196 

(4) The agency may allow providers to keep the certification forms if the forms 

will be available for inspection by the agency or HHS. 

§447.514 Upper limits for multiple source drugs.

(a) Establishment and issuance of a listing. 

(1) CMS will establish and issue listings that identify and set upper limits for 

multiple source drugs available for purchase by retail community pharmacies on a 

nationwide basis that the FDA has rated at least three drug products as pharmaceutically 

and therapeutically equivalent in its most current edition of “Approved Drug Products 

with Therapeutic Equivalence Evaluations” (including supplements or in successor 

publications). Only pharmaceutically and therapeutically equivalent formulations will be 

used to determine such limit, and such limit will only be applied to those therapeutically 

equivalent drug products 

(2) CMS publishes the list of multiple source drugs for which upper limits have 

been established and any revisions to the list in Medicaid Program issuances. 

(b) Specific upper limits. The agency's payments for multiple source drugs 

identified and listed periodically by CMS in Medicaid Program issuances must not 

exceed, in the aggregate, prior to the application of any Federal or State drug rebate 

considerations, payment levels determined by applying for each drug entity a professional 

dispensing fee established by the State agency plus an amount established by CMS that is 

equal to 175 percent of the weighted average of the most recently reported monthly AMP 

using manufacturer submitted utilization data. 

(c) Ensuring a drug is for sale nationally. To assure that a multiple source drug is 

for sale nationally, CMS will consider the following additional criteria: 
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 month after the termination date reported by the 

manufacturer to CMS. 

(2) The monthly AMP units data will be used to calculate the weighted average of 

monthly AMPs for all multiple source drugs to establish the FUL. 

(d) The FUL will be applied as an aggregate upper limit. 

§447.516 Upper limits for drugs furnished as part of services.

The upper limits for payment for prescribed drugs in this subpart also apply to 

payment for drugs provided as part of skilled nursing facility services and intermediate 

care facility services and under prepaid capitation arrangements. 

§447.518 State plan requirements, findings, and assurances.

(a) State plan. The State plan must describe comprehensively the agency's 

payment methodology for prescription drugs, including the agency’s payment 

methodology for drugs dispensed by all of the following: 

(1) A covered entity described in section 1927(a)(5)(B) of the Act. 

(2) A contract pharmacy under contract with a covered entity described in section 

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

(3) An Indian Health Service, tribal and urban Indian pharmacy. 

(b) Findings and assurances. Upon proposing significant State plan changes in 

payments for prescription drugs, and at least annually for multiple source drugs and 

triennially for all other drugs, the agency must make the following findings and 

assurances: 

(1) Findings. The agency must make the following separate and distinct findings: 
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, its Medicaid expenditures for all other drugs are in 

accordance with §447.512 of this subpart. 

(2) Assurances. The agency must make assurances satisfactory to CMS that the 

requirements set forth in §447.512 and §447.514 of this subpart concerning upper limits 

and in paragraph (b)(1) of this section concerning agency findings are met. 

(c) Recordkeeping. The agency must maintain and make available to CMS, upon 

request, data, mathematical or statistical computations, comparisons, and any other 

pertinent records to support its findings and assurances. 

(d) Data requirements. When proposing changes to the ingredient cost 

reimbursement or professional dispensing fee reimbursement, States must provide 

adequate data, including, but not limited to, a State or national survey of retail pharmacy 

providers or other reliable data which reflects the pharmacy’s actual or average 

acquisition cost as a base to support any proposed change in ingredient cost 

reimbursement. States must submit to CMS the proposed change in reimbursement and 

the supporting data through a State plan amendment through the formal review process. 

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

(a) No FFP is available for physician-administered drugs for which a State has not 

required the submission of claims using codes that identify the drugs sufficiently for the 

State to bill a manufacturer for rebates. 
CMS-2345-P 199 

(1) As of January 1, 2006, a State must require providers to submit claims for 

single source, physician-administered drugs using Healthcare Common Procedure 

Coding System codes or NDC numbers to secure rebates. 

(2) As of January 1, 2007, a State must require providers to submit claims for 

physician-administered single source drugs and the 20 multiple source drugs identified by 

the Secretary using NDC numbers. 

(b) As of January 1, 2008, a State must require providers to submit claims for the 

20 multiple source physician-administered drugs identified by the Secretary as having the 

highest dollar value under the Medicaid Program using NDC numbers to secure rebates. 

(c) A State that requires additional time to comply with the requirements of this 

section may apply to the Secretary for an extension. 

§447.522 Optional coverage of investigational drugs and other drugs not subject to 

rebate.

 (a) Medicaid coverage of investigational drugs may be provided at State option 

under section 1905(a)(12) of the Act when such drug has been indicated by the FDA for 

human trials. 

 (b) A State agency electing to provide coverage of an investigational drug must 

include in its State plan a description of the coverage and payment for such drug. 

 (c) The State plan must indicate that any payments for investigational drugs will 

be reimbursed in accordance with the FDA final rules at 21 CFR parts 312 and 316 if 

they are to be eligible to receive FFP for these drugs. 

 (d) Medicaid coverage of other drugs may be provided at State option under 

section 1905(a)(12) of the Act provided that they are not covered outpatient drugs or fail 

to be listed electronically with the FDA. 
CMS-2345-P 200 

 (e) Investigational drugs and other drugs are not subject to the rebate requirements 

of section 1927 of the Act provided they do not meet the definition of a covered 

outpatient drug as set forth in section 1927(k) of the Act. 
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 Filed 1–27–12; 11:15 am] 

<BILCOD>BILLING CODE 4120–01–P 
CMS-2345-P 202 

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