[Federal Register Volume 71, Number 246 (Friday, December 22, 2006)]
[Proposed Rules]
[Pages 77174-77200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9792]



[[Page 77173]]

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Part IV





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 447



Medicaid Program; Prescription Drugs; Proposed Rule

Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / 
Proposed Rules

[[Page 77174]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2238-P]
RIN 0938-AO20


Medicaid Program; Prescription Drugs

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement the provisions of the 
Deficit Reduction Act of 2005 (DRA) pertaining to prescription drugs 
under the Medicaid program. The DRA requires the Secretary of Health 
and Human Services to publish a final regulation no later than July 1, 
2007. In addition, we would add to existing regulations certain 
established Medicaid rebate policies that are currently set forth in 
CMS guidance. This rule would bring together existing and new 
regulatory requirements in one, cohesive subpart.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on February 20, 
2007.

ADDRESSES: In commenting, please refer to file code CMS-2238-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-2238-P, P.O. Box 8015, Baltimore, MD 21244-8015.
    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 (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-2238-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 (one original and two copies) before the 
close of the comment period to one of the following addresses. 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. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to 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.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Kimberly Howell, (410) 786-6762 (for 
issues related to the determination of average manufacturer price and 
best price).
    Yolanda Reese, (410) 786-9898 (for issues related to authorized 
generics).
    Madlyn Kruh, (410) 786-3239 (for issues related to nominal prices).
    Marge Watchorn, (410) 786-4361 (for issues related to manufacturer 
reporting requirements).
    Gail Sexton, (410) 786-4583 (for issues related to Federal upper 
limits).
    Christina Lyon, (410) 786-3332 (for issues related to physician-
administered drugs).
    Bernadette Leeds, (410) 786-9463 (for issues related to the 
regulatory impact analysis).

SUPPLEMENTARY INFORMATION: 
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-2238-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    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.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

I. Background

[If you choose to comment on issues in this section, please include the 
caption ``Background'' as the beginning of your comments.]

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 order for payment to be made available under section 
1903 for certain 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 formula 
for calculating rebate payments, and requirements for States with 
respect to covered outpatient drugs.
    This proposed rule would implement sections 6001(a)-(d), 6002, and 
6003 of the Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171 (Feb. 
8, 2006). It also would codify those parts of section 1927 of the Act 
that pertain to requirements for drug manufacturers' calculation and 
reporting of average

[[Page 77175]]

manufacturer price (AMP) and best price, and it would revise existing 
regulations that set upper payment limits for certain covered 
outpatient drugs. This proposed rule would also implement section 
1903(i)(10) of the Act, as revised by the DRA, with regard to the 
denial of FFP in expenditures for certain physician-administered drugs. 
Finally, the proposed rule would address other provisions of the drug 
rebate program, to the extent those provisions are affected by the DRA.
    The Medicaid Drug Rebate Program was established by section 4401 of 
the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), Pub. L. 101-
508 (Nov. 5, 1990) and subsequently modified by the Veterans Health 
Care Act of 1992 (VHCA), Pub. L. 102-585 (Nov. 4, 1992) and the Omnibus 
Budget Reconciliation Act of 1993, Pub. L. 103-66 (Aug. 10, 1993). 
These provisions were implemented primarily through the national drug 
rebate agreement (56 FR 7049 (Feb. 21, 1991)) and other informal 
program releases, which provide standards for manufacturer reporting 
and rebate calculations. The statutory changes that affect the 
provisions of this proposed rule are described below.

B. Changes Made by the Deficit Reduction Act of 2005

    Section 6001(a) of the DRA amends section 1927(e) of the Act to 
revise the formula CMS uses to set Federal upper limits (FULs) for 
multiple source drugs. Effective January 1, 2007, the upper limit for 
multiple source drugs shall be established at 250 percent of the 
average manufacturer price (AMP) (as computed without regard to 
customary prompt pay discounts extended to wholesalers) for the least 
costly therapeutic equivalent.
    Section 6001(b) of the DRA amends section 1927(b)(3) of the Act to 
create a requirement that manufacturers report certain prices to the 
Secretary monthly. It also requires the Secretary to provide AMP to 
States on a monthly basis beginning July 1, 2006 and post AMP on a Web 
site at least quarterly. We are aware of concerns that the AMPs 
released to the States beginning July 1, 2006, will not reflect changes 
to the definition of AMP made by the DRA and proposed in this rule. 
While we made the AMPs available to the States beginning July 1, 2006, 
States should keep these data confidential in accordance with section 
1927(b)(3)(D) of the Act. Section 6001(b) of the DRA revises these 
confidentiality provisions to permit States to use AMP to calculate 
payment rates; however, these confidentiality amendments are not 
effective until January 1, 2007. This six-month period will give the 
States a chance to review the AMP data and revise their systems to 
address the DRA amendments.
    Section 6001(c) of the DRA modifies the definition of AMP to remove 
customary prompt pay discounts extended to wholesalers from the AMP 
calculation and requires manufacturers to report these customary prompt 
pay discounts to the Secretary. It requires the Inspector General of 
the Department of Health and Human Services (IG) to review the 
requirements for, and the manner in which, AMP is determined and submit 
to the Secretary and Congress any recommendations for changes no later 
than June 1, 2006. Finally, it requires the Secretary to promulgate a 
regulation that clarifies the requirements for, and the manner in 
which, AMP is determined no later than July 1, 2007, taking into 
consideration any IG recommendations.
    Section 6001(d) of the DRA requires manufacturers to report 
information on sales at nominal price to the Secretary for calendar 
quarters beginning on or after January 1, 2007. It also specifies the 
entities to which nominal price applies. It limits the merely nominal 
exclusion to sales at nominal prices to the following: A covered entity 
described in section 340B(a)(4) of the Public Health Service Act 
(PHSA), an intermediate care facility for the mentally retarded (ICF/
MR), a State-owned or operated nursing facility, and any other facility 
or entity that the Secretary determines is a safety net provider to 
which sales of such drugs at a nominal price would be appropriate, 
based on certain factors such as type of facility or entity, services 
provided by the facility or entity, and patient population.
    Section 6001(e) of the DRA amends section 1927 of the Act to 
provide for a survey of retail prices and State performance rankings. 
These provisions are not addressed in this proposed rule.
    Section 6001(f) of the DRA makes minor amendments to section 
1927(g) of the Act which are self-implementing.
    Section 6001(g) of the DRA provides that the amendments in section 
6001 are effective on January 1, 2007, unless otherwise noted.
    Section 6002 of the DRA amends section 1903(i)(10) of the Act by 
prohibiting Medicaid FFP for physician-administered drugs unless States 
submit the utilization data described in section 1927(a) of the Act. It 
also amends section 1927 of the Act to require the submission of 
utilization data for physician-administered drugs.
    Section 6003(a) of the DRA amends section 1927(b)(3)(A) of the Act 
to require manufacturers to include within AMP and best price all of 
its drugs that are sold under a new drug application (NDA) approved 
under section 505(c) of the Federal Food, Drug, and Cosmetic Act 
(FFDCA) when they report AMP and best price to the Secretary.
    Section 6003(b) of the DRA amends section 1927(c)(1)(C) of the Act 
to clarify that manufacturers must include the lowest price available 
to any entity for a drug sold under an NDA approved under section 
505(c) of the FFDCA when determining best price. Section 6003(b) also 
amends section 1927(k) to require that in the case of a manufacturer 
that approves, allows, or otherwise permits any of its drugs to be sold 
under an NDA approved under section 505(c) of the FFDCA, the AMP shall 
be calculated to include the average price paid for such drugs by 
wholesalers for drugs distributed to the retail pharmacy class of 
trade. Section 6003(c) of the DRA provides that the amendments made by 
section 6003 are effective January 1, 2007.
    The statutory provisions in the DRA that affect the Medicaid Drug 
Rebate Program, as well as the regulatory provisions we are proposing 
to implement the program, are discussed in greater detail in the 
section entitled ``Provisions of the Proposed Regulations'' below.

C. Notice of Proposed Rulemaking Published September 19, 1995

    On September 19, 1995, CMS (then the Health Care Financing 
Administration) published a notice of proposed rulemaking (NPRM) in the 
Federal Register (60 FR 48442 (Sept. 19, 1995)). The purpose of the 
1995 NPRM was to propose regulations pertaining to the Medicaid Drug 
Rebate Program and to address the national rebate agreement (56 FR 7049 
(Feb. 21, 1991)). On August 29, 2003, CMS finalized two of the 
provisions in the 1995 NPRM through a final rule with comment period 
(68 FR 51912). These regulations require manufacturers to retain 
records for data used to calculate AMP and best price for three years 
from when AMP and best price are reported to CMS. We also provided that 
manufacturers should report revisions to AMP and best price for a 
period not to exceed twelve quarters from the quarter in which the data 
are due. On November 26, 2004, we published final regulations (69 FR 
68815) that require a manufacturer to retain pricing data for 10 years 
from the date the manufacturer reports that data to CMS and for an 
additional time frame where the manufacturer is the subject of an audit 
or government investigation. Due to the time that has elapsed since 
publication of the 1995 NPRM and

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changes in the prescription drug industry, we do not plan to finalize 
the other provisions of that proposed rule, and any comments on the 
1995 NPRM are outside the scope of this proposed rule. This proposed 
rule does not address the entire Medicaid Drug Rebate Program, but 
focuses primarily on the provisions of the DRA that address the 
Medicaid Drug Rebate Program.

II. Provisions of the Proposed Regulations

Basis and Purpose of Subpart I--Section 447.500

    This subpart would implement specified provisions of sections 1927, 
1903(i)(10), and 1902(a)(54) of the Act related to implementation of 
the DRA. It would include requirements related to State plans, FFP for 
drugs, and the payment for covered outpatient drugs under Medicaid. In 
this rule, we also propose to move the existing Medicaid drug 
provisions in the Federal regulations from subpart F to subpart I of 42 
CFR part 447.

Definitions--Section 447.502

    This section of the rule would include definitions of key terms 
used in 42 CFR part 447, subpart I. We propose to use definitions from 
several sources, including the Act, Federal regulations, program 
guidance, and the national rebate agreement. We invite the public to 
provide comments on the terms we have chosen to define as well as the 
proposed definitions described below.
    Bona fide service fee would mean a fee paid by a manufacturer to an 
entity, that represents fair market value for a bona fide, itemized 
service actually performed on behalf of the manufacturer that a 
manufacturer would otherwise perform (or contract for) in the absence 
of the service arrangement, and that is not passed in whole or in part 
to a client or customer of an entity, whether or not the entity takes 
title to the drug.
    Brand name drug would mean a single source or innovator multiple 
source drug.
    Bundled sale would mean an arrangement regardless of physical 
packaging under which the rebate, discount, or other price concession 
is conditioned upon the purchase of the same drug or drugs of different 
types (that is, at the nine-digit National Drug Code (NDC) level) or 
some other performance requirement (e.g., the achievement of market 
share, inclusion or tier placement on a formulary), or where the 
resulting discounts or other price concessions are greater than those 
which would have been available had the bundled drugs been purchased 
separately or outside the bundled arrangement. For bundled sales, the 
discounts are allocated proportionately to the dollar value of the 
units of each drug sold under the bundled arrangement. For bundled 
sales where multiple drugs are discounted, the aggregate value of all 
the discounts should be proportionately allocated across all the drugs 
in the bundle.
    Consumer Price Index `` Urban (CPI-U) would be defined the same as 
it is in the national rebate agreement, except we would replace ``U.S. 
Department of Commerce'' with ``U.S. Department of Labor'' to reflect 
that the Department of Labor is now responsible for updating the CPI-U. 
Therefore, the term CPI-U would mean the index of consumer prices 
developed and updated by the U.S. Department of Labor. For purposes of 
this subpart, it would be 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.
    Dispensing fee would be defined similarly to how it is defined for 
the Medicare Part D program in 42 CFR 423.100 in light of some of the 
parallels of Part D to Medicaid. We are defining this term in order to 
assist States in their evaluation of factors in establishing a 
reasonable dispensing fee to pharmacy providers. We note that while we 
propose to define this term, we do not intend to mandate a specific 
formula or methodology which the States must use to determine the 
dispensing fee. The formula is consistent with our regulation that 
defines estimated acquisition costs which give States flexibility to 
determine EAC. However, consistent with a recommendation made by the 
Office of the Inspector General (OIG) in its report, ``Determining 
Average Manufacturer Prices for Prescription Drugs under the Deficit 
Reduction Act of 2005,'' (A-06-06-00063) May 2006, we encourage States 
to analyze the relationship between AMP and pharmacy acquisition costs 
to ensure that the Medicaid program appropriately reimburses pharmacies 
for estimated acquisition costs.
    Dispensing fee would be defined as the fee which--
    (1) Is incurred at the point of sale and pays for costs other than 
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, 
any 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.
    Innovator multiple source drug would be defined based on the 
definition in section 1927(k)(7)(A)(ii) of the Act. We would also use 
the definition from the national rebate agreement. Innovator multiple 
source drug would mean a multiple source drug that was originally 
marketed under an original NDA approved by the Food and Drug 
Administration (FDA). It would include a drug product marketed by any 
cross-licensed producers or distributors operating under the NDA and a 
covered outpatient drug approved under an NDA, Product License 
Approval, Establishment License Approval or Antibiotic Drug approval. 
We believe this definition is consistent with our understanding of the 
drug rebate statute and section 6003 of the DRA which includes within 
the definition those drugs which often receive a certain amount of 
patent protection and/or market exclusivity.
    Manufacturer would be defined based on the definition in section 
1927(k)(5) of the Act and the national rebate agreement. It would also 
mirror the current definition of manufacturer used by Medicare in the 
regulations regarding manufacturer's average sales price (ASP) data. 
For purposes of the Medicaid program, manufacturer would be defined as 
any entity that possesses legal title to the NDC for a covered drug or 
biological product and--
    (a) 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
    (b) Is engaged in the packaging, repackaging, labeling, relabeling, 
or distribution of covered outpatient drug products and is not a 
wholesaler of drugs or a retail pharmacy licensed under State law.

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    (c) With respect to authorized generic products, the term 
``manufacturer'' will also include the original holder of the NDA.
    (d) With respect to drugs subject to private labeling arrangements, 
the term ``manufacturer'' will also include those entities that do not 
possess legal title to the NDC.
    Multiple source drug is currently defined in Federal regulations at 
section 42 CFR 447.301. We propose removing the definition from that 
section and revising the definition to reflect the DRA amendments to 
section 1927 of the Act. We would define the term multiple source drug 
to mean, with respect to a rebate period, 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, see the FDA's most recent 
publication of ``Approved Drug Products with Therapeutic Equivalence 
Evaluations'' which is available at http://www.fda.gov/cder/orange/default.htm or can be viewed at the FDA's Freedom of Information Public 
Reading Room at 5600 Fishers Lane, rm. 12A-30, Rockville, MD 20857;
    (2) Is pharmaceutically equivalent and bioequivalent, as determined 
by the FDA; and
    (3) Is sold or marketed in the United States during the rebate 
period.
    National drug code (NDC) would be defined as it is used by the FDA 
and based on the definition used in the national rebate agreement. For 
purposes of this subpart, it would mean the 11-digit numerical code 
maintained by the FDA that indicates the labeler, product, and package 
size, unless otherwise specified in the regulation as being without 
respect to package size (9-digit numerical code).
    National rebate agreement is described in section 1927 of the Act. 
Section 1927(b) of the Act outlines the terms of the rebate agreement, 
including reporting timeframes, manufacturer responsibilities, 
penalties, and confidentiality of pricing data. We propose that the 
national rebate agreement would continue to be defined as the rebate 
agreement developed by CMS and entered into by CMS on behalf of the 
Secretary or his designee and a manufacturer to implement section 1927 
of the Act.
    Nominal price would be defined as it is in the national rebate 
agreement. We propose incorporating this definition in this rule 
because it is the standard presently used in the Medicaid program and 
the Medicare Part B program, and is similar to that used by the 
Department of Veterans Affairs (DVA) in administering the Federal 
Supply Schedule (FSS). Nominal price would mean a price that is less 
than 10 percent of AMP in the same quarter for which the AMP is 
computed.
    Rebate period is defined in section 1927(k)(8) of the Act as a 
calendar quarter or other period specified by the Secretary with 
respect to the payment of rebates under the national rebate agreement. 
The Medicaid Drug Rebate Program currently operates using a calendar 
quarter for the rebate period. While AMPs would be reported monthly for 
purposes of calculating FULs and for release to States, we can find no 
evidence in the legislative history of the DRA that Congress intended 
to change the definition of rebate period. Therefore, we would define 
rebate period as a calendar quarter.
    Single source drug is defined in section 1927(k)(7)(A)(iv) of the 
Act as a covered outpatient drug which is produced or distributed under 
an original NDA approved by the FDA, including a drug product marketed 
by any cross-licensed producers or distributors operating under the 
NDA. It is further defined in the national rebate agreement as a 
covered outpatient drug approved under a Product License Approval, 
Establishment License Approval, or Antibiotic Drug Approval. We propose 
to define the term single source drug as it is defined in the statute 
and the national rebate agreement.

Determination of Average Manufacturer Price--Section 447.504

Background
    Prior to the DRA, section 1927(k)(1) of the Act specified that the 
AMP with respect to a covered outpatient drug of a manufacturer for a 
rebate period is 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 after deducting customary prompt pay 
discounts.
    The national rebate agreement (56 FR 7049 (Feb. 21, 1991)) further 
specifies that:
    <bullet> Direct sales to hospitals, health maintenance 
organizations (HMOs) and wholesalers, where the drug is relabeled under 
that distributor's national drug code number, and FSS prices are not 
included in the calculation of AMP;
    <bullet> AMP includes cash discounts and all other price reductions 
(other than rebates under section 1927 of the Act), which reduce the 
actual price paid;
    <bullet> AMP is calculated as net sales divided by the number of 
units sold, excluding free goods (i.e., drugs or any other items given 
away, but not contingent on any purchase requirements), and
    <bullet> Net sales means quarterly gross sales revenue less cash 
discounts allowed and all other price reductions (other than rebates 
under section 1927 of the Act) which reduce the actual price paid.
    Consistent with these provisions, it has been our policy that in 
order to provide a reflection of market transactions, the AMP for a 
quarter should be adjusted by the manufacturer if cumulative discounts 
or other arrangements subsequently adjust the prices actually realized.
    AMP should be adjusted for bundled sales (as defined above) by 
determining the total value of all the discounts on all drugs in the 
bundle and allocating those discounts proportionately to the respective 
AMP calculations. The aggregate discount is allocated proportionately 
to the dollar value of the units of each drug sold under the bundled 
arrangement. Where discounts are offered on multiple products in a 
bundle, the aggregate value of all the discounts should be 
proportionately allocated across all the drugs in the bundle. The 
average unit price means 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.

Provisions of the DRA

    Section 6001(c)(1) of 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. Section 6001(c)(3) 
of the DRA requires the OIG to review the requirements for and manner 
in which AMPs are determined and recommend changes to the Secretary by 
June 1, 2006. Section 6001(c)(3) of the DRA requires 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 recommendations.

OIG Recommendations on AMP

    In accordance with 6001(c)(3) of the DRA, the OIG issued its 
report, ``Determining Average Manufacturer Prices for Prescription 
Drugs under the Deficit Reduction Act of 2005,'' (A-06-06-00063), in 
May 2006. In this report, the OIG recommended that CMS:
    <bullet> Clarify the requirements in regard to the definition of 
retail pharmacy class of trade and treatment of pharmacy

[[Page 77178]]

benefit manager (PBM) rebates and Medicaid sales and
    <bullet> Consider addressing issues raised by industry groups, such 
as:
    [ctrcir] Administrative and service fees,
    [ctrcir] Lagged price concessions and returned goods,
    [ctrcir] The frequency of AMP reporting,
    [ctrcir] AMP restatements, and
    [ctrcir] Base date AMP.
    The OIG also recommended that the Secretary direct CMS to:
    <bullet> Issue guidance in the near future that specifically 
addresses the implementation of the AMP-related reimbursement 
provisions of the DRA and
    <bullet> 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.
    We address these recommendations as we discuss provisions of this 
proposed rule in the section below.

Definition of Retail Pharmacy Class of Trade and Determination of AMP

    We recognize that there have been concerns expressed regarding AMP 
because of inconsistencies in the way manufacturers determine AMP, 
changes in the drug marketplace, and the introduction of newer business 
practices such as payment of services fees. We also realize that in 
light of the DRA amendments, AMP will serve two distinct purposes: For 
drug rebate liability and for payments. For the purpose of determining 
drug rebate liability, drug manufacturers would generally benefit from 
a broad definition of retail pharmacy class of trade which would 
include entities that purchase drugs at lower prices and which would 
lower rebate liability. Including these lower prices would decrease the 
AMP, decreasing manufacturers' rebate liability. The retail pharmacy 
industry might benefit from a narrow definition of retail pharmacy 
prices that would be limited to certain higher priced sales given that, 
in light of the DRA amendments, States might use AMP to calculate 
pharmacy payment rates. Excluding low-priced sales would increase AMP, 
increasing, in all likelihood, manufacturers' rebate payments. The 
pharmacy industry believes that mail order pharmacies and nursing home 
pharmacies (long-term care pharmacies) pay less for drugs than retail 
pharmacies (e.g., independents and chain pharmacies), and thus the 
inclusion of such prices would lower AMP below the price paid by such 
retail pharmacies.
    The statute mandates that, effective January 1, 2007, the Secretary 
use AMP when computing FULs. For this purpose, we would exclude certain 
outlier payments (see our discussion in the FULs section for a more 
complete description of outlier exclusions). The statute also requires 
that AMP be provided to States monthly and be posted on a public Web 
site. While there is no requirement that States use AMPs to set payment 
amounts, we believe the Congress intended that States have drug pricing 
data based on actual prices, in contrast to previously available data 
that did not necessarily reflect actual manufacturer prices of sales to 
the retail pharmacy class of trade. We considered several options to 
define what prices should be included in AMP. We considered including 
only prices of sales to retail pharmacies that dispense drugs to the 
general public (e.g., independent and chain pharmacies) in retail 
pharmacy class of trade and removing prices to mail order pharmacies, 
nursing home pharmacies (long-term care pharmacies), and PBMs. This 
definition would address the retail pharmacy industry's contentions 
that an AMP used for reimbursement to retail pharmacies should only 
reflect prices of sales to those pharmacies which dispense drugs to the 
general public.
    The exclusion of prices to mail order pharmacies, nursing home 
facilities (long-term care facilities), and PBMs would substantially 
reduce the number of transactions included in AMP. Removal of these 
prices would simplify AMP calculations for manufacturers because it is 
our understanding that certain data (e.g., PBM pricing data) are 
difficult for manufacturers to capture. In addition, removal of these 
prices would address differing interpretations of CMS policy identified 
by the OIG and the Government Accountability Office (GAO) due to the 
lack of a clear definition of AMP or specific guidance regarding which 
retail prices should be included in AMP. However, such a removal would 
not be consistent with past policy, as specified in manufacturer 
Releases 28 and 29 (http://www.cms.hhs.gov/MedicaidDrugRebateProgram/03_DrugMfrReleases.asp#TopOfPage), would likely result in a higher 
AMP, and would result in an increase in drug manufacturers' rebate 
liabilities.
    We also considered not revising the entities included in the retail 
pharmacy class of trade. However, this would not address the issues 
identified by the OIG in its report, ``Medicaid Drug Rebates: The 
Health Care Financing Administration Needs to Provide Additional 
Guidance to Drug Manufacturers to Better Implement the Program,'' (A-
06-91-00092), November 1992 and GAO in its report ``Medicaid Drug 
Rebate Program--Inadequate Oversight Raises Concerns about Rebates Paid 
to States,'' (GAO-05-102), February 2005.
    We believe, based in part on the OIG and GAO reports, that retail 
pharmacy class of trade means that sector of the drug marketplace, 
similar to the marketplace for other goods and services, which 
dispenses drugs to the general public and which includes all price 
concessions related to such goods and services. As such, we would 
exclude from AMP the prices of sales to nursing home pharmacies (long-
term care pharmacies) because nursing home pharmacies do not dispense 
to the general public. We would include in AMP the prices of sales and 
discounts to mail order pharmacies. We considered limiting mail order 
pharmacy prices to only those prices that are offered to all pharmacies 
under similar terms and conditions. However, given our belief that such 
prices are simply another form of how drugs enter into the retail 
pharmacy class of trade, we have decided to maintain these prices in 
the definition. We note that even were we to incorporate this change, 
retail pharmacies may not be able to meet the terms and conditions 
placed on mail order pharmacies to be eligible for some manufacturer 
price concessions. CMS seeks public comment on the inclusion of all 
mail order pharmacy prices in our definition of retail pharmacy class 
of trade for purposes of inclusion in the determination of AMP.
    We recognize that a major factor contributing to the determination 
of AMP is the treatment of PBMs. These entities have assumed a 
significant role in drug distribution since the enactment of the 
Medicaid Drug Rebate Program in 1990. We are considering how PBM 
rebates, discounts, or other price concessions should be recognized for 
purposes of AMP calculations.
    A GAO report ``Medicaid Drug Rebate Program--Inadequate Oversight 
Raises Concerns about Rebates Paid to States,'' (GAO-05-102), in 
February 2005, indicated that the Medicaid Drug Rebate Program does not 
clearly address certain financial concessions negotiated by PBMs. The 
GAO recommended that we issue clear guidance on manufacturer price 
determination methods and the definitions of AMP and best price, and 
update such guidance as additional issues arise.
    The issue regarding PBMs was also addressed in the recently issued 
OIG report, ``Determining Average

[[Page 77179]]

Manufacturer Prices for Prescription Drugs under the Deficit Reduction 
Act of 2005,'' (A-06-06-00063), in May 2006. In this report, the OIG 
recommended that we clarify the treatment of PBM rebates. This report 
says that manufacturers treat rebates and fees paid to PBMs in the 
calculation of AMP in three different ways. Specifically they found 
that manufacturers (1) did not subtract rebates or fees paid to PBMs 
from the AMP calculation; (2) subtracted the rebates or fees paid to 
PBMs; or (3) subtracted a portion of the PBMs rebates or fees from the 
AMP calculation.
    In developing this proposed rule, we considered including all 
rebates, discounts and other price concessions from PBMs in the 
determination of AMP. We also considered excluding rebates, discounts 
and other price concessions from PBMs in the determination of AMP.
    One of the most difficult issues with PBM discounts, rebates, or 
other price concessions is that manufacturers contend that they do not 
know what part of these discounts, rebates, or other price concessions 
is kept by the PBM for the cost of its activities and profit, what part 
is passed on to the health insurer or other insurer or other entity 
with which the PBM contracts, and what part, if any, that entity passes 
on to pharmacies. Despite the difficulties of including certain PBM 
rebates, discounts or other price concessions in AMP, excluding all of 
these price concessions could result in an artificial inflation of AMP. 
For this reason, we propose to include PBM rebates, discounts, or other 
price concessions for drugs provided to the retail pharmacy class of 
trade for the purpose of determining AMP; however, we invite comments 
on whether this proposal is operationally feasible.
    As discussed more fully below, we have proposed that PBM rebates 
and price concessions that adjust the amount received by the 
manufacturer for drugs distributed to the retail pharmacy class of 
trade should be included in the calculation of AMP. We acknowledge that 
manufacturers have a variety of arrangements with PBMs and thus invite 
comments on all aspects of our proposal as explained below.
    The rebate agreement defines AMP to include cash discounts and all 
other price reductions (other than rebates under section 1927 of the 
Act), which reduce the actual price paid to the manufacturer for drugs 
distributed to the retail pharmacy class of trade. As noted in Release 
28 and reiterated in Release 29, manufacturers have developed a myriad 
of arrangements whereby specific discounts, chargebacks, or rebates are 
provided to PBMs which, in turn, are passed on to the purchaser. Those 
releases recognize that certain prices provided by manufacturers to 
PBMs should be included within AMP calculations. In accordance with 
those releases, our position has been that PBMs have no effect on the 
AMP calculations unless the PBM is acting as a wholesaler as defined in 
the rebate agreement. We are concerned, however, that this position may 
unduly exclude from AMP certain PBM prices and discounts which have an 
impact on prices paid to the manufacturer.
    We believe that AMP should be calculated to reflect the net drug 
price recognized by the manufacturer, inclusive of any price 
adjustments or discounts provided directly or indirectly by the 
manufacturer. We are interested in comments on this proposal, including 
the comments on the operational difficulties of including such PBM 
arrangements within AMP calculations.
    We recognize that the statute defines AMP as the average price paid 
to the manufacturer by wholesalers for drugs distributed to the retail 
pharmacy class of trade; however, in light of our understanding of 
congressional intent, we believe that the definition is meant to 
capture discounts and other price adjustments, regardless of whether 
such discounts or adjustments are provided directly or indirectly by 
the manufacturer. We invite comments on this definition and whether AMP 
should be calculated to include all adjustments that affect net drug 
prices.
    We acknowledge that there are many PBM/manufacturer arrangements. 
To the extent manufacturers are offering rebates, discounts, or other 
price concessions to the PBM that are not bona fide service fees, we 
propose that these lower prices should be included in the AMP 
calculations. We request comments on the operational difficulties of 
tracking these rebates, discounts, or chargebacks provided to a PBM for 
purposes of calculating AMP and on the inclusion of all such price 
concessions in AMP. Specifically, we solicit comments on the extent to 
which CMS should or should not define in regulation which rebates, 
discounts, or price concessions provided to PBMs should be included in 
AMP and how best to measure these. Also, we solicit public comment on 
how these PBM price concessions should be reported to CMS to assure 
that appropriate price adjustments are captured and included in the 
determination of AMP.
    Finally, we request comments on any other issues that we should 
take into account in making our final decisions. These include, but may 
not be limited to, possible Federal and State budgetary impacts (our 
savings estimates assumed no budgetary impacts as generic drugs are 
rarely, if ever, subject to PBM price adjustments in this context); 
possible future evolution in industry pricing and management practices 
(e.g., growth of ``preferred'' generic drugs); and possible impacts on 
reimbursement for brand name drugs under Medicaid. We are generally 
interested in comments on how and to what extent PBMs act as 
``wholesalers.'' We propose to incorporate the explicitly listed 
exclusions in section 1927 of the Act, and in the national rebate 
agreement, which are direct sales to hospitals, HMOs/managed care 
organizations (MCOs), wholesalers where the drug is relabeled under 
that distributor's NDC and FSS prices.
    The specific terms we propose to clarify and the proposed 
clarifications follow.
    Retail Pharmacy Class of Trade: We propose to include in the 
definition of retail pharmacy class of trade any entity that purchases 
prescription drugs from a manufacturer or wholesaler for dispensing to 
the general public (e.g., retail, independent, chain and mail order 
pharmacies), except as otherwise specified by the statute or regulation 
(such as, HMOs, hospitals).
    PBM Price Concessions: We proposed to include any rebates, 
discounts or other price adjustments provided by the manufacturer to 
the PBM that affect the net price recognized by the manufacturer for 
drugs provided to entities in the retail pharmacy class of trade.
    Customary Prompt Pay Discounts: Prior to the DRA, neither the 
statute nor the national rebate agreement defined customary prompt pay 
discounts. The DRA revises the definition of AMP to exclude customary 
prompt pay discounts extended to wholesalers; however, it does not 
revise or define customary prompt pay discounts. We propose to define 
customary prompt pay discounts as any discount off the purchase price 
of a drug routinely offered by the manufacturer to a wholesaler for 
prompt payment of purchased drugs within a specified time of the 
payment due date.
    Treatment of Medicaid Sales: The OIG recommended that we should 
address whether AMP should include Medicaid prices of sales; i.e., 
prices of sales where the end payer for the drug is the Medicaid 
program. In its May 2006 report, the OIG noted confusion on this

[[Page 77180]]

issue and recommended that we clarify that these prices of sales are to 
be included in AMP. It is our position that these sales are included in 
AMP because they are not expressly excluded in the statute. In this 
proposed rule, we would also clarify that prices to State Children's 
Health Insurance Program Title XIX (SCHIP) through an expanded Medicaid 
program are covered under the provisions of section 1927 of the Act and 
generally subsumed in Medicaid sales. As a general matter, Medicaid 
does not directly purchase drugs from manufacturers or wholesalers but 
instead reimburses pharmacies for these drugs. Therefore, Medicaid 
sales are determined by the entities that are actually in the sales 
chain and because Medicaid reimburses pharmacies for drugs for Medicaid 
beneficiaries, integrated into the chain of sales otherwise included in 
AMP.
    In this proposed rule, we would clarify that the units associated 
with Medicaid sales should be included as part of the total units in 
the AMP calculation. We have proposed that AMP be calculated to include 
all sales and associated discounts and other price concessions provided 
by the manufacturer for drugs distributed to the retail pharmacy class 
of trade unless the sale, discount, or other price concession is 
specifically excluded by the statute or regulation or is provided to an 
entity excluded by statute or regulation. Therefore, we would clarify 
that rebates paid to States under the Medicaid Drug Rebate Program 
should be excluded from AMP calculations but that price concessions 
associated with the sales of drugs in the retail pharmacy class of 
trade which are provided to Medicaid patients should be included.
    In this proposed rule, we also propose to clarify how the prices of 
sales to State Children's Health Insurance Program Title XXI (SCHIP) 
non-Medicaid expansion programs should be treated. Like the Medicaid 
program, SCHIP non-Medicaid expansion programs do not directly purchase 
drugs. Because such programs are not part of the Medicaid program, they 
are not covered under the provisions of section 1927 of the Act. As 
with Medicaid sales, these sales are included in AMP to the extent they 
concern sales at the retail pharmacy class of trade. Therefore, these 
sales should not be backed out of the AMP calculation to the extent 
that such sales are included within sales provided to the retail 
pharmacy class of trade. Rebates and units associated with those sales 
should also be included in the calculation of AMP.
    Treatment of Medicare Part D sales: We would clarify that the 
treatment of prices of sales through a Medicare Part D prescription 
drug plan (PDP), a Medicare Advantage prescription drug plan (MA-PD), 
or a qualified retiree prescription drug plan for covered Part D drugs 
provided on behalf of Part D eligible individuals should be included in 
the AMP calculation. Like the Medicaid program, PDPs and MA-PDs do not 
directly purchase drugs, but are usually third party payers. As with 
Medicaid sales, these sales are included in AMP to the extent they are 
sales to the retail pharmacy class of trade. Therefore, we believe 
these prices of sales should not be backed out of the AMP. Rebates paid 
by the manufacturer to the PDP or MA-PD should be included in the 
calculation of AMP.
    SPAP price concessions: In this proposed rule, we also propose to 
clarify how the prices to State pharmaceutical assistance programs 
(SPAPs) should be treated. Like the Medicaid program, PDPs, and MA-PDs, 
SPAPs do not directly purchase drugs, but are generally third-party 
payers. As with Medicaid sales, these sales are included in AMP to the 
extent the sales are to an entity included in the retail pharmacy class 
of trade. Therefore, we propose that SPAP sales should not be backed 
out of the AMP calculation. Rebates paid by the manufacturer to the 
SPAP should be included in the calculation of AMP.
    Prices to other Federal Programs: We propose that any prices on or 
after October 1, 1992, to the 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), or a 
covered entity described in subsection 1927(a)(5)(B) of the Act 
(including inpatient prices charged to hospitals described in section 
340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the 
GSA; and any depot prices (including Tricare) and single award contract 
prices, as defined by the Secretary, of any agency of the Federal 
government are excluded from the calculation of AMP. We propose that 
the prices to these entities should be excluded from AMP because the 
prices to these entities are not available to the retail pharmacy class 
of trade.
    Administrative and Service Fees: Current Medicaid drug rebate 
policy is that administrative fees which include service fees and 
distribution fees, incentives, promotional fees, chargebacks and all 
discounts or rebates, other than rebates under the Medicaid drug 
program, should be included in the calculation of AMP, if those sales 
are to an entity included in the calculation of AMP. The OIG has noted 
in its report, ``Determining Average Manufacturer Prices for 
Prescription Drugs under the Deficit Reduction Act of 2005,'' (A-06-06-
00063), May 2006, that confusion exists about the treatment of fees, 
such as service fees negotiated between a manufacturer and 
pharmaceutical distributor. Some believe that these fees should not be 
included in AMP because the manufacturer does not know if the fees act 
to reduce the price paid by the end purchasers. Others believe such 
fees should be included in the calculation, which would reduce AMP 
because they serve as a price concession. For the same reason as for 
sales to PBMs, we propose that all fees except fees paid for bona fide 
services should be included in AMP. We propose that bona fide service 
fees means fees paid by a manufacturer to an entity, which 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 which are not passed in whole or in part to a client or customer of 
an entity, whether or not the entity takes title to the drug. Medicare 
Part B also adopted this definition in its final rule with comment 
period that was published on December 1, 2006 (71 FR 69623-70251) that 
implemented the ASP provisions enacted in the Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 (MMA). We are not 
proposing to define fair market value. However, CMS invites comments 
from the public regarding an appropriate definition for fair market 
value.
    Direct Patient Sales: In response to manufacturers' questions, CMS 
has stated previously that covered outpatient drugs sold to patients 
through direct programs should be included in the calculation of AMP. 
These sales are usually for specialty drugs through a direct 
distribution arrangement, where the manufacturer retains ownership of 
the drug and pays either an administrative or service fee to a third 
party for functions such as the storage, delivery and billing of the 
drug. Some manufacturers have contended that direct patient sales for 
covered outpatient drugs sold by a manufacturer through a direct 
distribution channel should not qualify for inclusion in the 
calculation of AMP because the Medicaid rebate statute and the national 
rebate agreement do not address covered outpatient drugs that are not 
sold to wholesalers and/or not distributed in the retail pharmacy class 
of trade. We believe that the distributor is acting as

[[Page 77181]]

a wholesaler and these sales are to the retail pharmacy class of trade. 
In light of this, we propose in this regulation that these sales and 
the rebates associated with these sales to patients through direct 
programs would be included in AMP. CMS invites comments from the public 
on this proposed policy.
    Returned Goods: Current Medicaid Drug Rebate Program policy is that 
returned goods are credited back to the manufacturer in either the 
quarter of sale or quarter of receipt. This has caused difficulty for 
some manufacturers when these returns have substantially reduced AMP in 
a quarter or resulted in a negative AMP. In light of these concerns, we 
propose to exclude returned goods from the calculation of AMP when 
returned in good faith. CMS considers that goods are being returned in 
good faith when they are being returned pursuant to manufacturer 
policies which are not designed to manipulate or artificially inflate 
or deflate AMP. The Medicare Part B program excludes returned goods 
from the calculation of ASP. The exclusion of returned goods will allow 
the manufacturer to calculate and report an AMP that is more reflective 
of its true pricing policies to the retail pharmacy class of trade in 
the reporting period. It lessens the administrative burden and problems 
associated with allocating the returned goods back to the reporting 
period in which they were sold, as well as eliminating artificially 
low, zero or negative AMPs that may result from these adjustments.
    Manufacturer Coupons: In this proposed rule, we propose to clarify 
how manufacturer coupons should be treated. The treatment of 
manufacturer coupons has been problematic for CMS as well as some 
manufacturers. In this rule, we propose to include coupons redeemed by 
any entity other than the consumer in the calculation of AMP. We 
believe that the redemption of coupons by the consumer directly to the 
manufacturer is not included in the retail pharmacy class of trade. In 
this proposed rule, we propose to exclude coupons redeemed by the 
consumer directly to the manufacturer from the calculation of AMP. CMS 
invites comments from the public on this proposed policy.
    Future Clarifications of AMP: Based on past comments from the GAO 
and the OIG and recommendations of the OIG in its May 2006 report on 
AMP, we believe that we need to have the ability to clarify the 
definition of AMP in an expedited manner in order to address the 
evolving marketplace for the sale of drugs. We plan to address future 
clarifications of AMP through the issuance of program releases and by 
posting the clarifications on the CMS Web site as needed.

Requirements for Average Manufacturer Price

    To implement the provisions set forth in sections 6001 and 6003 of 
the DRA related to AMP, we propose a new Sec.  447.504. In Sec.  
447.504(a), we propose a revised definition of AMP and clarify that AMP 
is determined without regard to customary prompt pay discounts extended 
to wholesalers. In Sec.  447.504(b), we propose to define average unit 
price. In Sec.  447.504(c), we propose to define customary prompt pay 
discount. In Sec.  447.504(d), we propose to define net sales. In Sec.  
447.504(e), we propose to define retail pharmacy class of trade. In 
Sec.  447.504(f), we propose to define wholesaler. In Sec.  447.504(g), 
we would describe in detail the sales, rebates, discounts, or other 
price concessions that must be included in AMP. In Sec.  447.504(h), we 
would describe the sales, rebates, discounts, or other price 
concessions that must be excluded from AMP. In Sec.  447.504(i), we 
would provide further clarification about how manufacturers should 
account for price reductions and other pricing arrangements which 
should be included in the calculation of AMP.

Determination of Best Price--Section 447.505

    Prior to the DRA, section 1927(c)(1)(C) of the Act provided that 
manufacturers must include in their best price calculation, for a 
single source or innovator multiple source drug, the lowest price 
available from the manufacturers during the rebate period to any 
wholesaler, retailer, provider, HMO, non-profit entity, or governmental 
entity within the United States except for those entities specifically 
excluded by statute. Excluded from best price are prices charged on or 
after October 1, 1992, to the IHS, the DVA, a State home receiving 
funds under section 1741 of title 38, United States Code, the DoD, the 
PHS, or a covered entity described in section 1927(a)(5)(B) of the Act 
(including inpatient prices charged to hospitals described in section 
340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the 
GSA; any prices used under an SPAP; any depot prices (including 
Tricare) and single award contract prices, as defined by the Secretary, 
of any agency of the Federal Government; and prices to a Medicare Part 
D PDP, an MA-PD, or a qualified retiree prescription drug plan for 
covered Part D drugs provided on behalf of Part D eligible individuals.
    The statute further specifies that:
    <bullet> Best price includes cash discounts, free goods that are 
contingent on any purchase requirement, volume discounts and rebates 
(other than rebates under section 1927 of the Act), which reduce the 
price paid;
    <bullet> Best price must be determined on a unit basis without 
regard to special packaging, labeling or identifiers on the dosage form 
or product or package;
    <bullet> Best price must not take into account prices that are 
merely nominal in amount.
    Consistent with these provisions and the national rebate agreement, 
it has been our policy that in order to reflect market transactions, 
the best price for a rebate period should be adjusted by the 
manufacturer if cumulative discounts or other arrangements subsequently 
adjust the prices actually realized.
    Best price should be adjusted for any bundled sale. The drugs in a 
``bundle'' do not have to be physically packaged together to constitute 
a ``bundle,'' just part of the same bundled transaction.
    Section 1927(c)(1)(C)(ii)(I) of the Act specifies that best price 
must include free goods that are contingent on any purchase 
requirement. Thus, only those free goods that are not contingent on any 
purchase requirements may be excluded from best price.
    Section 103(e) of the MMA modified the definition of best price by 
excluding prices which are negotiated by a PDP under part D of title 
XVIII of the Act, 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) with 
respect to such drugs on behalf of individuals entitled to benefits 
under part A or enrolled under part B of such title. Section 1002(a) of 
the MMA modified section 1927(c)(1)(C)(i)(I) of the Act by clarifying 
that inpatient prices charged to hospitals described in section 
340B(a)(4)(L) of the PHSA are exempt from best price.
    Section 6003 of the DRA amended section 1927(c)(1)(C) of the Act by 
revising the definition of best price to clarify that the best price 
includes 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.
    In accordance with our understanding of congressional intent, in 
this proposed rule we propose to define best price with respect to a 
single source drug or innovator multiple source drug of a manufacturer, 
including any drug sold under an NDA approved under section

[[Page 77182]]

505(c) of the FFDCA, as the lowest price available from the 
manufacturer during the rebate period to any entity in the United 
States in any pricing structure (including capitated payments) in the 
same quarter for which the AMP is computed. It continues to be our 
policy that best price reflects the lowest price at which the 
manufacturer sells a covered outpatient drug to any purchaser, except 
those prices specifically exempted by law. We propose to define 
provider as a hospital; HMO, including an MCO or PBM; or other entity 
that treats individuals for illnesses or injuries or provides services 
or items in the provisions of health care.
    As with the determination of AMP, the DRA does not establish a 
mechanism to clarify how best price is to be determined should new 
entities be formed after this regulation takes effect. We believe that 
we need to have the ability to clarify best price in an expedited 
manner in order to address the evolving marketplace for the sale of 
drugs. We plan to address future clarifications to best price through 
the issuance of program releases and by posting the clarifications on 
the CMS Web site as needed. Even though the DRA did not require CMS to 
clarify the requirements for best price, we determined that it is 
reasonable to propose these provisions in this proposed rule, 
consistent with long-standing Medicaid Drug Rebate Program policy, the 
MMA, and our understanding of congressional intent with respect to best 
price as revised by the DRA.
    We propose to incorporate the explicitly listed exclusions in 
section 1927 of the Act, which are prices charged on or after October 
1, 1992, to the IHS, the DVA, a State home receiving funds under 
section 1741 of title 38, United States Code, the DoD, the PHS, or a 
covered entity described in section 1927(a)(5)(B) of the Act (including 
inpatient prices charged to hospitals described in section 
340B(a)(4)(L) of the PHSA); any prices charged under the FSS of the 
GSA; any prices paid under an SPAP; any depot prices (including 
Tricare) and single award contract prices, as defined by the Secretary, 
of any agency of the Federal Government; and payments made by a 
Medicare Part D PDP, an MA-PD, or a qualified retiree prescription drug 
plan for covered Part D drugs provided on behalf of Part D eligible 
individuals. We propose to codify this policy and require that 
manufacturers exclude the prices to these entities from best price. 
Because best price represents the lowest price available from the 
manufacturer to any entity with respect to a single source drug or 
innovator multiple source drug of a manufacturer, including an 
authorized generic, any price concession associated with that sale 
should be netted out of the price received by the manufacturer in 
calculating best price and best price should be adjusted by the 
manufacturer if other arrangements subsequently adjust the prices 
actually realized. We propose to consider any price adjustment which 
ultimately affects those prices which are actually realized by the 
manufacturer as ``other arrangements'' and that such adjustment should 
be included in the calculation of best price, except to the extent that 
such adjustments qualify as bona fide service fees.
    Consistent with our understanding of congressional intent, we 
propose that best price be calculated to include all sales, discounts, 
and other price concessions provided by the manufacturer for covered 
outpatient drugs to any entity unless the manufacturer can demonstrate 
that the sale, discount, or other price concession is specifically 
excluded by statute or is provided to an entity not included in the 
rebate calculation. To the extent that an entity is not included in the 
best price calculation, both sales and associated discounts or other 
price concessions provided to such an entity should be excluded from 
the calculation. The specific terms we propose to clarify and the 
proposed clarification follow.
    The Medicaid drug rebate agreement defines best price, in part, as 
the lowest price at which the manufacturer sells the covered outpatient 
drug to any purchaser in the United States. We propose to codify this 
policy in this proposed rule.
    Customary Prompt Pay Discounts: The DRA revises the definition of 
AMP to exclude customary prompt pay discounts to wholesalers; however, 
we can find no evidence in the legislative history of the DRA that 
Congress intended to change the definition of best price to exclude 
customary prompt pay discounts. Therefore, we propose in this 
regulation to include customary prompt pay discounts in best price.
    PBM Price Concessions: We recognize that a major factor 
contributing to the determination of best price includes the treatment 
of PBMs. These entities have assumed a significant role in drug 
distribution since the enactment of the Medicaid Drug Rebate Program in 
1990.
    As noted in Release 28 and reiterated in Release 29, manufacturers 
have developed a myriad of arrangements whereby specific discounts, 
chargebacks, or rebates are provided to PBMs which, in turn, are passed 
on to the purchaser. In such situations where discounts, chargebacks, 
or rebates are used to adjust drug prices at the wholesaler or retail 
level, such adjustments are included in the best price calculation.
    A GAO report, ``Medicaid Drug Rebate Program--Inadequate Oversight 
Raises Concerns about Rebates Paid to States,'' (GAO-05-102), in 
February 2005, indicated that the Medicaid Drug Rebate Program does not 
clearly address certain financial concessions negotiated by PBMs. The 
GAO recommended that we issue clear guidance on manufacturer price 
determination methods and the definitions of AMP and best price, and 
update such guidance as additional issues arise.
    The issue regarding PBMs was also addressed in the recently issued 
OIG report, ``Determining Average Manufacturer Prices for Prescription 
Drugs under the Deficit Reduction Act of 2005,'' (A-06-06-00063), in 
May 2006. In this report, the OIG recommended that we clarify the 
treatment of PBM rebates.
    One of the most difficult issues with PBM discounts, price 
concessions, or rebates is that manufacturers contend that they do not 
know what part of these discounts, price concessions, or rebates are 
kept by the PBM for the cost of their activities and profit, what part 
is passed on to the health insurer or other insurer or other entity 
with which the PBM contracts, and what part that entity passes on to 
pharmacies.
    Despite the difficulties of including certain PBM rebates, 
discounts or other price concessions in best price, excluding these 
price concessions could result in an artificial inflation of best 
price. We propose to include PBM rebates, discounts, or other price 
concessions for the purpose of determining best price.
    To the extent manufacturers are offering PBMs rebates, discounts, 
or other price concessions, these lower prices should be included in 
the best price calculations. Therefore, where the use of the PBM by 
manufacturers affects the price available from the manufacturer, these 
lower prices should be reflected in best price calculations. We 
acknowledge that there are many PBM/manufacturer arrangements.
    We believe that PBMs often obtain rebates, discounts, or other 
price concessions which adjust prices, either directly or indirectly. 
Unless the fees/discounts qualify as bona fide service fees (which are 
excluded), the PBM rebates, discounts, or chargebacks should be 
included in best price. We propose to consider these rebates,

[[Page 77183]]

discounts, or chargebacks in best price calculations. CMS invites 
public comment on the inclusion of certain PBM price concessions in the 
determination of best price. Also, we solicit public comment on how 
these PBM price concessions should be reported to CMS to assure that 
appropriate price concessions are captured and included in the 
determination of best price.
    We propose to incorporate the explicitly listed exclusions in 
section 1927 of the Act and in the national rebate agreement. Because 
best price represents the prices available from the manufacturer for 
prescription drugs, best price should be adjusted by the manufacturer 
if other arrangements subsequently adjust the prices actually realized. 
We propose to consider that any price adjustment which ultimately 
affects those prices which are actually realized by the manufacturer as 
``other arrangements'' and that such an adjustment should be included 
in the calculation of best price. The specific terms we propose to 
clarify and the proposed clarifications follow.
    Administrative and Service Fees: We propose that administrative 
fees which include service fees and distribution fees, incentives, 
promotional fees, chargebacks and all discounts or rebates, other than 
rebates under the Medicaid Drug Rebate Program, should be included in 
the calculation of best price, if those sales are to an entity included 
in the calculation of best price. As previously discussed, the OIG has 
noted in its report, ``Determining Average Manufacturer Prices for 
Prescription Drugs under the Deficit Reduction Act of 2005,'' (A-06-06-
00063), May 2006 that confusion exists about the treatment of fees, 
such as service fees negotiated between a manufacturer and 
pharmaceutical distributor for AMP and best price. We believe that 
price adjustments which ultimately affect those prices which are 
actually available from the manufacturer should be included in best 
price. We propose that manufacturers should include all such fees 
except bona fide service fees provided at fair market value in the best 
price calculation.
    Treatment of Medicare Part D Prices: In this proposed rule, we 
propose to clarify the treatment of prices which are negotiated by a 
Medicare Part D PDP, an MA-PD, or a qualified retiree prescription drug 
plan for covered Part D drugs provided on behalf of Part D eligible 
individuals. We propose that these prices are exempt from the best 
price. Section 1860D-2(d)(1)(C) of the Act specifically states that 
``prices negotiated by a prescription drug plan, by an MA-PD plan with 
respect to covered part D drugs, or by a qualified retiree prescription 
drug plan (as defined in section 1860D-22(a)(2)) with respect to such 
drugs on behalf of Part D eligible individuals, shall (notwithstanding 
any other provision of law) not be taken into account for the purposes 
of establishing the best price under section 1927(c)(1)(C).'' 
Therefore, while we propose that the prices listed above be included 
for the purpose of calculating AMP, we propose that prices negotiated 
by a PDP, an MA-PD, or a qualified retiree prescription drug plan for 
covered Part D drugs provided on behalf of Part D eligible individuals 
not be taken into account for the purpose of establishing best price.
    Manufacturer Coupons: In this proposed rule, we propose to clarify 
how manufacturer coupons should be treated for the purpose of 
establishing best price. We believe that the redemption of coupons by 
any entity other than the consumer to the manufacturer ultimately 
affects the price paid by the entity (e.g., retail pharmacy). In this 
rule, we propose to include coupons redeemed by any entity other than 
the consumer in the calculation of best price. We believe that the 
redemption of coupons by the consumer directly to the manufacturer does 
not affect the price paid by any entity whose sales are included in 
best price. In this proposed rule, we propose to exclude coupons 
redeemed by the consumer directly to the manufacturer from the 
calculation of best price. CMS invites comments from the public on this 
proposed policy.
    Medicaid Rebates and Supplemental Rebates: Section 
1927(c)(1)(C)(ii)(I) of the Act and the national rebate agreement 
provide that any rebates paid by manufacturers under section 1927 of 
the Act are to be excluded from the calculation of best price. 
Therefore, we propose to exclude Medicaid rebates from best price. 
Likewise, we consider rebates paid under CMS-authorized separate 
(supplemental) Medicaid drug rebate agreements with States to meet this 
requirement and propose that these rebates be excluded from best price. 
In accordance with section 1927 of the Act pertaining to the 
determination of best price and our understanding of congressional 
intent, we propose a new Sec.  447.505. In Sec.  447.505(a), we would 
provide a general definition of the term best price. In Sec.  
447.505(b), we propose to define provider. In Sec.  447.505(c), we 
would specify the sales and prices which must be included in best 
price. In Sec.  447.505(d), we would specify which sales and prices 
must be excluded from best price. In Sec.  447.505(e), we would further 
clarify the price reductions and other pricing arrangements included in 
the calculation of best price.

Authorized Generic Drugs--Section 447.506

    Under current law, drug manufacturers participating in the Medicaid 
Drug Rebate Program are required to report the AMP for each covered 
outpatient drug offered under the Medicaid program and the best price 
for each single source or innovator multiple source drug available to 
any wholesaler, retailer, provider, HMO, non-profit entity, or 
governmental entity with certain exceptions.
    For purposes of the Medicaid Drug Rebate Program, an authorized 
generic is any drug product marketed under the innovator or brand 
manufacturer's original NDA, but labeled with a different NDC than the 
innovator or brand product. According to our reading of the statute, 
authorized generics are single source or innovator multiple source 
drugs for the purpose of computing the drug rebate and are classified 
based on whether the drug is being sold or marketed pursuant to an NDA. 
Responsibility for the rebate rests with the manufacturer selling or 
marketing the drug to the retail pharmacy class of trade.
    This rule would implement section 6003 of the DRA. We propose to 
adopt the term ``authorized generic'' and define this term with respect 
to the Medicaid Drug Rebate Program, as any drug sold, licensed or 
marketed under a new drug application approved by the FDA under section 
505(c) of the FFDCA that is marketed, sold or distributed directly or 
indirectly under a different product code, labeler code, trade name, 
trademark, or packaging (other than repackaging the listed drug for use 
in institutions) than the listed drug.
    Section 6003 of the DRA amended section 1927(b)(3)(A) of the Act to 
include drugs approved under section 505(c) of the FFDCA in the 
reporting requirements for the primary manufacturer (NDA holder) for 
AMP and best price. We propose to interpret the language of section 
6003 of the DRA to include in the best price and AMP calculations of 
the branded drugs, the authorized generic drugs that have been marketed 
by another manufacturer or subsidiary of the brand manufacturer (or NDA 
holder). We believe that to limit the applicability of this regulation 
to the sellers of authorized generic drugs would allow manufacturers to 
circumvent the intent of the provision by licensing rather than selling 
the rights to such drugs. This is why we propose a broad definition of 
authorized

[[Page 77184]]

generic drugs rather than a more narrow definition of such drugs. We 
propose to require the NDA holder to include sales of the authorized 
generic product marketed by the secondary manufacturer or the brand 
manufacturer's subsidiary in its calculation of AMP and best price. We 
welcome comments on this issue.
    The secondary manufacturer or subsidiary of the brand manufacturer 
would continue to pay the single source or innovator multiple source 
rebate for the authorized generic drug products based on utilization 
under its own NDC number, as required under current law. We welcome 
comments on these issues.
    In Sec.  447.506(a), we would define the term authorized generic 
drug for the purposes of the Medicaid Drug Rebate Program.
    In Sec.  447.506(b), we would require the sales of authorized 
generic drugs that have been sold or licensed to another manufacturer 
to be included by the primary manufacturer as part of its calculation 
of AMP for the single source or innovator multiple source drug 
(including all such drugs that are sold under an NDA approved under 
section 505(c) of the FFDCA).
    In Sec.  447.506(c), we would require that sales of authorized 
generic drugs by the secondary manufacturer that buys or licenses the 
right to sell the drugs be included by the primary manufacturer in 
sales used to determine the best price for the single source or 
innovator multiple source drug approved under section 505(c) of the 
FFDCA during the rebate period to any manufacturer, wholesaler, 
retailer, provider, HMO, non-profit entity, or governmental entity 
within the United States. The primary manufacturer must include in its 
calculation of best price all sales of the authorized generic drug 
which have been sold or marketed by a secondary manufacturer or by a 
subsidiary of the brand manufacturer.

Exclusion From Best Price of Certain Sales at a Nominal Price--Section 
447.508

    Pursuant to the terms of the national rebate agreement, 
manufacturers excluded from their best price calculations outpatient 
drug prices below 10 percent of the AMP. The rebate agreement did not 
specify whether this nominal price exception applied to all purchasers 
or to a subset of purchasers. Medicaid has used this definition since 
the start of the Medicaid Drug Rebate Program and Medicare Part B also 
adopted it in its April 6, 2004 interim final rule with comment period 
(69 FR 17935) that implemented the ASP provisions enacted in the MMA. 
It is also similar to the definition of nominal price in the VHCA. We 
propose to continue to define nominal prices as prices at less than 10 
percent of the AMP in that same quarter; however, in accordance with 
the DRA, we further propose to specify that the nominal price exception 
applies only when certain entities are the purchasers.
    Section 6001(d)(2) of the DRA modified section 1927(c)(1) of the 
Act to limit the nominal price exclusion from best price to exclude 
only sales to certain entities and safety net providers. Specifically, 
it excluded from best price those nominal price sales to 340B covered 
entities as described in section 340B(a)(4) of the PHSA, ICFs/MR, and 
State-owned or operated nursing facilities. In addition, the Secretary 
has authority to identify as safety net providers other facilities or 
entities to which sales at a nominal price will be excluded from best 
price if he deems them eligible safety net providers based on four 
factors: the type of facility or entity, the services provided by the 
facility or entity, the patient population served by the facility or 
entity and the number of other facilities or entities eligible to 
purchase at nominal prices in the same service area.
    Section 340B(a)(4) of the PHSA defines entities covered under that 
provision. Covered entities include: A federally qualified health 
center as defined in section 1905(l)(2)(B) of the Act; an entity 
receiving a grant under section 340A of the PHSA; a family planning 
project receiving a grant or contract under Section 1001 of the PHSA 
(42 U.S.C. Sec.  300); an entity receiving a grant under subpart II of 
part C of title XXVI of the PHSA (relating to categorical grants for 
outpatient early intervention services for HIV disease); a State-
operated AIDS drug purchasing assistance program receiving financial 
assistance under title XXVI of the PHSA; a black lung clinic receiving 
funds under section 427(a) of the Black Lung Benefits Act; a 
comprehensive hemophilia diagnostic treatment center receiving a grant 
under section 501(a)(2) of the Act; a Native Hawaiian Health Center 
receiving funds under the Native Hawaiian Health Care Act of 1988; an 
urban Indian organization receiving funds under the title V of the 
Indian Health Care Improvement Act, any entity receiving assistance 
under title XXVI of the PHSA (other than a State or unit of local 
government or an entity receiving a grant under subpart II of part C of 
title XXVI of the PHSA), but only if the entity is certified by the 
Secretary pursuant to section 340B(a)(7) of the PHSA; an entity 
receiving funds under section 318 of the PHSA (relating to treatment of 
sexually transmitted diseases) or section 317(j)(2) of the PHSA 
(relating to treatment of tuberculosis) through a State or unit of 
local government, but only if the entity is certified by the Secretary 
pursuant to section 340B(a)(7) of the PHSA; a subsection (d) hospital 
(as defined in section 1886(d)(1)(B) of the Act that (i) is owned or 
operated by a unit of State or local government, is a public or private 
non-profit corporation which is formally granted governmental powers by 
a unit of State or local government, or is a private non-profit 
hospital which has a contract with a State or local government to 
provide health care services to low income individuals who are not 
entitled to benefits under title XVIII of the Act or eligible for 
assistance under the State plan under this title, (ii) for the most 
recent cost reporting period that ended before the calendar quarter 
involved, had a disproportionate share adjustment percentage (as 
determined under section 1886(d)(5)(F) of the Act) greater than 11.75 
percent or was described in section 1886(d)(5)(F)(i)(II) of the Act, 
and (iii) does not obtain covered outpatient drugs through a group 
purchasing organization or other group purchasing arrangement. We do 
not believe it necessary to elaborate further on these entities. We 
propose to define ICF/MR, for purposes of the nominal price exclusion 
from best price, to mean an institution for the mentally retarded or 
persons with related conditions that provides services as set forth in 
42 CFR 440.150. Additionally, we propose to define nursing facility as 
a facility that provides those services set forth in 42 CFR 440.155.
    The statute allows the Secretary to determine other facilities or 
entities to be safety net providers to whom sales of drugs at a nominal 
price would be excluded from best price. The Secretary's determination 
would be based on the four factors noted above established by the DRA. 
We considered using this authority to expand this exclusion to other 
safety-net providers. We considered proposing that we use the broader 
definition of safety net provider used by the Institute of Medicine 
(IOM). In its report, ``America's Health Care Safety Net, Intact but 
Endangered,'' the IOM defines safety-net providers as ``providers that 
by mandate or mission organize and deliver a significant level of 
healthcare and other health-related services to the uninsured, Medicaid 
and other vulnerable patients.'' We also considered proposing how the 
Secretary might use the four factors to allow the

[[Page 77185]]

nominal price exclusion to best price to apply to other safety net 
providers. However, we believe that the entities specified in the 
statute are sufficiently inclusive and capture the appropriate safety 
net providers. Therefore, we have chosen not to propose to expand the 
entities subject to this provision at this time. Additionally, we 
believe that adding other entities or facilities would have an 
undesirable effect on the best price by expanding the entities for 
which manufacturers can receive the best price exclusion beyond those 
specifically mandated by the DRA and lowering manufacturer rebates to 
the Medicaid Program. Because the statute gives the Secretary 
discretion not to expand the list of entities, we do not propose to do 
so at this time in this rule.
    CMS has concerns that despite the fact that the DRA limits the 
nominal price exclusion to specific entities, the nominal price 
exclusion will continue to be used as a marketing tool. Historically, 
patients frequently remain on the same drug regimen following discharge 
from a hospital. Physicians may be hesitant to switch a patient to a 
different brand and risk destabilizing the patient once discharged from 
the hospital. We believe that using nominal price for marketing is not 
within the spirit and letter of the law. We are considering crafting 
further guidance to address this issue. CMS invites comments from the 
public to assist us in ensuring that all aspects of this issue are 
fully considered.
    In accordance with the provisions of the DRA, the restriction on 
nominal price sales shall not apply to sales by a manufacturer of 
covered outpatient drugs that are sold under a DVA master agreement 
under section 8126 of title 38, United States Code.
    We propose a new Sec.  447.508 in which we would specify those 
entities to which a manufacturer of covered outpatient drugs may sell 
at nominal price and provide for the exclusion of such sales from best 
price.

Requirements for Manufacturers--Section 447.510

    On August 29, 2003, CMS finalized two of the provisions in the 1995 
NPRM through a final rule with comment period (68 FR 51912). We 
required manufacturers to retain records for data used to calculate AMP 
and best price for three years from when AMP and best price are 
reported to CMS. We also required manufacturers to report revisions to 
AMP and best price for a period not to exceed twelve quarters from the 
quarter in which the data are due. On January 6, 2004, we published an 
interim final rule with comment period replacing the three-year 
recordkeeping requirement with a ten-year requirement on a temporary 
basis (69 FR 508 (Jan. 6, 2004)). We also required that manufacturers 
retain records beyond the ten-year period if the records were subject 
to certain audits or government investigations. On November 26, 2004, 
we published final regulations (69 FR 68815) that require that a 
manufacturer retain pricing data for ten years from the date the 
manufacturer reports that period's data to CMS. We propose to move the 
recordkeeping requirements at Sec.  447.534(h) to Sec.  447.510(f) and 
revise them by adding the requirement that manufacturers must also 
retain records used in calculating the customary prompt pay discounts 
and nominal prices reported to CMS.
    Existing regulations at Sec.  447.534(i) require manufacturers to 
report revisions to AMP and best price for a period not to exceed 
twelve quarters from the quarter in which the data were due. We propose 
to move this provision to Sec.  447.510(b) and revise it to require 
manufacturers to also report revisions to customary prompt pay 
discounts and nominal prices for the same period.
    In order to reflect the changes to AMP as set forth in the DRA, we 
propose allowing manufacturers to recalculate base date AMP in 
accordance with the definition of AMP in Sec.  447.504(e) of this 
subpart. Base date 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 quarterly AMP reported 
to CMS and the base date AMP trended forward using the CPI--U. We 
propose this amendment so that the additional rebate would not increase 
due to changes in the definition of AMP. We propose giving 
manufacturers an opportunity to submit a revised base date AMP with 
their data submission for the first full calendar quarter following the 
publication of the final rule. We propose to allow manufacturers the 
option to decide whether they will recalculate and submit to CMS a base 
date AMP based on the new definition of AMP or submit their existing 
base date AMP. We are giving manufacturers this option because we are 
aware that some manufacturers may not have the data needed to 
recalculate base date AMP or may find the administrative burden to be 
more costly than the savings gained.
    Under section 1927(b)(3)(A) of the Act and the terms of the 
national rebate agreement, manufacturers that sign the national rebate 
agreement must supply CMS with a list of all product data (e.g., date 
entered market, drug category of single source, innovator multiple 
source, or noninnovator multiple source) and pricing information for 
their covered outpatient drugs. In accordance with the statute, the 
rule would require manufacturers to report AMP and best price to CMS 
not later than thirty days after the end of the rebate period.
    Section 6001(b)(1) of the DRA amended section 1927(b)(3)(A)(i) of 
the Act by adding ``month of a'' before ``rebate period.'' Section 
6003(a) of the DRA restructured section 1927(b)(3)(A)(i) of the Act. 
The statute, as amended by these provisions, can be read in different 
ways. One interpretation is that the revisions made by section 6003(a) 
of the DRA supersede the revisions made by section 6001(b)(1) of the 
DRA, effectively eliminating the requirement that manufacturers report 
data to CMS on a monthly basis. However, we do not believe that this 
reading is the better reading of the statute or consistent with 
congressional intent. It is unreasonable to presume that Congress would 
simultaneously establish and render meaningless a new provision of law 
and we do not propose to adopt this interpretation. Another 
interpretation is that the revisions made by section 6001(b)(1) of the 
DRA, when read with the amendments made by section 6003 of the DRA, 
create a new requirement that AMP, best price, and customary prompt pay 
discounts be reported on a monthly basis. However, there is no 
compelling evidence in the legislative history which indicates that 
Congress intended to change the rebate period from quarterly to 
monthly. Best price is reported to CMS quarterly for purposes of our 
calculation of the unit rebate amount for single source and innovator 
multiple source drugs. While Congress clearly intended that AMPs be 
reported and disclosed to States on a monthly basis, it did not 
establish any similar monthly use for best price or customary prompt 
pay discounts. For these reasons, we propose to interpret section 
6001(b) of the DRA to require that manufacturers report only AMP to CMS 
on a monthly basis beginning January 1, 2007. To implement this 
provision, we would require in Sec.  447.510(d) that manufacturers must 
submit monthly AMP to CMS not later than 30 days after each month. We 
would also require manufacturers to report quarterly AMP, best price, 
and customary prompt pay discounts on a quarterly basis.
    We propose that the monthly AMP will be calculated the same as the 
quarterly AMP, with the following exceptions. The time frame 
represented by the monthly AMP would be one calendar month instead of a 
calendar

[[Page 77186]]

quarter and once reported, would not be subject to revision later than 
30 days after each month. Because we recognize that industry pricing 
practices sometimes result in rebates or other price concessions being 
given by manufacturers to purchasers at the end of a calendar quarter, 
if the monthly AMP were calculated simply using sales in that month, 
these pricing practices might result in fluctuations between the AMP 
for the first two months and the AMP for the third month in a calendar 
quarter. In order to maximize the usefulness of the monthly AMP and 
minimize volatility in the prices, we propose allowing manufacturers to 
rely on estimates regarding the impact of their end-of-quarter rebates 
or other price concessions and allocate these rebates or other price 
concessions in the monthly AMPs reported to CMS throughout the quarter. 
We considered applying this same methodology to other cumulative 
rebates or other price concessions over longer periods of time, but are 
not certain that such rebates or other prices concessions could be 
allocated with respect to monthly AMP calculations. We invite comments 
on allowing the use of 12-month rolling average estimates of all lagged 
discounts for both the monthly and quarterly AMP. We also considered 
allowing manufacturers to calculate the monthly AMP based on updates of 
the most recent three-month period (i.e., a rolling three-month AMP). 
While this methodology may minimize volatility in the data, we believe 
it would be fairly complex for manufacturers to operationalize. We 
encourage comments on the appropriate methodology for calculating 
monthly AMP.
    Section 6001(b)(2)(C) of the DRA amended the confidentiality 
requirements at section 1927(b)(3)(D) of the Act by adding an exception 
for AMP disclosure through a Web site accessible to the public. The 
statute does not specify that this exception only applies to monthly 
AMP; therefore, we also propose to make the quarterly AMP publicly 
available. We note that the quarterly AMP would not necessarily be 
identical to the monthly AMP due to the potential differences in AMP 
from one timeframe to the next.
    Section 6001(d)(1) of the DRA modified section 1927(b)(3)(A)(iii) 
of the Act by adding a requirement that manufacturers report nominal 
prices for calendar quarters beginning on or after January 1, 2007 to 
the Secretary. To implement this provision, we propose to require that 
manufacturers report nominal price exception data to CMS on a quarterly 
basis. We further propose that nominal price exception data shall be 
reported as an aggregate dollar amount which includes all nominal price 
sales to the entities listed in Sec.  447.508(a) of this subpart for 
the rebate period.
    Section 1927(b)(3)(C) of the Act describes penalties for 
manufacturers that provide false information or fail to provide timely 
information to CMS. In light of these requirements, we propose to 
require that manufacturers certify the pricing reports they submit to 
CMS in accordance with Sec.  447.510. We propose to adopt the 
certification requirements established by the Medicare Part B Program 
for ASP in the interim final rule with comment period published on 
April 6, 2004. Each manufacturer's pricing reports would be certified 
by the manufacturer's Chief Executive Officer (CEO), Chief Financial 
Officer (CFO), or an individual who has delegated authority to sign 
for, and who reports directly to, the manufacturer's CEO or CFO.
    We propose that all product and pricing data, whether submitted on 
a quarterly or monthly basis, be submitted to CMS in an electronic 
format. When the Medicaid Drug Rebate Program was first implemented in 
1991, electronic data transfer was one of three data submission options 
as the use of such electronic media was not yet as commonplace as it is 
today. Due to the new monthly data reporting requirements and 
additional quarterly data reporting requirements, we propose to require 
manufacturers to use one uniform data transmission format to transmit 
and collect these data. CMS will issue operational instructions to 
provide additional guidance regarding the new electronic data 
submission requirements.

Aggregate Upper Limits of Payment--Section 447.512

    We propose that the existing Sec.  447.331 be revised and 
redesignated as a new Sec.  447.512. We propose to revise subsection 
(a) to clarify that the upper limit for multiple source drugs applies 
in the aggregate. We also propose to update several cross-references to 
provisions in subpart I.

Upper Limits for Multiple Source Drugs--Section 447.514

    We propose that the existing Sec.  447.332 be revised in a new 
Sec.  447.514.
A. Upper Limits for Multiple Source Drugs
    Existing regulations at 42 CFR 447.331, 447.332 and 447.334 address 
upper limits for payment of drugs covered under the Medicaid program. 
We propose to redesignate existing regulations at Sec. Sec.  447.331, 
447.332, and 447.334 as new regulations at Sec. Sec.  447.512, 447.514, 
and 447.516, respectively.
    Existing regulations at Sec.  447.332(a)(1)(i) state that an upper 
limit for a multiple source drug may be established if all of the 
formulations of the drug approved by the FDA have been evaluated as 
therapeutically equivalent in the current edition of the FDA's 
publication, ``Approved Drug Products with Therapeutic Equivalence 
Evaluations.''
    Section 1927(e)(4) of the Act, as amended by OBRA 90, expanded the 
criteria for multiple source drugs subject to FUL reimbursement. 
Specifically, the statute required CMS to establish an upper payment 
limit for each multiple source drug when there are at least three 
therapeutically and pharmaceutically equivalent multiple source drugs, 
regardless of whether all additional formulations are rated as such. 
Effective January 1, 2007, the DRA changed the requirement such that a 
FUL must be established for each multiple source drug for which the FDA 
has rated two or more products as therapeutically equivalent.
    Currently, if all formulations of a multiple source drug are 
identified as A-rated in the FDA's publication, ``Approved Drug 
Products with Therapeutic Equivalence Evaluations,'' at least two 
formulations must be listed in that publication for CMS to establish a 
FUL for that drug. If all formulations of a multiple source drug are 
not A-rated, there must be at least three A-rated versions of the drug 
listed in ``Approved Drug Products with Therapeutic Equivalence 
Evaluations'' for CMS to establish a FUL for the drug. If a product 
meets the FDA criteria described above, we confirm that at least three 
suppliers (i.e., manufacturers, wholesalers, re-packagers, re-labelers 
or any other entity from which a drug can be purchased) list the drug 
in published compendia of cost information for drugs available for sale 
nationally (e.g., Red Book, First DataBank, or Medi-Span). Then, using 
these pricing compendia, we select the lowest price (e.g., the average 
wholesale price, wholesale acquisition cost, or direct price) from 
among the A-rated formulations of a particular drug and apply the 
formula described in existing Sec.  447.332 to determine the FUL for 
that drug. FUL lists and changes to those lists based on the 
methodology set forth in the statute and regulations are issued 
periodically through Medicaid program issuances and are posted on the 
CMS Web site.

[[Page 77187]]

    By the term, ``therapeutically equivalent,'' we mean drugs that are 
identified as A-rated in the current edition of the FDA's publication, 
``Approved Drug Products with Therapeutic Equivalence Evaluations'' 
(including supplements or successor publications). We propose that the 
FUL will be established, as per section 1927(e)(4) of the Act, only 
using an ``A'' rated drug. However, we propose to continue our current 
practice of applying the FUL to all drug formulations, including those 
drug versions not proven to be therapeutically equivalent, (e.g., B-
rated drugs). We believe it is appropriate to apply the FUL to B-rated 
drugs in order not to encourage pharmacies to substitute B-rated drugs 
to avoid the FUL in the case where B-rated drugs would be excluded from 
the FUL. Current regulation does not prohibit or exclude B-rated drugs 
from the FUL reimbursement.
    We propose revising the methodology we use to establish FULs for 
multiple source drugs based on the modifications made by the DRA. 
Specifically, sections 6001(a)(3) and (4) of the DRA changed the 
definition of multiple source drug established in section 
1927(k)(7)(A)(i) of the Act to mean, with respect to 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 ``Approved Drug Products with Therapeutic 
Equivalence Evaluations''). Also, section 6001(a)(1) of the DRA changed 
the requirement for a FUL to be established for each multiple source 
drug for which the FDA has rated three or more products therapeutically 
and pharmaceutically equivalent to a requirement for a FUL when the FDA 
has established such a rating for two or more products. Therefore, we 
propose in Sec.  447.514(a)(1)(ii) that a FUL will be set when at least 
two suppliers (e.g., manufacturers, wholesalers, re-packagers, or re-
labelers) list the drug in a nationally available pricing compendia 
(e.g., Red Book, First DataBank, or Medi-Span).
    Existing regulations at Sec.  447.332(b) specify that the agency's 
payments for multiple source drugs identified and listed must not 
exceed, in the aggregate, payment levels determined by applying, for 
each drug entity, a reasonable dispensing fee established by the 
agency, plus an amount that is equal to 150 percent of the published 
price for the least costly therapeutic equivalent (using all available 
national pricing compendia) that can be purchased by pharmacies in 
quantities of 100 tablets or capsules (or, if the drug is not commonly 
available in quantities of 100, the package size commonly listed) or, 
in the case of liquids, the commonly listed size.
    Section 6001(a)(2) of the DRA added section 1927(e)(5) to the Act 
that changed the formula used to establish the FUL for multiple source 
drugs. Effective January 1, 2007, the upper limit for multiple source 
drugs shall be established at 250 percent of the AMP (as computed 
without regard to customary prompt pay discounts extended to 
wholesalers) for the least costly therapeutic equivalent. The currently 
reported AMP is based on the nine-digit NDC and is specific only to the 
product code, combining all package sizes of the drug into the same 
computation of AMP. We propose to continue to use the AMP calculated at 
the nine-digit NDC for the FUL calculation. In accordance with the DRA 
amendments, we will no longer take the individual 11-digit NDC, and 
thereby the most commonly used package size into consideration when 
computing the FUL because the currently reported AMP does not 
differentiate among package sizes.
    We considered using the 11-digit NDC to calculate the AMP, which 
would require manufacturers to report the AMP at the 11-digit NDC for 
each package size and that doing so would offer other advantages to the 
program for FULs and other purposes. An AMP at the 11-digit NDC would 
allow us to compute a FUL based on the most common package size as 
specified in current regulations. We do not believe computing an AMP at 
the 11-digit NDC would be significantly more difficult than computing 
the AMP at the nine-digit NDC as the data from each of the 11-digit 
NDCs is combined into the current AMP. The AMP at the 11-digit NDC 
would also align with State Medicaid drug payments that are based on 
the package size. It would also allow us to more closely examine 
manufacturer price calculations and allow the States and the public to 
know the AMP for the drug for each package size. It would also allow 
340B covered entities, which are entitled to buy drugs at a discount 
that is in part based on calculations related to AMP, to know what the 
pricing is for each package size, as 340B ceiling prices are 
established per package size. Calculating the AMP at the 11-digit NDC 
level permits greater transparency, and may increase accuracy and 
reduce errors for the 340B covered entities where prices are 
established for a package-size product rather than a per unit cost 
using the product's weighted average AMP.
    However, the legislation did not change the level at which 
manufacturers are to report AMP, and we find no evidence in the 
legislative history that the Congress intended that AMP should be 
restructured to collect it by 11-digit NDCs. We are proposing to use 
the currently reported 9-digit AMP for calculating the FUL. Changing 
the current method of calculating the AMP would require manufacturers 
to make significant changes to their reporting systems and have an 
unknown effect on the calculation of rebates in the existing Medicaid 
Drug Rebate Program. In State Medicaid payment systems that consider a 
number of different factors in deriving payment rates, we also believe 
it would offer minimal advantages. Furthermore, we expect that because 
the AMP is marked up 250 percent, the resultant reimbursement should be 
sufficient to reimburse the pharmacy for the drug regardless of the 
package size the pharmacy purchased and that to the extent it does have 
an impact, it would encourage pharmacies to buy the most economical 
package size.
    We specifically ask for comments on the alternative approach of 
using the 11-digit NDC to calculate the AMP. We will consider comments 
on the merits of using both approaches in calculating the AMP for the 
FUL.
    In computing the FUL, we propose that the monthly AMP submitted by 
the manufacturer will be used. Using the monthly AMP will provide for 
the timeliest pricing data and allow revisions to the FUL list on a 
monthly basis. 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, wherein the Secretary, after receiving notification that a 
therapeutically equivalent drug product is generally available, shall 
determine within 7 days if that drug product should have a FUL.
    Section 6001(c)(1) of the DRA redefines AMP to exclude customary 
prompt pay discounts extended to wholesalers. Due to this change in the 
computation, and the requirement that monthly AMP first be reported as 
of January 1, 2007, we propose that a FUL update of drugs, using the 
new methodology first be published when the revised AMPs are available 
and processed.
    We propose to adopt additional criteria to ensure that the FUL will 
be set at an adequate price to ensure that a drug is available for sale 
nationally as presently provided in our regulations. When establishing 
a FUL, we propose to disregard the AMP of an NDC which has been 
terminated. The AMP of a terminated NDC will not be used to set

[[Page 77188]]

the FUL beginning with the first day of the month after the actual 
termination date reported by the manufacturer. This refinement may not 
capture all outlier AMPs that would offset the availability of drugs at 
the FUL price. It is possible that a product that is not discontinued 
may be available on a limited basis at a very low price. As a further 
safeguard to ensure that a drug is nationally available at the FUL 
price and that a very low AMP is not used by us to set a FUL that is 
lower than the AMP for other therapeutically and pharmaceutically 
equivalent multiple source drugs, we propose to set the FUL based on 
the lowest AMP that is not less than 30 percent of the next highest AMP 
for that drug. That is to say, that the AMP of the lowest priced 
therapeutically equivalent drug will be used to establish the FUL, 
except in cases where this AMP is more than 70 percent below the second 
lowest AMP. In those cases, the second lowest AMP will be used in the 
FUL calculation. We propose to use this percentage calculation as a 
benchmark to prevent an outlier price from determining the FUL, but 
invite comments as to whether this percentage is an appropriate measure 
to use. We did consider other options, such as 60 percent below the 
next highest AMP so that at least drugs of two different manufacturers 
would be in the FULs group, but we were concerned that this percentage 
was insufficient to encourage competition where the cost of a 
particular drug was dropping rapidly. We also considered a test of a 
drug priced 90 percent below the next lowest priced drug, in line with 
how we look on nominal prices, as an indicator that the manufacturer 
was offering this drug on a not-for-profit basis. However, we note that 
nominal price relates to best price for some sales and it is unlikely a 
manufacturer would sell all of its drugs at this price. We welcome 
suggestions about other means to address outliers and whether outliers 
should be addressed at all.
    We are proposing an exception to the 30 percent carve-out policy 
when the FUL group only includes the innovator single source drug and 
the first new generic in the market, including an authorized generic. 
In this event, we would not apply the 30-percent rule as we believe the 
DRA intends that a FUL be set when new generic drugs become generally 
available so as to encourage greater utilization of a generic drug when 
the price is set less than its brand name counterpart.
    We invite comments from the public on all issues set forth in this 
subpart. We invite suggestions on how best to accomplish the goal of 
ensuring that the use of AMP in calculating the FUL will ensure that a 
drug is available nationally at the FUL price. Please submit data 
supporting your proposal when available.

Upper Limits for Drugs Furnished as Part of Services--Section 447.516

    We propose that the existing Sec.  447.334 be redesignated as a new 
Sec.  447.516.

State Plan Requirements, Findings and Assurances--Section 447.518

    We propose that the existing Sec.  447.333 be redesignated as a new 
Sec.  447.518.

FFP: Conditions Relating to Physician-Administered Drugs--Section 
447.520

    Prior to the DRA, many States did not collect rebates on physician-
administered drugs when they were not identified by NDC number because 
the NDC number is necessary for States to bill manufacturers for 
rebates. In its report, ``Medicaid Rebates for Physician Administered 
Drugs'' (April 2004, OEI-03-02-00660), the OIG reported that, by 2003, 
24 States either required providers to bill using NDC numbers or 
identified NDC numbers using a Healthcare Common Procedure Coding 
System (HCPCS)-to-NDC crosswalk for physician-administered drugs in 
order to collect rebates. Four of the 24 States were able to collect 
rebates for all physician-administered drugs, both single source and 
multiple source drugs (one State only collected these rebates from 
targeted providers). Section 6002 of the DRA added sections 1927(a)(7) 
and 1903(i)(10)(C) to the Act to require that States collect rebates on 
certain physician-administered drugs in order for FFP to be available 
for these drugs.
    Section 1927(a)(7)(A) of the Act requires that, effective January 
1, 2006, in order for FFP to be available, States must require the 
submission of utilization data for single source physician-administered 
drugs using HCPCS codes or NDC numbers. (HCPCS codes are numeric and 
alpha-numeric codes assigned by CMS to every medical or surgical 
supply, service, orthotic, prosthetic and generic or brand name drug 
for the purpose of reporting healthcare transactions for claims 
billing. Physician-administered drugs are assigned alpha-numeric HCPCS 
codes, and are commonly referred to as J-codes. However, physician-
administered drugs are also coded using other letters of the alphabet. 
For this reason, we will refer to the coding system, HCPCS, as opposed 
to one set of alpha-numeric codes in our discussion of section 6002 
requirements.) If States collect HCPCS codes for single source drugs, 
they can crosswalk these codes to NDC numbers because most HCPCS codes 
for single source drugs include only one NDC in order to collect 
rebates.
    Section 1927(a)(7)(C) of the Act requires that, beginning January 
1, 2007, States must provide for the submission of claims data with 
respect to physician-administered drugs (both single source and 
multiple source drugs) using NDC numbers, unless the Secretary 
specifies that an alternative coding system can be used. The Secretary 
does not plan to specify an alternative coding system because we 
believe that NDC numbers are well established in the medical community 
and provide States the most useful information to collect rebates.
    Section 1927(a)(7)(B) of the Act requires the Secretary, by January 
1, 2007, to publish a list of the 20 multiple source physician-
administered drugs with the highest dollar volume dispensed under the 
Medicaid program. We propose that the list will be developed by the 
Secretary using data from the Medicaid Statistical Information System 
and published on the CMS Web site.
    Section 1927(a)(7)(B)(ii) of the Act (when read with other DRA 
amendments) requires that, effective January 1, 2008, in order for FFP 
to be available, States must provide for the submission of claims for 
physician-administered multiple source drugs using NDC numbers for 
those drugs with the highest dollar volume listed by the Secretary.
    We propose, for the purpose of this section, that the term 
``physician-administered drugs'' be defined as covered outpatient drugs 
under section 1927(k)(2) of the Act (many are also covered by Medicare 
Part B) that are typically furnished incident to a physician's service. 
These drugs are usually injectable or intravenous drugs administered by 
a medical professional in a physician's office or other outpatient 
clinical setting. Examples include injectables: Lupron acetate for 
depot suspension (primarily used to treat prostate cancer), epoetin 
alpha (injectable drug primarily used to treat cancer), anti-emetic 
drugs (injectable drug primarily used to treat nausea resulting from 
chemotherapy), intravenous drugs primarily used to treat cancer 
(paclitaxel and docetaxel), infliximab primarily used to treat 
rheumatoid arthritis, and rituximab primarily used to treat non-
Hodgkin's lymphoma. We believe that some oral self-administered drugs 
(administered in an outpatient clinical setting), such as oral anti-
cancer drugs, oral anti-emetic

[[Page 77189]]

drugs should also be included in the designation of physician-
administered drugs consistent with Part B policy and sections 
1861(s)(2)(Q) and (T) of the Act.
    Section 1927(a)(7)(D) of the Act allows the Secretary to grant 
States extensions if they need additional time to implement or modify 
reporting systems to comply with this section. We are not proposing any 
criteria for reviewing these extension requests as we expect that most, 
if not all States will be able to meet the statutory deadlines for 
collection of NDC numbers on claims. Most States are already collecting 
rebates for single source drugs that are provided in a physician's 
office. For multiple source drugs, the States have nearly two years 
following enactment of the DRA before FFP would be denied for the 20 
multiple source drugs specified by the Secretary as having the highest 
dollar volume.
    We expect that States will require physicians to submit all claims 
using NDC numbers, as using multiple billing systems would be 
burdensome for physicians and States. This will also advantage States 
because rebates will be collectible on all physician-administered 
drugs.
    For States not currently billing manufacturers for rebates on 
single source drugs, we believe that the Medicare Part B crosswalk may 
be helpful to crosswalk HCPCS codes to NDC numbers. This crosswalk may 
be found on the CMS Web site at http://new.cms.hhs.gov/McrPartBDrugAvgSalesPrice/02_aspfiles.asp.
    To implement the provisions set forth in section 6002, we propose a 
new Sec.  447.520. In Sec.  447.520(a), we would require States to 
require that claims for physician-administered drugs be submitted using 
codes that identify the drugs sufficiently to bill a manufacturer for 
rebates in order for the State to receive FFP. In Sec.  447.520(b), we 
would require States to require providers to submit claims using NDC 
numbers. In Sec.  447.520(c), we would allow States that require 
additional time to comply with the requirements of this section to 
apply to the Secretary for an extension.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), 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 the OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> 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:

Requirements for Manufacturers (Sec.  447.510)

    Proposed Sec.  447.510 states that a manufacturer must report, 
electronically, product and pricing information to CMS not later than 
30 days after the end of the rebate period. In addition, customary 
prompt pay discounts and nominal prices must be reported quarterly. 
Detailed information pertaining to the manufacturer's reporting 
requirements is located under Sec. Sec.  447.510(a), (b), (c), (d), and 
(e).
    The burden associated with these new requirements is the time and 
effort it would take for a drug manufacturer to gather product and 
pricing information and submit it to CMS in an electronic format. We 
estimate that these requirements would affect the approximately 550 
drug manufacturers that currently participate in the Medicaid Drug 
Rebate Program. Our current reporting and recordkeeping hour burden for 
each manufacturer in the Medicaid Drug Rebate Program is 71 hours per 
quarter or 284 hours annually. We believe the new reporting 
requirements will require less than half of this time. Specifically, we 
believe it would take each manufacturer 31 hours per quarter or 124 
hours annually to report additional new information to CMS. The total 
estimated burden on all drug manufacturers associated with the new 
requirements under Sec.  447.510 is 68,200 annual hours.
    Section 447.510(f) requires a manufacturer to retain records for 
ten years from the date the manufacturer reports data to CMS for that 
rebate period. The ten-year time frame applies to a manufacturer's 
quarterly and monthly submissions of pricing data, as well as any 
revised quarterly pricing data subsequently submitted to CMS. As stated 
under Sec.  447.510(f)(2), there are certain instances when records 
must be maintained beyond the ten-year period.
    While this requirement is subject to the PRA, the retention of 
quarterly data it is not a new requirement. While this requirement will 
now also apply to monthly AMP data, we believe a similar set of data is 
now retained to support the quarterly retention requirement. Therefore, 
we believe this regulation imposes no additional burden on the drug 
manufacturer.

FFP: Conditions Relating to Physician-Administered Drugs. (Sec.  
447.520)

    Section 447.520 requires providers, effective January 1, 2007, to 
submit claims to the State for physician-administered single source 
drugs and the 20 multiple source drugs identified by the Secretary 
using NDC numbers.
    Assuming all States impose this requirement, the burden associated 
with this requirement is the time and effort it would take for a 
physician's office, hospital outpatient department or other entity 
(e.g., non profit facilities) to include the NDC on claims submitted to 
the State. We estimate this requirement would affect an excess of 
20,000 physicians, hospitals with outpatient departments and other 
entities that would submit approximately 3,910,000 claims annually. We 
believe this would take approximately 15 seconds per claim. We 
estimated the cost based on the average annual wage and benefits paid 
for office and administrative support services in 2006 of $21.14 per 
hour (http://www.bls.gov/news.release/pdf/ecec.pdf). The per claim cost 
would be under 9 cents.
    Section 447.520(c) allows States requiring additional time to 
comply with the requirements of this section to apply for an extension. 
The burden associated with this requirement is the time and effort it 
would take for each State to apply for a one-time extension. We 
estimate that it would take five hours for each State to apply for the 
extension; however, we believe that no State will apply. Therefore, we 
believe this requirement to be exempt as specified at 5 CFR 
1320.3(c)(4).
    We have submitted a copy of this proposed rule to the OMB for its 
review of the information collection requirements described above. 
These requirements are not effective until they have been approved by 
the OMB.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following: Centers for 
Medicare & Medicaid Services, Office of Strategic Operations and 
Regulatory Affairs, Division of Regulations Development, Attn: Melissa 
Musotto, [CMS-2238-P], Room C4-26-05, 7500 Security Boulevard, 
Baltimore, MD

[[Page 77190]]

21244-1850; and Office of Information and Regulatory Affairs, Office of 
Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Katherine Astrich, CMS Desk Officer, CMS-
2238-P, <a href="/cdn-cgi/l/email-protection#7912180d111c0b10171c26180a0d0b101a113916141b571c1609571e160f"><span class="__cf_email__" data-cfemail="e68d87928e83948f8883b9879592948f858ea6898b84c8838996c8818990">[email protected]</span></a>. Fax (202) 395-6974.

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'' February 20, 2007, and, 
when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

V. Regulatory Impact Analysis

    [If you choose to comment on issues in this section, please include 
the caption ``Impact Analysis'' at the beginning of your comments].

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Act, the Unfunded Mandates Reform Act of 1995 
(Pub. L. 104-4), Executive Order 13132, and the Congressional Review 
Act (CRA, 5 U.S.C. 804(2)).
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs 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). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
``economically significant'' effects ($100 million or more in any 1 
year). We believe this rule will have an economically significant 
effect. We believe the rule would save $8.4 billion over the next five 
years ($4.93 billion Federal savings and $3.52 billion State savings as 
shown in the table below). This figure represents a 5.6 percent 
reduction in total Medicaid drug expenditures in Federal fiscal years 
2007-2011. We consider this proposed rule to be a major rule for 
purposes of the CRA.

                                                         State and Federal Savings Over 5 Years
                                                                      [In millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                2007-11
           DRA section and provision                       FFY Federal State               2007       2008       2009       2010       2011      Total
                                                                                                                                                savings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Section 6001--Federal Upper Payment Limits and  Federal...............................       $465       $750     $1,075     $1,155     $1,250     $4,695
 Other Provisions.
                                                State.................................        330        535        765        825        890      3,345
                                                                                       -----------------------------------------------------------------
                                                 Total................................        795      1,285      1,840      1,980      2,140      8,040
                                                                                       =================================================================
Section 6002--Rebates on Physician-             Federal...............................         18         19         20         22         24        103
 Administered Drugs.
                                                State.................................         13         14         15         16         18         76
                                                                                       -----------------------------------------------------------------
                                                 Total................................         31         33         35         38         42        179
                                                                                       =================================================================
Section 6003--Authorized Generics in Rebate     Federal...............................         10         25         28         32         36        131
 Best Price.
                                                State.................................          7         19         21         24         27         98
                                                                                       -----------------------------------------------------------------
                                                 Total................................         17         44         49         56         63        229
                                                                                       =================================================================
    Total Savings for FFY.....................  Federal...............................        493        794      1,123       1209       1310      4,929
                                                State.................................        350        568        801        865        935      3,519
                                                                                       -----------------------------------------------------------------
                                                 Total................................        843      1,362      1,924       2074       2245      8,448
--------------------------------------------------------------------------------------------------------------------------------------------------------

    All savings estimates were developed by the Office of the Actuary 
in CMS. We note that the Congressional Budget Office, in its estimates 
of the budgetary effects of these provisions of the DRA, reached an 
almost identical estimate for these years, about $4.8 billion in 
Federal outlay reduction compared to the CMS estimate of $4.9 billion.
    Savings estimates for section 6001 of the DRA--FULs and other 
provisions--were derived from simulations of the new FULs performed 
using price and utilization data from the Medicaid Drug Rebate Program 
combined with generic group codes from First DataBank. Percent savings 
from these simulations were applied to projected Medicaid prescription 
drug spending developed for the President's fiscal year 2007 budget. 
Savings were phased in over three years to allow for implementation 
lags. On the previous chart, the estimate for FFY 2007 through FFY 2010 
includes $5 million for the retail price survey.
    The savings estimates for section 6002 of the DRA--rebates on 
physician-administered drugs--are based on the 2004 OIG report, 
``Medicaid Rebates for Physician-Administered Drugs.'' A key finding of 
the report is the amount of additional rebates that could have been 
collected in 2001 if all States had collected rebates on physician-
administered drugs. This amount was then projected forward using 
historical data (2001-2005) and projections consistent with the 2007 
President's Budget forecast for Medicaid spending to develop the total 
estimated impact.
    The savings estimates for section 6003 of the DRA--Reporting of 
authorized generics for Medicaid rebates--are based on the consensus of 
Medicaid experts and the review of available and relevant data. After 
estimating the impact of the proposal in the first year of 
implementation, the total impact was projected using assumptions 
consistent with the 2007 President's Budget

[[Page 77191]]

forecast for Medicaid spending as well as adjustments given that the 
proposal is limited to a subset of the prescription drug market.
    None of the estimates include Federal or State administrative 
costs. We believe these costs would be small as they involve changes in 
work processes rather than new activities. The resulting program 
savings would be many times these costs.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses and other small entities if a proposed or final 
rule would have a ``significant impact on a substantive 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 business entities are potentially affected by this regulation. 
They are small pharmaceutical manufacturers participating in the 
Medicaid Drug Rebate Program, small retail pharmacies, and physicians 
and other practitioners (including small hospitals or other entities 
such as non-profit providers) that bill Medicaid for physician-
administered drugs. We will discuss each type of business in turn.
    According to the Small Business Administration's (SBA) size 
standards, drug manufacturers are small businesses if they have fewer 
than 500 employees (http://www.sba.gov/size/sizetable2002.html). 
Approximately 550 drug manufacturers participate in the Medicaid Drug 
Rebate Program. We believe that most of these manufacturers are small 
businesses. We anticipate that this rule would have a small impact on 
small drug manufacturers. The rule would require all drug manufacturers 
participating in the Medicaid Drug Rebate Program to submit pricing 
information (AMP) on each of their drug products on a monthly basis. 
Currently drug manufacturers are required to submit similar information 
quarterly. In addition, drug manufacturers would be required to submit 
two additional pricing data elements--customary prompt pay discounts 
and nominal prices--on each of their drugs on a quarterly basis. We 
believe that drug manufacturers currently have these data; therefore, 
the new requirement does not require new data collection. Rather, it 
simply requires that existing information be reported to CMS. For this 
reason, we believe the burden to be minimal. In addition, the proposed 
regulation would affect the level of rebates due from manufacturers. 
The DRA provides that customary prompt pay discounts be excluded from 
AMP. This would result in higher AMPs and, consequently, higher rebate 
payments. We have been told informally by manufacturers that customary 
prompt pay discounts are generally about 2 percent. We have found no 
independent source to confirm this percentage. We also do not know what 
percent of sales qualify for customary prompt pay discounts. Based on 
this limited information, we believe that the removal of customary 
prompt pay discounts would cost manufacturers up to $160 million (2 
percent of $8 billion in rebate payments annually). In this proposed 
regulation we also would remove sales to nursing home pharmacies from 
AMP. We have been told by industry representatives that nursing home 
pharmacies receive larger discounts than other sectors, thus resulting 
in an increase in AMP from this change. However, because we have no 
independent data on the cost of drugs to nursing home pharmacies, we 
cannot quantify the effect of this provision other than to say that we 
believe it would increase rebates owed by drug manufacturers.
    According to the SBA's size standards, a retail pharmacy is a small 
business if it has revenues of $ 6.5 million or less in 1 year (http://www.sba.gov/size/sizetable2002.html). The SBA estimates that there are 
about 18,000 small pharmacies. These pharmacies would be affected by 
this regulation as the law will result in lower FULs for most drugs 
subject to the limits, thus reducing Medicaid payments to pharmacies 
for drugs. The revision to the FULs would generally reduce those limits 
and, thereby, reduce Medicaid payment for drugs subject to the limits. 
The savings for section 6001 of the DRA reflect this statutory change. 
The other provisions concerning payment for drugs would provide States 
two new data points to use to set payment rates. Beginning in January 
2007, States may use AMP and retail survey prices in their payment 
methodologies. The savings for section 6001 of the DRA do not reflect 
decreases to State payments for drugs not on the FUL list. As analyzed 
in detail below, we believe that these legislatively mandated section 
6001 savings will potentially have a ``significant impact'' on some 
small, independent pharmacies. The analysis in this section, together 
with the remainder of the preamble, constitutes an Initial Regulatory 
Flexibility Analysis (IRFA) for purposes of compliance with the RFA.
    According to the SBA's size standards, physician practices are 
small businesses if they have revenues of $9 million or less in 1 year 
(http://www.sba.gov/size/sizetable2002.html). Nearly all of the 
approximately 20,000 physician's practices that specialize in oncology, 
rheumatology and urology may experience some administrative burden due 
to new requirements that claims include the NDC for drugs administered 
by these physicians. These practices would be required to transfer the 
NDC code for drugs administered by a physician to the electronic or 
paper claim. We estimate that 3,910,000 claims would be submitted a 
year. We derived this number by multiplying the 23 million annual Part 
B claims by the percentage (17) of Medicare beneficiaries who are also 
Medicaid beneficiaries. We believe most of the Medicaid beneficiaries 
who receive physician-administered drugs are also in Medicare. We then 
assume that it would take 15 seconds per claim. Multiplying 3,910,000 
by 15 seconds equals 58,650,000 seconds or 16,292 hours (58,650,000/
3600 seconds per hour). We multiplied 16,292 hours by the hourly wage 
and benefit rate of $21.14 for office and administrative staff 
published by the Department of Labor, Bureau of Labor Statistics for 
March 2006 to estimate the annual cost to be $344,000. We divided the 
total cost of $344,000 by the 3,910,000 claims to estimate the cost per 
claim would be under 9 cents. Calculated another way, the annual cost 
per physician practice would be under $20 ($344,000 divided by 20,000 
equals about $17). Accordingly, we believe that there is no 
``significant impact'' on these physicians.
    According to the SBA's size standards, hospitals are small 
businesses if they have yearly revenue of $31.5 million or less (http://www.sba.gov/size/sizetable2002.html). As with physician practices, 
outpatient units of hospitals would need to include NDCs on claims for 
physician-administered drugs. Outpatient hospital claims for physician-
administered drugs are included in the 3,910,000 annual total claims 
discussed in the previous paragraph. However, we believe that these 
costs could be reduced or eliminated with a one-time systems change to 
capture this code in the billing system. In any case, the total cost of 
this change to hospitals would be small, and we believe that there is 
no ``significant impact'' on hospitals.
    Other small entities such as non-profit providers may also be 
affected by this provision. We do not have data to quantify how many of 
the 3,910,000 annual total claims are submitted by

[[Page 77192]]

these entities. In any case, the cost would be under 9 cents per claim.
    Section 1102(b) of the Act requires us to prepare an RIA 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 Core-Based Statistical Area and has fewer than 100 beds. There are 
approximately 700 small rural hospitals that meet this definition. We 
do not know how many of these hospitals have outpatient departments. 
However, we believe that this rule would not have a significant impact 
on small rural hospitals because the only provision that would affect 
small rural hospitals is the requirement for those hospitals to include 
the NDC on bills for drugs administered by physicians in the outpatient 
department. As the national annual cost of this provision is estimated 
at $344,000, the impact on small rural hospitals would be minimal.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates on States and private entities require 
spending in any one year of $100 million in 1995 dollars, updated 
annually for inflation. That threshold level is currently approximately 
$125 million. This proposed rule would mandate that drug manufacturers 
provide information on drug prices, and that these data be used in 
calculating FULs. However, our estimate of costs to manufacturers (see 
next section) falls far below the threshold and we anticipate this rule 
would save States $3.5 billion over the 5-year period from October 1, 
2006 through September 30, 2011.
    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. Since this proposed rule would impose only minimal new 
administrative burden on States and yield substantial savings to 
States, we believe that these costs can be absorbed by States from the 
substantial savings they would accrue.

B. Anticipated Effects

1. Effects on Drug Manufacturers
    As previously indicated, approximately 550 drug manufacturers 
participate in the Medicaid Drug Rebate program. The rule would require 
all drug manufacturers participating in the Medicaid Drug Rebate 
Program to submit pricing information (AMP) on each of their drug 
products on a monthly basis. Currently drug manufacturers are required 
to submit similar information quarterly. In addition, drug 
manufacturers would be required to submit two additional pricing data 
elements--customary prompt pay discounts and nominal prices--on each of 
their drugs on a quarterly basis. We believe that drug manufacturers 
currently have these data; therefore, the new requirement would not 
require new data collection. Rather it simply requires that existing 
information be reported to CMS. For this reason, we believe the burden 
to be minimal. The estimated startup burden to the manufacturers is 
$27.5 million for a one-time systems upgrade, or $50,000 for each of 
the 550 manufacturers that participate in the Medicaid Drug Rebate 
Program. To estimate the ongoing burden, we expect that the 
manufacturers would each spend 208 hours annually (114,400 total hours 
annually) in complying with these requirements. The estimated annual 
operational expenses are $5.7 million, which is 114,400 total annual 
hours multiplied by $37.50 per labor hour in wages and benefits, or 
$4.3 million in labor burden, plus $1.4 million in technical support.
    In addition, the proposed regulation would affect the level of 
rebates due from manufacturers. The DRA provides that customary prompt 
pay discounts be excluded from AMP. This would result in higher AMPs 
and, consequently, higher rebate payments. We have been told informally 
by manufacturers that customary prompt pay discounts are generally 
about two percent. We have found no independent source to confirm this 
percentage. We also do not know what percent of sales qualify for 
customary prompt pay discounts. Based on this limited information, we 
believe that the removal of customary prompt pay discounts would cost 
manufacturers up to $160 million (2 percent of $8 billion in rebate 
payments annually). In this proposed regulation, we also would remove 
sales to nursing home pharmacies from AMP. We have been told by 
industry representatives that nursing home pharmacies receive larger 
discounts than other sectors, thus resulting in an increase in AMP. 
However, because we have no independent data on the cost of drugs to 
nursing home pharmacies, we cannot quantify the effect of this 
provision other than to say that we believe it would increase rebates 
owed by drug manufacturers.
2. Effects on State Medicaid Programs
    States share in the savings from this rule. As noted in the table 
above, we estimate five-year State savings of over $3.5 billion. State 
administrative costs associated with this regulation are minor as 
States currently pay based on a FUL for drugs subject to that limit, 
determine their drug reimbursement rates, and collect claims 
information on physician-administered drugs.
3. Effects on Retail Pharmacies
    Retail pharmacies would be affected by this regulation, as the law 
will result in lower FULs for most drugs subject to the limits, thus 
reducing Medicaid payments to pharmacies for drugs. The revision to the 
FULs would generally reduce those limits and, thereby, reduce Medicaid 
payment for drugs subject to the limits. The savings for section 6001 
of the DRA reflect this statutory change. The other provisions 
concerning payment for drugs would provide States two new data points 
to use to set payment rates. Beginning in January 2007, States may use 
AMP and retail survey prices in their payment methodologies. The 
savings for section 6001 of the DRA do not reflect decreases to State 
payments for drugs not on the FUL list that may result if States change 
their payment methodologies.
    The savings to the Medicaid program would largely be realized 
through lower payments to pharmacies. As shown earlier in this 
analysis, the annual effect of lower FULs and related changes will 
likely reduce pharmacy revenues by about $800 million in 2007, 
increasing to a $2 billion reduction annually by 2011. These 
reductions, while large in absolute terms, represent only a small 
fraction of overall pharmacy revenues. According to recent data 
summarized by the National Association of Chain Drug Stores (http://www.nacds.org/wmspage.cfm?parm1=507), total retail prescription sales 
in the United States, including chain drug stores, independent drug 
stores, supermarket, and mail order, totaled about $230 billion in 
2005. Assuming, conservatively, that sales will rise at only five 
percent a year, 2007 sales would be over $250 billion and 2011 sales 
well over $300 billion. Thus, the effect of this proposed rule would be 
to reduce retail prescription drug revenues by less than one percent, 
on average. Actual revenue losses would be even smaller for two 
reasons. First, almost all of these stores sell goods other than 
prescription drugs, and overall sales average more than twice as much 
as

[[Page 77193]]

prescription drug sales. Second, pharmacies have the ability to 
mitigate the effects of the proposed rule by changing purchasing 
practices. The 250 percent FUL will typically be lower than the prices 
available to pharmacies only when one or more very low cost generic 
drugs are included in the calculation. Pharmacies will often be able to 
switch their purchasing to the lowest cost drugs and mitigate the 
effect of the sales loss by lowering costs.
    Although it is clear that the effects will be small on the great 
majority of pharmacies, whether chain or independent, we are unable to 
estimate quantitatively effects on ``small'' pharmacies, particularly 
those in low-income areas where there are high concentrations of 
Medicaid beneficiaries. We request any information that may help us 
better assess those effects before we make final decisions. Because of 
these uncertainties, we have concluded that this proposed rule is 
likely to have a ``significant impact'' on some pharmacies.
4. Effects on Physicians
    This regulation would affect physician practices that provide and 
bill Medicaid for physician-administered drugs. This includes about 
20,000 physicians as well as hospitals with outpatient departments. The 
effect on physicians is the same as discussed in section A--Overall 
Impact above for small businesses because all or nearly all physician 
offices are small businesses.
5. Effects on Hospitals
    This regulation would affect hospitals with outpatient departments 
that provide and bill Medicaid for physician-administered drugs. As 
discussed above, hospitals with outpatient departments would need to 
include the NDC on claims for physician-administered drugs. We believe 
this would need to be done manually or would require a one-time systems 
change. We believe the cost of adding the NDC to each claim would be 
minimal. We are not able to estimate the cost to make this change. We 
also note that CMS has encouraged States to collect information on 
physician-administered drug claims to enable them to collect rebates. 
Some States have required that NDCs be included on claims and others 
are in the process of doing so. We expect that, in the absence of the 
DRA requirement, the number of States requiring NDCs on these claims 
would have increased.
6. Effects on Small Business Entities
    As previously discussed, for purposes of the RFA, three types of 
small business entities are potentially affected by this regulation. 
This regulation would affect small pharmaceutical manufacturers 
participating in the Medicaid Drug Rebate Program, small retail 
pharmacies, and physicians and other practitioners (including small 
hospitals or other entities such as non-profit providers).
    According to the SBA's size standards, we believe that most of the 
550 pharmaceutical manufacturers in the Medicaid Drug Rebate Program 
are small businesses. We previously indicated that this rule impacts 
drug manufacturers by requiring them to submit pricing information 
(AMP) on each of their drug products on a monthly basis with an 
estimated impact that is minimal. The rule would also increase the 
amount of drug rebates that manufacturers would pay as a result of 
removing customary prompt pay discounts and nursing home sales from 
AMP, which is used in the rebate calculation. The exclusion of 
customary prompt pay discounts would cost manufacturers up to $160 
million (2 percent of $8 billion in rebate payments annually). 
Additional detail regarding the effects of this proposed rule for the 
determination of drug prices and calculation of drug rebate liability 
for drug manufacturers is described in the preamble under ``Definition 
of Retail Pharmacy Class of Trade and Determination of AMP.''
    We estimate that 18,000 small retail pharmacies would be affected 
by this regulation. However, we are unable to specifically estimate 
quantitative effects on small retail pharmacies, particularly those in 
low income areas where there are high concentrations of Medicaid 
beneficiaries. We request any information that may help us better 
assess those effects before we make final decisions. The preamble under 
``Definition of Retail Pharmacy Class of Trade and Determination of 
AMP'' provides additional information regarding the entities included 
in the retail pharmacy class of trade and the discounts or other price 
concessions for drugs provided to the retail pharmacy class of trade. 
As shown earlier, the annual effect of lower FULs and related changes 
will likely reduce overall pharmacy revenues by about $800 million in 
2007, increasing to a $2 billion reduction annually by 2011.
    Nearly all of the approximately 20,000 physician practices that 
specialize in oncology, rheumatology and urology are considered small 
businesses. The rule would impose some administrative burden on these 
practices due to new requirements that claims include the NDC for 
physician-administered drugs. As shown earlier, we believe that the 
annual cost per claim would be under 9 cents and the annual cost per 
physician practice would be under $20. Accordingly, we believe that 
there is no significant impact on these physician practices.
    We also previously indicated that this rule would not have a 
significant impact on the operations of small rural hospitals. There 
are approximately 700 small rural hospitals that meet the small 
business standard. As previously discussed, small rural hospitals would 
need to include the NDC on claims for physician-administered drugs 
through outpatient departments. We do not have data to quantify how 
many of the overall claims for physician-administered drugs are 
submitted by these 700 small rural hospitals. In any case, the cost 
would be under 9 cents per claim.
    The following chart depicts the number of small entities and the 
estimated economic impact for each category of small entity affected by 
this rule.

------------------------------------------------------------------------
                                     Number
          Small entity            affected  by      Estimated economic
                                      rule                impact
------------------------------------------------------------------------
Pharmaceutical Manufacturers in             550  $160 million (2 percent
 Medicaid Drug Rebate Program.                    of $8 billion) higher
                                                  rebates result from
                                                  removal of customary
                                                  prompt pay discounts
                                                  from rebate
                                                  calculations.
                                                 Independent cost data
                                                  not available for
                                                  excluded nursing home
                                                  drug sales that are
                                                  expected to increase
                                                  rebate cost.
Small Retail Pharmacies........          18,000  Reduces overall
                                                  pharmacy revenues by
                                                  about $800 million in
                                                  2007 increasing to $2
                                                  billion annually by
                                                  2011.
                                                 Unable to
                                                  quantitatively
                                                  estimate effects on
                                                  small retail
                                                  pharmacies,
                                                  particularly in low
                                                  income areas.

[[Page 77194]]

 
Physicians in their Offices,             20,000  Under 9 cents per claim
 Hospital Outpatient Settings                     to enter NDC number.
 or Other Entities (e.g., Non-                   About $17 annual cost
 profit Facilities) that                          per physician practice
 Specialize in Oncology,                          to enter NDC number on
 Rheumatology and Urology.                        claims for physician-
                                                  administered drugs.
                                                 Total estimated impact
                                                  is $344,000.
Small Rural Hospitals..........             700  Minimal impact.
------------------------------------------------------------------------

C. Alternatives Considered

    We considered a number of different policies and approaches during 
the development of the proposed rule.
    With regard to the definition of AMP, we considered one definition 
for quarterly AMP and a different definition for monthly AMP. However, 
we believe the better reading of statute is for AMP to be defined the 
same way for quarterly or monthly reporting.
    We also considered redefining the entities included in ``retail 
pharmacy class of trade'' for purposes of the definition of AMP. 
Options considered included whether to include or exclude sales to 
nursing home pharmacies, PBMs, and mail order pharmacies. We chose to 
propose to exclude sales to nursing home pharmacies.
    We considered retaining the current base date AMP rather than 
allowing manufacturers to recalculate their base date AMP to reflect 
the revised definition of AMP. However, we decided that retaining the 
current base date AMP is unwarranted because it would create a 
financial burden on manufacturers that was not intended by section 6001 
of the DRA.
    We considered several options concerning the timeframe to be 
covered by the monthly AMP. We considered requiring manufacturers to 
report the same quarterly AMP three times over the quarter, and reflect 
any changes to the quarterly AMP vis-a-vis the monthly reports. 
However, we did not believe that this timeframe would provide useful 
pricing information to States. We also considered establishing a 
rolling three-month period for the monthly AMP. While this may yield 
updated pricing information, we felt this would be too burdensome for 
manufacturers to implement.
    We considered proposing to extend the nominal price exclusion from 
best price to other facilities or entities that the Secretary 
determines to be safety net providers to which sales of drugs at 
nominal prices would be appropriate. However, we were concerned that 
expanding the list of entities eligible for nominal pricing would drive 
up best price, which would effectively lower the amount of rebates 
manufacturers pay for Medicaid drugs.
    We considered using a non-weighted AMP, which is specific to a 
package size, to establish the FUL. However, we decided to continue to 
base AMP on all package sizes for each drug. We did not find any 
indication that the Congress intended to change how package size is 
used for AMP. Such a change would be burdensome on manufacturers and 
would have no impact on how States pay for drugs.
    We considered not making an exception to using the lowest AMP for 
drugs in a FUL group to establish the upper limit for the group. 
However, we were concerned that low outlier prices might result in only 
one drug being available at or near the FUL price and that a sufficient 
supply of the drug to meet the national Medicaid need may not be 
available at that price.
    As discussed extensively earlier in the preamble, we believe that 
mail order sales and the activities of PBMs are an important part of 
the wholesale and retail markets for drugs. They reflect the realities 
of today's marketplace for consumers of prescription drugs. However, 
there are difficulties in dealing with both segments of the market and 
we specifically request comments on ways to handle these components of 
the marketplace. We also welcome comments on any options that would 
maintain the overall savings of the proposed rule, appropriately 
encompass the entire retail marketplace, and reduce burden on small 
pharmacies.

D. Other Requirements in the Regulatory Flexibility Act

    The RFA lists five general requirements for an IRFA and four 
categories of burden-reducing alternatives. We know of no relevant 
Federal rules that duplicate, overlap, or conflict with the proposed 
rule. The preceding analysis, together with the rest of this preamble, 
addresses all these general requirements.
    We have not, however, addressed the various categories of burden 
reduction listed in the RFA as appropriate for IRFAs. These 
alternatives, such as an exemption from coverage for small entities, 
establishment of less onerous requirements for small entities, or use 
of performance rather than design standards, simply do not appear to 
apply in a situation where uniform payment standards are being 
established. However, we welcome comments with suggestions for 
improvements we can make, consistent with the statute, to minimize any 
unnecessary burdens on pharmacies or other affected entities.
E. Accounting Statement
    As required by OMB's Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in the table below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this proposed rule. This 
table provides our best estimate of the decreases in Medicaid payments 
under sections 6001 `` 6003 of the DRA. All expenditures are classified 
as transfers to the Federal and State Medicaid programs from retail 
pharmacies and drug manufacturers.

             Accounting Statement: Classification of Estimated Expenditures, From CY 2007 to CY 2011
                                               [In millions/year]
----------------------------------------------------------------------------------------------------------------
                                                               Discount
                   Category                      Transfers       rate               From whom to whom?
                                                              (percent)
----------------------------------------------------------------------------------------------------------------
Federal Annualized Monetized Transfers........       $957.8            7  Retail Pharmacies and Drug
                                                                           Manufacturers to the Federal
                                                                           Government.

[[Page 77195]]

 
                                                      973.6            3
Other Annualized Monetized Transfers..........        683.8            7  Retail Pharmacies and Drug
                                                                           Manufacturers to the State
                                                                           Governments.
                                                      695.1            3
----------------------------------------------------------------------------------------------------------------

F. Conclusion

    We estimate savings from this regulation of $8.4 billion over five 
years, $4.9 billion to the Federal Government and $3.5 billion to the 
States. Most of these savings result from a change in how the FULs on 
multiple source drugs are calculated and from a change in how 
authorized generic drugs are treated for AMP and best price. The 
majority of the savings would come from lower reimbursement to retail 
pharmacies. The provision on physician-administered drugs does not 
change the legal liability of drug manufacturers for paying rebates but 
would make it easier for States to collect these rebates.
    While the effects of this regulation are substantial, they are a 
result of changes to the law.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the OMB.

List of Subjects in 42 CFR Part 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs--health, Health facilities, Health professions, Medicaid, 
Reporting and recordkeeping requirements, Rural areas.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services propose to amend 42 CFR chapter IV as set forth 
below:

PART 447--PAYMENTS FOR SERVICES

    1. The authority citation for part 447 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

Subpart F--Payment Methods for Other Institutional and Non-
institutional Services

    2. Section 447.300 is revised to read as follows:


Sec.  447.300  Basis and purpose.

    In this subpart, Sec.  447.302 through Sec.  447.325 and Sec.  
447.361 implement section 1902(a)(30) of the Act, which requires that 
payments be consistent with efficiency, economy and quality of care. 
Section 447.371 implements section 1902(a)(13)(F) of the Act, which 
requires that the State plan provide for payment for rural health 
clinic services in accordance with regulations prescribed by the 
Secretary.


Sec.  447.301  [Removed]

    3. Section 447.301 is removed.


Sec.  447.331  [Removed]

    4. Section 447.331 is removed.


Sec.  447.332  [Removed]

    5. Section 447.332 is removed.


Sec.  447.333  [Removed]

    6. Section 447.333 is removed.


Sec.  447.334  [Removed]

    7. Section 447.334 is removed.
    8. Subpart I is revised to read as follows:
Subpart I--Payment for Drugs
Sec.
447.500 Basis and purpose.
447.502 Definitions.
447.504 Determination of AMP.
447.505 Determination of best price.
447.506 Authorized generic drugs.
447.508 Exclusion from best price of certain sales at a nominal 
price.
447.510 Requirements for manufacturers.
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.

Subpart I--Payment for Drugs


Sec.  447.500  Basis and purpose.

    (a) Basis. This subpart--
    (1) Interprets those provisions of section 1927 of the Act that set 
forth requirements for drug manufacturers' calculating and reporting 
average manufacturer prices (AMPs) and 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.
    (b) Purpose. This subpart specifies certain requirements in the 
Deficit Reduction Act of 2005 and other requirements pertaining to 
Medicaid payment for drugs.


Sec.  447.502  Definitions.

    Bona fide service fees mean 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.
    Brand name drug means a single source or innovator multiple source 
drug.
    Bundled sale means an arrangement regardless of physical packaging 
under which the rebate, discount, or other price concession is 
conditioned upon the purchase of the same drug or drugs of different 
types (that is, at the nine-digit National Drug Code (NDC) level) or 
some other performance requirement (for example, the achievement of 
market share, inclusion or tier placement on a formulary), or, where 
the resulting discounts or other price concessions are greater than 
those which would have been available had the bundled drugs been 
purchased separately or outside the bundled arrangement. For bundled 
sales, the discounts are allocated proportionally to the dollar value 
of the units of each drug sold under the bundled arrangement. For 
bundled sales where multiple drugs are discounted, the aggregate value 
of all the discounts should be proportionately allocated across all the 
drugs in the bundle.
    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

[[Page 77196]]

calendar quarter for which the rebate is paid.
    Dispensing fee means the fee which--
    (1) Is incurred at the point of sale 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 recipient. Pharmacy costs include, but are not limited to, 
any 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.
    Estimated acquisition cost means 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.
    Innovator multiple source drug means a multiple source drug that 
was originally marketed under an original new drug application (NDA) 
approved by the Food and Drug Administration (FDA). It includes a drug 
product marketed by any cross-licensed producers or distributors 
operating under the NDA and a covered outpatient drug approved under a 
product license approval, establishment license approval or antibiotic 
drug approval.
    Manufacturer means any entity that possesses legal title to the NDC 
for a covered drug or biological product and--
    (1) Is engaged in the production, preparation, propagation, 
compounding, conversion, or processing of covered outpatient drug 
products, either directly or indirectly by extraction from substances 
of natural origin, or independently by means of chemical synthesis, or 
by a combination of extraction and chemical synthesis; or
    (2) Is engaged in the packaging, repackaging, labeling, relabeling, 
or distribution of covered outpatient drug products and is not a 
wholesale distributor of drugs or a retail pharmacy licensed under 
State law.
    (3) With respect to authorized generic products, the term 
``manufacturer'' will also include the original holder of the NDA.
    (4) With respect to drugs subject to private labeling arrangements, 
the term ``manufacturer'' will also include the entity that does not 
possess legal title to the NDC.
    Multiple source drug means, with respect to a rebate period, 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, see the FDA's most recent 
publication of ``Approved Drug Products with Therapeutic Equivalence 
Evaluations'' which is available at http://www.fda.gov/cder/orange/default.htm or can be viewed at the FDA's Freedom of Information Public 
Reading Room at 5600 Fishers Lane, rm. 12A-30, Rockville, MD 20857;
    (2) Is pharmaceutically equivalent and bioequivalent, as determined 
by the FDA; and
    (3) Is sold or marketed in the United States during the rebate 
period.
    National drug code (NDC) means the 11-digit numerical code 
maintained by the FDA that indicates the labeler, product, and package 
size, unless otherwise specified in this part as being without respect 
to package size (i.e., the nine-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 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.
    Rebate period means a calendar quarter.
    Single source drug means a covered outpatient drug that is produced 
or distributed under an original NDA approved by the FDA, including a 
drug product marketed by any cross-licensed producers or distributors 
operating under the NDA. It also includes a covered outpatient drug 
approved under a product license approval, establishment license 
approval, or antibiotic drug approval.


Sec.  447.504  Determination of AMP.

    (a) 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)) for a 
calendar quarter, the average price received by the manufacturer for 
the drug in the United States from wholesalers for drugs distributed to 
the retail pharmacy class of trade. AMP shall be determined without 
regard to customary prompt pay discounts extended to wholesalers. AMP 
shall be calculated to include all sales and associated discounts and 
other price concessions provided by the manufacturer for drugs 
distributed to the retail pharmacy class of trade unless the sale, 
discount, or other price concession is specifically excluded by statute 
or regulation or is provided to an entity specifically excluded by 
statute or regulation.
    (b) Average unit price means 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.
    (c) Customary prompt pay discount means any discount off the 
purchase price of a drug routinely offered by the manufacturer to a 
wholesaler for prompt payment of purchased drugs within a specified 
time.
    (d) Net sales means quarterly gross sales revenue less cash 
discounts allowed and all other price reductions (other than rebates 
under section 1927 of the Act or price reductions specifically excluded 
by statute or regulations) which reduce the amount received by the 
manufacturer.
    (e) Retail pharmacy class of trade means any independent pharmacy, 
chain pharmacy, mail order pharmacy, pharmacy benefit manager (PBM), or 
other outlet that purchases, or arranges for the purchase of, drugs 
from a manufacturer, wholesaler, distributor, or other licensed entity 
and subsequently sells or provides the drugs to the general public.
    (f) Wholesaler means any entity (including a pharmacy, chain of 
pharmacies, or PBM) to which the manufacturer sells, or arranges for 
the sale of, the covered outpatient drugs, but that does not relabel or 
repackage the covered outpatient drug.
    (g) Sales, rebates, discounts, or other price concessions included 
in AMP. Except with respect to those sales identified in paragraph (h) 
of this section, AMP for covered outpatient drugs shall include--
    (1) Sales to wholesalers, except for those sales that can be 
identified with adequate documentation as being subsequently sold to 
any of the excluded entities as specified in paragraph (h) of this 
section;
    (2) Sales to other manufacturers who act as wholesalers and do not

[[Page 77197]]

repackage/relabel under the purchaser's NDC, including private labeling 
agreements;
    (3) Sales (direct and indirect) to hospitals, where the drug is 
used in the outpatient pharmacy;
    (4) Sales at nominal prices to any entity except a covered entity 
described in section 340B(a)(4) of the Public Health Service Act 
(PHSA), an intermediate care facility for the mentally retarded (ICF/
MR) providing services as set forth in Sec.  440.150 of this chapter, 
or a State-owned or operated nursing facility providing services as set 
forth in Sec.  440.155 of this chapter;
    (5) Sales to retail pharmacies including discounts or other price 
concessions that adjust prices either directly or indirectly on sales 
of drugs to the retail pharmacy class of trade;
    (6) Discounts, rebates, or other price concessions to PBMs 
associated with sales for drugs provided to the retail pharmacy class 
of trade;
    (7) Sales directly to patients;
    (8) Sales to outpatient clinics;
    (9) Sales to mail order pharmacies;
    (10) Rebates, discounts, or other price concessions (other than 
rebates under section 1927 of the Act or as otherwise specified in the 
statute or regulations) associated with sales of drugs provided to the 
retail pharmacy class of trade;
    (11) Manufacturer coupons redeemed by any entity other than the 
consumer that are associated with sales of drugs provided to the retail 
pharmacy class of trade; and
    (12) Sales and associated rebates, discounts and other price 
concessions under the Medicare Part D, Medicare Advantage Prescription 
Drug Program (MA-PD), State Children's Health Insurance Program 
(SCHIP), State pharmaceutical assistance programs (SPAPs), and Medicaid 
programs that are associated with sales of drugs provided to the retail 
pharmacy class of trade (except for rebates under section 1927 of the 
Act or as otherwise specified in the statute or regulations).
    (h) Sales, rebates, discounts, or other price concessions excluded 
from AMP. AMP excludes--
    (1) Any prices on or after October 1, 1992, to the Indian Health 
Service (IHS), the Department of Veterans Affairs (DVA), a State home 
receiving funds under 38 U.S.C. 1741, the Department of Defense (DoD), 
the Public Health Service (PHS), or a covered entity described in 
subsection (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 to hospitals (direct and indirect), where the drug is 
used in the inpatient setting;
    (5) Sales to health maintenance organizations (HMOs), including 
managed care organizations (MCOs);
    (6) Sales to long-term care facilities, including nursing home 
pharmacies;
    (7) Sales to wholesalers where the drug is distributed to the non-
retail pharmacy class of trade;
    (8) Sales to wholesalers or distributors where the drug is 
relabeled under the wholesalers' or distributors' NDC number;
    (9) Manufacturer coupons redeemed by a consumer;
    (10) Free goods, not contingent upon any purchase requirement;
    (11) Bona fide service fees;
    (12) Customary prompt pay discounts extended to wholesalers; and
    (13) Returned goods when returned in good faith.
    (i) Further clarification of AMP calculation. (1) AMP includes cash 
discounts, free goods that are contingent on any purchase requirement, 
volume discounts, PBM price concessions, chargebacks, incentives, 
administrative fees, service fees, (except bona-fide service fees), 
distribution fees, and any other discounts or price reduction and 
rebates, other than rebates under section 1927 of the Act, which reduce 
the price received by the manufacturer for drugs distributed to the 
retail pharmacy class of trade.
    (2) AMP is calculated as a weighted average of prices for all the 
manufacturer's package sizes for each covered outpatient drug sold by 
the manufacturer during a rebate period. It is calculated as net sales 
divided by number of units sold, excluding goods or any other items 
given away unless contingent on any purchase requirements.
    (3) The manufacturer must adjust the AMP for a rebate period if 
cumulative discounts, rebates, or other arrangements subsequently 
adjust the prices actually realized.


Sec.  447.505  Determination of best price.

    (a) Best price means, with respect to a single source drug or 
innovator multiple source drug of a manufacturer (including any drug 
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 entity in the United States in any pricing structure (including 
capitated payments), in the same quarter for which the AMP is computed. 
Best price shall be calculated to include all sales and associated 
discounts and other price concessions provided by the manufacturer to 
any entity unless the sale, discount, or other price concession is 
specifically excluded by statute or regulation or is provided to an 
entity specifically excluded by statute or regulation from the rebate 
calculation.
    (b) For purposes of this section, 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 provisions of health care.
    (c) Prices included in best price. Except with respect to those 
prices identified in paragraph (d) of this section and Sec.  447.505 of 
this subpart, best price for covered outpatient drugs, includes--
    (1) Prices to wholesalers;
    (2) Prices to any retailer, including PBM rebates, discounts or 
other price concessions that adjust prices either directly or 
indirectly on sales of drugs;
    (3) Prices to providers (e.g., hospitals, HMOs/MCOs, physicians, 
nursing facilities, and home health agencies);
    (4) Prices available to non-profit entities;
    (5) Prices available to governmental entities within the United 
States;
    (6) Prices of authorized generic drugs;
    (7) Prices of sales directly to patients;
    (8) Prices available to mail order pharmacies;
    (9) Prices available to outpatient clinics;
    (10) Prices to other manufacturers who act as wholesalers and do 
not repackage/relabel under the purchaser's NDC, including private 
labeling agreements;
    (11) Prices to entities that repackage/relabel under the 
purchaser's NDC, including private labeling agreements, if that entity 
also is an HMO or other non-excluded entity; and
    (12) Manufacturer coupons redeemed by any entity other than the 
consumer.
    (d) Prices excluded from best price. Best price excludes:
    (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, the 
PHS, or a covered entity described in subsection (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 FSS of the GSA;
    (3) Any prices paid by an SPAP;
    (4) Any depot prices (including Tricare) and single award contract 
prices, as defined by the Secretary, of any agency of the Federal 
Government;

[[Page 77198]]

    (5) 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) with respect to such drugs on behalf of individuals entitled 
to benefits under Part A or enrolled under Part B of Medicare;
    (6) Rebates or supplemental rebates paid to Medicaid States 
agencies under section 1927 of the Act;
    (7) Prices negotiated under a manufacturer's sponsored Drug 
Discount Card Program;
    (8) Manufacturer coupons redeemed by a consumer;
    (9) Goods provided free of charge under a manufacturers' patient 
assistance programs;
    (10) Free goods, not contingent upon any purchase requirement;
    (11) Nominal prices to certain entities as set forth in Sec.  
447.508 of this subpart; and
    (12) Bona fide service fees.
    (e) Further clarification of best price. (1) Best price shall be 
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 (except bona fide 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 
special packaging, labeling or identifiers on the dosage form or 
product or package, and must not take into account prices that are 
nominal in amount as described in Sec.  447.510 of this subpart.
    (3) The manufacturer must adjust the best price for a rebate period 
if cumulative discounts, rebates, or other arrangements subsequently 
adjust the prices available from the manufacturer.


Sec.  447.506  Authorized generic drugs.

    (a) Authorized generic drug defined. For the purposes of this 
subpart, authorized generic drug means any drug sold, licensed or 
marketed under an NDA approved by the FDA under section 505(c) of the 
FFDCA; and marketed, sold or distributed directly or indirectly under a 
different product code, labeler code, trade name, trade mark, or 
packaging (other than repackaging the listed drug for use in 
institutions) than the listed drug.
    (b) Inclusion of authorized generic drugs in AMP. A manufacturer 
holding title to the original NDA of the authorized generic drug must 
include the direct and indirect sales of this drug in its AMP.
    (c) Inclusion of authorized generic drugs in best price. A 
manufacturer holding title to the original NDA of an authorized generic 
drug approved under section 505(c) of the FFDCA must include the price 
of such drug in the computation of best price for the single source or 
innovator multiple source drug during the rebate period to any 
manufacturer, wholesaler, retailer, provider, HMO, non-profit entity, 
or governmental entity within the United States.


Sec.  447.508  Exclusion from best price of certain sales at a nominal 
price.

    (a) Exclusion from best price. Sales of covered outpatient drugs by 
a manufacturer at nominal prices are excluded from best price when 
purchased by the following entities:
    (1) A covered entity described in section 340B(a)(4) of the PHSA,
    (2) An ICF/MR providing services as set forth in Sec.  440.150 of 
this chapter; or
    (3) A State-owned or operated nursing facility providing services 
as set forth in Sec.  440.155 of this chapter.
    (b) Nonapplication. This restriction shall not apply to sales by a 
manufacturer of covered outpatient drugs that are sold under a master 
agreement under 38 U.S.C. 8126.


Sec.  447.510  Requirements for manufacturers.

    (a) Quarterly reports. A manufacturer must report product and 
pricing information for covered outpatient drugs to CMS not later than 
30 days after the end of the rebate period. The quarterly pricing 
report must include:
    (1) AMP, calculated in accordance with Sec.  447.504 of this 
subpart;
    (2) Best price, calculated in accordance with Sec.  447.505 of this 
subpart;
    (3) Customary prompt pay discounts, which shall be reported as an 
aggregate dollar amount which includes discounts paid to all purchasers 
in the rebate period; and
    (4) Prices that fall within the nominal price exclusion, which 
shall be reported as an aggregate dollar amount and shall include all 
sales to the entities listed in Sec.  447.508(a) of this subpart for 
the rebate period.
    (b) Timeframe for reporting revised AMP, best price, customary 
prompt pay discounts, or nominal prices. A manufacturer must report to 
CMS revisions 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.
    (c) Base date AMP report. (1) A manufacturer must report base date 
AMP to CMS for the first full calendar quarter following [publication 
date of the final rule].
    (2) Any manufacturer's recalculation of the base date AMP must only 
reflect the revisions to AMP as provided for in Sec.  447.504(e) of 
this subpart.
    (d) Monthly AMP. (1) 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. In calculating monthly AMP, a 
manufacturer may estimate the impact of its end-of-quarter discounts 
and allocate these discounts in the monthly AMPs reported to CMS 
throughout the rebate period. The monthly AMP should be calculated 
based on the methodology in Sec.  447.504 of this subpart, except the 
period covered will be one month. Further, monthly AMP should be 
calculated based on the best data available to the manufacturer at the 
time of submission.
    (3) Prohibition against reporting revised monthly AMP. In 
calculating monthly AMP, a manufacturer should not report a revised 
monthly AMP later than 30 days after each month, except in exceptional 
circumstances authorized by the Secretary.
    (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); or
    (3) An individual who has delegated authority to sign for, and who 
reports directly to, the manufacturer's CEO or CFO.
    (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. 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. The 10-year time frame applies to 
a manufacturer's quarterly and monthly submissions of pricing data, as 
well as any revised quarterly pricing data subsequently submitted to 
CMS.

[[Page 77199]]

    (2) A manufacturer must retain records beyond the 10-year period if 
both 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.


Sec.  447.512  Drugs: Aggregate upper limits of payment.

    (a) Multiple source drugs. Except for brand name drugs that are 
certified in accordance with paragraph (c) of this section, the agency 
payment for multiple source drugs must not exceed, in the aggregate, 
the amount that would result from the application of the specific 
limits established in accordance with Sec.  447.514 of this subpart. If 
a specific limit has not been established under Sec.  447.514 of this 
subpart, then the rule for ``other drugs'' set forth in paragraph (b) 
applies.
    (b) Other drugs. The agency payments for brand name drugs certified 
in accordance with paragraph (c) of this section and drugs other than 
multiple source drugs for which a specific limit has been established 
under Sec.  447.514 of this subpart must not exceed, in the aggregate, 
payment levels that the agency has determined by applying the lower of 
the--
    (1) Estimated acquisition costs plus reasonable dispensing fees 
established by the agency; or
    (2) Providers' usual and customary charges to the general public.
    (c) Certification of brand name drugs. (1) The upper limit for 
payment for multiple source drugs for which a specific limit has been 
established under Sec.  447.514 of this subpart does not apply if a 
physician certifies in his or her own handwriting that a specific brand 
is medically necessary for a particular recipient.
    (2) The agency must decide what certification form and procedure 
are used.
    (3) A checkoff box on a form is not acceptable but a notation like 
``brand necessary'' is allowable.
    (4) The agency may allow providers to keep the certification forms 
if the forms will be available for inspection by the agency or HHS.


Sec.  447.514  Upper limits for multiple source drugs.

    (a) Establishment and issuance of a listing.
    (1) CMS will establish and issue listings that identify and set 
upper limits for multiple source drugs that meet the following 
requirements:
    (i) The FDA has rated two or more drug products as therapeutically 
and pharmaceutically equivalent in their most current edition of 
``Approved Drug Products with Therapeutic Equivalence Evaluations'' 
(including supplements or in successor publications), regardless of 
whether all such formulations are rated as such and only such 
formulations shall be used when determining any such upper limit.
    (ii) At least two suppliers list the drug, which has met the 
criteria in paragraph (a)(1)(i) of this section, based on all listings 
contained in current editions (or updates) of published compendia of 
cost information for drugs available for sale nationally.
    (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, payment levels 
determined by applying for each drug entity a reasonable dispensing fee 
established by the State agency plus an amount established by CMS that 
is equal to 250 percent of the average manufacturer price (as computed 
without regard to customary prompt pay discounts extended to 
wholesalers) for the least costly therapeutic equivalent.
    (c) Ensuring a drug is for sale nationally. To assure that a drug 
is for sale nationally, CMS will consider the following additional 
criteria:
    (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 
actual termination date reported by the manufacturer to CMS.
    (2) Except as set forth in paragraph (c)(3) of this section, in 
establishing the FUL, the AMP of the lowest priced therapeutically and 
pharmaceutically equivalent drug that is not less than 30 percent of 
the next highest AMP will be used to establish the FUL.
    (3) When the FUL group includes only the innovator single source 
drug and the first new generic or authorized generic drug enters the 
market, the criteria in paragraph (c)(2) of this section will not 
apply.


Sec.  447.516  Upper limits for drugs furnished as part of services.

    The upper limits for payment for prescribed drugs in this subpart 
also apply to payment for drugs provided as part of skilled nursing 
facility services and intermediate care facility services and under 
prepaid capitation arrangements.


Sec.  447.518  State plan requirements, findings and assurances.

    (a) State plan. The State plan must describe comprehensively the 
agency's payment methodology for prescription drugs.
    (b) Findings and assurances. Upon proposing significant State plan 
changes in payments for prescription drugs, and at least annually for 
multiple source drugs and triennially for all other drugs, the agency 
must make the following findings and assurances:
    (1) Findings. The agency must make the following separate and 
distinct findings:
    (i) In the aggregate, its Medicaid expenditures for multiple source 
drugs, identified and listed in accordance with Sec.  447.514(a) of 
this subpart, are in accordance with the upper limits specified in 
Sec.  447.514(b) of this subpart; and
    (ii) In the aggregate, its Medicaid expenditures for all other 
drugs are in accordance with Sec.  447.512 of this subpart.
    (2) Assurances. The agency must make assurances satisfactory to CMS 
that the requirements set forth in Sec. Sec.  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.


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

    (a) No FFP is available for physician-administered drugs for which 
a State has not required the submission of claims using codes that 
identify the drugs sufficiently for the State to bill a manufacturer 
for rebates.
    (1) As of January 1, 2006, a State must require providers to submit 
claims for single source, physician-administered drugs using Healthcare 
Common Procedure Coding System codes or NDC numbers in order to secure 
rebates.
    (2) As of January 1, 2008, a State must require providers to submit 
claims for the 20 multiple source physician-administered drugs 
identified by the

[[Page 77200]]

Secretary as having the highest dollar value under in the Medicaid 
program using NDC numbers in order to secure rebates.
    (b) 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.
    (c) A State that requires additional time to comply with the 
requirements of this section may apply to the Secretary for an 
extension.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program.)

    Dated: August 10, 2006.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: October 16, 2006.
Michael O. Leavitt,
Secretary.
[FR Doc. 06-9792 Filed 12-15-06; 4:51 pm]
BILLING CODE 4120-01-P


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