39142 Federal Register / Vol. 72, No. 136 / Tuesday, July 17, 2007 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 447 

[CMS–2238–FC] 

RIN 0938–AO20 

Medicaid Program; Prescription Drugs 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule with comment period. 

SUMMARY: This final rule with comment 

period will 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 HHS to 

promulgate a final regulation no later 

than July 1, 2007. In addition, we are 

adding to existing regulations certain 

established Medicaid rebate policies 

that are currently set forth in CMS 

guidance. This rule will bring together 

existing and new regulatory 

requirements in one, cohesive subpart. 

Finally, this final rule with comment 

period allows for further public 

comment on the Average Manufacturer 

Price and Federal upper limit (FUL) 

outlier section of the rule. 

DATES: Effective Date: These regulations 

are effective on October 1, 2007. 

Comment date: To be assured 

consideration, comments must be 

received at one of the addresses 

provided below, no later than 5 p.m. on 

January 2, 2008. 

ADDRESSES: In commenting, please refer 

to file code CMS–2238–FC. 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– 

FC, P.O. Box 8012, Baltimore, MD 

21244–8012. 

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–FC, Mail Stop C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–8012. 

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 (AMP)). 

Joseph Fine, (410) 786–2128 (for 

issues related to the determination of 

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 FULs). 

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 (RIA)). 

SUPPLEMENTARY INFORMATION: 

Submitting Comments: We welcome 

comments from the public on the AMP 

and FUL outlier provisions as 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–FC. 

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 be 

also available for public inspection as 

they are received, generally beginning 

approximately three weeks after 

publication of a document, at the 

headquarters of the Centers for Medicare 

& Medicaid Services, 7500 Security 

Boulevard, Baltimore, Maryland 21244, 

Monday through Friday of each week 

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

appointment to view public comments, 

phone 1–800–743–3951. 

I. Background 

A. Introduction 

Under the Medicaid Program, States 

may provide coverage of outpatient 

drugs as an optional service under 

section 1905(a)(12) of the Social 

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

of the Act provides for Federal financial 

participation (FFP) in State 

expenditures for these drugs. In order 

for payment to be made available under 

section 1903 for certain drugs, 

manufacturers must enter into the 

national 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 final rule implements sections 

6001(a)–(d), 6002, and 6003 of the DRA, 

Pub. L. 109–171 (Feb. 8, 2006). It also 

codifies those parts of section 1927 of 


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the Act that pertain to requirements for 

drug manufacturers’ calculation and 

reporting of AMP and best price, and it 

revises existing regulations that set 

upper payment limits for certain 

covered outpatient drugs. This final rule 

also implements section 1903(i)(10) of 

the Act, as revised by the DRA, with 

regard to the denial of FFP in 

expenditures for certain physicianadministered drugs. Finally, the rule 

addresses other provisions of the 

Medicaid 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 rebate agreement (56 Fed. Reg. 

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 

final 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 FULs 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. 

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 

finalized 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, 

effective January 1, 2007, to permit 

States to use AMP to calculate payment 

rates. 

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 Stateowned 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 

were not addressed in the 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 physicianadministered 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) of 

the Act 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. 

C. Proposed Rule Published September 

19, 1995 

On September 19, 1995, CMS (then 

the Health Care Financing 

Administration) published a proposed 

rule in the Federal Register (60 FR 

48442 (Sept. 19, 1995)). The purpose of 

the 1995 proposed rule 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 proposed rule 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 proposed rule 

and 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 

proposed rule are outside the scope of 

this final rule with comment period. 

This final rule with comment period 

does not address the entire Medicaid 

Drug Rebate Program, but focuses 

primarily on the provisions of the DRA 


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that address the Medicaid Drug Rebate 

Program. 

II. Provisions of the Proposed 

Regulations 

Basis and Purpose of Subpart I 

(§ 447.500) 

We proposed that 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 the proposed rule, we also 

proposed to move the existing Medicaid 

drug provisions in the Federal 

regulations from subpart F to subpart I 

of 42 CFR part 447. 

Definitions (§ 447.502) 

We proposed that the rule include 

definitions of key terms used in 42 CFR 

part 447, subpart I. We proposed to use 

definitions from several sources, 

including the Act, Federal regulations, 

program guidance, and the national 

rebate agreement. We invited the public 

to provide comments on the terms we 

chose to define as well as the definitions 

described below. 

We proposed to define ‘‘bona fide 

service fee’’ as 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. 

We proposed to define ‘‘brand name 

drug’’ as a single source or innovator 

multiple source drug. 

We proposed to define ‘‘bundled sale’’

as an arrangement regardless of physical 

packaging under which the rebate, 

discount, or other price concession is 

conditioned upon the purchase of the 

same drug 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 

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. 

We proposed to define ‘‘Consumer 

Price Index—Urban (CPI–U)’’ as the 

same as it is defined 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. 

We proposed to define ‘‘dispensing 

fee’’ 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 proposed to 

define 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 proposed 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 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 encouraged States to analyze the 

relationship between AMP and 

pharmacy acquisition costs to ensure 

that the Medicaid Program 

appropriately reimburses pharmacies for 

estimated acquisition costs. 

We proposed to define ‘‘dispensing 

fee’’ 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. 

We proposed to define ‘‘innovator 

multiple source drug’’ based on the 

definition in section 1927(k)(7)(A)(ii) of 

the Act. We also proposed using 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 (PLA), Establishment License 

Approval (ELA) or Antibiotic Drug 

Approval (ADA). 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. 

We proposed to define 

‘‘manufacturer’’ 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, we 

proposed that 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. 

(c) With respect to authorized generic 

products, the term ‘‘manufacturer’’ will 


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Federal Register / Vol. 72, No. 136 / Tuesday, July 17, 2007 / Rules and Regulations 39145 

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 proposed to remove 

the definition from that section and 

revise the definition to reflect the DRA 

amendments to section 1927 of the Act. 

We proposed to 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. 

We proposed to define ‘‘national drug 

code (NDC)’’ 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 national rebate agreement, 

including reporting timeframes, 

manufacturer responsibilities, penalties, 

and confidentiality of pricing data. We 

proposed 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. 

We proposed to define ‘‘nominal 

price’’ as it is in the national rebate 

agreement. We proposed 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). We 

proposed that 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 proposed to 

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 PLA, ELA, or ADA. 

We proposed to define the term single 

source drug as it is defined in the statute 

and the national rebate agreement. 

Determination of Average Manufacturer 

Price (§ 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: 

• Direct sales to hospitals, health 

maintenance organizations (HMOs) and 

wholesalers, where the drug is relabeled 

under that distributor’s NDC number, 

and FSS prices are not included in the 

calculation of AMP; 

• AMP includes cash discounts and 

all other price reductions (other than 

rebates under section 1927 of the Act), 

which reduce the actual price paid; 

• AMP is calculated as net sales 

divided by the number of units sold, 

excluding free goods (that is, drugs or 

any other items given away, but not 

contingent on any purchase 

requirements), and 

• 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: 

• Clarify the requirements in regard 

to the definition of retail pharmacy class 

of trade and treatment of pharmacy 

benefit manager (PBM) rebates and 

Medicaid sales and 

• Consider addressing issues raised 

by industry groups, such as: 


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Æ Administrative and service fees, 

Æ Lagged price concessions and 

returned goods, 

Æ The frequency of AMP reporting, 

Æ AMP restatements, and 

Æ Base date AMP. 

The OIG also recommended that the 

Secretary direct CMS to: 

• Issue guidance in the near future 

that specifically addresses the 

implementation of the AMP-related 

reimbursement provisions of the DRA 

and 

• Encourage States to analyze the 

relationship between AMP and 

pharmacy acquisition cost to ensure that 

the Medicaid Program appropriately 

reimburses pharmacies for estimated 

acquisition costs. 

We addressed these recommendations 

as we discussed provisions of the 

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 (for example, 

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 proposed excluding 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 (for example, 

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. 

We proposed that 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 (for example, 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 proposed 

excluding 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 proposed including 

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 proposed maintaining these prices in 

the definition. We noted 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 

sought 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 recognized 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 considered 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 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. This 


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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 the 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 

proposed 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 invited 

comments on whether this proposal is 

operationally feasible. 

As discussed more fully below, we 

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 acknowledged 

that manufacturers have a variety of 

arrangements with PBMs and thus 

invited comments on all aspects of our 

proposal as explained below. 

The national 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 Manufacturer Release 28 and 

reiterated in Manufacturer 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 national 

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 were 

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 invited comments on 

this definition and whether AMP should 

be calculated to include all adjustments 

that affect net drug prices. 

We acknowledged 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 proposed that 

these lower prices should be included 

in the AMP calculations. We requested 

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 solicited 

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 solicited 

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 requested comments on 

any other issues that we should take 

into account in making our final 

decisions. These included, but were not 

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 (for example, 

growth of ‘‘preferred’’ generic drugs); 

and possible impacts on reimbursement 

for brand name drugs under Medicaid. 

We were generally interested in 

comments on how and to what extent 

PBMs act as ‘‘wholesalers.’’ We 

proposed 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 proposed to 

clarify and the proposed clarifications 

follow. 

Retail Pharmacy Class of Trade: We 

proposed 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 (for 

example, retail, independent, chain and 

mail order pharmacies), except as 

otherwise specified by the statute or 

regulation (for example, 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 

proposed 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; that is, 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 

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 


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statute. In the proposed rule, we also 

proposed clarifying that prices to State 

Children’s Health Insurance Program 

(SCHIP) Title XIX 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 the proposed rule, we proposed 

clarifying that the units associated with 

Medicaid sales should be included as 

part of the total units in the AMP 

calculation. We 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 proposed 

clarifying 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. 

We also proposed to clarify how the 

prices of sales to SCHIP Title XXI nonMedicaid 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 proposed clarifying 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 the 

proposed rule, we also proposed 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 

proposed 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 

proposed that any prices on or after 

October 1, 1992, to the Indian Health 

Service (IHS), the DVA, a State home 

receiving funds under section 1741 of 

title 38, United States Code, the 

Department of Defense (DoD), the Public 

Health Service (PHS), 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 General Services 

Administration (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 proposed 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 Rebate 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 

proposed that all fees except fees paid 

for bona fide services should be 

included in AMP. We proposed 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 through 70251) 

that implemented the ASP provisions 

enacted in the Medicare Prescription 

Drug, Improvement, and Modernization 

Act of 2003 (MMA). We did not propose 

to define fair market value. However, 

CMS invited 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 

a wholesaler and these sales are to the 

retail pharmacy class of trade. In light 


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of this, we proposed that these sales and 

the rebates associated with these sales to 

patients through direct programs would 

be included in AMP. CMS invited 

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 proposed 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 the 

proposed rule, we proposed to clarify 

how manufacturer coupons should be 

treated. The treatment of manufacturer 

coupons has been problematic for CMS 

as well as some manufacturers. We 

proposed 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 the proposed rule, we 

proposed to exclude coupons redeemed 

by the consumer directly to the 

manufacturer from the calculation of 

AMP. CMS invited comments from the 

public on the 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 proposed 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 proposed a new 

§447.504. In §447.504(a), we proposed a 

revised definition of AMP and clarified 

that AMP is determined without regard 

to customary prompt pay discounts 

extended to wholesalers. In §447.504(b), 

we proposed to define average unit 

price. In §447.504(c), we proposed to 

define customary prompt pay discount. 

In §447.504(d), we proposed to define 

net sales. In §447.504(e), we proposed to 

define retail pharmacy class of trade. In 

§447.504(f), we proposed to define 

wholesaler. In §447.504(g), we 

described in detail the sales, rebates, 

discounts, or other price concessions 

that must be included in AMP. In 

§447.504(h), we described the sales, 

rebates, discounts, or other price 

concessions that must be excluded from 

AMP. In §447.504(i), we provided 

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 (§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 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; 

• Must be determined on a unit basis 

without regard to special packaging, 

labeling or identifiers on the dosage 

form or product or package; 

• 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 Medicare 

Modernization Act of 2003 (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 the proposed rule we proposed 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 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 


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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 proposed 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 proposed 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 was reasonable to 

propose these provisions in the 

proposed rule, consistent with longstanding Medicaid Drug Rebate Program 

policy and the MMA with respect to 

best price as revised by the DRA. 

We proposed 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 

proposed 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 

proposed 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. 

We proposed 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 national 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 

proposed to codify this policy in the 

proposed rule. 

Customary Prompt Pay Discounts: 

The DRA revises the definition of AMP 

to exclude customary prompt pay 

discounts to wholesalers; however, it 

does not change the definition of best 

price to exclude customary prompt pay 

discounts. Therefore, we proposed 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 Manufacturer Release 28 

and reiterated in Manufacturer 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 proposed 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, we proposed that these 

lower prices should be reflected in best 

price calculations. We acknowledged 

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), we proposed 

that the PBM rebates, discounts, or 

chargebacks should be included in best 

price. We proposed to consider these 

rebates, discounts, or chargebacks in 

best price calculations. CMS invited 

public comment on the inclusion of 

certain PBM price concessions in the 

determination of best price. Also, we 

solicited 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. 


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We proposed 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 proposed 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 proposed to clarify and the 

proposed clarifications follow. 

Administrative and Service Fees: We 

proposed 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 

proposed 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 the proposed rule, we proposed 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 proposed 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 proposed that the prices listed 

above be included for the purpose of 

calculating AMP, we proposed 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 the 

proposed rule, we proposed 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 (for example, 

retail pharmacy). We proposed 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 the proposed rule, we proposed 

to exclude coupons redeemed by the 

consumer directly to the manufacturer 

from the calculation of best price. CMS 

invited 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 

proposed to exclude Medicaid rebates 

from best price. Likewise, we 

considered rebates paid under CMSauthorized separate (supplemental) 

Medicaid drug rebate agreements with 

States to meet this requirement and 

proposed 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 proposed a new § 447.505. In 

§ 447.505(a), we provided a general 

definition of the term best price. In 

§ 447.505(b), we proposed to define 

provider. In § 447.505(c), we specified 

the sales and prices which must be 

included in best price. In § 447.505(d), 

we specified which sales and prices 

must be excluded from best price. In 

§ 447.505(e), we further clarified the 

price reductions and other pricing 

arrangements included in the 

calculation of best price. 

Authorized Generic Drugs (§ 447.506) 

In the proposed rule, we stated that 

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 multiple source drug or brand 

manufacturer’s original NDA, but 

labeled with a different NDC than the 

innovator multiple source drug 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. 

We proposed to implement section 

6003 of the DRA by proposing 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 

an NDA 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 proposed 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 

proposed a broad definition of 

authorized generic drugs rather than a 

more narrow definition of such drugs. 

We proposed 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 

welcomed comments on this issue. 


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The secondary manufacturer or 

subsidiary of the brand manufacturer 

would continue to pay the single source 

drug or innovator multiple source drug 

rebate for the authorized generic drug 

products based on utilization under its 

own NDC number, as required under 

current law. We welcomed comments 

on these issues. 

In § 447.506(a), we proposed defining 

the term authorized generic drug for the 

purposes of the Medicaid Drug Rebate 

Program. 

In § 447.506(b), we proposed 

requiring 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 § 447.506(c), we proposed requiring 

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 (§ 447.508) 

Pursuant to the terms of the national 

rebate agreement, manufacturers 

excluded from their best price 

calculations outpatient drug prices 

below ten percent of the AMP. The 

national 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 proposed 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 proposed 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. § 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 (GPO) or 

other group purchasing arrangement. 

We did not believe it necessary to 

elaborate further on these entities. We 

proposed 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 proposed 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 

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 

chose not to propose to expand the 


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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 could 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 did not 

propose to do so in the proposed 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 

considered crafting further guidance to 

address this issue. CMS invited 

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, we proposed that 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 proposed a new § 447.508 in 

which we specified those entities to 

which a manufacturer of covered 

outpatient drugs may sell at nominal 

price and provided for the exclusion of 

such sales from best price. 

Requirements for Manufacturers 

(§ 447.510) 

On August 29, 2003, CMS finalized 

two of the provisions in the 1995 

proposed rule 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 12 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 proposed to 

move the recordkeeping requirements at 

§ 447.534(h) to § 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 § 447.534(i) 

require manufacturers to report 

revisions to AMP and best price for a 

period not to exceed 12 quarters from 

the quarter in which the data were due. 

We proposed to move this provision to 

§ 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 proposed 

allowing manufacturers to recalculate 

base date AMP in accordance with the 

definition of AMP in § 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 proposed this amendment so that 

the additional rebate would not increase 

due to changes in the definition of AMP. 

We proposed 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 

proposed 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 were giving 

manufacturers this option because we 

were 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 (for 

example, 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, 

we proposed requiring manufacturers to 

report AMP and best price to CMS not 

later than 30 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 did not believe that this 

reading is the better reading of the 

statute. 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 (URA) for single source 

and innovator multiple source drugs. 

While the DRA requires AMPs to 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 proposed 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 proposed requiring in 

§ 447.510(d) that manufacturers must 

submit monthly AMP to CMS not later 

than 30 days after each month. We also 

proposed requiring manufacturers to 

report quarterly AMP, best price, and 

customary prompt pay discounts on a 

quarterly basis. 

We proposed 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 

quarter and once reported, would not be 

subject to revision later than 30 days 

after each month. Because we 

recognized that industry pricing 

practices sometimes result in rebates or 

other price concessions being given by 

manufacturers to purchasers at the end 


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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 

proposed 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 were not certain that such rebates or 

other price concessions could be 

allocated with respect to monthly AMP 

calculations. We invited comments on 

allowing the use of 12-month rolling 

average estimates of all lagged price 

concessions 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 (that is, 

a rolling three-month AMP). While this 

methodology may minimize volatility in 

the data, we believed it would be fairly 

complex for manufacturers to 

operationalize. We encouraged 

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 

proposed to make the quarterly AMP 

publicly available. We noted 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 proposed 

to require that manufacturers report 

nominal price exception data to CMS on 

a quarterly basis. We further proposed 

that nominal price exception data shall 

be reported as an aggregate dollar 

amount which includes all nominal 

price sales to the entities listed in 

§ 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 

proposed to require that manufacturers 

certify the pricing reports they submit to 

CMS in accordance with § 447.510. We 

proposed 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 proposed 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 

proposed to require manufacturers to 

use one uniform data transmission 

format to transmit and collect these 

data. We stated that CMS will issue 

operational instructions to provide 

additional guidance regarding the new 

electronic data submission 

requirements. 

Aggregate Upper Limits of Payment 

(§ 447.512) 

We proposed that the existing 

§ 447.331 be revised and redesignated as 

a new § 447.512. We proposed to revise 

subsection (a) to clarify that the upper 

limit for multiple source drugs applies 

in the aggregate. We also proposed to 

update several cross-references to 

provisions in subpart I. 

Upper Limits for Multiple Source Drugs 

(§ 447.514) 

We proposed that the existing 

§ 447.332 be revised in a new § 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 proposed to redesignate existing 

regulations at §§ 447.331, 447.332, and 

447.334 as new regulations at 

§§ 447.512, 447.514, and 447.516, 

respectively. 

Existing regulations at 

§ 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 Arated 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 Arated, there must be at least three Arated 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 (that is, 

manufacturers, wholesalers, repackagers, 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 (for example, Red Book, 

First DataBank, or Medi-Span). Then, 

using these pricing compendia, we 

select the lowest price (for example, the 

average wholesale price (AWP), 

wholesale acquisition cost (WAC), or 

direct price) from among the A-rated 

formulations of a particular drug and 

apply the formula described in existing 

§ 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. 

By the term, ‘‘therapeutically 

equivalent,’’ we mean drugs that are 

identified as A-rated in the current 

edition of the FDA’s publication, 


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‘‘Approved Drug Products with 

Therapeutic Equivalence Evaluations’’

(including supplements or successor 

publications). We proposed that the 

FUL will be established, as per section 

1927(e)(4) of the Act, only using an ‘‘A’’

rated drug. However, we proposed to 

continue our current practice of 

applying the FUL to all drug 

formulations, including those drug 

versions not proven to be 

therapeutically equivalent, (for example, 

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 Brated drugs would be excluded from the 

FUL. Current regulation does not 

prohibit or exclude B-rated drugs from 

the FUL reimbursement. 

We proposed 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 proposed in 

§ 447.514(a)(1)(ii) that a FUL will be set 

when at least two suppliers (for 

example, manufacturers, wholesalers, 

re-packagers, or re-labelers) list the drug 

in a nationally available pricing 

compendia (for example, Red Book, 

First DataBank, or Medi-Span). 

Existing regulations at § 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 proposed 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 did not believe 

computing an AMP at the 11-digit NDC 

would be significantly more difficult 

than computing the AMP at the 9-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 proposed 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 

believed it would offer minimal 

advantages. Furthermore, we expected 

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 asked for comments 

on the alternative approach of using the 

11-digit NDC to calculate the AMP. We 

invited comments on the merits of using 

both approaches in calculating the AMP 

for the FUL. 

In computing the FUL, we proposed 

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 seven 

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 proposed that a FUL 

update of drugs, using the new 

methodology first be published when 

the revised AMPs are available and 

processed. 

We proposed 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 proposed 

to disregard the AMP of an NDC which 

has been terminated. The AMP of a 

terminated NDC will not be used to set 

the FUL beginning with the first day of 

the month after the actual termination 


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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 proposed 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 

proposed to use this percentage 

calculation as a benchmark to prevent 

an outlier price from determining the 

FUL, but invited 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 

noted 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 welcomed suggestions 

about other means to address outliers 

and whether outliers should be 

addressed at all. 

We proposed 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 invited comments from the public 

on all issues set forth in this subpart. 

We invited 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. We asked commenters 

to please submit data supporting their 

proposals when available. Upper Limits 

for Drugs Furnished as Part of Services 

(§ 447.516) 

We proposed that the existing 

§ 447.334 be redesignated as a new 

§ 447.516. 

State Plan Requirements, Findings and 

Assurances (§ 447.518) 

We proposed that the existing 

§ 447.333 be redesignated as a new 

§ 447.518. 

FFP: Conditions Relating to PhysicianAdministered Drugs (§ 447.520) 

Prior to the DRA, many States did not 

collect rebates on physicianadministered 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, physicianadministered drugs are also coded using 

other letters of the alphabet. For this 

reason, we referred 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 physicianadministered 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 did not propose 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 proposed that the list 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 physicianadministered multiple source drugs 

using NDC numbers for those drugs 

with the highest dollar volume listed by 

the Secretary. 

We proposed, for the purpose of this 

section, that the term ‘‘physicianadministered 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 believed that some oral 

self-administered drugs (administered 

in an outpatient clinical setting), such as 

oral anti-cancer drugs, oral anti-emetic 

drugs should also be included in the 

designation of physician-administered 


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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 

did not propose any criteria for 

reviewing these extension requests as 

we expected that most, if not all States 

would 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 expected that States would 

require physicians to submit all claims 

using NDC numbers, as using multiple 

billing systems would be burdensome 

for physicians and States. This would 

also advantage States because rebates 

would be collectible on all physicianadministered drugs. 

For States not currently billing 

manufacturers for rebates on single 

source drugs, we believed 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 

§ 447.520. In § 447.520(a), we proposed 

to 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 § 447.520(b), we 

proposed requiring States to require 

providers to submit claims using NDC 

numbers. In § 447.520(c), we proposed 

allowing States that require additional 

time to comply with the requirements of 

this section to apply to the Secretary for 

an extension. 

III. Analysis of and Responses to Public 

Comments 

We received over 1,600 timely items 

of correspondence that addressed the 

issues in the proposed rule. We received 

comments from pharmacists and other 

health care providers, drug 

manufacturers, membership 

organizations, law firms, PBMs, 

consultants, State agencies, members of 

Congress, and individuals. A summary 

of the major issues and our responses 

follow. 

General Comments 

We received many comments 

expressing general support for the 

provisions of the proposed rule. One 

commenter specifically indicated 

support for Federal efforts that are 

designed to positively affect the 

affordability of and access to 

prescription drugs and healthcare 

professionals. Other commenters 

indicated support for CMS’ efforts to 

clarify the definitions of significant 

terms as well as the treatment of various 

types of sales and prices in 

manufacturer calculations. 

Comment: Commenters asked CMS to 

explain how we will reconcile the 

national rebate agreement with this final 

rule, which substantially changes a 

number of the definitions and 

requirements of the agreement. One 

commenter asked CMS to specify that it 

will not incorporate into a revised 

national rebate agreement any 

definitions or requirements until such 

provisions have been subject to noticeand-comment rulemaking. 

Response: The national rebate 

agreement provides that manufacturers 

should comply with the Medicaid rebate 

statute, any amendments to that statute, 

and regulations issued by the Secretary 

to implement the statute. We will 

consider revising the national rebate 

agreement in accordance with 

applicable Federal statutes and 

regulations. 

Effective Date 

Comment: Many commenters asked 

CMS to clarify that the provisions of this 

final rule will be applied prospectively. 

One commenter specifically asked for 

clarification of the effective date of the 

provision regarding the treatment of 

Medicaid sales in AMP. Another 

commenter expressed concern that CMS 

should have published the proposed 

rule by September 1, 2006 to provide 

adequate time for community 

pharmacies to prepare for the 

implementation of the changes in the 

Medicaid Program. 

Response: In this final rule, we are 

bringing together existing and new 

regulatory requirements in one cohesive 

subpart. Unless otherwise indicated, 

these regulations are effective on 

October 1, 2007. However, this rule is 

not designed to delay the effective date 

with respect to statutory provisions, 

regulations or policies that are already 

in effect. Those existing requirements 

that remain unchanged in this final rule 

will continue in force. In addition, to 

the extent that this rule addresses 

previous policies already established by 

the Agency, those policies will remain 

in effect. Further, the DRA provided 

specific effective dates for certain 

provisions as noted in the preamble to 

the proposed rule. 

Comment: Many commenters asked 

us to consider delaying implementation 

of the final rule. Several commenters 

suggested that we delay the overall 

effective date of this final rule at least 

six months from the date of publication 

in order to provide manufacturers with 

necessary time to revise their systems 

and retrain personnel on the 

requirements of this final rule. One 

commenter noted that government 

pricing system vendors will need 

between six months to one year after the 

effective date of this final rule to code, 

implement and test the required 

computer changes. 

Other commenters suggested a delay 

of four quarters for the entire rule. One 

commenter suggested we delay 

finalizing the rule until more detailed 

information regarding AMP and the 

established FUL is made available to the 

pharmacy industry; another commenter 

suggested a delay of 90 days after the 

release of the new FUL source file. 

Another commenter suggested a 180-day 

compliance period followed by a 90-day 

testing period, during which time the 

AMP may only be used for research and 

verification purposes only. 

A few commenters specifically asked 

that we delay the implementation of the 

requirement that manufacturers submit 

a base date AMP. Another commenter 

noted that the practical implication of 

treating inpatient and outpatient 

hospital sales differently for AMP 

purposes would mean that hospital 

contracts for the purchase of 

prescription drugs would need to be 

renegotiated, which could necessitate a 

delay in the implementation of the AMP 

rule for six months to a year. 

Response: The DRA provides specific 

timeframes for the implementation of 

many of the major provisions addressed 

in this final rule. Because the DRA was 

signed into law on February 8, 2006, we 

believe there was sufficient time for 

affected parties to prepare for the 

implementation of these provisions. In 

addition, CMS issued guidance to States 

and manufacturers in December, 2006 to 

address many of the details pertaining 

to the drug provisions in the DRA. 

Accordingly, we are not convinced that 

there is a compelling reason to delay 

implementation of the provisions of this 

final rule beyond the October 1, 2007, 

effective date. 

Comment: One commenter 

recommended that CMS do more to 

educate Medicare participating 


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providers, particularly pharmacies, 

about the changes in reimbursement 

addressed in this final rule. 

Response: We received hundreds of 

comments on the proposed rule from 

individual pharmacy providers and 

national pharmacy membership 

organizations. Therefore, we believe 

there is already a high level of 

awareness about how the provisions of 

this final rule will impact pharmacies. 

In addition, we recognize the vital role 

that States play in the State-Federal 

Medicaid partnership by establishing 

relationships with pharmacy providers. 

States process pharmacy claims, 

maintain participating provider lists, 

and provide a variety of information 

directly to pharmacies. Therefore, we 

continue to believe that States are in a 

better position to provide any education 

to pharmacies to the extent that States 

may opt to revise their payment rates. 

Comment: One commenter noted that 

if we had published the proposed rule 

earlier, it would have been easier for all 

affected parties to meet the deadlines 

mandated in the DRA. The commenter 

asked that CMS extend the comment 

period for the proposed rule for an 

additional 60 days. One commenter 

expressed concern that our proposed 

rule did not contain enough discussion 

of the issue of bundled sales in 

§ 447.502 to provide reasonable notice 

and an opportunity for comment. The 

commenter suggests that CMS provide 

some alternative mechanism or forum 

for manufacturers and other interested 

parties to have more substantial and 

more specific communication with CMS 

on this issue. 

One commenter urged CMS to issue 

an interim final rule with comment 

period instead of this final rule. The 

commenter expressed confusion 

regarding the correct interpretation of a 

number of provisions in the proposed 

rule. The commenter believes that an 

interim final rule with comment period 

would foster even greater dialog 

between the pharmaceutical industry 

and CMS. 

Response: We disagree with the 

commenters regarding the need for an 

additional comment period for the vast 

majority of issues addressed in this final 

rule. However, as discussed below in 

greater detail, we have decided to 

publish the AMP and FUL outlier 

provision as a final rule with an 

extended comment period. This will 

allow for further public comment after 

the clarified definition of AMP becomes 

effective and it will give CMS an 

opportunity to further revise this 

provision. 

Definitions (§ 447.502) 

Bundled Sale 

Comment: One commenter supported 

the inclusion of bundled sales in the 

determination of AMP. 

Response: We appreciate the support 

for this provision and have retained this 

requirement in the final rule. 

Comment: One commenter said that 

the proposed definition of what 

constitutes a bundled agreement is 

confusing. For example, it could be 

assumed that any type of 

comprehensive, multi-product portfolio 

contract could fit within CMS’ proposed 

new definition. The commenter does 

not believe that this is CMS’ intent. The 

commenter asked us to provide 

examples of bundled discounts that 

meet the final definition. 

Response: We appreciate the 

comment and are including an example 

to provide some additional clarity. This 

example is for illustrative purposes only 

as the complexity of the market place 

prevents us from describing every 

situation. 

Bundled Sale Example 

Products A and B are sold under a 

bundled arrangement and have a 

combined bundled discount equal to 

$200,000 on total undiscounted sales of 

$1 million. If Product A has 

undiscounted sales of $600,000 and 

product B has undiscounted sales of 

$400,000, the manufacturer would 

allocate 60 percent of the combined 

bundled discount to Product A when 

calculating AMP. Forty percent of the 

combined bundled discount would be 

allocated to Drug B. The effective unit 

price of each product would be 

calculated by subtracting the discount 

allocated to each drug product 

($600,000 ¥ $120,000 = $480,000 for 

Product A; $400,000 ¥ $80,000 = 

$320,000 for Product B) and dividing 

the result by the number of units for 

each drug product in the bundled sale. 

Comment: Several commenters 

requested that CMS explicitly clarify 

how bundled discounts that meet the 

definition should be allocated across 

products. 

Response: We appreciate this 

comment and have clarified the 

regulation at § 447.502 to specify how to 

allocate a discount. We have clarified 

that where multiple drugs are 

discounted, the aggregate value of all 

the discounts in the bundled 

arrangement should be proportionately 

allocated across all the drugs in the 

bundle. 

Comment: Several commenters said 

that CMS should not include sales of the 

same drug in the definition of bundled 

sale. Another commenter requested that 

CMS confirm that the proposed 

‘‘bundled sale’’ definition applies to 

sales of the same drug only where the 

manufacturer provides free or 

discounted goods contingent on a 

purchase requirement. The commenter 

stated that they can conceive of only 

one instance where sales of the same 

drug properly should be considered 

bundled—where the manufacturer 

provides a discount or free drugs if the 

purchaser agrees to buy a certain 

amount of the same drug; for example, 

‘‘buy nine, get one free’’ or ‘‘buy nine, 

get the tenth at half price.’’ The 

commenter believes that such sales 

essentially represent volume discounts, 

and the discount properly should be 

apportioned across the drugs provided 

by the manufacturer in the bundled (or 

contingent) arrangement. The 

commenter stated that the Medicaid 

rebate statute mandates such a result, 

requiring ‘‘free goods that are contingent 

on any purchase requirement’’ and 

volume discounts to be included in best 

price. 

Response: A contingent arrangement 

involving drugs with different NDC–9s 

constitutes a bundled arrangement. A 

contingent arrangement involving drugs 

that share the same NDC–9 may 

constitute a bundled sale or volume 

discount. For these types of 

arrangements, the aggregate value of all 

the discounts must be allocated 

proportionately to all drugs within the 

bundled or volume discount 

arrangement. 

Comment: One commenter stated that 

CMS should define ‘‘drugs of different 

types’’ as those with different 9-digit 

NDC codes and clarify that it is the 

aggregate value of all the bundled 

discounts that must be allocated across 

the drugs in the bundle. 

Response: We agree. The definition of 

bundled sale provides that drugs are 

considered to be the same drug when 

they share a 9-digit NDC and are 

considered to be drugs of different types 

when their 9-digit NDCs are not the 

same. 

Comment: A few commenters said 

that the proposed definition differs 

significantly from the definition of 

bundled sales provided in the Medicaid 

rebate agreement and that it contains a 

number of vague and ambiguous terms. 

Response: The clarification of the 

bundled sales definition in this final 

rule does not create a new definition or 

impose new obligations that did not 

already exist under the Rebate 

Agreement. It has always been our 

policy that AMP and best price must be 

adjusted to reflect discounts offered in 

bundled sale arrangements to those 


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entities included in the determination of 

AMP and best price. 

Comment: Several commenters said 

that CMS does not provide any 

explanation for why it proposes to 

change the definition of bundled sale, 

describe the policy objectives the 

changes are intended to promote, or 

provide sufficient specificity to give 

adequate notice and opportunity to 

comment. Should CMS wish to pursue 

this new definition, the commenters 

requested that CMS provide additional 

information regarding the new 

definition and another opportunity for 

comment before the definition is 

finalized. In the interim, CMS should 

clarify that manufacturers may continue 

to rely on the definition included in the 

national rebate agreement. 

Response: We believe that it is 

necessary to clarify the definition of a 

bundled sale because of questions we 

have received from manufacturers. Our 

policy objective is unchanged from that 

set forth in the rebate agreement 

inasmuch as manufacturers are required 

to report the effect of these and other 

arrangements that affect price on AMP 

and best price. The proposed rule was 

designed to clarify the definition in the 

rebate agreement and program guidance 

and to specify that AMP and best price 

must be adjusted to reflect discounts, 

rebates or other price concessions for all 

drugs in a bundled or contingent sale 

arrangement. 

Comment: One commenter said that 

there are important implications that 

CMS should evaluate regarding the 

proposed new definition of ‘‘bundled 

sale’’ given that it differs significantly 

from that term’s definition in the 

Medicaid Drug Rebate Agreement. The 

commenter believes that the new 

proposed definition would not improve 

the accuracy of rebate calculations. 

Since there is no compelling policy 

rationale for the new proposed 

definition and there is no demonstrated 

problem with the current definition, the 

proposed change does not appear 

necessary and serves no purpose. 

Response: We believe that this 

clarification will enable manufacturers 

to better understand what constitutes a 

bundled sale and how discounts offered 

with bundled sales must be allocated 

when reporting the AMP and best prices 

for drugs in the bundle. 

Comment: One commenter requested 

that CMS clarify how discounts should 

be allocated when a bundled sale 

arrangement includes both contingent 

and non-contingent discounts and 

rebates. 

Response: We consider all contingent 

and non-contingent drugs to be within 

the bundled sale if any drug must be 

purchased in order to get a discount on 

any drug in the bundle regardless of 

whether any drug is purchased at full 

price. Additionally, a bundled sale 

exists where the discounts available are 

greater than those which have been 

received had the drug products been 

purchased separately and apart from the 

bundled arrangement. 

Comment: Several commenters 

recommended that CMS apply the 

bundled sale definition only in 

situations where a manufacturer cannot 

determine the price of a specific item 

and clarify how discounts involved in a 

bundled sale are to be allocated 

proportionately when such allocation is 

needed. 

Response: We disagree. To assure the 

consistent application of this policy by 

all manufacturers, we believe that the 

definition, as clarified in this final rule 

at § 447.502, is needed to clearly and 

uniformly specify what constitutes a 

bundled sale and how discounts must 

be allocated across products in the 

bundle. 

Comment: Another commenter 

expressed disappointment with the lack 

of meaningful detail in the proposed 

rule and noted that it essentially mirrors 

the bundling proposal CMS articulated 

last year for ASP in the 2007 Medicare 

Physician Fee Schedule Proposed Rule. 

Response: We have provided further 

details on the application of this policy 

in this final rule. We believe a 

consistent methodology for addressing 

bundled sales in the Medicaid and 

Medicare Part B programs will reduce 

the burden and likelihood of errors for 

manufacturers calculating and reporting 

Medicaid rebate prices and ASP. 

Comment: One commenter requested 

that CMS clarify that the new definition 

does not apply for periods prior to the 

effective date of this final rule. 

Response: The provisions of this final 

rule do not create a new definition for 

bundled sales, but merely clarify the 

existing definition. 

Comment: One commenter said that a 

figure for a prior period may be used as 

the basis of performance for the current 

period. For example, if the market share 

during the previous quarter was 20 

percent, and an increase of 2 percent to 

22 percent will gain the purchaser a 

discount of 5 percent, the commenter 

requested that CMS clarify whether the 

5 percent discount should be reallocated 

to the sales in the prior quarter. The 

commenter asserts that the five percent 

discount need not be reallocated to the 

prior period. 

Response: We have clarified in 

§ 447.502 that the bundled sale applies 

to all drugs for all quarters including 

prior purchases used in the calculation 

of the discount for the contingent and 

non-contingent drugs. The data used in 

the determination of bundled sales 

arrangement should reflect and apply to 

the month or quarter being used in the 

determination, for example, in a 

situation where a manufacturer must 

achieve a certain market share of the 

product in one quarter to achieve a 

discount in the second quarter, CMS 

would treat the contingent discount as 

a bundle. The quarter for the prior 

purchase and current purchase would 

be used in the determination of the 

bundled sale arrangement. 

Comment: One commenter said that 

discounts for bundled sales should be 

used only if the bundled sales are 

available to a majority of retail 

pharmacies, and the manufacturer 

should not include bundled sales 

available to institutional long-term care 

or mail order pharmacies. 

Response: We do not agree. AMP is 

based on the ‘‘average’’ price paid to a 

manufacturer by wholesalers. It does not 

take into account prices available to a 

certain percentage of pharmacies. As 

discussed previously, the calculation of 

AMP is based on the average price paid 

to the manufacturer by wholesalers for 

drugs distributed to the retail pharmacy 

class of trade. It is calculated to include 

the sale, as well as the discount, rebate, 

and other price concession associated 

with that sale, unless the discount, 

rebate, or other price concession is 

excluded by statute or regulation. 

Accordingly, in a bundled sale, the 

discount should be allocated to the 

drugs sold in the bundled sale 

arrangement, regardless of whether the 

discount is only available to certain 

retail pharmacies. We do not include 

institutional long-term care pharmacies 

in the retail pharmacy class of trade, 

while we do include mail order 

pharmacies. 

Comment: One commenter suggested 

that the language should be clarified to 

remove room for interpretive error 

regarding the intent. The phrase 

‘‘allocated proportionately to the dollar 

value of the units’’ should be slightly 

modified to state ‘‘allocated 

proportionately to the total dollar value 

of the units’’ and the word ‘‘should’’ in 

the last sentence should be amended to 

‘‘shall.’’

Response: We agree and have revised 

the regulation text in § 447.502 to reflect 

the recommended changes. 

Comment: One commenter stated that 

drugs placed on a formulary without a 

purchase requirement do not represent 

a discount on another product and 

should not be the basis for considering 

a sale to be bundled. The commenter 

further stated that the requirement that 


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the value of the discounts be 

proportionately allocated across all of 

the drugs in the bundle could open the 

door to manipulation of prices reported 

for bundled products. In addition, there 

is a large administrative burden for 

manufacturers to implement a system 

for aggregating and allocating discounts 

for bundled sales. 

Response: We believe that the 

clarification of a bundled sale in this 

final rule at § 447.502 will ensure the 

accuracy of the AMP and best price 

calculation and reduce the opportunity 

for improper manipulation. A bundled 

sale exists where the rebate, discount, or 

price concession is ‘‘conditioned’’ upon 

additional purchase requirements. A 

bundled sale also exists where the 

discounts under the arrangement are 

greater than those which have been 

received had the drug products been 

purchased separately and apart from the 

bundled arrangement. The requirement 

to allocate discounts for bundled sales 

is not new for manufacturers that have 

been participating in the Medicaid drug 

rebate program. It has always been our 

policy that AMP and best price must be 

adjusted to reflect discounts offered as 

part of bundled sales. Therefore, we do 

not believe that this final rule places 

new obligations or additional 

administrative burdens on 

manufacturers. 

Comment: A few commenters asked 

CMS to clarify that manufacturers may 

continue to rely on the definition of 

bundled sale in the national rebate 

agreement. Several commenters stated 

that the definition that is set forth in the 

national rebate agreement should be 

retained. 

Response: The final regulation does 

not change the definition of bundled 

sales at § 447.502 but clarifies the 

existing definition. 

Comment: A few commenters asked 

for additional guidance on how to treat 

a discount when its receipt is 

conditioned on utilization levels for 

multiple drug products. 

Response: We have clarified in this 

final rule at § 447.502 that aggregate 

value of all discounts are to be allocated 

across all the products within the 

bundled arrangement. 

Comment: One commenter stated that 

the concept of bundled sale does not 

seem to apply to market share 

arrangements and asked CMS to clarify 

what discounts on market based 

contracts are considered bundled sales 

for which discounts must be allocated. 

Response: Discounts that are 

contingent on performance 

requirements, such as the achievement 

of market share may result in either a 

bundled arrangement or a volume 

discount. In such an arrangement, the 

aggregate or total value of all the 

discounts must be allocated to all the 

drugs in the bundle. For example, if 

Drug A is discounted to a purchaser if 

the purchaser achieves a set market 

share of Drug B, Drugs A and B are part 

of a bundled arrangement. The total 

discount for Drug A and any discount 

on Drug B must be proportionately 

allocated to both drugs. 

Comment: One commenter expressed 

concern that CMS broadens the 

definition of ‘‘bundled sale’’ in the 

proposed rule to potentially include 

routine multiple drug sales to entities 

such as wholesalers and GPOs. The 

commenter does not believe that CMS 

intended to require that manufacturers 

allocate on an item-by-item basis the 

discounts on the price of the drug 

product had it been sold separately. The 

commenter recommends that CMS 

should not broaden the definition of the 

term ‘‘bundled sale.’’

Response: We disagree. A bundled 

sale occurs whenever a discount is 

given for the purchase of a group of 

drugs, contingent on the sale of another 

drug, a performance requirement such 

as market share arrangements or other 

purchases. Additionally, a bundled sale 

also exists where the discounts are 

greater than those which would have 

been received if the drugs were 

purchased separately and outside the 

bundled arrangement. 

Comment: One commenter requested 

that CMS confirm the information 

provided in the Medicaid Drug Rebate 

Operational Training Guide that 

bundled sale arrangements are limited 

to arrangements that involve covered 

outpatient drugs. 

Response: We have clarified in the 

regulation text at § 447.502 that a 

bundled sale arrangement involves an 

arrangement for the sale of covered 

outpatient drugs or some other purchase 

requirement. 

Dispensing Fee 

Comment: Some commenters asserted 

that the proposed definition of 

dispensing fee inferred a cost-based 

methodology not reflective of economies 

and competition in the marketplace. 

One commenter stated that the proposed 

definition of dispensing fee 

inadvertently infers that a pharmacy is 

entitled to a dispensing fee every time 

a covered outpatient drug is dispensed. 

The commenter goes on to say that such 

a definition does not assure efficient 

filling schedules for maintenance drugs, 

and encourages pharmacies to split 

prescribers’ orders to receive more 

reimbursement, (for example, split a 30- 

day supply prescription into two 15-day 

supplies) particularly in the nursing 

home setting. Several commenters said 

that the definition of dispensing fee 

should incorporate the true cost of a 

pharmacist’s time spent and other real 

costs such as rent and utilities. One 

commenter agreed that the definition 

should be sufficiently broad to 

accommodate any future costs that 

pharmacies might incur in dispensing 

prescriptions to Medicaid beneficiaries, 

and supported the terminology 

‘‘includes’’ and, ‘‘are not limited to’’ in 

the final definition. One commenter 

would add ‘‘professional’’ fees to the 

definition. One commenter notes that 

the proposed definition refers to ‘‘point 

of sale’’ which seems to preclude 

dispensing to Medicaid populations in 

nursing homes, home and community 

based settings, etc. A more appropriate 

replacement would be ‘‘point of 

service.’’ Several commenters stated that 

the CMS definition of dispensing fee 

specifies that pharmacy costs do not 

include ‘‘administrative cost incurred 

by the States in the operation of the 

covered outpatient drug benefit 

including systems costs for interfacing 

with pharmacies,’’ and that this 

disclaimer is unnecessary and confusing 

as it is obvious that States’ costs are not 

those of pharmacy providers. 

Response: We provided a definition in 

order to assist States in their evaluation 

of factors used in establishing a 

reasonable dispensing fee. We did not 

intend to mandate a specific formula or 

methodology which States must use 

when calculating those fees. Therefore, 

we believe that the definition of 

dispensing fee is generally sufficient to 

capture the activities involved with the 

dispensing of a drug. However, we 

concur with the commenter about the 

need to recognize different service 

settings. Therefore, in the final rule, we 

are revising the definition of dispensing 

fee by adding ‘‘or service’’ after ‘‘point 

of sale’’ in § 447.502. States may also 

require the prescriptions be filled in 

specified quantities or to have other 

measures in place in order to avoid 

paying additional dispensing fees and 

encourage efficient filling schedules. 

Comment: Many commenters 

expressed concern that CMS did not 

propose that States be required to pay a 

minimum dispensing fee to ensure that 

pharmacies’ operating costs are covered. 

A few commenters stated that CMS 

should require States to make a specific 

finding that their dispensing fee is 

adequate to cover the cost of dispensing 

prescriptions to the Medicaid 

population. Other commenters 

suggested that we include a 

comprehensive and accurate definition 

of dispensing fee in the final rule, issue 


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formal guidance to States, and require 

States to conduct annual surveys or 

studies on the pharmacy provider’s cost 

to dispense a prescription. One 

commenter stated that the pharmacy 

dispensing fee should be increased 

based on the Federal Cost of Living 

Adjustment. One commenter stated that 

CMS should advise States if we intend 

that some profit to the pharmacy be 

included in the dispensing fee. One 

commenter believed that the proposed 

rule should remain silent on the criteria 

for calculating dispensing fees. 

Response: We do not agree that CMS 

should establish or mandate specific 

criteria for States to use when setting 

their dispensing fees. We proposed to 

define the term dispensing fee in 

regulation to assist States in their 

evaluation of factors in establishing a 

reasonable dispensing fee to providers, 

and we continue to believe that we 

should not mandate a specific formula 

or methodology which the States must 

use to determine the dispensing fee. We 

believe that the flexibility provided 

States is sufficient to allow them to set 

reasonable dispensing fees. We have not 

separately identified profit as a 

component of the dispensing fee as we 

believe the components of the 

dispensing fee we have already 

identified include a reasonable profit. 

We also do not agree that we should 

remain silent on the criteria for 

calculating dispensing fees as we 

believe it is important that pharmacies 

be reasonably compensated for the 

services they provide in dispensing a 

prescription. 

Comment: A few commenters said 

that allowing the States to determine 

their dispensing fees, without Federal 

guidelines or mandates, would permit 

States with financial problems the 

latitude to arbitrarily cut dispensing 

fees. Another commenter suggested that 

CMS expeditiously approve State plan 

amendments (SPAs) that would increase 

pharmacies’ professional fees so that 

they are closer to the actual cost of 

dispensing and provide a reasonable 

return. The commenter also proposed 

that CMS disapprove SPAs that decrease 

reimbursement paid to pharmacies for 

the ingredient cost component unless 

they increase the dispensing fee. One 

commenter suggested that the language 

of the proposed regulation should be 

changed to clarify that States will retain 

the authority to set reimbursement rates 

and dispensing fees for single source 

drugs. Several commenters stated that it 

is inappropriate for CMS to require 

States to increase dispensing fees to 

compensate for decreased 

reimbursement. One commenter noted 

that a State decided to raise dispensing 

fees for drugs reimbursed with FUL 

pricing, but admitted that until the State 

has experience with FUL prices, the 

State will not know if this dispensing 

fee compensates pharmacies 

appropriately. 

Response: Dispensing fees must be 

approved as part of the Medicaid State 

plan. We encourage States to set 

reasonable dispensing fees to 

appropriately pay pharmacies for their 

costs. We will review State requests to 

change dispensing fees as to their 

reasonableness. States need to describe 

in their State plan the methodology they 

use to establish drug payment rates 

(which include dispensing fees) and 

demonstrate that their dispensing fees 

are reasonable. We will evaluate 

requests to change reimbursement for 

ingredient costs and dispensing fees 

separately but we encourage States to 

review their dispensing fees when they 

consider changes to reimbursement for 

ingredient costs. 

Comment: Many commenters stated 

that dispensing fees must cover costs to 

safely and effectively dispense a 

prescription. Many commenters 

communicated the findings of surveys 

such as the Grant Thornton LLP 

National Study to Determine the Cost of 

Dispensing Prescriptions in Community 

Retail Pharmacies, prepared for the 

Coalition for Community Pharmacy 

Action (CCPA), published in January 

2007, and accessible at http:// 

www.aphanet.org/AM/Template.cfm?

Section=Home&CONTENTID=7641&

TEMPLATE=/CM/ContentDisplay.cfm 

that reported the average national cost 

to dispense a prescription to be $10.50. 

Response: We agree that States should 

set reasonable dispensing fees; however, 

we disagree that they should be required 

to use any specific methodology 

including the Grant Thornton study to 

do so. States may continue to use other 

sources to set dispensing fees, such as 

their own surveys. They may also look 

at dispensing fees paid to pharmacies by 

other payers or the amount of 

dispensing fees paid in neighboring 

States. CMS intends to permit States to 

retain the authority to set reasonable 

dispensing fees and exercise flexibility 

in setting their dispensing fees. 

Comment: Several commenters 

pointed out that the Congressional 

Budget Office’s (CBO) estimates of 

savings to the Medicaid Program based 

on the provisions of the DRA, assumed 

that States will raise dispensing fees to 

mitigate the effects of the revised 

payment limit on pharmacies. 

Response: CMS will review any State 

plan amendments or revisions to drug 

payment rates, including any revisions 

to the dispensing fees, to assure 

compliance with the applicable statutes 

and regulations. 

Comment: Several commenters stated 

that CMS should specifically instruct 

States to establish higher reimbursement 

for specialty pharmacies, as Medicare 

Part B has done. Citing section 303(e)(1) 

of the MMA, which created a furnishing 

fee for certain blood clotting factors, 

some commenters felt that a separate 

furnishing fee should be established for 

Medicaid providers who dispense 

prescriptions that may require more 

time or resources for handling, storing, 

or delivery. 

Response: We do not agree. CMS 

believes its proposal/provision provides 

a definition which is reasonable. While 

CMS appreciates the comment, the 

MMA provision is not applicable to 

Medicaid. 

Comment: Some commenters stated 

that a formula for prescription drug 

reimbursement should include a 

dispensing and/or education fee as an 

actual part of the reimbursement. 

Another commenter stated that a 

percentage standard or a flat fee should 

be added to prescription reimbursement 

to achieve an adequate reimbursement 

to pharmacy providers. 

Response: We disagree. The 

dispensing fee is determined separately 

from the cost of the drug ingredient and 

covers the cost of dispensing the drug as 

defined in this regulation. As discussed 

in the proposed rule, dispensing fees are 

related to the transfer or possession of 

the drug to the beneficiary. If dispensing 

fees were bundled with ingredient cost, 

it would be difficult for CMS or States 

to determine whether the dispensing 

fees, as discussed in this regulation, are 

reasonable. 

Comment: Many commenters 

expressed concern that current 

dispensing fees, in light of the DRA 

provisions that change ingredient 

reimbursement for FUL drugs to a 

methodology based on AMP, will not 

cover the pharmacy provider’s cost of 

dispensing medications to the Medicaid 

population and that, as a result, the 

dispensing fee should be increased for 

generic drugs. One commenter asserted 

that retail pharmacies that serve large 

numbers of Medicaid beneficiaries may 

be particularly hard hit. One commenter 

stated that the proposed rule suggested 

that the States examine the market 

realities and adjust their dispensing fee 

to compensate pharmacies, and while 

this was an important correction to the 

reimbursement system, it did not solve 

the underlying problem presented by an 

unreasonable system for calculating the 

FUL. 

Response: We believe that States are 

in the best position to identify and 


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address what is a reasonable dispensing 

fee and we encourage them to evaluate 

and set such dispensing fees. Since the 

dispensing fee is meant to reflect the 

cost of dispensing a drug, it should not 

be affected by the determination of 

ingredient cost. As we have said 

elsewhere in this regulation, we believe 

the system for calculating the FUL will 

permit pharmacies to be reasonably 

compensated for drugs they dispense to 

Medicaid beneficiaries. 

Estimated Acquisition Cost 

Comment: One commenter suggested 

that CMS revise the definition of 

estimated acquisition cost (EAC) by 

adding at the end, ‘‘within the previous 

twelve months as provided to State 

Medicaid agencies by the Centers for 

Medicare & Medicaid Services.’’ This 

would provide States with more specific 

guidance and a source from which to 

draw the information regarding the 

package size of drug most frequently 

purchased by providers. 

Response: The DRA did not modify 

the definition of EAC and we have not 

made any modifications in this 

regulation. Additionally, States 

currently report all utilization 

information to CMS by package size; 

however, we do not sort by most 

frequently dispensed or utilized package 

size. This information is posted on our 

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

MedicaidDrugRebateProgram/SDUD/ 

list.asp. 

Innovator Multiple Source Drug 

Comment: One commenter noted that 

our definition of innovator multiple 

source drug does not address the 

situation where, at the end of the life 

cycle of a particular drug product, the 

only covered outpatient drug remaining 

on the market in the U.S. happens to be 

a version of the product that was 

originally approved by the FDA under 

an abbreviated NDA (ANDA). The 

commenter also noted that we did not 

address products that came to market 

before 1962 and remain commercially 

available today. The commenter 

suggested that CMS revise the definition 

of innovator multiple source drugs to 

address these situations. Other 

commenters requested that we revise 

the definition of innovator multiple 

source drug to include those drugs 

approved under a biological license 

application (BLA). 

Response: By statute, an innovator 

multiple source drug is a drug that was 

originally marketed under an original 

NDA approved by the FDA. We do not 

believe that it would be consistent with 

the statute to modify the definition to 

include drugs marketed under an 

ANDA. To clarify the distinction 

between multiple source drugs 

approved under an ANDA and multiple 

source drugs approved under an NDA, 

we are adding a definition of 

noninnovator multiple source drug in 

this final rule. Noninnovator multiple 

source drugs are defined as multiple 

source drugs marketed under an ANDA 

or an abbreviated antibiotic drug 

application. 

In response to the comments 

regarding drugs that entered the market 

prior to 1962, we believe these drugs are 

not classified as innovator multiple 

source drugs unless they are marketed 

under an NDA. Further, we recognize 

the need to classify drugs that entered 

the market prior to 1962 that are not 

marketed under an NDA. Therefore, we 

are further defining noninnovator 

multiple source drugs as drugs that 

entered the market prior to 1962 that 

were not originally marketed under an 

original NDA. 

In response to comments regarding 

drugs approved under a BLA, we 

believe the statutory definition of 

covered outpatient drug in section 1927 

of the Act is sufficient to address these 

concerns without further revision to the 

definition of innovator multiple source 

drug. 

Manufacturer 

Comment: One commenter 

recommended that the definition of 

manufacturer be narrowed such that 

entities that repackage drugs simply for 

distribution to retail pharmacies not be 

considered manufacturers. The 

commenter noted that these retail 

pharmacy service repackagers prepare 

‘‘unit of use’’ quantities in a highly 

efficient manner, increasing the 

efficiencies of prescription dispensing 

for retail pharmacies, and they should 

not be responsible for signing rebate 

agreements with the Secretary of HHS or 

paying rebates to Medicaid. 

Response: The statutory definition of 

manufacturer clearly includes such 

repackagers, so we are not excluding 

them from the definition of 

manufacturer in this final rule. 

Comment: One commenter asked 

CMS to clarify the meaning of ‘‘legal 

title’’ in the definition of manufacturer. 

Specifically, if a product is sold from 

one manufacturer to another, are the 

manufacturers required to calculate data 

based on both labeler codes? 

Response: Except as noted in the 

regulatory provisions pertaining to 

authorized generics, we would consider 

the manufacturer holding legal title to 

the drug to be the labeler whose NDC 

appears on the label at the time the drug 

is dispensed. This is also the labeler 

responsible for paying rebates. 

Comment: One commenter suggested 

that ‘‘manufacturer’’ should include an 

entity that does not possess legal title to 

the NDC but that markets a drug through 

a private labeling arrangement. 

Response: This final rule incorporates 

the definition in the proposed rule with 

respect to drugs subject to private 

labeling arrangements, and provides 

that, with respect to drugs, the term 

‘‘manufacturer’’ will also include the 

entity that does not possess legal title to 

the NDC. 

Multiple Source Drug 

Comment: One commenter suggested 

that CMS revise the definition of 

multiple source drug in two ways. First, 

the commenter asked us to consider the 

situation where, at the end of the life 

cycle of a particular drug product, the 

only covered outpatient drug remaining 

on the market in the U.S. happens to be 

a version of the drug that was originally 

approved by the FDA under an ANDA. 

Second, the commenter asked us to 

include products that came to market 

before 1962 and remain commercially 

available today. 

Response: Multiple source drugs that 

are marketed under an ANDA are 

considered noninnovator multiple 

source drugs. We have added a 

definition of noninnovator multiple 

source drugs to this final rule, which we 

believe addresses this concern as well as 

the concern regarding products that 

came to market before 1962. 

Comment: One commenter asked us 

to consider adding products approved 

under BLAs to the definition of multiple 

source drug. 

Response: The definition of covered 

outpatient drug in section 1927 of the 

Act includes biological products, other 

than vaccines, that are licensed under 

section 351 of the PHS Act. Drugs that 

are approved under this statutory 

provision include products approved 

under BLAs. 

Comment: A few commenters asked 

us to consider revising or creating 

separate definitions for multiple source 

drugs. One component of the definition 

should define this term with respect to 

the establishment of the FUL since the 

FUL will be applied on a particular date 

of service on a pharmacy claim, while 

the other component would address this 

term with respect to the payment of 

rebates. One of the commenters 

recommended maintaining the current 

definition of multiple source drug listed 

at 42 CFR § 447.301 with a note 

specifying that FULs are placed on 

multiple source drugs complying with 


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the requirements in §§ 447.512 and 

447.514. 

Response: We disagree with the 

commenters about the need to revise the 

definition of multiple source drugs in 

order to address the application of that 

term in the context of the FULs. The 

DRA amended the definition to require 

that two or more drug products be rated 

as therapeutically equivalent, 

pharmaceutically equivalent, or 

bioequivalent. The DRA also requires 

CMS to calculate a FUL for each drug 

that qualifies as a multiple source drug. 

We believe the regulatory provisions at 

§ 447.514 are sufficient to address the 

application of the FULs to multiple 

source drugs. 

Comment: One commenter supported 

the revised definition of multiple source 

drug, which requires only one other 

covered outpatient drug to be rated as 

therapeutically equivalent, 

pharmaceutically equivalent, and 

bioequivalent. 

Response: We appreciate the support 

for this definition and agree because the 

FUL will apply to more drugs. 

National Drug Code (NDC) 

Comment: A few commenters asked 

for clarification of the relationship 

between the 10-digit NDC maintained 

by the FDA and the 11-digit NDC 

referenced in the proposed rule. One of 

these commenters suggested that we 

define NDC as ‘‘the segmented, 10-digit 

numerical code maintained by the FDA 

that indicates the labeler, product and 

package size, and that for commercial 

and technical reasons, must be 

converted to an unsegmented 11-digit 

number by inserting a place-holding 

zero.’’ The commenter also noted that 

the FDA recently published a proposed 

rule which contemplates changes to the 

NDC system maintained by the FDA and 

recommended that CMS consult with 

FDA prior to finalizing this rule so that, 

to the extent possible, the agencies can 

determine how best to harmonize the 

definition of NDC. Other commenters 

expressed support for our proposed 

definition of NDC, particularly as it 

pertains to 11-digits vs. 9-digits. 

Response: We are retaining the use of 

the 11-digit NDC in the Medicaid Drug 

Rebate Program. Because we have used 

the 11-digit code since the start of the 

Medicaid Drug Rebate Program, we do 

not believe that it is necessary to clarify 

this further in the regulation. If the FDA 

makes changes to the NDC number, at 

some point in the future, we will 

determine the effect of this change on 

the program and respond accordingly. 

Rebate Period 

Comment: One commenter urged 

CMS to redefine the rebate period as a 

monthly period rather than a quarterly 

period. The commenter cited the new 

requirement that AMP be reported 

monthly as support for this change, in 

addition to the observation that 

Congress did not explicitly prohibit 

such a change in the provisions of the 

DRA. 

Another commenter indicated support 

for maintaining a quarterly rebate 

period. The commenter noted that in 

addition to the lack of legislative intent 

to change the rebate period, establishing 

a different or more frequent time period 

would place unnecessary burdens on 

changing drug manufacturers’

government reporting systems without 

additional public benefit. 

Response: We don’t see a need to 

redefine the rebate period at this time, 

so we are maintaining a quarterly rebate 

period. 

Single Source Drug 

Comment: A few commenters 

expressed concern with our definition 

of single source drug. The commenters 

noted that certain FDA regulations 

require biologic products to be approved 

under a BLA under section 351 of the 

PHS Act. The proposed definition of 

single source drug excludes these 

products. The commenters suggested we 

revise the definition to include these 

products as follows: ‘‘a covered 

outpatient drug that is produced or 

distributed under an original NDA or 

BLA approved by the FDA, including a 

drug product marketed by any crosslicensed producers or distributors 

operating under the NDA or BLA.’’

Another commenter noted that our 

definition does not address the situation 

where, at the end of the life cycle of a 

particular drug product, the only 

covered outpatient drug remaining on 

the market in the U.S. happens to be a 

version of the product that was 

originally approved by the FDA under 

an ANDA. The commenter also noted 

that we did not address products that 

came to market before 1962 and remain 

commercially available today. The 

commenter suggested CMS revise the 

definition of single source drugs to 

address these situations. 

Response: As noted above, we have 

added a definition of noninnovator 

multiple source drug to this final rule in 

order to clarify the distinction between 

drugs approved under an NDA and 

drugs approved under an ANDA. We 

concur with the commenters about the 

need to address products approved 

under a BLA in the definition of single 

source drug, and have revised the 

definition in § 447.502 accordingly. 

However, we believe the statutory 

definition of covered outpatient drug in 

section 1927 of the Act is sufficient to 

address the remainder of these concerns 

without further revision to the 

definition of single source drug. 

Terms Not Defined in the Proposed Rule 

Comment: A few commenters 

recommended that CMS include in this 

final rule a definition of covered 

outpatient drug that addresses both 

over-the-counter (OTC) products and 

prescription drug products. The 

commenter also noted that the statutory 

definition of covered outpatient drug 

incorporates grandfathered products 

and drugs still undergoing the Drug 

Efficacy Study Implementation (DESI) 

review process. 

Response: We believe the statutory 

definitions of covered outpatient drug 

and nonprescription drug in section 

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

definition of noninnovator multiple 

source drug in this final rule, are 

sufficient to address the concerns raised 

by the commenters. We do not believe 

there would be an additional benefit to 

incorporating a definition of covered 

outpatient drug in this final rule. 

Comment: One commenter asked us 

to define the term NDA. The commenter 

states that the term is not defined in the 

Medicaid Rebate statute, the national 

rebate agreement, or the FFDCA. 

Another commenter asked us to define 

the term ‘‘original NDA.’’

Response: The FDA has extensive 

information about the NDA process on 

its Web site at http://www.fda.gov/cder/ 

regulatory/applications/nda.htm. We do 

not see the need to add a definition of 

NDA in this final rule. Further, the FDA 

does not make a distinction between an 

NDA and an original NDA; therefore, we 

view these terms as having the same 

meaning. 

Comment: One commenter asked 

CMS to specify that the ‘‘United States’’

means the 50 States and the District of 

Columbia. 

Response: It has been our 

longstanding policy to define States as 

the 50 States and the District of 

Columbia; this is the definition we 

adopted in the national rebate 

agreement. Therefore, we concur with 

the commenter and have added a 

definition of States as the 50 States and 

the District of Columbia. 

Determination of AMP (§ 447.504) 

Definition of Net Sales 

Comment: Several commenters 

requested that CMS clarify that the term 


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‘‘revenue’’ in the ‘‘net sales’’ definition 

refers only to sales dollars associated 

with a transaction and not revenue 

recognized for a transaction for financial 

accounting purposes. This 

interpretation is consistent with the 

position CMS already has taken in the 

context of ASP reporting. Another 

commenter believes that it is 

appropriate to define net sales as a 

measure of actual sales made regardless 

of the financial accounting treatment of 

the transaction. 

Response: Net sales should be 

calculated as gross sales less cash 

discounts allowed and other price 

reductions (other than the rebates or 

price reductions excluded by the statute 

or regulations) which reduce the 

amount received by the manufacturer. 

We have defined AMP to center on the 

concept of a transaction, such that any 

given transaction includes both the 

‘‘sale’’ and any discounts, rebates, or 

other price concessions associated with 

that sale. In certain instances, the statute 

or regulations specifically exclude from 

the calculation of AMP either certain 

portions of a transaction or entire 

transactions with certain entities. 

Absent such specific exclusions, we 

believe that manufacturers should 

calculate AMP by matching sales with 

their associated price concessions. In 

the absence of specific guidance, a 

manufacturer may make reasonable 

assumptions in its calculations, 

consistent with the general 

requirements and the intent of the Act, 

Federal regulations, and its customary 

business practices. 

Comment: One commenter expressed 

support for the definition of net sales 

because it addresses quarterly gross 

sales revenue less discounts and price 

reductions which reduce the amount 

received by the manufacturer. 

Response: We appreciate the support 

for this provision and have retained this 

requirement in this final rule at 

§ 447.504(d). 

Definition of Nursing Home Pharmacies 

Comment: One commenter stated that 

CMS should unambiguously define 

nursing home pharmacies. 

Response: We do not believe that it is 

necessary to define these entities in the 

final rule. We remind manufacturers 

that in the absence of specific guidance, 

they may make reasonable assumptions. 

Definition of Repackagers/Relabelers 

Comment: One commenter stated that 

CMS should unambiguously define 

repackager/relabelers. 

Response: We have defined 

manufacturer to mean the entity that 

(except with respect to certain private 

labeling arrangements) possesses legal 

title to the NDC for the covered 

outpatient drug. We do not believe that 

further definition is necessary at this 

time. 

Private Labeling Arrangements 

Comment: One commenter requested 

that CMS clarify whether sales under 

private labeling agreements are or are 

not included in AMP. 

Response: We have clarified that sales 

to another manufacturer which acts as a 

wholesaler and does not repackage/ 

relabel under the purchaser’s NDC 

including private labeling agreements 

are included in AMP. 

Definition of Retail Pharmacy Class of 

Trade 

Comment: Some commenters 

requested that CMS define the term 

‘‘general public’’ used in the proposed 

definition of retail pharmacy class of 

trade. 

Response: We appreciate the 

comment but do not believe that further 

definition is necessary at this time. We 

remind manufacturers that in the 

absence of specific guidance, they may 

make reasonable assumptions. 

Comment: A commenter said that 

retail pharmacy class of trade is not 

universally defined. Variations may 

exist in the marketplace among 

manufacturers as to the class of trade to 

which PBMs and mail order pharmacies 

belong. One commenter requested that 

CMS reconsider the definition of retail 

pharmacy which will be used in the 

calculation of AMP. Several 

commenters requested that CMS define 

the retail pharmacy class of trade as 

defined in the Prescription Drug 

Marketing Act (PDMA) and FDA 

regulations. 

Response: We have revised the 

definition of retail pharmacy class of 

trade in § 447.504(e) to mean any 

independent pharmacy, chain 

pharmacy, mail order pharmacy, or 

other outlet that purchases drugs from a 

manufacturer, wholesaler, distributor, or 

other licensed entity and subsequently 

sells or provides the drugs to the general 

public. 

Comment: Several commenters noted 

that the proposed definition is different 

from the definition of ‘‘retail pharmacy’’

under Medicare Part D which defines 

retail pharmacy as a licensed pharmacy 

that is not a mail order pharmacy from 

which Part D enrollees can purchase a 

covered Part D drug. The commenters 

believe that adopting the Part D 

definition of retail pharmacy for retail 

pharmacy class of trade would result in 

an AMP that more accurately reflects 

the prices at which retail pharmacies 

acquire prescription drugs and prevent 

confusion and burdensome 

administrative and recordkeeping 

requirements for drug manufacturers, 

health plans, wholesalers, and 

pharmacies that would result from use 

of inconsistent definitions. 

Response: These statutory 

requirements applicable to the Medicaid 

drug rebate program are different from 

those applicable to Part D. We believe 

that the definition of retail pharmacy 

class of trade included in this rule at 

§ 447.504(e) is defined for the purpose 

of the Medicaid Drug Rebate Program 

consistent with our interpretation of the 

applicable statutory requirements. 

Comment: One commenter said that 

the inclusion of ‘‘other outlets’’ provides 

for a number of entities that are 

typically not considered retail 

pharmacies. For example, outpatient 

clinics are outlets that purchase drugs 

and provide these drugs to the general 

public; however, they are not retail 

pharmacies. The commenter further 

stated that it seems that the calculation 

of AMP would have to include these 

entities since they are not expressly 

excluded in subsequent paragraphs of 

the proposed rule. 

Response: We believe that the 

inclusion of ‘‘other outlets’’ allows for 

the inclusion of sales for those entities, 

for example physician offices and 

outpatient clinics, that purchase drugs 

from the manufacturer and provide 

them to the general public. 

Comment: A commenter stated that 

the definition of retail pharmacy class of 

trade should not use general and 

undefined descriptions such as 

‘‘independent’’ or ‘‘mail order’’

pharmacy, or ‘‘other outlet.’’ The 

definition should be amended to mean 

any entity in the United States that is 

licensed as a pharmacy which provides 

drugs to the general public. 

Response: We disagree. We believe 

that a narrow definition of retail 

pharmacy class of trade which would 

exclude independent and mail order 

pharmacies does not encompass the 

universe of entities which purchase 

drugs from manufacturers and provide 

them to the general public. 

Wholesaler 

Comment: Several commenters said 

that CMS should define the term 

‘‘wholesaler’’ to mean any entity that 

purchases drugs from a manufacturer for 

purposes of resale. This would be 

consistent with the definition in the 

national rebate agreement. Another 

commenter said that ‘‘wholesaler’’

should be defined in a manner that 

better reflects current law and practice. 

The commenter proposed wholesaler to 


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mean any entity that is licensed in a 

State as a wholesaler distributor of 

pharmaceuticals to which the 

manufacturer sells, or arranges for the 

sale of, covered outpatient drugs, but 

that does not relabel or repackage the 

covered outpatient drug. Several 

commenters requested that CMS define 

the terms wholesaler, wholesale 

distribution and distributor be 

consistent with FDA regulation. The 

FFDCA defines wholesale distributor as 

any person (other than the manufacturer 

or the initial importer) who distributes 

a device or drug from the original place 

of manufacture to the person who makes 

the final delivery or sale of the device 

or drug to the ultimate consumer or 

user. Under the PDMA regulations, 

wholesale distributor means any person 

engaged in the wholesale distribution of 

prescription drugs, including, but not 

limited to manufacturers, repackers, 

own-label distributors, private-label 

distributors, jobbers, brokers, 

warehouses, including manufacturers’

and distributors’ warehouses, chain 

drug warehouses, and wholesale drug 

warehouses, independent wholesale 

drug traders, and retail pharmacies that 

conduct wholesale distributions. 

Several commenters support 

warehousing pharmacy chains, 

warehousing mass merchant and 

supermarket pharmacy operations being 

treated as wholesalers. 

Response: We believe that for this 

final rule to be consistent with current 

law as well as reflect recommendations 

made to us by the OIG and relevant 

comments, it is necessary to revise the 

definition of wholesaler. We have 

revised wholesaler at § 447.504(f) to 

mean any entity (including those 

entities in the retail pharmacy class of 

trade) to which the manufacturer sells 

the covered outpatient drug, but that 

does not relabel or repackage the 

covered outpatient drug. 

Comment: Another commenter said 

that the only transactions that should be 

included in AMP are those prices that 

(1) are paid by wholesalers to 

manufacturers, and (2) apply to the 

purchase of prescription drugs by 

wholesalers from manufacturers for the 

wholesalers’ redistribution to the retail 

pharmacy class of trade. The commenter 

believes that because Congress 

specifically exempted customary 

prompt pay discounts between the 

manufacturer and wholesalers from the 

definition of AMP, it is reasonable to 

conclude that they intended that only 

price concessions between 

manufacturers and wholesalers be 

included in AMP. 

Response: We disagree. We have 

defined AMP in § 447.504(a) to be 

consistent with the provisions of the 

DRA and section 1927 of the Act, and 

include cash discounts and all other 

price reductions. We have defined 

wholesaler at § 447.504(f) to mean any 

entity (including those entities in the 

retail pharmacy class of trade) to which 

the manufacturer sells the covered 

outpatient drugs, but that does not 

relabel or repackage the covered 

outpatient drug. The DRA amendment 

excluded customary prompt discounts 

‘‘extended to wholesalers’’ but not other 

discounts or price reductions applicable 

to AMP. 

Comment: One commenter stated that 

mail order purchases and discounts, 

Medicaid or SCHIP payments and 

discounts, or Medicare Part D payments 

and discounts should not be included in 

AMP because the discounts associated 

with these programs are not provided to 

entities which qualify as not 

wholesalers. 

Response: We continue to believe that 

mail order pharmacies serve the general 

public and have included them in the 

retail pharmacy class of trade in this 

final rule at § 447.504(g)(9). We agree, in 

part with the comments on discounts, 

rebates or other price concessions from 

manufacturers to Medicaid, SCHIP, and 

Part D programs and have clarified at 

§ 447.504(h)(23) that such discounts, 

rebates, or other price concessions when 

provided to third party payers such as 

a SCHIP program or an MA–PD are not 

included in the determination of AMP. 

We retained in the regulation text at 

§ 447.504(g) that sales to wholesalers for 

drugs distributed to the retail pharmacy 

class of trade (including sales, which are 

provided to a SCHIP program or an MA–

PDP) are included in AMP. 

Comment: One commenter stated that 

it is not possible to determine AMP for 

direct sales to wholesalers where the 

wholesaler then sells to an entity that is 

unknown to the manufacturer. The 

manufacturer is not able to identify the 

purchaser or to assess whether the 

entity was in the retail pharmacy class 

of trade. 

Response: We have modified this final 

rule at § 447.504(g)(1) to state that 

manufacturers should include sales to 

the wholesaler except where the 

subsequent sale of the drug to an 

excluded entity could be adequately 

documented. 

Comment: One commenter said that 

many manufacturers rely on chargeback 

data to identify the retail pharmacy 

class of trade for AMP. The commenter 

requested that CMS confirm that to the 

extent that there is no chargeback 

associated with a sale and a 

manufacturer has no way of knowing 

whether the end purchaser was ‘‘retail,’’

those sales are excluded from AMP. 

Response: We have modified this final 

rule at § 447.504(g)(1) to state that where 

the manufacturer can identify with 

adequate documentation that 

subsequent sales from the wholesaler 

are to an excluded entity, the 

manufacturer can exclude such sales 

from AMP. 

Comment: A few commenters 

requested that CMS clarify that clearly 

identifiable indirect sales to excluded 

entities should be excluded from AMP 

(for example, sales identified through 

chargeback data). Similarly, they asked 

that we confirm that indirect sales to 

excluded entities, if not identifiable as 

such by the data available to a 

manufacturer, are not required to be 

‘‘excluded.’’

Response: We have modified this final 

rule at § 447.504 to state that 

manufacturers should only exclude 

sales to the wholesaler where the 

subsequent sale of the drug to an 

excluded entity could be adequately 

documented. 

Comment: One commenter noted that 

the proposed rule does not address 

whether sales to entities that relabel or 

repackage under the purchaser’s NDC 

are included in AMP. 

Response: We have defined 

manufacturer at § 447.502 to mean the 

entity that (except with respect to 

certain private labeling arrangements) 

possesses legal title to the NDC for the 

covered outpatient drug. Therefore, we 

decided in the final rule that sales to 

other manufacturers who repackage/ 

relabel under the purchaser’s NDC are 

excluded from AMP. 

Comment: One commenter stated that 

they interpret the definition of 

wholesaler to mean it is exclusive of any 

entity that purchases a covered 

outpatient drugs and repackages or 

relabels using the purchaser’s own NDC. 

The commenter requests that CMS 

confirm or provide guidance on what is 

meant for an entity to relabel or 

repackage under § 447.504(f). 

Response: We have clarified at 

§ 447.504(f) that wholesaler means any 

entity (including those entities in the 

retail pharmacy class of trade) to which 

the manufacturer sells covered 

outpatient drugs, but that does not 

relabel or repackage the covered 

outpatient drug. Furthermore, we are 

requiring at § 447.504(g)(2) that sales to 

other manufacturers who act as 

wholesalers and do not repackage/ 

relabel under the purchaser’s NDC are 

included in AMP. 

Comment: One commenter requested 

that CMS delete from the definition of 

wholesaler, the parenthetical 


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‘‘(including a pharmacy, chain of 

pharmacies or PBM).’’

Response: We have clarified the 

definition of wholesaler for these 

entities in the regulation text at 

§ 447.504(f). 

Customary Prompt Pay Discounts 

Comment: One commenter asked that 

CMS confirm that a customary prompt 

pay discount is the discount ‘‘routinely 

offered by the manufacturer to an 

individual wholesaler at the time of 

payment,’’ and not a historical amount 

approximating the typical discount 

offered to all wholesalers. 

Response: We agree and have clarified 

this issue in this final rule at 

§ 447.504(c). 

Comment: Several commenters said 

that customary prompt pay discounts 

extended to wholesalers should be 

included in the AMP calculation. 

Response: We disagree. The statute 

requires that customary prompt pay 

discounts to wholesalers be excluded 

from AMP. 

Comment: One commenter said that 

the word ‘‘routinely’’ should be deleted 

from the definition so that any 

customary prompt pay discounts the 

manufacturer passes on to the retail 

pharmacy class of trade are excluded 

from AMP. The commenter further 

believes that the definition is overly 

restrictive because manufacturers may 

have a standard customary prompt pay 

policy but may also occasionally offer 

other prompt pay discounts when a 

product is introduced or production is 

expanded to encourage wholesalers and 

retailers to stock a product without a 

proven demand. Additionally, 

manufacturers establish prompt pay 

standards that are intended to apply to 

the retail marketplace and expect the 

wholesaler to honor this policy. Another 

commenter said that CMS should clarify 

what is meant by ‘‘routinely offered’’

and specify the criteria that 

manufacturers should use to determine 

what is ‘‘routine.’’ In particular, CMS 

should address whether a customary 

prompt pay discount is considered 

routine if (1) it differs across customers; 

(2) it changes over the life cycle of the 

product; for example, the prompt pay 

discount offered at the introduction of 

the product differs from the prompt pay 

discount offered for the remainder of the 

product’s life cycle; and (3) it is 

different across products. 

Response: CMS proposed a definition 

which we believe is consistent with 

customary business practice regarding a 

routine discount extended to all 

purchasers for payment within a set 

time period; for example, 30, 60, or 90 

days and that would be flexible and 

accommodate prompt pay policies for 

standard sales. Discounts that do not 

meet this standard which are used for 

other purposes (for example, marketing, 

sales, and promotional strategies, 

special package discounts, incentives, 

and performance based discounts) are 

not considered customary prompt pay 

discounts and should not be excluded 

from AMP. 

Comment: One commenter said that, 

in restating the base date AMP, if prior 

data is not available, ‘‘customary 

prompt pay discounts’’ should be the 

discount that was typically offered by 

the manufacturer to wholesalers for 

prompt pay at the time of the price 

reporting submission related to such 

utilization, as reasonably determined by 

manufacturers. The commenter believes 

that any other reading would be 

arbitrary, impractical to implement, and 

inconsistent with congressional intent. 

The commenter requested that CMS 

confirm this interpretation. 

Response: Manufacturers must have 

data on actual prompt pay discounts 

provided during the period for which 

the base date AMP applies in order to 

recompute their base date AMPs. 

Manufacturers should document how 

they calculated their base date AMPs 

and maintain supporting 

documentation. 

Comment: One commenter said that 

prompt pay discounts, if included in 

AMP, will have a negative impact on the 

wholesaler drug distribution system, 

which needs that cash flow. The 

commenter further stated that the 

incentive for customary prompt pay 

discounts will be eliminated; therefore 

the impact will be negative to the 

economy of the industry. If wholesale 

distribution is negatively impacted, it 

will have direct consequences on drug 

availability at the patient level. 

Response: The law requires that 

manufacturers exclude customary 

prompt pay discounts extended to 

wholesalers from AMP beginning in 

January 2007. 

Comment: A few commenters agreed 

with the exclusion of customary prompt 

pay discounts from the AMP 

calculation. 

Response: We appreciate the support 

for the provisions. This is a requirement 

of law and we have retained this 

requirement at § 447.504(h)(20) in the 

final rule. 

Comment: Several commenters stated 

that many people in the industry have 

historically referred to ‘‘prompt pay 

discounts’’ as ‘‘cash discounts;’’

therefore, to avoid confusion, CMS 

should clarify the term ‘‘cash 

discounts.’’ Another commenter 

requested that the final rule should 

further clarify ‘‘cash discounts’’ to 

exclude any discount off of the purchase 

price of a drug routinely offered by the 

manufacturer to a wholesaler for prompt 

payment of purchased drugs within a 

specified time from when the payment 

is due. Another commenter requested 

that CMS add a parenthetical phrase 

reading ‘‘(except customary prompt pay 

discounts extended to wholesalers)’’

after the term ‘‘cash discount’’ in 

§ 447.504(d) and (i). 

Response: We agree and have clarified 

what we mean by cash discounts in the 

regulation at § 447.504(d). We have also 

changed §§ 447.504(d) and (i) to add 

‘‘except customary prompt pay 

discounts’’ after ‘‘cash discounts.’’

Comment: One commenter requested 

that CMS refrain from defining ‘‘cash 

discounts’’ in a manner that is 

inconsistent with the definition of 

customary prompt pay discounts in the 

proposed rule. Clarity and consistency 

of pricing terms is essential for the 

accurate submission of AMP data. 

Response: We agree and have clarified 

cash discounts in this final rule at 

§ 447.504(d). 

Comment: One commenter said that 

customary prompt pay cash discounts 

extended by wholesalers to pharmacies 

should be omitted from AMP. Cash 

discounts are provided to some retail 

pharmacies based on financing terms 

negotiated between the wholesaler and 

the pharmacy. These are not 

performance-based discounts. Not all 

pharmacies, especially independent 

pharmacies, have the distribution 

capabilities or the cash flow to take 

advantage of these terms. 

Response: The statute defines AMP as 

the average price paid to the 

manufacturer by wholesalers for 

covered outpatient drugs distributed to 

the retail pharmacy class of trade, 

without regard to customary prompt pay 

discounts extended to wholesalers. 

Therefore, neither prices nor discounts 

to those prices offered by wholesalers to 

pharmacies affect AMP. 

Comment: A few commenters agreed 

with the definition of customary prompt 

pay discount, but requested that CMS 

confirm that manufacturers may make 

reasonable assumptions in applying this 

definition to their AMP calculations and 

in the reporting of such discounts each 

quarter. One commenter expressed hope 

that CMS will take note of the 

significant administrative burdens 

associated with tracking customary 

prompt pay discounts on an individual 

basis. 

Response: As with other pricing 

calculations, in the absence of specific 

guidance, manufacturers may make 

reasonable assumptions consistent with 


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the statute, Federal regulations, and 

customary business practices. We 

believe that manufacturers should 

maintain documentation to support the 

customary prompt pay discounts 

reported to CMS. However, 

manufacturers may not assume an 

across the board percentage for 

customary prompt pay discounts. We 

recognize that reporting the amount of 

customary prompt pay discounts is a 

new requirement but that it is required 

by law. 

Comment: A commenter requested 

that CMS clarify that ‘‘prompt’’ is 

defined by the manufacturer regardless 

of the length of time in which the 

purchaser can receive the discount. 

Response: The length of time in 

which the purchaser can receive the 

discount should be consistent across 

purchasers for that manufacturer as well 

as consistent with customary business 

practice. 

Comment: A commenter requested 

that CMS clarify that, in accordance 

with current industry practice, it is 

appropriate for manufacturers to 

calculate customary prompt pay 

discounts by applying the available 

prompt pay discount percentage (for 

example, two percent) to total direct 

sales. 

Response: We do not agree. 

Manufacturers must report the actual 

amount of customary pay discounts 

provided for the period. 

Comment: One commenter requested 

that CMS clarify that ‘‘any discount’’

means a discount regardless of the 

amount that is conditioned on the 

timing of payment. 

Response: We disagree. ‘‘Any 

discount’’ should be the discount off of 

the purchase price of a drug provided 

when payment is made within a 

specified time that is consistent with 

customary business practices. 

Comment: One commenter requested 

that we clarify the term ‘‘routine’’ to 

apply only to those discounts that are 

provided to entities that satisfy 

manufacturer defined, objective criteria. 

Response: We agree and have clarified 

in § 447.504(c) that the discount should 

be consistent with customary business 

practice. 

Comment: One commenter requested 

that CMS clarify the term ‘‘prompt pay.’’

Response: The term ‘‘prompt pay’’

refers to a discount provided consistent 

with industry customary business 

practices for payment within a specific 

timeframe. 

Comment: One commenter requested 

that CMS clarify whether prompt pay 

discounts paid to pharmacies and PBMs 

are eligible for exclusion from AMP 

based on the definition of wholesaler. 

Response: As specified in statute, 

only prompt pay discounts to 

wholesalers, as defined in this final rule 

in at § 447.504(c) are to be excluded 

from AMP. 

Comment: Several commenters 

support the definition of customary 

prompt pay discount. 

Response: We appreciate the support 

for this definition. 

Comment: One commenter requested 

that CMS exclude customary prompt 

pay discounts from the calculation of 

ASP. 

Response: These issues are not 

addressed in the proposed rule and are 

outside the scope of this rulemaking 

document. Therefore, we have not 

considered these comments as we 

consider revisions to the final rule. 

Comment: One commenter stated that 

the exclusion of customary prompt pay 

discounts from AMP will effectively 

increase the AMP, resulting in 

incremental increases to the rebates for 

drugs to States and the Federal 

Government. 

Response: CMS does not have data 

sufficient to predict how AMP will 

change to the exclusion of customary 

prompt pay discounts or other changes 

in this rule. 

Comment: One commenter agreed that 

CMS should not specify payment 

amounts or time terms in the definition. 

Although some manufacturers may ask 

CMS to further define the various 

aspects of customary prompt pay 

discounts, the commenter encouraged 

CMS to maintain the proposed 

definition in this final rule because this 

approach allows manufacturers and 

wholesalers the necessary flexibility to 

negotiate payment terms, including 

customary prompt pay discounts based 

on their particular situations and the 

commercial conditions at the time of the 

particular transaction. Additionally, this 

flexibility promotes competition in the 

healthcare distribution business, which 

ultimately will lower distribution costs. 

Response: We appreciate the support 

but note that customary prompt pay 

discounts must be routinely offered in 

order to be excluded from AMP. 

Determination of AMP 

Comment: One commenter stated that 

the law clearly limits prices included in 

AMP to be prices paid by wholesalers, 

including discounts received by 

wholesalers. However, CMS proposed to 

require that manufacturers include 

prices that are not paid by wholesalers, 

such as to PBMs, as well as discounts 

on drugs that are not received by 

wholesalers. The commenter believes 

that the proposal is inconsistent with 

both congressional intent and CMS’

longstanding interpretation of the 

statute. 

Response: We have clarified in this 

final rule in § 447.504 that AMP should 

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. We have also clarified that 

rebates, discounts, or other price 

concessions to PBMs should not be 

included in AMP because we believe 

they do not adjust the price actually 

realized. We believe that this final rule 

provides a definition of AMP and 

wholesaler consistent with the 

provisions of the DRA and section 1927 

of the Act. 

Comment: One commenter stated that 

they know that an imprecise definition 

of AMP, especially if publicly posted, 

will be misleading to State Medicaid 

Directors and others who will use this 

as a reference point for setting pharmacy 

reimbursement. 

Response: We have clarified the 

definition of AMP in § 447.504(a) to be 

consistent with the current law. We 

intend to clarify in guidance that posted 

AMPs are not designed to reflect prices 

paid by specific pharmacies. 

Comment: Another commenter said 

that CMS proposes to include in AMP 

all sales to wholesalers except for those 

sales that can be identified with 

‘‘adequate documentation’’ as being 

subsequently sold to any excluded 

entity. The commenter requested CMS 

to specify what constitutes adequate 

documentation. In the absence of further 

guidance, the commenter presumes that 

manufacturers may make reasonable 

assumptions in determining whether 

they have satisfied the adequate 

documentation requirement. However, 

the commenter requests that CMS 

provide an opportunity for 

manufacturers to comment on any 

further guidance prior to issuing a final 

rule. 

Response: We have clarified that 

adequate documentation includes, but is 

not limited to, chargeback data or data 

for which an outside auditor, certified 

public accounting firm, CMS, the OIG, 

or another authorized government 

agency could reconstruct the 

transaction. Manufacturers may 

continue to make reasonable 

assumptions that are consistent with 

this final rule, statute, and general 

business practices. We do not 

specifically request comments on 

guidance issued to implement the rebate 


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program but we intend to respond to 

comments received before and after 

such guidance. 

Comment: One commenter suggested 

that CMS reconsider whether all of the 

sales enumerated under § 447.504(g) are 

appropriately ‘‘included’’ in AMP based 

on the definition of ‘‘wholesaler.’’

Response: We appreciate the 

comment and have revised the 

regulation text in § 447.504 to reflect 

revisions based upon comments 

received on this issue. 

Comment: Several commenters 

requested that CMS provide a clear 

definition of AMP. Other commenters 

said that it must be defined fairly and 

equitably. Another commenter also said 

that the current definition of AMP is 

ambiguous and has never been 

adequately defined by CMS. One 

commenter said that AMP cannot be 

clearly defined as the industry does not 

have a true standard definition. 

Response: We believe that this final 

rule provides a clear and adequate 

definition of AMP consistent with the 

provisions of the DRA and helps resolve 

ambiguities and confusion that may 

have existed with the pre-DRA 

definition. 

Comment: One commenter said that 

they did not support the current 

definition of AMP. 

Response: We have revised the 

regulation text at § 447.504 to reflect 

revisions based upon comments 

received. 

Comment: One commenter said that 

this final rule should be consistent with 

established Medicaid rebate policies, 

definitions and terms set forth in 

current CMS guidance, such as program 

releases and the national rebate 

agreement. 

Response: We have clarified previous 

policies as well as incorporated changes 

mandated by the DRA. This final rule is 

consistent with current law and it 

reflects recommendations made to us by 

the OIG and relevant comments. 

Comment: One commenter requested 

clarification regarding whether the 

definition of AMP is being changed. The 

commenter requested clarification 

regarding whether AMP is the price 

received by the manufacturer, the price 

recognized by the manufacturer, or the 

price paid by the retail pharmacy class 

of trade. 

Response: We have clarified at 

§447.504(a) that the AMP is the average 

price received by the manufacturer for 

the drugs in the United States from 

wholesalers for drugs distributed to the 

retail pharmacy class of trade, without 

regard to customary prompt pay 

discounts extended to wholesalers, and 

inclusive of sales and associated 

discounts, which reduce the amount 

received by the manufacturer (unless 

the sale or discount is excluded by the 

statute or regulation). We have clarified 

the definition in the regulation. 

Comment: One commenter requested 

that CMS clarify the phrase ‘‘prices 

which are actually available’’ used in 

the proposed rule. Available prices 

should not be used to define AMP. If a 

price is offered and not taken, it is 

irrelevant to prices received by 

manufacturers or prices paid by retail 

pharmacies. 

Response: Actual sales must occur in 

the period in order for a particular price 

to be reflected in AMP. 

Comment: One commenter requested 

that AMP be defined as, ‘‘with respect 

to a covered outpatient drug of a 

manufacturer (including those sold 

under an NDA approved under section 

505(c) of the FFDCA) for a calendar 

month, 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.’’

The commenter requested that AMP be 

defined to include only sales to chain 

and independent pharmacies, and 

discounts to retail pharmacies, but only 

to the extent that such discounts reduce 

the actual price paid by retail 

pharmacies. 

Response: We disagree. In light of our 

understanding of the statute and DRA 

amendments, we have decided to 

include in the AMP and retail pharmacy 

class of trade, sales to chain, 

independents, and mail order 

pharmacies, as well as discounts to such 

entities to the extent that they reduce 

the amount received by the 

manufacturer and are not otherwise 

excluded by statute and regulation. 

Comment: One commenter requested 

that CMS clarify the meaning of the 

term, ‘‘associated with,’’ referenced in 

§447.504(g)(10) in the proposed rule. 

Response: The term, ‘‘associated 

with’’ means with respect to the AMP 

calculation, that manufacturers should 

include all sales and associated rebates, 

discounts, or other price concessions 

which relate to the sale, unless those 

sales, rebates, or other price concessions 

are excluded by statute or regulation. 

Comment: One commenter requested 

that CMS exclude from AMP price 

adjustments that do not affect the actual 

price provided by the manufacturer and 

that are not received by retail 

community pharmacies. 

Response: As noted previously, we 

have defined AMP to include 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. Absent such specific 

exclusions, we believe that 

manufacturers should calculate AMP by 

matching sales with their associated 

price concessions. 

Comment: Many commenters asked 

that CMS issue a clear definition of 

AMP that covers community, 

independent and chain pharmacy 

acquisition costs. This definition should 

be issued as soon as possible, before 

AMP takes effect. 

Response: We have defined AMP 

consistent with our understanding of 

the current law. Because AMP is based 

on the average price received by the 

manufacturer for the drug, it does not 

necessarily reflect a pharmacy’s 

acquisition cost for the drug. 

Comment: One commenter 

commended CMS for articulating the 

rationale behind our proposals 

regarding the determination of AMP. 

For example, in the definition of ‘‘retail 

pharmacy class of trade,’’ CMS 

articulated an assessment based on 

whether or not sales are available to the 

general public. The commenter 

appreciated this effort to describe the 

history and development of the 

Agency’s thinking. However, the 

commenter was concerned that the test, 

as articulated, lacks sufficient clarity. 

The commenter believed that the 

proposed rule represents an important 

and necessary step forward in 

standardizing AMP calculations. 

However, the commenter urged CMS to 

significantly refine its guidance. 

Response: We believe that this final 

rule provides a clearer, accurate and 

precise definition of AMP to allow 

manufacturers to accurately calculate 

AMPs. We expect to continue to issue 

further guidance and answer specific 

questions to the extent necessary to 

provide additional clarity. Furthermore, 

this final rule period allows for 

additional public comment on AMP. 

Comment: One commenter said that 

the proposed definition of AMP is 

unfair to retail pharmacies because it 

includes sales to PPOs, HMOs, and 

outpatient clinics, all of which receive 

bid prices from drug companies. To be 

fair, the cost should be derived from the 

prices paid by retail pharmacies. Many 

commenters said that if AMP is to 

accurately serve as both the basis for 

rebates and payment, CMS must define 

AMP to reflect the actual acquisition 

cost with respect to prices paid for 


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drugs by retail pharmacies, excluding 

all rebates and price concessions not 

available to retail pharmacy. 

Response: As we noted previously, 

the statute defines AMP, in part, as the 

average price received by the 

manufacturer for drugs distributed to 

the retail pharmacy class of trade. 

Accordingly, AMP does not necessarily 

reflect the pharmacy’s acquisition cost. 

We note that when the AMP is used in 

the calculation of FULs, the calculation 

includes a markup of 250 percent and 

excludes certain outlier prices, as 

described elsewhere in this regulation. 

The DRA does not require the States to 

otherwise base their payments on 

AMPs. To the extent that they do so, we 

would expect them to look at 

appropriate mark-ups and any other 

relevant factors to ensure access. Such 

changes in payment would also require 

the submission and CMS approval of a 

State plan amendment. 

Comment: One commenter agreed 

with CMS’ interpretation of 

congressional intent that both direct and 

indirect pharmacy sales be included in 

AMP. The commenter requested that 

CMS incorporate direct retail pharmacy 

sales in AMP without adopting a 

strained, overly-broad definition of 

wholesaler. It should be sufficient to 

include a provision in the final rule 

expressly stating that net sales to retail 

pharmacies are to be included when 

AMP is calculated, but CMS could avoid 

all ambiguity about the requirement to 

include direct pharmacy sales in AMP 

by adding the parenthetical, ‘‘(direct 

and indirect)’’ after the word ‘‘sales’’ at 

the beginning of proposed 

§ 447.504(g)(5). 

Response: We appreciate the 

comment and believe that we have 

defined AMP to be consistent with the 

provisions of the DRA and section 1927 

of the Act, and include sales, rebates, 

and price concessions provided by the 

manufacturer for drugs distributed to 

the retail pharmacy class of trade. In 

addition the definition of wholesaler 

has been revised. 

Comment: One commenter said that 

the new determination of AMP will 

cause many pharmacies to consider 

disenrolling from Medicaid pharmacy 

programs. Commenters said that the 

current definition of AMP will cause 

their retail pharmacy to lose money 

with each prescription that is filled. A 

few commenters stated that AMP must 

be defined as it relates to the retail 

pharmacy class of trade. Retail 

pharmacy must be able to purchase 

these drugs at a price that is less than 

the reimbursement it is to receive, 

including the cost of electronic 

transmission to the PBM, labeling, 

container, counseling time, delivery 

costs, and packaging. Another 

commenter stated that the formula must 

be tweaked to provide a true cost. 

Response: We disagree. As we have 

noted elsewhere in this regulation, the 

AMPs will be used to establish FULs, 

which is calculated based, in part, on 

250 percent of the AMP. To the extent 

States decide to use AMPs for 

reimbursement that decision will be 

subject to our review and approval 

through a State plan amendment 

approval process. We believe that this 

final regulation provides an adequate 

opportunity for States to set adequate 

reimbursement rates for drugs subject to 

the upper limits. We also believe that 

States that opt to use AMP as a basis for 

their pharmacy reimbursements will 

also use other resources available to 

them to determine fair and reasonable 

reimbursement to ensure continued 

access to pharmacy services for 

Medicaid patients. We also note that we 

encourage States to reevaluate their 

dispensing fees to ensure that they are 

reasonable and cover the costs to 

dispense drugs identified in this final 

rule. 

Comment: A few commenters said 

that a new definition for AMP is 

needed, which should be Average Retail 

Price (ARP). 

Response: Current law requires that 

AMP be computed based, in part, on the 

average price received by manufacturers 

and submitted by manufacturers and it 

provides no authority for us to define 

AMP as an average retail price. 

Comment: A few commenters stated 

that the field is skewed against 

independent pharmacies. If CMS 

proceeds with AMP, then there needs to 

be a different AMP for different classes 

of trade. Some commenters stated 

further that mail order, retail, hospital, 

and long-term care pharmacies all 

purchase drugs at different costs and the 

same AMP should not be used for every 

class of trade. One commenter said that 

the formula is taking into account all of 

the rebates and special pricing afforded 

to the ‘‘closed door’’ specialties such as 

nursing homes, mail order houses, and 

hospitals. It has already been shown 

that the actual reimbursement proposed 

will be far less than what retail 

pharmacies can purchase the product 

for. 

Response: We disagree. We know of 

no evidence at this point that the 

payments, which would be set as a 

result of the revised FULs or publication 

of AMPs would be any less than 

pharmacy acquisition prices especially 

given that neither the FUL methodology 

nor AMP data has been established or 

available prior to publication of this 

rule. Current law provides no authority 

for a different AMP for different types 

of entities. However, we believe that the 

publication of AMP will provide the 

Federal and State Governments with 

more transparency with respect to the 

average price received by manufacturers 

for prescription drugs, and provide a 

basis on which to set payments rates. 

We further believe that, in light of the 

methodology for calculating the FULs, 

the AMPs will be fully adequate for 

computing the upper limits and that 

States will make their own best 

decisions, subject to the State plan 

amendment process, with respect to 

how to use AMP as a factor in provider 

payment. 

Comment: One commenter said that it 

will be harder for community 

pharmacies to compete with the retail 

giants as their prescription volume is 

much lower and it will be harder to 

recover their expenses. Community 

pharmacies will not necessarily receive 

the discounts that the larger retail 

pharmacies receive when purchasing 

generic drugs. 

Response: We believe that any 

payment revisions that states may 

establish as a result of these provisions 

will not prevent community pharmacies 

from competing with other pharmacies. 

CMS has calculated the FULs without 

regard to any outlier AMPs and will 

review any state plan amendment 

submission as a result of those FULs to 

ensure sufficient access. We further note 

that States maintain the authority to 

vary payment rates by rural area as well 

as by the type of the provider. 

Comment: Several commenters said 

that the proposed rule would unduly 

reduce AMP. 

Response: We appreciate the 

comment and have revised AMP at 

§ 447.504 to address similar concerns. 

Comment: One commenter said that it 

is clear from the proposed rule 

discussion that CMS has struggled to 

balance AMP-based rebate collection 

and AMP-based reimbursement through 

the inclusion of non-pharmacy entities. 

Should CMS believe it important to 

maintain these entities in AMP for the 

purposes of reducing manufacturer 

rebates, then an alternative would be to 

have monthly and quarterly rebates 

calculated differently. Monthly and 

quarterly AMPs would afford CMS the 

opportunity to use the monthly AMP to 

establish the FUL in a way that would 

provide a more accurate reflection of 

traditional retail pharmacy purchasing 

(that is, only including licensed 

pharmacies and excluding other entities 

such as PBMs) and maintain the CMS 

decision to reduce manufacturer rebate 

liabilities by the inclusion of the various 


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non-pharmacy entities in the quarterly 

AMP reporting. Another commenter 

said that the best method of resolving 

any conflict between the two functions 

of AMP (paying rebates and payment) is 

to examine the basic purposes of the 

statutes and craft the definition and use 

of AMP to better fit those purposes. The 

commenter did not believe the proposed 

rule dealt with these purposes 

adequately. 

Response: We do not agree. There is 

only one definition of AMP, as revised 

by the DRA, that is applied for both 

rebate and FUL purposes. By using only 

one definition, these AMPs become 

much more transparent and provide 

information regarding the average price 

received by manufacturer from 

wholesalers for drugs distributed to the 

retail pharmacy class of trade. We 

believe that the definition of AMP as 

clarified in this final rule at § 447.504(a) 

accurately reflects the dual purposes of 

AMP. 

Comment: One commenter stated that 

the approach that CMS used in the 

determination of AMP is overly broad, 

in that past policy reflects a different 

focus on the use of AMP and the 

agency’s interpretation of the 

marketplace does not provide adequate 

consideration of the obvious 

inconsistencies that occur when FULs 

based on AMPs are defined in the 

proposed rule as approximations for 

estimated acquisition cost (EAC). The 

transactions included in AMP should be 

based on a more narrow view of what 

is meant by the retail pharmacy class of 

trade, but should also consider more 

significantly the link between FULs and 

EAC. 

Response: We agree that although 

AMP was defined in the rebate 

agreement, the list of sales included in 

the AMP calculation was not well 

established when the DRA was enacted. 

While we have reviewed the OIG’s 

recommendations and those of 

commenters, and incorporated changes 

where we thought appropriate, we 

believe that we have crafted a definition 

of AMP that reflects the requirements of 

the law and serves as a basis for both 

rebates and the FULs program. 

Comment: A few commenters said 

that without clear and concise guidance 

from CMS regarding how AMP is to be 

calculated, including what classes of 

trade are eligible and which classes of 

trade are not eligible, for inclusion in 

the AMP calculation manufacturers who 

compete in the same therapeutic area 

could have differing methodologies 

resulting in unfair physician 

reimbursement calculations. CMS needs 

to provide clear guidance on the 

calculation of AMP in order to maintain 

a fair and level playing field for 

physician reimbursement. 

Response: We believe that we have 

developed requirements in this final 

regulation that are clear and concise and 

that can provide a basis for consistent 

calculations and fair reimbursement 

rates. 

Comment: One commenter stated that 

AMP would be valid for determining 

transactions between a manufacturer 

and the next step down the trade chain 

(for example, a drug wholesaler) but 

using AMP is not valid to compute the 

price of the drug at the point a 

community pharmacist is dispensing it 

to his or her patients. 

Response: The statute provides that 

manufacturers calculate Medicaid 

rebates and CMS calculates the FULs 

based in part, on AMP. In accordance 

with the statute, we have defined AMP 

as the average price received by the 

manufacturer from wholesalers for 

drugs distributed to the retail pharmacy 

class of trade, excluding customary 

prompt pay discounts extended to 

wholesalers and including certain sales 

and associated discounts. As stated 

elsewhere in this final rule, we have not 

only applied the 250 percent markup to 

the lowest price therapeutically 

equivalent drug, we have implemented 

other policies to assure that the 

resulting FULs, in the aggregate, are 

reasonably established to reflect the 

pharmacy acquisition cost of drugs 

subject to the FULs, while protecting the 

taxpayer against excessive costs. 

Comment: A commenter 

recommended that the playing field on 

drug pricing be leveled by making the 

discounts extended to PBMs, mail order 

pharmacies, and government contracts 

available to retail pharmacies and allow 

a reasonable profit structure as any 

business deserves. 

Response: These issues were not 

addressed in the proposed rule; 

therefore, we can not consider these 

comments as we consider revisions to 

be included in the final rule. 

Comment: One commenter stated that 

the definition of AMP must be 

operational and feasible for 

manufacturers. Manufacturers are 

frequently not aware of the subsequent 

sales of their drug products after the 

first sale. Manufacturers do not have 

information about sales to hospitals, 

other wholesalers, mail order 

pharmacies, and PBMs. 

Response: We have modified the 

requirements in § 447.504(h) with 

respect to AMP calculations to exclude 

certain sales to hospitals and PBMs. The 

requirement of AMP specifies that 

where sales to excluded entities are 

documented, they should be excluded 

from AMP. 

Comment: One commenter said that 

AMP should be calculated based on the 

average price, not the lowest price. 

Response: We agree. The AMP, as 

amended by the DRA, represents the 

average unit price, not the lowest price, 

received by the manufacturer for the 

drug in the United States from 

wholesalers for drugs distributed to the 

retail pharmacy class of trade, without 

regard to customary prompt pay 

discounts extended to wholesalers as 

noted previously, AMP should be 

calculated to include sales and 

associated discounts and other price 

concessions provided by a 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), which reduce the amount 

received by the manufacturer. 

Comment: One commenter said that 

an appropriate calculation of AMP 

depends on an accurate definition of 

retail pharmacy class of trade, accurate 

identification of manufacturers’ prices 

paid by wholesalers for drugs 

distributed to retail pharmacies, and an 

appropriate definition of wholesaler. 

The commenter stated that CMS’

proposed definition has problems in all 

three areas. 

Response: In response to comments, 

we have clarified the definition of retail 

pharmacy class of trade at § 447.504(e), 

wholesalers at § 447.504(f), and the list 

of sales included in the determination of 

AMP at § 447.504(g). 

Comment: One commenter said that 

AMP is as ambiguous as AWP or ASP 

in that it can be interpreted many ways 

and does not consider business 

overhead requirements of drug 

wholesalers and distributors. 

Response: We do not agree. ASP and 

AMP are defined in the statute and 

Medicare regulations. However, AWP is 

a term that is not further defined in the 

regulation and has been found to 

frequently overstate the actual cost of 

drugs. 

Comment: One commenter stated that 

AMP should have full transparency. 

Another commenter said that the AMP 

calculation should be solidified and that 

a more transparent method should be 

developed. 

Response: We have clarified at 

§ 447.504(i)(2) and § 447.510(d)(2) how 

manufacturers should calculate and 

report AMP on both a quarterly and 

monthly basis, and we expect to post 

AMP data for public review on our Web 

site. Although the manufacturers’

documentation for these calculations 

will not be made available to the general 


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public, they are subject to Federal 

Government verification. 

Comment: Many commenters stated 

that all rebates and price concessions 

are appropriately included in best price 

but should not be included in AMP. 

Another commenter said that CMS 

should exclude from AMP those sales 

that are exempt from best price under 

section 1927(c)(1)(C)(i) of the Act. The 

commenter asserts that including sales 

to SPAPs and Part D Plans that are 

exempt from best price in AMP will 

artificially lower AMP as a 

reimbursement benchmark by including 

discounts in AMP to which pharmacists 

do not have access. 

Response: We have revised this final 

rule in § 447.504(h)(23) to exclude 

rebates and other price concessions 

provided to SPAPs and Part D plans. It 

is our understanding that such rebates 

and price concessions do not adjust the 

prices actually realized. We have 

continued in § 447.504(g)(15) to include 

sales with respect to such programs and 

plans to the extent that they occur 

through the retail pharmacy class of 

trade. 

Comment: One commenter asked 

whether CMS’ intent is to continue to 

allow manufacturers to treat an entity as 

either included or excluded in the retail 

pharmacy class of trade based on its 

function, provided that the 

manufacturer can provide sound 

rationale. 

Response: In the final rule we have 

defined that AMP be calculated to 

include sales and associated discounts 

and other price concessions provided by 

the manufacturer to wholesalers 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. Sales and 

associated price concessions should be 

included in AMP to the extent they 

concern sales at the retail pharmacy 

class of trade and are not otherwise 

exclude. 

Comment: One commenter stated that 

any entity that does not directly 

purchase drugs from the wholesaler 

should be excluded from AMP. 

Response: We have revised 

wholesaler in § 447.504(g) to mean any 

entity (including those entities in the 

retail pharmacy class of trade) to which 

the manufacturer sells the covered 

outpatient drugs, but that does not 

relabel or repackage the covered 

outpatient drug. 

Comment: A commenter stated that 

CMS will need to be exceedingly clear 

in the guidance that it provides to 

manufacturers in calculating AMP to 

ensure that manufacturers are able to 

determine the sales and associated price 

concessions that should not be included 

in AMP and to ensure consistency in 

AMP calculations across all 

manufacturers. 

Response: We have clarified in the 

regulation text at § 447.504(g) those 

sales and associated price concessions 

included in AMP. 

Comment: A commenter stated that 

§§ 447.504(a), (g) and (i) indicate types 

of discounts and price concessions that 

manufacturers should deduct from the 

calculation of the AMP. By including 

these discounts and concessions, the 

proposed rule incorrectly based AMP, 

not on the amounts paid by 

wholesalers—the predominant supply 

source for retail pharmacies—but 

instead includes amounts that 

manufacturers have contracted to pay 

other entities. While these discounts, 

rebates, chargebacks and other forms of 

price concessions may reduce the 

amount received by the manufacturer 

for drugs, they are not realized by retail 

pharmacies and do not reduce prices 

paid by retail pharmacies. 

Response: Our definition of AMP is 

consistent with our understanding of 

the section 1927(k)(1), as amended by 

the DRA. While we understand that 

some commenters do not agree with that 

definition because it does not represent 

the exact amount at which pharmacies 

purchase drugs, we believe that our 

definition is consistent with the statute. 

As we explain elsewhere in this final 

rule, the statute requires the use of 

AMPs in the FUL calculation with a 

sufficient markup of the AMP and we 

have included other exclusions in the 

FUL calculation to assure that these 

FULs prices in the aggregate are 

sufficient to cover pharmacists’ costs. 

Comment: One commenter said that 

§ 447.504(a) through (i) proposed 

revisions to various definitions and 

directions to manufacturers related to 

AMP calculation. The validity of CMS’

consideration for inclusion or exclusion 

of factors in determining AMP is 

essential for obtaining data that 

accurately reflects drug pricing. The 

commenter recommended that CMS 

adopt clear and specific policies to 

ensure consistency in the calculation of 

AMPs across all manufacturers. 

Response: We appreciate this 

comment and believe we have done so. 

Comment: One commenter said that 

the proposed definition, coupled with 

the broad definition of wholesaler, is 

intended to capture transactions with 

entities that do not pay manufacturers a 

price established by the manufacturer 

directly or through distributors. When 

combined with the proposed inclusions 

and exclusions from AMP, this 

definition creates confusion. 

Response: We appreciate the 

comment. As discussed previously, we 

have revised the definition of AMP in 

§ 447.504(g) to clarify which sales and 

associated price concessions must be 

included. 

Comment: One commenter said that 

the proposed rule provided 

manufacturers a significant amount of 

latitude and discretion with respect to 

the final AMP calculation. It is likely 

that there will be widespread 

differences in interpretation with 

respect to those elements that should be 

included or excluded from AMP. One 

example of this confusion relates to the 

treatment of a ‘‘bona fide service fee.’’

It remains unclear as to the comparative 

standard that will be used to establish 

the determination of ‘‘fair market 

value.’’ The commenter requests that 

additional clarity be provided to 

eliminate variation in manufacturer’s 

AMP calculation. 

Response: We believe that this final 

rule provides a clearer, accurate and 

precise definition of AMP, eliminating 

much of the confusion and assumptions 

regarding the entities included and 

excluded in AMP. For example, we have 

introduced the concept of bona fide 

service fees and provided further 

instructions on how they are to be 

determined. We expect that 

manufacturers participating in the 

Medicaid Drug Rebate Program will be 

in a much better position to understand 

our requirements and to determine their 

AMP calculations consistent with this 

final regulation. In the absence of 

specific guidance, manufacturers may 

make reasonable assumptions consistent 

with the statute, regulations and general 

business practices. 

Nursing Homes 

Comment: Many commenters said 

that nursing home pharmacies should 

not be included in AMP because they 

are not traditional retail pharmacies. 

Several commenters stated that rebates 

and discounts to nursing homes are not 

available to retail pharmacies. Other 

commenters said that nursing homes 

sales should be outside the retail 

pharmacy class of trade as these sales 

are not accessible to the public. A few 

commenters supported excluding 

nursing home pharmacies from the 

definition of retail pharmacy class of 

trade and noted that long-term care 

pharmacies are not retail pharmacies for 

Part D. 

Response: We appreciate the support 

for this policy and have decided to 

finalize our proposal to exclude nursing 

facility pharmacies from the retail 


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pharmacy class of trade, and, therefore 

AMP, in this final rule at 

§ 447.504(h)(6). 

Comment: One commenter requested 

that CMS clarify whether contract 

pharmacies that dispense drugs to 

nursing home and long-term care 

residents also should be excluded from 

the calculation of AMP. 

Response: We have clarified in the 

regulation text at § 447.504(h)(6) that 

sales to contract pharmacies that 

dispense drugs through nursing homes 

and long-term care facilities and other 

entities such as assisted living facilities 

which do not serve the general public 

are excluded from AMP. Since we 

believe a manufacturer would not know 

which drugs are dispensed to a nursing 

facility through an outside contract 

pharmacy, we have not excluded these 

sales from AMP unless that 

manufacturer has reasonable 

documentation that the drugs were 

subsequently sold to an excluded entity. 

Comment: One commenter stated that 

to remove nursing home sales from 

AMP would be inconsistent with CMS 

guidance issued to date and would be a 

substantive policy change. The 

commenter requested that long-term 

care sales continue to be included in 

AMP because these transactions are a 

significant portion of the market for 

many drugs and the exclusion of those 

transactions from AMP would yield 

inaccurate and misleading AMPs. 

Changing the current policy would 

require substantial changes in systems, 

policies, procedures, and data links that 

would more than offset the benefit from 

simplifying the AMP calculations. A 

few commenters encouraged CMS to 

continue its long-standing policy of 

including these sales in the calculation 

of AMP. 

Response: We have decided to retain 

the proposed exclusion at 

§ 447.504(h)(6) in this final rule because 

we believe that nursing home sales are 

not in the retail pharmacy class of trade 

because the general public cannot 

obtain drugs through this source. 

Comment: One commenter said that 

CMS has not clearly identified those 

entities that would be considered longterm care (or nursing home) pharmacies. 

The commenter encouraged CMS to 

clearly define the attributes of entities 

that qualify as long-term care 

pharmacies to avoid disparate treatment 

by manufacturers as they exclude prices 

to long-term care pharmacies. In 

particular, the commenter believed that 

it is not clear whether the following 

would be considered a long-term 

pharmacy: long-term care pharmacies 

owned by a hospital, infusion centers, 

and rehabilitation centers. The 

commenter further recommended that 

CMS establish a list of long-term care 

pharmacies similar to the list of eligible 

340B covered entities provided by the 

Office of Pharmacy Affairs in HRSA. 

Response: We consider a long-term 

care pharmacy to be a pharmacy that 

provides drugs to nursing home 

patients. Infusion centers and 

rehabilitation centers that serve patients 

outside a nursing home would not be 

included. We do not believe it is 

administratively feasible for CMS to 

maintain a list of the entities that fall 

into this category. 

Comment: A commenter asserted that 

it is often operationally infeasible for 

manufacturers to identify those sales 

that are made to a particular type of 

entity such as a long-term care 

pharmacy, as opposed to another type of 

entity that might not satisfy the 

definition of a long-term care pharmacy. 

Manufacturer sales data are captured at 

the contract level, but any included or 

excluded class of trade customer could 

purchase products from any wholesaler 

source contract. Thus, manufacturers 

have no way of determining whether 

final sales are made to customers 

excluded from AMP. Given this 

inherent difficulty with calculating 

AMP, it is imperative that CMS provide 

mechanisms by which manufacturers 

can calculate AMP as consistently as 

possible. 

Response: The final rule in 

§ 447.504(h)(6) clearly indicates that 

nursing home sales are excluded from 

AMP and allows manufacturers to use 

standards of reasonable documentation 

to identify such sales. 

Hospice and Other Home Health Care 

Pharmacies 

Comment: One commenter suggested 

that sales to hospice pharmacies should 

be treated the same as sales to long-term 

care pharmacies and excluded from 

AMP and best price. 

Response: Hospice pharmacies are 

outside of the regular retail marketplace, 

as drugs from these pharmacies are not 

available to the general public. 

Therefore, we have clarified in the 

regulation text at § 447.504(h)(7) that 

sales to hospices (outpatient and 

inpatient) are excluded from AMP. 

Comment: Several commenters 

requested that CMS specify in the final 

rule whether home health care 

providers meet the retail pharmacy class 

of trade definition. One commenter 

asked CMS to clarify whether prices 

paid by home health care agencies for 

drugs delivered to home bound patients 

are included in AMP. Several 

commenters requested that CMS clarify 

that home health care providers are 

included in the retail pharmacy class of 

trade because such entities provide 

pharmacy to the general public. 

Response: We have clarified in this 

final rule at § 447.504(g)(12) that sales to 

home health care providers are included 

in the retail pharmacy class of trade and 

AMP unless such drugs are dispensed 

through nursing facilities. We believe 

that, unlike nursing facilities, home 

health care providers operate to provide 

drugs to the general public. 

Physician Offices and Other Provider 

Settings 

Comment: Many commenters 

requested that CMS specify in the final 

rule whether sales to physicians are in 

the retail pharmacy class of trade. 

Several commenters requested guidance 

regarding the treatment of the physician 

class of trade (direct and indirect sales) 

since it was not addressed in the 

proposed rule. 

Response: We have clarified in the 

regulation text at § 447.504(g)(13) that 

sales to physicians fall into the 

definition of retail pharmacy class of 

trade and are included in AMP. The 

definition of retail pharmacy class of 

trade includes any pharmacy or other 

outlet that purchases, or arranges for the 

purchase of, drugs from a manufacturer, 

wholesaler, or distributor and 

subsequently sells or provides the drugs 

to the general public. We believe that, 

to the extent that the physician is 

operating to provide drugs to the general 

public, they should be included within 

the definition of retail pharmacy class of 

trade and AMP. 

Comment: One commenter sought 

clarification concerning whether sales to 

surgical centers, ambulatory care 

centers, prisons, and mental health 

centers are in the retail pharmacy class 

of trade. Unlike walk-in pharmacies, 

these providers generally provide drugs 

incident to providing medical services 

to persons who are their private 

patients, although some physician 

practices sell self-administered products 

to patients who take the products home. 

Response: We appreciate this 

comment and have clarified in the 

regulation text at § 447.504(h)(9) that 

sales to prisons are excluded from AMP. 

We have further clarified at 

§ 447.504(g)(8) that sales to surgical 

centers, ambulatory care centers, and 

mental health centers are included in 

AMP to the extent that such facilities 

provide drugs to the general public 

unless such drugs are provided through 

a nursing facility pharmacy. 

Hospital Pharmacy Sales 

Comment: Several commenters stated 

that hospital prices should be excluded 


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from AMP because hospital pharmacies 

receive generous price breaks from 

wholesalers and manufacturers that are 

not available to retail pharmacies. Many 

commenters believe that CMS should 

exclude all hospital pharmacy sales 

from AMP because the vast majority of 

sales are for inpatient use and hospitals 

do not generally track whether a drug is 

provided to an individual receiving 

inpatient services or outpatient services. 

Another commenter stated that it would 

be administratively difficult for 

manufacturers to include sales to walkin pharmacies located in hospitals 

because most hospitals buy drugs for 

inpatient and outpatient use through 

wholesalers or distributors under 

agreements negotiated by GPOs. The 

commenter further suggested that 

manufacturers be permitted to assume 

hospital purchases are for their 

inpatient inventory and exclude them 

from AMP unless sales to hospital 

outpatient pharmacies are identifiable. 

One commenter said that drugs 

provided through hospital outpatient 

departments are not available to the 

general public and should be excluded 

as they are not in the retail pharmacy 

class of trade. Another commenter 

stated that hospital outpatient 

departments receive drugs at lower 

prices than retail pharmacies which 

would result in a lower AMP and 

unfairly lower reimbursement to retail 

pharmacies. 

Response: We agree that 

manufacturers often do not know what 

drugs sold to hospitals are used in the 

hospital outpatient pharmacies or other 

hospital facilities, such as clinics. In 

such an event, we believe that 

manufacturers should exclude hospital 

sales from AMP. We have provided in 

this final rule at § 447.504(g)(3) that 

drugs sold to hospitals for use in an 

outpatient pharmacy are included in 

AMP, except where the manufacturer 

cannot identify and document hospital 

sales for outpatient use. 

Comment: One commenter stated that 

it is unclear if pharmacies in physician 

clinics that dispense prescriptions in 

such clinics are included in the retail 

pharmacy class of trade. 

Response: We consider physician 

clinics, to the extent that they provide 

drugs to the general public, to be in the 

retail pharmacy class of trade and drugs 

sold to these clinics should be included 

in AMP. 

Comment: One commenter asked if an 

outpatient clinic includes hospital 

surgical centers, ambulatory care centers 

and outpatient departments in which a 

patient is admitted to the hospital and 

released the same day. 

Response: The term outpatient clinic 

was intended to capture all outpatient 

facilities including hospital surgical 

centers, ambulatory care centers and 

outpatient departments because such 

facilities provide drugs that are 

available to the general public. We have 

revised the regulation text in 

§ 447.504(g)(8) to expand the term 

‘‘outpatient clinic’’ to ‘‘outpatient 

facilities; for example, outpatient 

clinic.’’

Comment: One commenter requested 

that CMS define outpatient clinic. The 

commenter assumed that federally 

qualified health centers, independent 

diagnostic facilities, and the like are 

outpatient clinics. 

Response: We have revised the term 

outpatient clinic in § 447.504(g)(8) to 

mean ‘‘outpatient facilities; for example, 

outpatient clinic’’ in the regulation text. 

Comment: One commenter indicated 

that it is unclear if the term outpatient 

clinic was intended to include 

physician offices. If not, the proposed 

rule is silent on the handling of sales to 

physicians in AMP. 

Response: The term outpatient clinic 

was not intended to cover direct 

physician sales. We have clarified in the 

final regulation text at § 447.504(g)(13) 

that the retail pharmacy class of trade 

may include physicians to the extent 

that they provide drugs to the general 

public. 

Comment: One commenter requested 

that CMS clarify that the term 

‘‘outpatient clinic’’ is not intended to 

mean hospital outpatient departments 

since a different sub-paragraph in 42 

CFR § 447.504(g) addresses sales to 

hospitals outpatient pharmacies. 

Manufacturers may find it difficult to 

distinguish between hospital-affiliated 

freestanding outpatient clinics and true 

hospital-based outpatient departments. 

Response: We have clarified in the 

regulation text at § 447.504(g)(8) that 

outpatient clinics and facilities, which 

are not hospital-affiliated entities, are 

included in AMP. We have further 

clarified in the regulation text at 

§ 447.504(g)(3) that sales to hospitals, 

for use by an outpatient pharmacy for a 

hospital outpatient department, clinic or 

affiliated entity are included in AMP, 

except when a manufacturer does not 

have information to distinguish these 

sales from sales used for inpatients. 

Mail Order Pharmacies 

Comment: Many commenters said 

that though mail order pharmacies have 

a tendency to decrease AMP, they 

should be included in AMP because 

they are licensed pharmacies and 

provide drugs to the general public. 

Some commenters support CMS’

decision to maintain its existing policy 

to include sales and price concessions 

to mail order pharmacies in the AMP 

calculation. One commenter agreed that 

mail order should be included in AMP 

on the basis that it is simply another 

form of how drugs enter into the retail 

pharmacy class of trade. 

Response: We appreciate the support 

for this provision and have retained this 

requirement in this final rule at 

§ 447.504(g)(9). 

Comment: One commenter said that 

mail order pharmacy rebates, 

chargebacks, and other price 

concessions should not be included in 

AMP. 

Response: We do not agree. After 

consideration of all comments received, 

we continue to believe that mail order 

pharmacies are part of the retail 

pharmacy class of trade inasmuch as 

they are accessible and dispense 

prescriptions to the general public. The 

rebate agreement which provides for the 

inclusions of rebates, discounts, and 

price concessions associated with drugs 

provided to the retail pharmacy class of 

trade be included in AMP. We further 

believe that we are correct to include 

mail order pharmacies in AMP, since 

Congress did not seek to change the 

policy regarding the inclusion of mail 

order pharmacy sales and associated 

price concessions in AMP with the 

recent DRA (except with respect to 

customary prompt pay discounts 

extended to wholesalers). Accordingly, 

CMS has not changed the policy in this 

final rule. 

Comment: Several commenters said 

that any closed-door mail order 

pharmacy, in that it sells only to 

facilities or plans with which a 

contractual relationship exists, should 

be excluded. 

Response: As previously discussed, 

we believe that all sales to mail order 

pharmacies are within the retail 

pharmacy marketplace and drugs from 

these pharmacies are available to the 

general public. We have clarified in the 

final regulation at § 447.504(e) the 

definition of retail pharmacy class of 

trade. 

Comment: Several commenters said 

that any mail order pharmacy whose 

rebate and discount arrangements are 

not available to other pharmacies in the 

retail pharmacy class of trade should be 

excluded. 

Response: We disagree. The rebate 

agreement which provides that rebates, 

discounts, and price concessions 

associated with drugs provided to the 

retail pharmacy class of trade be 

included in AMP. It does not 

precondition this on whether other 


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entities within the retail pharmacy class 

of trade can get these same discounts. 

Comment: One commenter expressed 

the concern that the inclusion of mail 

order discounts and rebates in the AMP 

calculation will impact access for a drug 

when used for the purposed of the FUL 

process. Several commenters said that to 

include mail order pharmacies in AMP 

will skew the price to a lower price at 

which retail outlets will never be able 

to purchase medications. Another 

commenter noted that although mail 

order pharmacies serve consumers on a 

retail level their dispensing rate per day 

is many hundreds of times larger than 

a community-based retail pharmacy, 

allowing them to buy at a lower cost 

that is not available to a communitybased retail pharmacy. Another 

commenter stated that the inclusion of 

mail order pharmacies will lower 

reimbursement to the community 

pharmacies below their cost. Several 

commenters stated that drug acquisition 

costs available to mail order pharmacies 

may not be available to smaller retail 

pharmacies and that inclusion of mail 

order pharmacies will serve to drive 

down pharmacy ingredient costs even 

further below average acquisition cost. 

One commenter said that it is selfevident to those in the industry that 

independent pharmacies do not 

purchase pharmaceuticals at the same 

cost as mail order pharmacies or chain 

pharmacies. This is driven by the 

inability to collectively negotiate with 

manufactures and to purchase 

pharmaceuticals without acquiring the 

product from a wholesaler or distributor 

that requires significant additional 

margins for the distribution of those 

items from the manufacturers to 

independent pharmacies. They further 

noted that the differentials of mail order 

and chain pharmacies to other 

pharmacies acquisition cost are very 

significant. Many commenters said that 

the proposed rule is flawed by allowing 

manufacturers to include mail order in 

AMP on the basis that AMP will not 

reflect the price paid by traditional 

retail pharmacies or community 

pharmacies. A few commenters said that 

the idea of an AMP is acceptable, but 

only if hospital and mail order 

pharmacy pricing is excluded from 

AMP as mail order and hospital 

pharmacies receive generous price 

breaks from wholesalers and 

manufacturers alike, and thus their 

AMP should be calculated separately 

from other traditional retail pharmacies. 

One commenter further said that mail 

order pharmacies do not create a level 

playing field with community 

pharmacies. Mail order pharmacies have 

tremendous advantages over community 

retail pharmacies due to their 

preferential treatment by 

pharmaceutical manufacturers. Their 

special discounts and pricing are not 

available to the public. Therefore, 

adding their pricing into the equation 

will cause an artificially low AMP to be 

reported. Another commenter stated 

that community pharmacies are at a loss 

compared to hospital/clinic 

organizations, PBMs, and mail order 

pharmacies because these pharmacies 

have access to rebates and price 

concessions that may not be available to 

community pharmacy. 

Response: We disagree. Mail order 

and other pharmacies are included in 

the definition retail pharmacy class of 

trade given that they provide drugs to 

the general public. Furthermore, the 

calculation of AMP is based, in part, on 

the average price received by 

manufacturers. Some drug prices in 

AMP will be lower than the average but 

they will be combined with other sales 

prices that are higher. The FULs, in 

turn, are calculated based on the lowest 

priced drug inflated by 250 percent. In 

addition, we have taken other measures 

as described in this regulation to assure 

that drugs used in the FUL calculation 

will be available at the FULs price. 

Comment: One commenter said that 

while the proposed rule makes a strong 

case for the inclusion of prices of sales 

to mail order pharmacies, it remains 

extremely vague on operational issues. 

Because the inclusion of these prices 

will have a significant impact on the 

AMP, the operational detail is extremely 

important. 

Response: We are unable to respond 

to this comment as the commenter did 

not include enough specific information 

regarding operational issues to enable us 

to do so. Prices of sales to mail order 

pharmacies are currently included in 

AMP; therefore, we do not believe that 

the finalization of this provision will 

present or create new operational issues 

for manufacturers. 

Comment: Many commenters said 

that mail order pharmacies should be 

excluded from AMP because mail order 

pharmacy sales are not traditional retail 

pharmacies and are a restricted vehicle 

for the delivery of prescriptions which 

is not publicly accessible to all patients. 

They do not provide the expected and 

needed services a retail pharmacy 

provides nor do they provide identical 

medications. Another commenter noted 

that a traditional retail pharmacy almost 

without exception pays the highest 

price. Mail order pharmacies are 

structurally similar to pharmacies that 

service nursing homes, which have been 

excluded in the proposed rule from the 

retail pharmacy class of trade. They 

should be considered separate entities. 

Response: We disagree. We continue 

to believe that mail order pharmacies 

are a segment of the retail pharmacy 

class of trade and should remain in 

AMP. We note that in the OIG’s 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 in the GAO report, ‘‘Medicaid 

Drug Rebate Program—Inadequate 

Oversight Raises Concerns about 

Rebates Paid to States,’’ (GAO–05–102), 

February 2005, retail pharmacy class of 

trade was defined to mean 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. We do believe that there 

are not sufficient similarities between 

long-term care pharmacies and mail 

order pharmacies especially given that 

drugs of long-term care pharmacies are 

only available to residents of those 

institutions. 

Comment: One commenter said that 

removing mail order pharmacies from 

the retail pharmacy class of trade creates 

consistency in the regulation and 

conforms the definition to market 

reality. 

Response: We disagree. We have 

consistently applied the definition of 

retail pharmacy class of trade to mean 

that segment of the market accessible to 

the general public. Given that mail order 

pharmacies are a segment of the retail 

marketplace, we continue to believe that 

their inclusion reflects market reality. 

Comment: One commenter stated that 

mail order pharmacies are owned by 

PBMs and PBMs are not wholesale 

distributors; therefore, there is no 

method for distributing this lower cost 

to the retail sector. Another commenter 

said that should CMS decide to include 

mail order pharmacies in its definition 

of ‘‘retail pharmacy class of trade’’ then 

PBMs acting as wholesalers and or mail 

order pharmacies would by default need 

to have their purchase discounts 

included in the calculation of AMP. 

Response: As discussed previously, 

we have decided to exclude PBM 

rebates, discounts and other price 

concessions from the determination of 

AMP, except for purchases through 

PBM mail order pharmacies. We 

understand that PBMs do not generally 

take possession of pharmaceutical 

products. Only in their role as mail 

order pharmacies do PBMs participate 

directly in the purchase or delivery of 

prescriptions drugs. However, we 


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continue to include sales to mail order 

pharmacies operated by PBMs. We 

believe that the sale to a mail order 

pharmacy, regardless of whether such a 

pharmacy in owned by a PBM, meets 

the definition of a sale to the retail 

pharmacy class of trade given that the 

drugs provided by such pharmacies are 

generally available to the general public. 

Comment: One commenter said that 

mail order sales should not be included 

in the calculation of AMP because they 

are treated by the pharmaceutical 

manufacturers as a different class of 

trade. 

Response: We disagree. The definition 

of retail pharmacy class of trade for the 

purposes of the drug rebate program is 

governed be the standards in this rule, 

not by how a manufacturer treats a sale. 

Comment: A few commenters stated 

that mail order pharmacies will have an 

unfair competitive advantage over retail 

pharmacy if the final rule permits the 

inclusion in AMP. 

Response: We do not believe the 

inclusion of mail order pharmacies in 

AMP in this final rule will significantly 

affect the competitive advantage one 

segment of the market has over the 

other. As we previously noted, the FULs 

price, which is calculated as an 

aggregate upper limit based on 250 

percent of the AMP, should allow 

adequate payment to any pharmacy. We 

believe that States will consider the 

interests of all pharmacies in the State 

in setting other pharmacy payment rates 

and note that such rates will require 

approval of a State plan amendment. 

Comment: One commenter suggests 

that if mail order pharmacy pricing is 

not excluded, then it should at least be 

used only with a diminished weight in 

the actual equation used to calculate 

AMP. 

Response: We disagree. The 

legislation does not support a different 

methodology for mail order pharmacies 

or any other segment of the retail 

pharmacy class of trade when 

calculating AMP. 

Comment: One commenter said that 

including mail order pricing in the 

determination of AMP is wrong and 

instead there should be a retail AMP 

and a mail order AMP. 

Response: The current law does not 

provide for separate AMP calculations. 

Comment: One commenter questioned 

why mail order pharmacies pay less for 

drugs. The commenter stated that 

community pharmacy should have the 

same rebates and pricing to save money. 

Response: Such issues regarding the 

purchase prices of different entities are 

not covered by this final rule. 

Comment: A few commenters stated 

that if mail order price concessions are 

included in AMP, the resulting base 

date AMP will be artificially low. 

Response: As elsewhere described in 

this final rule, we are allowing 

manufacturers to revise their base date 

AMPs for the first four calendar quarters 

following publication of this final rule. 

Comment: AMP needs to be defined 

so that the community pharmacist can 

continue to serve Medicaid patients. 

Response: We believe that this final 

regulation permits states to provide for 

adequate reimbursement for FUL drugs 

subject to the FULs. 

Comment: One commenter said that 

CMS should take into consideration 

how price concessions are earned by 

mail order pharmacies. Mail order 

pharmacies are able to provide 

manufacturers with increased market 

share via the use of formularies and 

incentives, such as copayments. In 

return for increased market share and 

profits, manufacturers offer monies and 

incentives not available to purchasers 

other than mail order for Medicaid 

prescriptions. Medicaid requires 

manufacturers to pay rebates/incentives 

directly to States. Manufacturers 

expressly exclude Medicaid 

prescriptions from incentive programs 

offered to mail order. The calculation of 

AMP should exclude discounts or 

incentives that are not available for 

Medicaid prescriptions. 

Response: We appreciate the 

comment; however, the methods for 

earning such price concessions by mail 

order pharmacies are outside of the 

scope of the proposed rule. The 

calculation of AMP is not based on 

incentives offered to one segment of the 

market or whether these incentives are 

offered for Medicaid prescriptions. 

Comment: Several commenters stated 

that because mail order pharmacies do 

not generally service the Medicaid 

population, they should not be included 

in the definition of retail pharmacy class 

of trade. 

Response: We disagree. The definition 

of retail pharmacy class of trade is not 

dependent on whether or not Medicaid 

beneficiaries obtain their services from 

the pharmacy. 

Comment: One commenter said that 

the inherent variable nature of AMP 

coupled with the fact that CMS 

proposed to include the prices paid to 

mail order pharmacies in the calculation 

of AMP will not provide for a viable 

benchmark for the cost of drugs that will 

allow States to control prescription 

drugs cost while providing 

pharmaceutical care for the Medicaid 

population. 

Response: We disagree. We believe 

that the AMPs will be fully adequate for 

computing FULs and that States will 

make their best decisions on the 

application of these AMPs to the 

providers in their States. 

Comment: One commenter said that 

providing mail order pharmacy services 

in rural areas will not suffice because of 

the inability to do what is required to 

obtain medicines. 

Response: In this final rule, we are 

addressing the issue of what prices are 

included in AMP; we are not addressing 

this issue at this time. 

Comment: One commenter said that if 

mail order pharmacies are in the same 

class of trade as retail pharmacies, then 

it is not clear why the MMA, which 

established Medicare Part D, created 

separate distinctions for retail 

pharmacy, nursing home pharmacy and 

mail order pharmacy. Another 

commenter stated that CMS specifically 

excluded mail order pharmacies from 

the definition of retail pharmacy in the 

rule implementing the Medicare Part D 

Program. Therefore, excluding mail 

order pharmacies from AMP would be 

consistent with CMS’ current Part D 

definition of retail pharmacy. 

Response: The statutory provisions 

applicable to Medicare Part D and the 

Medicaid Drug Rebate Program are 

significantly different. We continue to 

believe that mail order pharmacies are 

a segment of the retail pharmacy class 

of trade accessible to the general public 

and should remain in AMP. 

Comment: One commenter said that 

the only reason offered by CMS in the 

proposed rule for including mail order 

pharmacies in AMP is that the removal 

would be inconsistent with past policy 

(71 FR 77178). The commenter further 

states that this does not apply to the 

DRA AMP. 

Response: We disagree. Our reasons 

for including mail order pharmacies are 

clearly enunciated in this final rule and 

as noted, we do so based on more than 

consistency with previous policy. We 

continue to believe that mail order 

pharmacies are a segment of the retail 

pharmacy class of trade accessible to the 

general public and should remain in 

AMP. The DRA required that we clarify 

the definition of AMP, but did not 

mandate a manner in which we do so. 

Comment: One commenter stated that 

if mail order should be included in the 

definition of retail pharmacy class of 

trade, a significant additional 

percentage increase to the FUL or 

significantly higher dispensing fee 

should be provided to those entities that 

provide the more desirable mode of 

delivery of products and services, such 

as community pharmacies. 

Response: We disagree. The law 

provides that the FUL should be 

calculated based on a 250 percent of the 


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AMP for the lowest price drug. The 

determination of dispensing fees is left 

up to each State, with CMS’ approval 

through a State plan amendment. We 

also disagree that mail order pharmacies 

do not offer a desirable mode of 

delivery. 

Specialty Pharmacies and Direct Patient 

Sales 

Comment: One commenter stated that 

direct sales to patients are usually for 

specialty drugs provided through a 

direct distribution arrangement and 

should be excluded from AMP. Several 

commenters believed that specialty 

pharmacies should not be included in 

the definition of retail pharmacy class of 

trade and therefore, excluded from 

AMP, because they limit their services 

to a defined population and do not 

dispense to the general public. Another 

commenter requested that CMS provide 

specific guidance regarding the 

treatment of discounts and rebates to 

specialty pharmacies when calculating 

AMP. Several commenters stated that 

traditional pharmacies do not have 

access to the prices provided to 

specialty pharmacies. 

Response: We believe that drugs 

supplied through specialty pharmacies 

are within the regular retail 

marketplace. The fact that the 

pharmacies serve a client population 

characterized by specific medical 

conditions does not mean that their 

drugs are not sold to the general public, 

nor does it take them out of the retail 

pharmacy class of trade. Therefore, we 

have clarified in the regulation text at 

§ 447.504(g)(11) that sales, rebates, 

discounts, or other price concessions to 

specialty pharmacies are included in 

AMP. 

Comment: Several commenters said 

that sales to specialty pharmacies 

should be included in AMP. 

Response: We appreciate the 

commenters’ support for this provision 

and have retained this requirement at 

§ 447.504(g)(11) in this final rule. 

Comment: One commenter requested 

that CMS confirm that payments for 

specialty pharmacy services that satisfy 

the definition of a bona fide service fee 

should be excluded from the calculation 

of AMP. 

Response: We concur. Payments for 

specialty pharmacy services that satisfy 

the definition of bona fide service fees 

should be excluded from the 

determination of AMP. 

Comment: A few commenters said 

that home infusion pharmacies do not 

clearly fit the definition of retail 

pharmacy class of trade for the purpose 

of this regulation because they do not 

sell or provide drugs to the general 

public. Unlike retail pharmacies, 

infusion pharmacies treat only a 

specialized class of patients who rely on 

these pharmacies for services that 

support their therapy regimen as a 

substitute for hospitalization. In other 

contexts, infusion pharmacies have been 

excluded from the retail pharmacy class 

of trade. For instance, CMS excluded 

infusion pharmacies from this 

classification for purposes of Health 

Insurance Portability and 

Accountability Act (HIPAA) standards 

when it established the National 

Council for Prescription Drugs Program 

(NCPDP) claim format for retail 

pharmacy claims. Infusion pharmacies 

also are distinguished from retail 

pharmacies under HCPCS. HCPCS 

provides approximately 80 ‘‘S’’ codes 

for home infusion therapy services that 

may not be used by retail pharmacies for 

their drug claims. It is not clear if 

payment based on AMP would 

appropriately reimburse home infusion 

pharmacies for the drugs that they 

provide. 

Response: We believe that even 

though home infusion therapy 

pharmacies serve a defined population 

based on medical condition and are 

classified differently for the purpose of 

reimbursement; the drugs from these 

pharmacies are sold in the retail 

marketplace and are available to the 

general public. In accordance with the 

statute, the AMPs could be used to 

establish FULs. States may decide to use 

AMPs for reimbursements subject to our 

review and approval of a State plan 

amendment. We further believe that this 

final regulation provides states with 

sufficient flexibility to establish 

adequate reimbursement rates for FULs 

drugs. Therefore, we have clarified in 

the regulation text that sales to home 

infusion therapy pharmacies are 

included in AMP. 

Retail Pharmacy Class of Trade 

Comment: One commenter said that 

the proposed definition of retail 

pharmacy class of trade does not allow 

for adequate analysis of the costs related 

to operating such pharmacy. What 

normally qualifies as a retail pharmacy 

is an independently owned grocery, or 

chain pharmacy locations. Mail service 

and hospital outpatient pharmacies do 

not incur the same costs as retail 

pharmacies. These practice sites are able 

to purchase drugs at a lower cost than 

retail pharmacies. Any definition of 

pharmacy that is used in calculating 

costs must adequately differentiate 

between various practices settings so 

that the reimbursement can properly 

cover the true cost associated with each 

setting. 

Response: The AMP is the average 

price received by the manufacturer for 

the drugs in the United States from 

wholesalers for drugs distributed to the 

retail pharmacy class of trade excluding 

certain customary prompt pay discounts 

and including certain price concessions, 

as defined in the regulation. We have 

defined AMP consistent with our 

understanding of current law. Since 

AMP is based on the price received by 

the manufacturer for the drug, it does 

not necessarily reflect a particular 

pharmacy’s acquisition cost of a drug. 

Comment: One commenter asked 

whether all community retail entities 

buy drugs at the same price; if not, what 

are the differences in purchased drugs 

for all the retail outlets (HMOs, mail 

order pharmacies, hospital pharmacies, 

Federal agency pharmacies, chain 

pharmacies and independent retail 

pharmacies). If there is a significant 

difference, is CMS discriminating 

against some retail outlets? One 

commenter said that the definition 

should reflect the prices at which 

traditional retail pharmacies purchase 

medications. Another commenter said 

that in order to be included in the 

definition of retail pharmacy class of 

trade, the prices used should be prices 

available to community pharmacy and 

the prescriptions should be publicly 

accessible. 

Response: As we have previously 

noted, AMP is based on the average 

price received by the manufacturer for 

the drug; it does not necessarily reflect 

the pharmacy’s acquisition cost. 

Comment: Several commenters agreed 

that the entities included in the retail 

pharmacy class of trade must provide 

public access. Another commenter said 

that retail pharmacy class of trade 

describes outlets that dispense drugs to 

the general public. 

Response: We agree. 

Comment: One commenter stated that 

entities should be included in the 

definition of retail pharmacy class of 

trade on the basis that they do not 

conduct a manufacturer-wholesaler 

transaction. Also, hospitals and nursing 

homes do not distribute drugs to the 

general public and should not be 

included in retail pharmacy class of 

trade. Only traditional retail pharmacies 

(chains and independents) should be 

included. The retail pharmacy class of 

trade should be defined as those 

pharmacies that provide face-to-face 

service to patients, offer timely delivery, 

can provide 24/7 availability and 

response to patient needs, and are 

available to patients in the event of a 

disaster. 

Response: We do not agree that the 

retail pharmacy class of trade is limited 


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to those entities proposed by the 

commenter. As stated in response to 

prior comments, we define retail 

pharmacy class of trade more broadly to 

include, for example, direct sales to 

physicians and outpatient hospital 

sales, to the extent that they provide 

drugs to the general public. 

Comment: Many commenters stated 

that the retail pharmacy class of trade 

should include any independent 

pharmacy, independent pharmacy 

franchise, independent chains, 

independent compounding pharmacy, 

and traditional chain pharmacy—

including each traditional chain 

pharmacy location, mass merchant 

pharmacy and supermarket pharmacy. 

Response: We agree, but note that we 

do not believe this list of pharmacies to 

be inclusive of all entities in the retail 

pharmacy class of trade. 

Comment: Another commenter said 

that the proposed definition of retail 

pharmacy class of trade includes 

entities such as mail-service 

pharmacies, hospital outpatient 

pharmacies, and outpatient clinics that 

may have access to rebates and price 

concessions that are not accessible to 

community pharmacies. One 

commenter further said that these 

entities fall clearly outside of the 

statutory definition of AMP. Some 

commenters said that if AMP is to 

represent the price of drugs bound to 

the retail pharmacy class of trade then 

it should include and exclude 

components (including discounts, 

rebates, and other price concessions) 

according to their impact on the 

acquisition price actually paid by the 

retail pharmacy class of trade. 

Response: We disagree. We believe 

the statute requires that rebates, 

discounts, and price concessions 

associated with drugs to the retail 

pharmacy class of trade be included in 

AMP. The definition does not 

precondition the inclusion of such 

discounts or other price concessions on 

whether other entities within the retail 

pharmacy class of trade can access these 

same discounts. We believe there are 

variety of circumstances in which an 

entity within the retail pharmacy class 

of trade might receive a rebate or 

discount not available to other entities 

in that class. 

Comment: One commenter said that 

manufacturers should be instructed to 

exclude from AMP sales to entities that 

do not meet the definition of the retail 

pharmacy class of trade. 

Response: We have clarified at 

§ 447.504(g)–(h) which sales are 

included and excluded in this final 

regulation. 

Comment: A few commenters said 

that independent pharmacy owners 

should have a level playing field. It is 

not fair to include rebates and discounts 

to PBMs, insurance companies and 

government agencies and exclude 

rebates to independent business owners. 

One commenter said that only if 

complete access to all discounts offered 

at every level, mail order, government, 

HMO and PPOs are offered to any 

willing buyer will this system be fair. 

Response: We disagree. The rebate 

agreement provides for the inclusion of 

rebates, discounts, and price 

concessions associated with drugs 

provided to the retail pharmacy class of 

trade in AMP. It does not condition the 

inclusion of such price concessions on 

whether other entities within the retail 

pharmacy class of trade can receive 

these same discounts. We agree with the 

comments concerning the PBMs and 

certain government purchasers, and 

have decided to exclude certain Federal 

and state sales, and PBM rebates, 

discounts, or other price concessions 

from the determination of AMP, except 

for purchases through PBM mail order 

pharmacies. As noted previously, we 

believe there may be circumstances in 

which an entity within the retail 

pharmacy class of trade might receive a 

rebate or discount not available to other 

entities in that class of trade. 

Comment: One commenter stated that 

there is no basis in the statute or in the 

congressional discussion surrounding 

the legislation to include sales to mail 

order pharmacies and rebates, 

discounts, or other price concessions 

associated with sales of drugs provided 

to the retail pharmacy class of trade in 

AMP. Had Congress wanted to do so, it 

would have expressly provided for these 

items to be included in AMP, as it had 

done in establishing the ASP-based 

reimbursement system for Medicare Part 

B drugs. 

Response: We do not agree. After 

consideration of all comments received, 

we continue to believe that mail order 

pharmacies are part of the retail 

pharmacy class of trade in as much as 

they dispense prescriptions to the 

general public. The rebate agreement 

has consistently provided for the 

inclusion of rebates, discounts, and 

price concessions associated with drugs 

provided to the retail pharmacy class of 

trade be included in AMP. We see no 

reason to change that policy in this rule. 

Comment: One commenter requested 

that CMS clarify what it means to sell 

or provide covered drugs to the general 

public. 

Response: We believe that the term 

sell or provide covered drugs to the 

general public as discussed previously 

in the OIG reports is consistent with our 

definition of the retail pharmacy class of 

trade. As discussed previously, we have 

defined retail pharmacy class of trade to 

include the sector of the drug 

marketplace, similar to the marketplace 

for other goods and services, which 

dispenses drugs to the general public 

and which include all price concessions 

related to such goods and services. 

Treatment of Medicaid Sales 

Comment: One commenter stated that 

price concessions associated with the 

sales to Medicaid should be included in 

AMP but Medicaid rebates should be 

excluded because no portion of these 

rebates is shared with the retail 

pharmacy community. One commenter 

agreed that prices paid by Medicaid 

programs should be included in AMP. 

Response: We appreciate the support 

for this provision and have clarified in 

the regulation text at § 447.504(h)(23) 

that discounts and other price 

concessions to third party payers, 

including Medicaid, are excluded from 

AMP. 

Comment: One commenter stated that 

if CMS requires Medicaid sales and 

units to be included in AMP, then CMS 

should require that the applicable 

Medicaid rebates are included in AMP. 

Requiring the inclusion of Medicaid 

units in AMP without including the 

applicable Medicaid rebates will skew 

the AMP calculation and make the 

resulting AMP inaccurate. 

Response: We disagree. We do not 

believe that including Medicaid sales 

and units without the respective rebate 

in AMP results in an inaccurate AMP. 

AMP is calculated by dividing net sales 

by total number of units sold, less free 

goods. This has been CMS’ policy since 

the inception of the Medicaid Drug 

Rebate Program. While AMP and best 

price include discounts or other price 

concessions, we do not believe that 

Medicaid rebates should be subtracted 

from sales. As a practical matter, we do 

not know how this could be done with 

accuracy because manufacturers often 

do not know which of their sales are 

dispensed to Medicaid beneficiaries. 

Comment: Many commenters stated 

that Medicaid sales should not be 

included in AMP, similar to other 

Federal payers. 

Response: We disagree. Medicaid 

sales are included in AMP, as are the 

sales in other Federal programs (except 

for those excluded as identified in the 

regulation), because Medicaid sales are 

part of the chain of sales to retail 

pharmacies. Therefore, we believe that 

it is appropriate to include Medicaid 

sales in AMP. Furthermore, 

manufacturers often do not know which 


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of their sales are dispensed to Medicaid 

beneficiaries, making it impossible to 

remove these sales from AMP. 

Comment: One commenter stated that 

AMP should reflect rebates paid by 

manufacturers to third party payers 

such as Medicaid which are unavailable 

to retail pharmacies. 

Response: AMP generally reflects 

rebates provided by the manufacturer 

for drugs distributed to the retail 

pharmacy class of trade. However, the 

rebate agreement specifically state that 

rebates paid to States under the 

Medicaid Drug Rebate Program are 

excluded from AMP calculations. We 

see no reason to change that policy in 

this rule. 

Comment: One commenter requested 

that CMS explain what sales and 

associated rebates are paid under the 

Medicaid Program other than those paid 

under section 1927 of the Act. 

Response: Rebates paid to State 

Medicaid Agencies for covered 

outpatient drugs dispensed to Medicaid 

beneficiaries, including CMS-authorized 

State supplemental rebates, are 

excluded from AMP. 

Comment: One commenter requested 

that CMS clarify what we mean in the 

proposed by the statement, ‘‘Therefore, 

we would clarify that rebates paid to the 

States under the Medicaid Drug Rebate 

Program should be excluded from AMP 

calculations but that the price 

concessions associated with the sales of 

drugs in the retail pharmacy class of 

trade which are provided to Medicaid 

patients should be included’’ (71 FR 

77180). 

Response: This statement was 

intended to clarify how price 

concessions provided to wholesalers for 

drugs for which Medicaid is the payer 

differ from Medicaid rebates paid 

directly by manufacturers to Medicaid 

agencies. It would be virtually 

impossible for a manufacturer to 

separate these price concessions out 

from its AMP calculation because 

Medicaid does not purchase drugs 

directly, but reimburses pharmacies for 

drugs. Rebates, however, are paid based 

on state utilization data by 

manufacturers to States. These are 

clearly identifiable and are not taken 

into account in the calculation of AMP. 

Comment: One commenter requested 

that CMS clarify how rebates paid to 

State Medicaid agencies under either 

the national rebate agreement or a CMSauthorized supplemental rebate 

agreement are treated in the calculation 

of AMP. The commenter asked whether 

manufacturers are expected to perform 

some level of diligence to trace 

Medicaid sales to the retail pharmacy 

class of trade. 

Response: Rebates paid to State 

Medicaid Agencies under either the 

national rebate agreement or CMSauthorized State supplemental rebate 

agreements are excluded from AMP. 

Comment: Several commenters stated 

that including Medicaid data in AMP is 

‘‘bootstrapping’’ the AMP calculation 

and does not recognize that Medicaid 

pricing is heavily regulated by the State 

and Federal Government. The 

commenters believed that the inclusion 

of Medicaid data would have an 

artificial impact on market prices, and 

that Medicaid should be excluded from 

the AMP calculation. Other commenters 

stated that including Medicaid sales 

data would likely create a circular loop, 

negating the validity of AMP. 

Response: We disagree. The AMP is 

not intended to represent the prices 

paid by retail pharmacies for 

medications; rather, it 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. We do 

not believe that the inclusion of 

Medicaid sales will have an impact on 

market prices because they are 

subsumed in the total sales from 

manufacturers to wholesalers. 

Treatment of Supplemental Rebates 

Comment: One commenter stated that 

supplemental rebates paid to the 

Medicaid agency are not disclosed, 

never shared with pharmacy vendors 

and may be significant in their negative 

impact on those vendors participating in 

the Medicaid Program. 

Response: Medicaid supplemental 

rebates paid to the Medicaid agency are 

not included in AMP. We see no reason 

why supplemental rebates paid to the 

State that do not impact the payment 

rate to pharmacies would affect their 

participation in the Medicaid Program. 

Comment: A few commenters stated 

that because community pharmacies do 

not receive State supplemental rebates, 

the rebates should be excluded from 

AMP. Another commenter requested 

that CMS clarify that any supplemental 

rebates manufacturers pay to State 

Medicaid programs are to be considered 

‘‘other price concessions’’ for the 

purposes of this section; thus, these 

rebates should be included in AMP 

calculations. 

Response: Supplemental rebates paid 

under a CMS-authorized State 

supplemental rebate agreement are 

excluded from AMP and not considered 

as ‘‘other price concessions’’ for the 

purposes of this section. We have 

clarified in the regulation text at 

§ 447.504(h)(24) that such supplemental 

drug rebates are excluded from AMP. 

Comment: One commenter requested 

that CMS 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. 

Response: Rebates paid to States 

under the Medicaid Drug Rebate 

Program are excluded from AMP, but 

the units and price concessions 

associated with the sales of drugs in the 

retail pharmacy class of trade, regardless 

of whether such drugs are provided to 

Medicaid patients, are included. 

Comment: A commenter requested 

that CMS clarify whether supplemental 

state rebates (for example, those 

associated with a preferred drug list) are 

included as well. 

Response: All supplemental rebates 

paid under a CMS-authorized State 

supplemental rebate agreement are 

excluded from AMP regardless of 

whether the agreement is associated 

with a preferred drug list. 

Treatment of Medicare Part D Sales 

Comment: Several commenters 

expressed support for CMS’ treatment of 

Medicare Part D. 

Response: We appreciate the support 

for this provision and have clarified in 

the regulation text at § 447.504(h)(23) 

that associated discounts, rebates, or 

other price concessions to third party 

payers such as a PDP or an MA–PD are 

not included in the calculation of AMP 

on the basis that such price concessions 

are essentially third party discounts and 

not discounts which adjust the price 

actually realized at the retail pharmacy. 

We retained in the regulation text that 

the sales of drugs in the retail pharmacy 

class of trade which are provided to a 

PDP or an MA–PD are included in AMP. 

Comment: Several commenters stated 

that sales and rebates to a Medicare Part 

D PDP and an MA–PD should not be 

included in AMP. One commenter 

recommended that CMS exclude price 

concessions under Medicare Part D, as 

these price discounts are PBM discounts 

of those PBMs that administer the Part 

D Program. One commenter further 

stated that the rebates paid by the 

manufacturer to a PDP or an MA–PD are 

not considered by wholesalers when 

determining the purchase price to a 

retail community pharmacy and should 

not be included in any calculation to 

reimburse the pharmacy. A few 

commenters stated that Medicare Part D 

rebates are similar to Medicaid rebates, 

which are excluded from AMP, and that 

Medicare Part D rebates should be 

treated similarly. One commenter 


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requested that CMS confirm and 

provide guidance regarding whether 

rebates paid to Medicare Part D are 

excluded from AMP. Another 

commenter stated that including the 

prices of sales and rebates through a 

PDP, MA–PD, or a qualified retiree 

prescription drug plan would result in 

a windfall to manufacturers and an 

additional burden for retail pharmacies. 

The commenter stated that while prices 

charged to Part D plans cannot create a 

new best price for the Medicaid 

Program, including Part D prices that 

are lower than typical commercial 

prices in AMP calculations could 

further reduce the reported AMPs below 

the actual cost to retail pharmacies. 

Response: We have clarified in the 

regulation text at § 447.504(h)(23) that 

associated discounts, rebates, or other 

price concessions to third party payers 

such as to a PDP or an MA–PD are not 

included in AMP. Such price 

concessions are essentially third party 

discounts and not discounts which 

adjust the price actually realized. We 

retained in the regulation text that the 

sale of the drugs reimbursed by these 

programs and units associated with the 

sales of drugs in the retail pharmacy 

class of trade which are reimbursed by 

a PDP or an MA–PD should remain in 

AMP. We do not believe that this will 

be a burden for retail pharmacy because 

the manufacturer would not necessarily 

know the ultimate destination or 

whether the discount or price 

concession to the third party payer is 

passed on to the retail pharmacy class 

of trade such that it would result in an 

adjustment of the price actually 

realized. 

Comment: One commenter requested 

that CMS clarify whether a 

manufacturer discount provided to a 

PBM in connection with Part D mail 

order business should be included in 

AMP. 

Response: We have clarified in the 

final rule at § 447.504(g)(6) that sales 

and discounts to mail order pharmacies 

operated by PBMs are included in AMP. 

Comment: One commenter requested 

that CMS clarify the treatment of 

qualified retiree prescription drug plans 

for purposes of AMP. 

Response: We have clarified in the 

regulation text at § 447.504(h)(23) that 

associated discounts, rebates, or other 

price concessions paid to third party 

payers such as rebates paid by the 

manufacturer to a qualified retiree 

prescription drug plan under section 

1860D–22(a)(2) of the Act are not 

included in AMP. Such price 

concessions are essentially third party 

discounts and not discounts which 

adjust the price actually realized. We 

retained in the regulation text that the 

sale of the drugs reimbursed by these 

programs and units associated with the 

sales of drugs in the retail pharmacy 

class of trade which are reimbursed by 

a qualified retiree prescription drug 

plan under section 1860D–22(a)(2) of 

the Act should remain included in 

AMP. 

Comment: One commenter stated that 

the proposed rule excludes from AMP 

rebates to Medicaid, the DoD, the IHS, 

and the DVA because prices to these 

entities are not available to the retail 

pharmacy class of trade. Rebates offered 

to SCHIP, Medicare Part D Plans, and 

SPAPs are also not available to the retail 

pharmacy class of trade but are required 

to be included in AMP. The commenter 

asserted that assumptions in the 

proposed rule regarding these programs 

are definitely flawed and should be 

revisited. 

Response: We revised the regulation 

text at § 447.504(h)(23) to state that 

associated discounts, rebates, or other 

price concessions to third party payers 

such as a PDP, MA–PD, SCHIP, or an 

SPAP are not included in the 

calculation of AMP. Such price 

concessions are essentially third party 

discounts and not discounts which 

adjust the price actually realized. 

Comment: One commenter stated that 

including Part D in AMP may change 

manufacturer discounting behavior for 

Part D. 

Response: We do not believe that a 

change in manufacturer discounting 

behavior is likely, as the manufacturer 

would not necessarily know the 

ultimate destination when initially sold. 

Furthermore, as discussed previously, 

we have revised the regulation to 

exclude discounts, rebates, or other 

price concessions to third party payers, 

such as a PDP or MA–PD. Such price 

concessions are essentially third party 

discounts and not discounts which 

adjust the price actually realized. 

Comment: A few commenters said 

that the proposed rule directs 

manufacturers to consider sales and 

associated price concession extended to 

Part D. However, manufacturers do not 

have access to this information until 

they receive quarterly invoices from the 

States. CMS should include in the final 

rule instructions for addressing lagged 

data. 

Response: We appreciate these 

comments and have clarified in the 

regulation text at § 447.504(h)(23) that 

associated discounts, rebates, or other 

price concessions paid to third party 

payers such as rebates paid by the 

manufacturer to a qualified retiree 

prescription drug plan under section 

1860D–22(a)(2) of the Act are not 

included in AMP. As discussed 

previously, such price concessions are 

essentially third party discounts and not 

discounts which adjust the price 

actually realized. 

Comment: One commenter said that 

CMS should recognize in the final rule 

the operational challenges 

manufacturers face in collecting data. 

Based on those challenges, the 

commenter urged CMS to allow 

manufacturers to make and rely upon 

appropriate reasonable assumptions 

when including Part D sales in AMP. 

Response: We recognized the 

operational challenges manufacturers 

face in collecting data and have clarified 

in the final regulation text the 

submission of lagged price concessions 

and the use of manufacturer 

assumptions. 

SPAP Price Concessions 

Comment: Many commenters 

suggested that CMS exclude 

manufacturer rebates to SPAPs from 

AMP calculations as it does with 

Medicaid rebates. Another commenter 

expressed appreciation for CMS’

specific guidance regarding the 

treatment of discounts/rebates to SPAPs, 

but disagreed with including discounts/ 

rebates to SPAPs in AMP. This 

commenter argued that SPAPs are 

government-run programs, and 

discounts offered to them are often 

statutorily driven (sometimes tied to 

Medicaid rebates) or otherwise not 

determined by market factors. Another 

commenter stated that SPAPs are 

similar to the Medicaid Program in that 

SPAPs represent third-party government 

payers; therefore, rebates for these 

programs should be treated the same as 

Medicaid rebates. One commenter 

stated that the proposal to include all 

SPAP sales and rebates in AMP to the 

extent that these sales are made to the 

retail pharmacy class of trade conflicts 

with Manufacturer Release 68, which 

states that only SPAPs that meet 

specified criteria are excluded from 

AMP. Another commenter requested 

that CMS clarify that all SPAP sales and 

rebates are included regardless of the 

administrative structure of the SPAP. 

Other commenters supported the 

inclusion of SPAP sales and rebates in 

AMP. 

Response: We recognize that SPAPs 

are typically third-party governmental 

payers that do not directly purchase 

drugs from manufacturers. After 

considering the comments received, we 

agree that SPAP sales, as well as sales 

to PDPs and MA–PDs under the 

Medicare Part D Program should be 

treated in the same manner as Medicaid 

sales. That is, sales of drugs that are 


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paid by these programs to pharmacies 

are included in AMP, but we have 

revised our policy and provide in this 

final rule at § 447.504(h)(23) that 

associated discounts, rebates, or other 

price concessions to the extent that they 

do not adjust prices at the retail 

pharmacy class of trade are excluded 

from AMP. As discussed previously, we 

believe that such price concessions are 

essentially third party discounts and not 

discounts which adjust the price 

actually realized. Other State payments 

for drugs, such as State employee 

benefit programs or medical programs 

for inmates or patients of State prisons 

or hospitals, do not meet the criteria of 

an SPAP. We also agree with the 

commenter regarding Manufacturer 

Release 68 and have clarified that SPAP 

sales should be included in AMP and 

SPAP discounts should be excluded. 

Therefore, all SPAP sales will be treated 

the same for AMP, regardless of whether 

they meet the criteria in Manufacturer 

Release 68. 

Comment: Several commenters stated 

that community pharmacies do not 

receive State-only and SPAP prices and 

rebates; therefore, these should be 

excluded from AMP. One commenter 

believed it is inconsistent with the 

legislative intent of the DRA for CMS to 

include sales reimbursed by SPAPs for 

non-Medicare Part D covered 

prescriptions in the calculation of the 

AMP because no Federal money is 

involved, making it outside CMS’

purview in determining what to include 

in AMP. One commenter stated that the 

inclusion of SPAPs seems inconsistent 

with legislative intent. 

Response: CMS believes that SPAP 

sales should be included in AMP given 

our understanding of the statute. We 

also find that SPAP sales, like Medicaid 

and Medicare Part D sales, are part of 

the broader chain of sales from 

manufacturers to wholesalers or 

pharmacies that are indistinguishable 

from other market sales. We believe that 

SPAP sales are within the scope of AMP 

because AMP is intended to capture 

sales to the retail pharmacy class of 

trade. 

Comment: One commenter requested 

that CMS post on its Web site a 

complete and accurate list of qualified 

SPAPs which is updated on a frequent 

and regular basis. 

Response: We appreciate this 

comment and will continue to post a 

current list of SPAPs designated as 

exempt from best price on the CMS Web 

site at http://www.cms.hhs.gov/ 

MedicaidDrugRebateProgram/ 

Downloads/SPAPBestPriceList.pdf. 

Comment: Another commenter asked 

that CMS treat SPAP sales consistently 

for AMP and best price purposes and 

exclude them from both. AMP should 

reflect prices in the commercial 

marketplace and including prices set by 

statute in the AMP calculation 

undermines this purpose. Likewise, 

excluding prices from best price 

encourages manufacturers to provide 

concessions that do not reflect 

commercial considerations, as is the 

case with SPAPs, where prices or 

rebates are generally the result of State 

law rather than market negotiations. 

Response: We disagree. While the 

statute specifically excludes SPAPs 

from the determination of best price, 

CMS believes that SPAP sales should be 

included in AMP because they are 

subsumed in the overall chain of sales 

from the manufacturers through 

wholesalers to the pharmacies in the 

retail pharmacy class of trade. 

Comment: One commenter asked 

CMS to provide guidance regarding how 

SPAP sales and rebates should be 

included. Specifically, the commenter 

asked CMS to specify what ratio of sales 

manufacturers should apply to SPAP 

rebates, since the data available to 

manufacturers do not indicate the 

particular sales to which the rebates 

apply. 

Response: We have clarified in the 

regulation text at § 447.504(h)(23) that 

associated discounts, rebates, or other 

price concessions paid to third party 

payers such as rebates paid by the 

manufacturer to a SPAP are not 

included in AMP. Such price 

concessions are essentially third party 

discounts and not discounts which 

adjust the price actually realized. 

Comment: One commenter noted that 

the proposed rule directs manufacturers 

to consider sales and associated price 

concession extended to SPAPs. 

However, manufacturers do not have 

access to this information until they 

receive quarterly invoices from the 

states. CMS should include in the final 

rule instructions for addressing lagged 

data. 

Response: We have in 

§ 447.504(h)(23) excluded the associated 

discounts, rebates, or other price 

concessions provided by the 

manufacturer to SPAPs from AMP in 

this final rule. 

Comment: One commenter requested 

that CMS define SPAP. 

Response: We have decided not to 

define SPAP in this regulation at this 

time. The current guidance for the 

definition of SPAP has been set forth in 

Manufacturer Release 68. 

Comment: One commenter requested 

that we share with SPAPs the quarterly 

unit rebate amount (URA) on the basis 

that the data is already being furnished 

to State Medicaid Agencies. 

Response: The URAs for brand name 

drugs are based on best price, which we 

consider confidential. The URAs for 

generic drugs are 11 percent of AMP, 

which will be posted on our Web site. 

Treatment of SCHIP 

Comment: One commenter noted that 

the proposed rule directs manufacturers 

to consider sales and associated price 

concession extended to SCHIP. 

However, manufacturers do not have 

access to this information until they 

receive quarterly invoices from the 

States. CMS should include in the final 

rule instructions for addressing lagged 

price concessions. 

Response: We have modified the 

regulation text regarding the submission 

of lagged price concessions to allow 

manufacturers to submit such 

information. 

Comment: One commenter asked that 

we clarify the meaning of the term 

‘‘associated with sales of drugs provided 

to the retail pharmacy class of trade’’ in 

regard to Part D, SCHIP, and SPAP. 

Response: We have clarified in the 

regulation text at § 447.504(h)(23) that 

associated discounts, rebates, or other 

price concessions paid to third party 

payers such as rebates paid by the 

manufacturer to Medicare Part D, 

SCHIP, and SPAP are not included in 

AMP. However, we continue to believe 

that the respective sales are included in 

AMP to the extent that such sales have 

occurred through the retail pharmacy 

class of trade. However, the associated 

discounts, rebates, or other price 

concessions for these sales are not 

included in AMP because we 

understand such price concessions are 

essentially third party discounts and not 

discounts which adjust the price 

actually realized. 

Comment: One commenter stated that 

SCHIP should be excluded from AMP 

and another commenter expressed 

support for the inclusion of SCHIP. 

Response: We agree that the treatment 

of SCHIP sales is determined by the 

entities that are actually in the sales 

chain for drugs for SCHIP beneficiaries. 

We recognize that SCHIP sales are 

similar to Medicaid sales and should be 

treated as such. Therefore, we have 

clarified in the regulation text at 

§ 447.504(h)(23) that the associated 

discounts, rebates, or other price 

concessions for these sales are not 

included in AMP. We understand that 

such price concessions are essentially 

third party discounts and not discounts 

which adjust the price actually realized. 

We retained in the regulation text at 

§ 447.504(g)(15) that the sale and units 


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associated with the sales of drugs in the 

retail pharmacy class of trade which are 

provided to SCHIP are included in 

AMP. 

Prices to Other Federal Programs 

Comment: One commenter endorsed 

CMS’ position to exclude from AMP the 

prices provided to government programs 

on the basis that such purchases are 

outside the retail pharmacy class of 

trade. Other commenters stated that 

community pharmacies do not receive 

FSS/depot prices and should be 

excluded from AMP. 

Response: We appreciate the support 

for this provision and have retained this 

requirement at § 447.504(h) in the final 

rule. 

Comment: Several commenters stated 

that CMS rightly excluded from AMP, 

manufacturer rebates paid to the DoD 

under TRICARE. One commenter 

requested that the classification of the 

retail TRICARE pharmacies as a depot 

should be avoided until the issue 

between manufacturers and the DVA 

has been resolved. Several commenters 

requested that CMS provide clarification 

regarding which TRICARE prices, if any, 

are considered depot prices and are 

excludable. Several commenters 

requested that CMS provide clarification 

in the treatment of TRICARE utilization 

when the manufacturer has not paid 

rebates on the utilization and does not 

receive utilization data. 

Response: We appreciate the 

comment regarding the litigation 

concerning TRICARE and DVA program. 

See The Coalition for Common Sense in 

Government Procurement v. Secretary of 

Veteran Affairs, 464 F.3d 1306 (Fed. Cir. 

2006). However, we recognize that 

TRICARE, like the Medicaid Program, is 

a third-party governmental payer that 

does not directly purchase drugs from 

manufacturers. After considering the 

comments received, we agree that 

TRICARE sales, as well as sales to 

SPAPS, PDPs and MA–PDs under the 

Medicare Part D Program should be 

treated in the same manner as Medicaid 

sales to the extent that such sale has 

occurred through the retail pharmacy 

class of trade. That is, sales of drugs to 

pharmacies that are reimbursed by these 

programs are included in AMP, but we 

have revised our policy and provide in 

this final rule at § 447.504(h)(23) that 

associated discounts, rebates, or other 

price concessions to these programs are 

excluded from AMP. 

Comment: One commenter requested 

that CMS clarify whether the exclusion 

for depot prices applies both to 

mandatory rebates and voluntary rebates 

paid to the DoD. Additionally, if 

voluntary rebates paid to DoD are to be 

excluded from AMP, the final rule must 

specify whether the units are to be left 

in the calculation, as with Medicaid 

rebates, or, if the units are to be 

excluded, the value at which the 

excluded units should be removed from 

the AMP calculation. 

Response: We have clarified in this 

final regulation at § 447.504(g)(15) that 

sales of drugs to pharmacies that are 

reimbursed by TRICARE are included in 

AMP, but we have revised our policy 

and provide in this final rule at 

§ 447.504(h)(23) that associated 

discounts, rebates, or other price 

concessions, whether mandatory or 

voluntary, are excluded from AMP. 

Comment: One commenter requested 

that CMS clarify whether payment of 

rebates by a manufacturer on TRICARE 

utilization is a prerequisite for 

concluding that such utilization is a 

depot sale. 

Response: We have clarified in the 

final regulation at § 447.504(h)(23) that 

associated discounts, rebates, or other 

price concessions to TRICARE are 

excluded from AMP. 

Comment: Several commenters stated 

that CMS rightly excluded manufacturer 

rebates paid to the DVA and the DoD 

from AMP. 

Response: We appreciate the support 

for this provision and have retained this 

requirement at § 447.504(h)(1) in the 

final rule. 

HMOs and MCOs 

Comment: A few commenters stated 

that it is unclear whether the HMO/ 

MCO exclusion from AMP applies only 

to purchases by MCOs that have their 

own facilities, or whether it also 

excludes transactions of health plans 

that reimburse network providers. The 

commenters further stated that only 

transactions with clearly identifiable 

HMOs and health plans should be 

treated as excluded from AMP. Many 

commenters asked that CMS clarify that 

HMOs that simply reimburse enrollees 

for their drug purchases at retail 

pharmacies (without themselves 

purchasing or taking possession of the 

drugs) are included in the calculation of 

AMP. 

Response: We recognize that many 

HMOs that act as third party payers, like 

SPAPs and PBMs, do not generally take 

possession of pharmaceutical products. 

Sales of these drugs flow through the 

regular retail chain of sales and are not 

distinguishable to manufacturers. 

Accordingly, similar to a third party 

payer, when an HMO does not purchase 

or take possession of drugs, we consider 

those sales to be within the retail sales 

chain and not the HMOS. Because as 

with other third party payers, the 

discounts, rebates, or price concessions 

are not available to the wholesaler, we 

have clarified that the associated 

rebates, discounts, or other price 

concessions are not included in AMP. 

We retained in the regulation text at 

§ 447.504(h)(23) that the sales of the 

drug reimbursed by the HMO/MCO 

should remain in AMP, but sales 

directly to the HMO/MCO should be 

excluded. However, when drugs are 

dispensed by HMOs, including managed 

care organizations, those drugs are not 

subject to the requirements of the 

Medicaid drugs rebate program. 

Comment: One commenter noted that 

in some places in the proposed rule 

CMS uses the terms MCO and HMO 

interchangeably, but in others, it refers 

to ‘‘health maintenance organizations 

(HMOs), including managed care 

organizations (MCOs).’’ The commenter 

noted that MCO is usually an umbrella 

term for a number of different entities, 

one of which is an HMO. The 

commenter requested that CMS clarify 

the definition of MCO for purposes of 

the final rule. Another commenter 

stated that neither HMO nor MCO is 

defined in the proposed rule. 

Response: We acknowledge that the 

terminology used for these entities 

varies. Our intent is that sales to HMOs 

and MCOs that purchase and take 

possession of drugs are excluded from 

AMP. We have clarified in 

§ 447.504(h)(23) that the associated 

rebates, discounts, or other price 

concessions for an HMO does not 

purchase or take possession of drugs are 

not included in AMP. We retained in 

the regulation text at § 447.504(g)(15) 

that the sales of the drug reimbursed by 

the HMO/MCO should remain in AMP. 

Comment: One commenter requested 

that CMS clarify whether HMO-operated 

pharmacies that provide drugs only to 

their enrollees are excluded from AMP. 

The commenter noted that these 

pharmacies do not serve the general 

public in the way that other retail 

pharmacies do. 

Response: HMO-operated pharmacies 

that purchase drugs and provide these 

drugs only to their enrollees are 

excluded from AMP. We have clarified 

in the regulation text at § 447.504(h)(5) 

that direct sales to HMO-operated 

pharmacies are excluded from AMP. 

Comment: One commenter asked that 

we clarify whether the reference to 

HMOs and MCOs are limited to socalled ‘‘staff model’’ HMOs and MCOs 

that purchases pharmaceuticals for 

dispensing to their members, or whether 

they include so-called ‘‘IPA-model’’

HMOs and MCOs that arrange for 

pharmacy discounts but do not actually 

purchase drugs. 


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Response: As explained above, direct 

sales to HMOs that purchase and take 

possession of drugs, such as many staff 

model HMOs, would be excluded from 

AMP. 

Comment: One commenter was 

pleased that CMS included MCOs in its 

definition of HMOs, which the statute 

specifically excludes in section 1927 of 

the Act. Another commenter expressed 

support for the treatment of HMOs/ 

MCOs. 

Response: As discussed in the 

preceding responses, we distinguish 

between HMOs and MCOs that purchase 

and take possession of drugs, which are 

excluded from AMP, from those that 

reimburse for drugs through retail 

pharmacies, which are included in 

AMP. 

Comment: One commenter requested 

that CMS exclude direct and identifiable 

indirect sales to HMOs that operate their 

own pharmacy. 

Response: As noted in the preceding 

responses, these sales are excluded from 

AMP. 

Administrative and Service Fees 

Comment: Several commenters agreed 

with CMS that ‘‘bona fide service fees’’

should not be taken into account for the 

purpose of AMP. These commenters 

noted that this is consistent with 

Congress’s intent and consistent with 

the treatment of bona fide services fees 

for the calculation of ASP for Medicare 

Part B. 

Response: We appreciate the support 

for this provision and have retained this 

provision at § 447.504(h)(19) in the final 

regulation. 

ASP 

Comment: Many commenters 

requested that CMS explicitly adopt all 

guidance related to the definition of 

bona fide service fee contained in the 

preamble to the 2007 Physician Fee 

Schedule (PFS) final rule published on 

December 1, 2006 (71 FR 69624). 

Another commenter supported the same 

approach for AMP in Medicaid. CMS 

defined these fees as ‘‘expenses that 

generally would have been paid for by 

the manufacturer at the same rate had 

these services been performed by other 

or similarly situated entities.’’ CMS 

should continue to permit 

manufacturers, depending on the 

circumstances and the nature of the 

services involved, to calculate the fair 

market value for a set of itemized bona 

fide services, rather than for each 

service individually. Moreover, as the 

method for determining fair market 

value may vary based on the terms of 

the contract at issue, CMS should 

refrain from requiring manufacturers to 

follow a particular method for 

evaluating whether a fee equals fair 

market value. The commenter further 

said that the bona fide service fee 

definition requires these fees to ‘‘not be 

passed on, in whole or in part, to a 

client or customer of an entity.’’ The 

commenter urged CMS to replicate its 

interpretation of this clause in the ASP 

context for AMP. Another commenter 

stated that CMS should clarify that the 

explanations applicable to the definition 

of bona fide service fees when 

manufacturers are calculating ASP also 

apply when they are determining AMP 

and best price because many 

manufacturers do not make products 

subject to ASP reporting and may not be 

familiar with the discussion of service 

fees in the preamble to the 2007 PFS 

final rule. The commenter requested 

CMS to expressly reference the 

discussion of bona fide service fees in 

the preamble to the 2007 PFS final rule, 

as well as make clear that CMS is 

adopting the principles and positions 

applicable to bona fide service fees 

outlined in the 2007 PFS final rule in 

the ASP context for purposes of AMP 

and best price. 

Response: We agree. In light of the 

many comments received, we are 

adopting the 2007 final ASP reporting 

rule’s (71 FR 69668, December 1, 2006) 

interpretation of the definition of bona 

fide service fees and how manufacturers 

may apply the definition for the 

purposes of AMP and best price. We 

appreciate these comments and have 

further clarified in § 447.502 that bona 

fide service fees mean fees for an 

expense that would have been paid by 

the manufacturer at the same rate had 

these services been performed by the 

manufacturer or another entity. 

Comment: One commenter believes 

CMS should apply the definition of 

bona fide service fees to the term 

‘‘distribution services’’ on the basis that 

the ASP final rule has clearly articulated 

a standard for exclusion. Furthermore, 

incorporating the term ‘‘distribution 

services’’ into the definition of AMP 

does not reflect the fact that many core 

distribution services—such as 

packaging, shipping and handling—may 

meet the test of bona fide service fee and 

should be excluded from AMP. 

Response: We appreciate this 

comment and have clarified at 

§ 447.504(h) that distribution services 

which meet the definition of bona fide 

services fees are excluded from AMP. 

Comment: Several commenters 

expressed support for the exclusion of 

legitimate service fees from AMP, since 

by definition, these fees are paid for 

services, not the drug. However, the 

exclusion only recognizes one of the 

two standard methods by which 

manufacturers have paid service fees 

and recommended that CMS create an 

additional explicit exclusion for 

administrative fee arrangements that 

meet the OIG safe harbor under the antikickback statute. 

Response: We believe that it is outside 

the scope of our authority to propose 

exclusions regarding the OIG safe harbor 

under the anti-kickback statute since 

only the IG of the U.S. Department of 

Health and Human Services has been 

authorized to issue advisory opinions 

related to health care fraud and abuse 

under section 1128D(b) of the Act. 

Comment: Several commenters 

recommended that CMS eliminate the 

condition that the services would be 

required ‘‘in the absence of the service 

arrangement’’ or otherwise clarify that 

fees paid for bona fide administrative 

services related to the administration of 

a rebate contract will qualify as ‘‘bona 

fide service fees’’ as long as they are: (i) 

for legitimate services, (ii) for services 

that the manufacturer would otherwise 

have to perform or have others perform 

for it, and (iii) represent fair market 

value. 

Response: We disagree. We do not 

believe that for the purposes of the 

Medicaid drug rebate program, 

administrative services related to the 

administration of a rebate contract 

would qualify as bona fide service fees 

because these fees are not associated 

with the efficient distribution of drugs 

or our interpretation of the bona fide 

service fee guidance. 

Comment: A commenter further said 

that bona fide service fees should 

explicitly include all fees paid by 

manufacturers to non-terminal retail 

providers. 

Response: We disagree. We believe 

that the definition and additional 

guidance clearly defines what 

constitutes a bona fide service fee and 

distinguishes these fees from other fees 

that may reduce the price of a drug. 

Comment: One commenter strongly 

supports CMS’ proposed definition of 

bona fide services and believes that the 

decision to adopt the same definition of 

these fees for both ASP and AMP will 

enhance uniformity in reporting across 

the Medicare and Medicaid Programs. 

However, the commenter encourages 

CMS to confirm several points by 

replicating portions of the narrative of 

the PFS final rule and (1) deleting the 

specific reference to ‘‘distribution fees’’

in the definition of AMP, (2) confirm 

that the terms ‘‘bona fide,’’ ‘‘itemized,’’

and ‘‘actually performed on behalf of 

the manufacturer or otherwise 

performed’’ include ‘‘any reasonably 

necessary or useful services of value to 


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the manufacturer that are associated 

with the efficient distribution of drugs.’’

CMS should reiterate that AMP will 

incorporate the ASP definition’s 

reference to services that are performed 

‘‘on behalf of’’ a manufacturer as 

including both those services that a 

manufacturer possesses the capacity to 

perform and those that only another 

entity can perform. 

Response: We appreciate the support 

for this provision and have incorporated 

the final ASP reporting rule’s 

interpretation of the definition of bona 

fide service fees at § 447.502 and how 

manufacturers may apply the definition 

for the purposes of AMP in its entirety. 

Group Purchasing Organizations 

Comment: Many commenters 

requested that CMS specify that 

administrative fees paid to GPOs be 

specifically excluded from AMP. A few 

commenters requested that CMS clarify 

an issue in the preamble to the final 

ASP rule regarding whether fees paid to 

GPOs would come within the definition 

of bona fide service fees. The 

commenters stated that these fees 

should receive the same treatment as 

other administrative and service fees for 

the purpose of AMP and best price. 

Also, CMS should clarify in the final 

rule that such arrangements do not 

constitute price concessions or 

discounts to purchasers and should 

require the manufacturer to ascertain if 

the fee is passed on. One commenter 

requested that CMS clarify that fees paid 

to GPOs are excluded and revise the 

definition of bona fide service fee to 

read, ‘‘For purposes of 42 CFR 

§§ 447.504(h) and 447.505(e), fees paid 

by a manufacturer to a bona fide group 

purchasing organization, as defined at 

42 CFR § 100.952(j)(2), will not 

constitute a price concession by the 

manufacturer unless the fees (or any 

portion thereof) are passed on to the 

group purchasing organization’s 

members or customers as part of an 

agreement between the manufacturer 

and the GPO.’’

Response: We have clarified in 

§ 447.504(h)(19) that to the extent that 

fees, including service fees, distribution 

fees, and administrative fees and other 

fees to GPOs meet the definition of 

‘‘bona fide service fee,’’ such fees are 

excluded from the calculation of AMP 

and are not considered price 

concessions. If the manufacturer has an 

agreement with the GPO that any of 

these monies are passed on to the group 

purchasing organization’s members or 

customers, they would not be excluded 

as a bona fide service fee. We believe 

there must be no evidence or 

arrangement that the fee is passed on to 

the member pharmacy, client or 

customer of any entity included in the 

calculation of AMP in order for the 

manufacturer to exclude these fees from 

the determination of AMP. 

Comment: Several commenters said 

that unlike the ‘‘safe harbor’’

regulations, the proposed rule should 

not differentiate between administrative 

fees paid to entities, such as GPOs and 

PBMs, and fees for other services, such 

as distribution and inventory 

management. The commenter further 

supported the exclusion of both types of 

fees from AMP, if they satisfy the 

criteria for itemized bona fide services 

performed on behalf of a manufacturer 

for fair market value not passed through 

to a customer or client of the recipient, 

regardless of whether it takes title to the 

drugs, because such fees are necessary 

business expenditures. However, the 

commenters urge CMS to allow 

categorical exclusion of administrative 

fees of three percent or less if they fall 

within the GPO administrative fee safe 

harbor, including its limitation with 

ownership of members. Such a 

categorical exclusion would be 

consistent with the purpose of the 

statutory exemption and safe harbor, 

which encourage group purchasing 

arrangements, and alleviate the 

necessity to evaluate each GPO 

agreement to determine if it is fair 

market value for bona fide services 

received by the manufacturer. 

Response: We appreciate these 

comments and have clarified at 

§ 447.504(h)(19) that to the extent that 

fees to GPOs meet the definition of 

‘‘bona fide service fee,’’ they are 

excluded from the calculation of AMP. 

We believe that to propose a categorical 

exclusion of administrative fees of 3 

percent or less if they fall within the 

GPO safe harbor provisions would be 

inconsistent with our guidance 

regarding an actual determination of the 

amount of bona fide service fees. 

Comment: One commenter requested 

that CMS clarify that the guidance 

provided in the preamble to the final 

rule on the ASP calculation is equally 

applicable in the Medicaid context, 

except with regard to those 

circumstances in which a GPO is 

passing on fees to members. 

Response: As we have previously 

stated, we have incorporated the policy 

in the ASP rule into this final regulation 

in § 447.502. 

Comment: One commenter further 

requested that CMS clarify that GPO 

fees do not affect AMP calculations 

when the GPO negotiates prices for 

member hospitals for drugs used in the 

inpatient setting, since the underlying 

sales to hospitals would be excluded 

from AMP in this circumstance. 

Response: We agree that these fees 

should be excluded to the extent that 

the sales are not recognized as 

outpatient hospital sales as elsewhere 

discussed in this final rule. 

Comment: One commenter expressed 

support for the comment provided by an 

entity within the industry which 

suggested that fees to GPOs should not 

be treated as price concessions ‘‘unless 

the fees (or any portion thereof) are 

passed on to the group purchasing 

organization’s members or customers as 

part of an agreement between the 

manufacturer and GPO.’’

Response: We have incorporated the 

2007 final ASP reporting rule’s 

interpretation of the definition of bona 

fide service fees at § 447.502 and how 

manufacturers may apply these 

definitions for purposes of AMP. We 

believe that it is necessary to retain 

consistency regarding bona fide service 

fees and clarify that to the extent that 

fees to GPOs meet the definition of 

‘‘bona fide service fees’’ the fees are 

excluded from the calculation of AMP. 

Comment: One commenter stated that 

the proposed rule treats fees, discounts 

and other concessions offered to 

purchasers of drugs the same as 

payments made to third parties like 

PBMs and GPOs that do not purchase or 

take possession of drugs (and for GPOs, 

do not even pay for drugs). The 

commenter requested that CMS limit the 

provision to price reductions and other 

payments that flow to purchasers, and 

expressly exclude payments that flow to 

third parties not involved in the 

purchase transactions. The commenter 

recommended that CMS clarify this to 

state that all fees that manufacturers pay 

to customers or third parties meeting the 

definition of a bona fide service fee are 

excluded from the calculation of AMP. 

The commenter contended that the 

provision clouds the issue of proper 

handling of bona fide service fees and 

appears to create distinctions between 

administrative fees, service fees and 

distribution fees that do not always 

exist. 

Response: We appreciate this 

comment and have clarified at § 447.502 

that to the extent that fees to any entity 

included in the retail pharmacy class of 

trade meet the definition of bona fide 

fees, they are excluded from the 

calculation. 

Comment: One commenter 

recommended that CMS remove the 

bona fide service fees provision because 

this term is not well defined and is open 

for interpretation, abuse, and fraud. The 

commenter believed that if this term 

reduces AMP, it should be eliminated. 


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Response: We disagree. We believe 

that the excluding bona fide service fee 

results in an appropriate measure of 

AMP. We also believe that it provides 

the appropriate safeguard against 

potential fraud and abuse. The Federal 

Government, however, will continue to 

monitor these calculations to assure 

they are not done improperly. 

Comment: One commenter said that 

the final rule should provide an 

overview of the types of payments that 

are bona fide service fees but not 

identify an exclusive list. This would 

allow for manufacturers and contracting 

entities to make future interpretations 

based on the practices of the 

marketplace. The commenter did not 

see the need for future guidance or 

rulemaking to add to this list and 

believes that doing so may reduce the 

level of innovation and impede the 

delivery of new products to patients. 

Other commenters requested that CMS 

provide more guidance as to what 

constitutes a bona fide service fee, as 

well as provide additional parameters 

and/or specific examples to assist 

manufacturers in making this 

determination. Another commenter 

supported excluding bona fide service 

fees from AMP, especially when those 

fees are not passed through to the 

product’s ultimate purchaser, but did 

not support any attempt to list specific 

bona fide service fees in the final 

regulation. The commenter further 

noted that the preamble should provide 

examples of types of bona fide service 

fee payments that would be acceptable 

for exclusion from the AMP calculation 

at this time. 

Response: We believe that the 

definition defines what constitutes a 

bona fide service fee. Providing a list of 

types of bona fide service fee payments 

could limit the scope of what 

constitutes a bona fide service and, 

because of the complexities of the 

marketplace, raises further questions as 

to why some examples were included 

and some excluded from that list. 

Other Fees 

Comment: Commenters requested that 

CMS provide guidance regarding the 

treatment of payments from 

manufacturers for performing certain 

patient care programs, such as patient 

education and compliance and 

persistency programs. These payments 

should be omitted from the AMP 

calculation because they do not reflect 

prices paid by wholesalers for drug 

products or reduce the retail pharmacy’s 

cost of purchasing the drugs. 

Response: We are providing no 

further policy on these arrangements in 

this final rule and will continue to 

review such arrangements individually. 

Fair Market Value 

Comment: One commenter disagrees 

with the adoption of Medicare Part B’s 

definition of fair market value. The 

commenter said that AMP should not 

exclude bona fide service fees set at the 

fair market value because Part B drugs 

cannot be purchased by the pharmacy 

community at the prices set using ASP. 

The commenter further stated that 

excluding bona fide service fees from 

AMP would transform chain pharmacy 

stores into variety stores and 

independent pharmacies would cease to 

exist. Access to prescription drugs 

would be unavailable and hospital 

emergency rooms would become 

understaffed clinics. 

Response: We disagree. We do not 

believe that allowing manufacturers to 

exclude bona fide service fees that 

represent the fair market value of the 

service will have any impact on the 

operations of chain and independent 

pharmacies. 

Comment: One commenter stated that 

to be truly fair and appropriate, the 

definition of fair market value of drugs 

must be in some way related to the 

purchasing power of the pharmacy 

involved. If all pharmacies are to be 

included in the calculation, then it must 

be the cost at which the least powerful 

purchaser can obtain the product. 

Alternatively the markets could be 

separated in a fair manner and the 

average acquisition cost for each market 

could be considered to be the fair 

market value of that particular segment. 

Response: We believe that the 

commenter misunderstood the context 

of fair market value as it relates to a 

manufacturer’s payment of bona fide 

service fees. We do not believe that 

allowing manufacturers to determine 

the fair market value of drug 

distribution services as it relates to bona 

fide service fees impacts the average 

acquisition cost. 

Comment: One commenter supported 

the exclusion of bona fide service fees 

from AMP but stated that an 

unnecessarily narrow reading of what 

constitutes ‘‘fair market value’’

remuneration for legitimate services 

performed on behalf of a manufacturer 

may disrupt normal and legitimate 

business transactions between PBMs 

and manufacturers. 

Response: Elsewhere in this final rule, 

we have excluded rebates, discounts 

and price concessions provided to PBMs 

from the determination AMP, except for 

purchases through PBM mail order 

pharmacies eliminating an effect on 

these transactions between 

manufacturers and PBMs. We have not 

further defined ‘‘fair market value’’ so 

that manufacturers have the flexibility 

to determine fair market value 

consistent with industry accepted 

methods. This is consistent with our 

adoption of the discussion in the 2007 

final ASP reporting rule (see 71 FR 

69668, December 1, 2006). 

Comment: One commenter 

recommended that CMS not provide 

that a fee must not be passed on in order 

for it to be considered a bona fide 

service fee. If the fee is for a legitimate 

service performed for the manufacturer, 

it should not matter if it is passed on. 

Moreover, the administrative burden for 

manufacturers to gather confidential 

information from PBMs and others in 

the drug channel would be significant 

and may cause manufacturers to forgo 

any service arrangements. 

Response: We disagree. We believe 

that a fee which is passed on is not a 

bona fide service fee but rather a price 

concession. Price concessions reduce 

the price realized by the manufacturer 

for drugs distributed to the retail 

pharmacy class of trade. We understand 

that manufacturers may face 

administrative burdens regarding the 

collection of data to determine whether 

a fee is passed on and have incorporated 

the discussion in the 2007 final ASP 

reporting rule (see 71 FR 69669, 

December 1, 2006). Finally, elsewhere 

in this final rule, we have excluded 

rebates, discounts and price concession 

to PBMs so there is no longer the 

administrative burden associated with 

PBM adjustments. 

Commenter: One commenter asked 

that CMS allow manufacturers 

discretion in selecting methodologies 

for determining fair market value and in 

identifying the types of services that can 

qualify as bona fide services. 

Response: We have not further 

defined ‘‘fair market value’’ so that 

manufacturers have the flexibility to 

determine fair market value consistent 

with generally recognized standards. 

This is consistent with our adoption of 

the discussion in the 2006 final ASP 

reporting rule (see 71 FR 69668, 

December 1, 2006). 

Comment: One commenter requested 

that CMS amend the definition of bona 

fide service fee to reflect that a fee paid 

by a manufacturer to a group purchasing 

organization, as that term is defined in 

42 CFR § 1001.952(j), represents ‘‘fair 

market value’’ if the fee results from 

arms-length, bona fide bargaining 

between the manufacturer and the GPO. 

Response: We believe that the 

proposed definition and additional 

guidance incorporated from the final 

ASP reporting rule clarifies that fees, 


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including service fees, administrative 

fees and other fees paid to GPOs are not 

considered price concessions to the 

extent that they satisfy the definition of 

a bona fide service fee. 

Comment: A commenter said that 

CMS should amend the definition of 

‘‘bona fide service fee’’ to allow that a 

payment need not represent fair market 

value in order to qualify as a bona fide 

services fee. 

Response: We do not agree. As 

previously discussed, we have not 

further defined ‘‘fair market value’’ so 

that manufacturers have the flexibility 

to determine fair market value 

consistent with generally recognized 

standards. This is consistent with our 

adoption of the discussion in the 2006 

final ASP reporting rule (see 71 FR 

69668, December 1, 2006). 

Comment: Other commenters stated 

that CMS should allow a manufacturer 

to exclude from AMP any payment to 

any entity other than a purchaser, where 

this payment is not passed on in whole 

or in part by the entity to a purchaser 

of the manufacturer’s drugs as a price 

concession by the manufacturer. 

Response: We disagree. We believe 

that the proposed definition and 

additional guidance incorporated from 

the final ASP reporting rule clearly 

define what constitutes a bona fide 

service fee to an entity included in the 

retail pharmacy class of trade, which is 

excluded from AMP. 

Comment: One commenter requested 

that CMS clarify whether a service fee 

determined not to be ‘‘bona fide,’’

should be prorated to include only that 

portion related to sales included in 

AMP. 

Response: A manufacturer’s AMP 

should include administrative fees, 

service fees (except bona fide service 

fees) and distribution fees for those 

entities and units of drugs included in 

the determination of AMP. 

Comment: One commenter agreed that 

certain service fees should be included 

in the calculation of AMP on the basis 

that some wholesalers charge inventory 

service or stocking fees to certain 

manufacturer for carrying their 

products. Fees such as inventory service 

or stocking fees should not be 

considered bona fide service fees as they 

do not fall under the proposed 

definition and effectively result in a 

discount that should be considered 

when calculating AMP. The commenter 

further expressed concern that 

inventory service or stocking fees 

charged to manufactures by wholesalers 

are not imposed uniformly and agreed 

that these should be excluded from 

AMP to ensure consistency between 

manufacturers. 

Response: We believe that the 

definition and additional guidance 

clearly defines what constitutes a bona 

fide service fee and distinguishes these 

fees from other fees that may reduce the 

price of a drug. 

Retail Impact 

Comment: One commenter said that 

community pharmacies do not receive 

administrative service agreements from 

wholesalers and should be excluded 

from AMP. Another commenter stated 

that administrative fees and service fees 

paid to wholesalers, PBMs or HMOs 

should not be excluded from the 

calculation of AMP because these fees 

are not available to the retail pharmacy 

of trade. The commenter further stated 

that the fees are kept by the above 

entities and have no effect on invoice 

pricing to the retail pharmacy. If CMS 

feels that these fees are more than 

nominal, then this should be addressed 

in the future through further legislation. 

Response: We disagree. A 

manufacturer’s AMP should include 

administrative fees, service fees (except 

bona fide service fees) and distribution 

fees for those entities and units of drugs 

included in the determination of AMP. 

Direct Patient Sales 

Comment: One commenter supported 

the inclusion of direct patient sales in 

AMP on the basis that when drugs are 

provided to patients through 

distributors, the distributor is acting as 

a wholesaler and the transaction is a 

sale to the retail pharmacy class of 

trade. 

Response: We appreciate the support 

for this provision and have retained this 

requirement in the final rule at 

§ 447.504(g)(7). However, as discussed 

below, we did not intend to include 

patient assistance programs. 

Comment: A few commenters stated 

that CMS should reconsider the 

rationale used to include direct sales to 

patients in AMP because the statute 

does not contemplate those patients 

within the classes of purchasers used to 

determine AMP. One commenter said 

that sales directly to patients should be 

excluded from AMP. Several 

commenters said that sales and rebates 

associated with direct sales programs 

should not be included in AMP for 

pharmacy reimbursement. Many 

commenters said that the retail 

pharmacy class of trade does not have 

access to direct to patient sales and that 

they should not be included in AMP. 

One commenter requested that CMS 

explain how drugs distributed directly 

to patients fall within the definition of 

drugs distributed to the retail pharmacy 

class of trade when patients do not 

resell or provide drugs to the general 

public. A few commenters said that 

there is no support for CMS to expand 

‘‘wholesaler’’ and ‘‘retail pharmacy class 

of trade’’ to include direct-to-patient 

sales by a manufacturer. CMS has not 

provided an analysis as to why it 

believes patients are within the retail 

pharmacy class of trade. 

Response: We appreciate the 

comment and have clarified that where 

the distributor is acting as a wholesaler, 

such sales should be included in AMP. 

We believe such sales are usually for 

specialty drugs through a direct 

distribution arrangement, where the 

manufacturer may retain ownership of 

the drug and pay either an 

administrative or service fee to a third 

party for functions such as the storage, 

delivery and billing of the drug. In this 

case, where the distributor is acting as 

a wholesaler, such sales should be 

included in AMP. 

Comment: A few commenters said 

that direct-to-patient programs are an 

efficient, cost-effective means to provide 

much needed therapies. Federal policy 

should encourage such programs rather 

than discourage their development and 

use. However, requiring manufacturers 

to include such sales in AMP many 

have an unintended effect of 

discouraging manufacturers from 

implementing such programs. The 

commenter urged CMS to revise its 

proposed rule so that direct sales to 

patients are excluded from AMP. 

Another commenter said that including 

these sales and, presumably, discounts, 

in the AMP calculation may potentially 

serve as a disincentive for 

manufacturers to offer patient assistance 

programs or other subsidies to patients. 

If the intent of the AMP calculation is 

to determine the net price paid by 

wholesalers for drugs to the retail 

pharmacy class of trade, including sales 

and discounts directly to patients may 

improperly lower AMP. 

Response: The inclusion of direct 

patient sales in AMP is not intended to 

discourage manufacturers from 

implementing these programs. However, 

we believe that the inclusion of such 

direct patient sales in AMP (where the 

distributor is acting as a wholesaler) is 

consistent with our understanding of 

the statute and our definition of 

wholesaler. The policy with respect to 

patient assistance programs is addressed 

elsewhere in this final rule. 

Comment: One commenter said that 

the inclusion of direct patient sales in 

AMP is inconsistent with CMS’ position 

on patient coupons, which are excluded 

from AMP. 

Response: We disagree. Direct patient 

sales (where the distributor is acting as 


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a wholesaler) are like other sales 

included in AMP where the 

manufacturer sells a drug to a 

wholesaler/distributor which then sells/ 

transfers the drug to a pharmacy or 

dispenses the drug itself. Our policy is 

based on our understanding of the 

transaction and on the pharmacy or 

wholesaler not being involved in the 

patient coupon transaction given that 

there is no adjustment of price at the 

wholesaler or pharmacy level. 

Comment: One commenter requested 

that CMS clarify whether products 

which are sold directly to patients 

through company stores that sell only to 

the company’s employees are included 

in AMP. 

Response: We are unable to respond 

to this comment as the commenter did 

not include enough specific information 

to enable us to do so. However, we have 

defined retail pharmacy class of trade at 

§ 447.504(e) to mean any independent 

pharmacy, chain pharmacy, mail order 

pharmacy or other outlet that purchase 

drugs from a manufacturer, wholesaler, 

distributor, or other licensed entity and 

subsequently sells or provides the drugs 

to the general public. We will continue 

to respond to such questions via the 

website or informal guidance when 

additional information can be obtained. 

Comment: One commenter requested 

that CMS clarify the meaning of ‘‘direct 

sales’’ as it used in the calculation of 

AMP. 

Response: As we understand this 

term, it means sales for which the 

manufacturer exerts control over the 

distribution of the drug through either 

an exclusive wholesaler/distributor or 

pharmacy. While this is the general 

definition we used to respond to these 

comments, we note that the underlying 

basis for our policy on these sales’

inclusion in AMP is based on our 

broader policy concerning the type of 

sales that are included in our definition 

of the retail pharmacy class of trade. 

Returned Goods 

Comment: Some commenters 

expressed support for CMS’ proposal to 

exclude returned goods from the 

calculation of AMP pursuant to 

manufacturer policies that are not 

designed to manipulate or artificially 

inflate or deflate AMP. The commenters 

believed that manufacturers should be 

able to design their return policies and 

exclude such returns from AMP, 

provided the policies do not represent a 

covert means of manipulating AMP. As 

they understood it, CMS’ proposal 

permits manufacturers the operational 

freedom to define and accept returned 

goods, while eliminating administrative 

burdens, preserving the integrity of the 

Medicaid drug rebate program, and 

harmonizing the AMP calculation with 

that of ASP. Thus, they asked that CMS 

finalize its proposed rule on returned 

goods. 

Response: We appreciate this support 

and have retained this requirement in 

the final rule at § 447.504(h)(21). 

Comment: Several commenters 

requested that CMS clarify the standards 

for determining when a return is made 

in good faith. The commenters asked 

whether a manufacturer may assume 

that goods are returned in good faith if 

a manufacturer has no evidence to the 

contrary. Alternatively, they requested 

that CMS delete the ‘‘good faith’’

requirement as this requirement 

addresses the intentions of those 

returning the drugs and not the 

manufacturer. 

Response: We intend that ‘‘good 

faith’’ must be demonstrated on the part 

of the manufacturer, not the returning 

entity. We believe that returns made in 

good faith should be made in 

accordance with pre-existing 

manufacturer policies that comply with 

customary acceptable business 

practices; and applicable laws and 

regulations. 

Comment: One commenter stated that 

these negotiated return goods policies 

should take into consideration the 

unique burdens which retail pharmacies 

must absorb in order to efficiently 

return expired pharmaceutical products 

to manufacturers. By mandating that 

only returns made pursuant to 

manufacturers’ policies be excluded 

from AMP, CMS could be voiding these 

negotiated return goods policies (which 

were negotiated in good faith between 

manufacturers and retailers) and are 

forcing retailers to accept 

manufacturers’ policies and their 

inherent deficiencies. The commenter 

asserted that such action ignores that 

retailers absorb considerable cost 

through replacement value of returns, 

inventory carry cost, reverse logistic 

costs, and administrative expense. In 

order to remedy this inequity, the 

commenter believes that goods returned 

in good faith pursuant to a commercial 

agreement, written or otherwise, 

between a manufacturer and a purchaser 

of its product, including wholesalers 

and pharmacies, should also be 

excluded from AMP. The commenter 

further recommended that CMS adopt a 

policy regarding returned goods that 

define them as the result of a 

commercial agreement, written or 

otherwise, between a manufacturer and 

a purchaser of its product, including 

wholesalers and pharmacies, which are 

designed to reimburse pharmacies for 

the replacement cost of products 

returned in good faith. 

Response: The returned goods policy 

in this regulation pertains to when 

payments for these goods are to be 

excluded from AMP. It should not affect 

negotiated agreements between 

pharmacies and manufacturers 

regarding returned goods. While the 

proposed rule did not address the 

treatment of replacement products, in 

the final rule at § 447.504(h)(21), we 

clarify that replacement products 

should not be included in AMP. 

Comment: One commenter said that 

the language regarding handling 

returned goods in ‘‘good faith’’ leaves 

too much opportunity for interpretation 

by various manufacturers. The 

commenter stated that CMS should 

clearly state whether or not returned 

goods are to be included in pricing 

calculations rather than providing a 

method for some manufacturers to pick 

and choose when they will exclude 

returns. 

Response: We do not agree that we 

should provide a standard definition at 

this time. As previously stated, we 

believe that returns made in ‘‘good 

faith’’ should be made in accordance 

with manufacturer policies that comply 

with customary business practices; and 

applicable laws and regulations. 

Comment: The commenter 

recommended that we eliminate the 

reference to ‘‘manufacturers’ policies’’

as it is unfair and could result in 

additional changes by manufacturers in 

their policies that would compromise 

community retail pharmacy. 

Response: We disagree. Historically, 

manufacturers have had the flexibility 

to determine whether returns were to be 

credited to the quarter of sales or quarter 

of receipt. This has caused difficulty for 

some manufacturers when returns have 

substantially reduced AMP in a quarter 

or resulted in a negative AMP. In light 

of these concerns, we proposed to 

exclude returned goods from the 

calculation of AMP. The intent of this 

revision is not to cause or encourage 

manufacturers to change their current 

policies regarding returns. On the 

contrary, 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 

eliminates artificially low, zero or 

negative AMPs that may result from 

these adjustments. 

Comment: One commenter expressed 

support for the proposal to exclude 

returned goods from AMP. The 

commenter further requested that CMS 

clarify that manufacturers may exclude 


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returned goods based on the good faith 

of the manufacturer in accepting the 

return, because manufacturers do not 

have a basis to determine the good faith 

of the returning purchaser. 

Response: We intend that the ‘‘good 

faith’’ be shown on the part of the 

manufacturer, not the pharmacy 

returning the goods. In order to exclude 

returned goods from the AMP 

calculation, the manufacturer must 

exercise good faith, in accordance with 

the manufacturers return policy. 

Comment: One commenter requested 

that CMS clarify that goods that are 

returned in accordance with the 

manufacturer’s written return policies 

will be deemed to have been made in 

good faith. 

Response: We agree to the extent it 

meets the criteria specified in this final 

rule. 

Comment: One commenter said that a 

manufacturer’s payment to a pharmacy 

or wholesaler for expired or recalled 

merchandise as well as fees associated 

with those services should be excluded 

from the manufacturer’s AMP 

calculation of the basis that the level of 

credit provided is not enough to cover 

the replacement values, the cost of 

carrying the product to expiration, the 

cost of returning the product and the 

administrative cost associated with 

tracking the return. 

Response: We would consider these 

payments acceptable provided that this 

payment is in lieu of a credit for the 

returned good and meet the other 

criteria in this final rule for such 

returns. 

Comment: One commenter requested 

that CMS clarify that products destroyed 

by purchasers (and thus, not returned to 

the manufacturer) should be excluded 

from AMP. 

Response: We agree. Products that are 

destroyed with no replacement product 

issued can be treated as a return. 

Comment: One commenter 

recommended that recalls be treated the 

same as returned goods and excluded 

from AMP and urged CMS to clarify the 

treatment for AMP calculation of any 

return fees or reasonable recall fees paid 

by manufacturers. 

Response: We agree to the extent that 

these recalls meet the other criteria in 

this final rule. 

Comment: One commenter requested 

that CMS clarify whether a 

manufacturer may treat all chargeback 

reversals as returns if data is not 

available to the manufacturer to indicate 

otherwise. 

Response: Only returns within the 

criteria in this final rule are to be 

excluded from AMP. 

Comment: One commenter expressed 

concern regarding the exclusion of 

returned goods because of the effect that 

excluding these goods may have on 

AMP. The commenter believed that a 

significant increase or decrease in the 

AMP as a result of a returned good 

could lead to inaccuracies in FULs and 

potential future payment methodologies 

based on AMP to be used by third party 

programs. 

Response: We disagree. We believe 

that the exclusion of returns will 

stabilize AMP and allow the 

manufacturer to calculate and report an 

AMP that is reflective of its pricing to 

the retail pharmacy class of trade in the 

reporting period. It eliminates 

artificially low, zero or negative AMPs 

that may result from these adjustments. 

Manufacturer Coupons 

Comment: One commenter stated that 

the final rule should clarify that 

manufacturer coupons redeemed by 

consumers, either directly to the 

manufacturer or at point of sale through 

pharmacies, are excluded from AMP as 

long as manufacturer payments to 

pharmacies are limited to administrative 

fees, charged at fair market rates, to 

compensate the pharmacies for their 

services; and, the prices paid by such 

pharmacies for the drugs are not 

affected by the coupon. Several 

commenters stated that if CMS decides 

that coupons redeemed by entities other 

than the consumer are to be included in 

AMP, additional guidance would be 

needed regarding the valuation of such 

transactions in AMP (for example, at 

wholesale acquisition cost (WAC), retail 

cost, or some other method). Another 

commenter requested that CMS clarify 

that coupons should not be included in 

AMP if, the benefit provided to the 

patient was set by the manufacturer 

without any negotiation between the 

manufacturer and a third party; the 

entire amount of the benefit was made 

available to an individual patient, 

without any opportunity for the retail 

pharmacy or other third party (such as 

an insurer or PBM) to reduce that 

benefit or take a portion of it for its own 

purposes; and the pharmacy collected 

no additional payment, other than the 

benefit amount, from the drug discount 

program. Coupons redeemed directly by 

patients with the manufacturer should 

be treated the same as coupons 

redeemed through other parties. The 

commenter proposed that CMS adopt as 

a definition of manufacturer coupon any 

certificate provided to a consumer that 

provides by its terms that the consumer 

is entitled to a discount on his or her 

purchase of drugs, either at the point-ofpurchase, through a reduction equal to 

the face value of the coupon up to the 

amount the consumer is required to pay 

the entity that dispense the drugs, or 

subsequent to the purchase, through 

receipt of a cash reimbursement from 

the manufacturer (or a vendor under 

contract to the manufacturer to 

administer the coupon program) where 

the reimbursement amount is equal to 

the lesser of the amount the consumer 

paid to the dispensing entity or the face 

value of the coupon. The commenter 

further requested that CMS clarify that 

manufacturers should exclude from 

AMP any fee paid to an entity other 

than a consumer that redeems a 

manufacturer coupon where the fee 

satisfies the definition of ‘‘bona fide 

service fee’’ adopted by the final rule. 

Response: In light of the comments 

received, we believe that manufacturer 

coupons redeemed by any entity other 

than the consumer where full value of 

the coupon is passed on to the 

consumer, and the pharmacy does not 

receive any price concessions, should be 

excluded from AMP. We also agree with 

the comment regarding the need to 

clarify criteria regarding coupons and 

are codifying our prior guidance in this 

final rule with respect to manufacturer 

coupons at § 447.504(g)(15) to state that 

manufacturer coupons redeemed by any 

entity other than the consumer are 

excluded from AMP as long as the 

following provisions are met: 

1. The manufacturer coupon is not 

contingent upon any purchase 

requirement to individuals. 

2. The manufacturer establishes a 

benefit amount of the coupon to be 

given to individual patients, without 

any negotiation between the 

manufacturer and any other third party 

(such as an insurer or PBM) as to that 

amount. 

3. The entire amount of the free 

product or coupon amount is made 

available to the individual patient, 

without any opportunity for the retail 

pharmacy or any third party (such as an 

insurer or PBM), to reduce the benefit 

amount, or take a portion of it, for its 

own purposes. 

4. The pharmacy collects no 

additional payment, other than the 

benefit amount and a bona fide service 

fee, from the coupon. 

Comment: Many commenters 

requested that CMS clarify that it does 

not matter who or which type of entity 

provides the benefit to the patient. 

Another commenter requested that CMS 

make clear that manufacturer coupons 

redeemed by a consumer, whether 

directly or indirectly to the 

manufacturer should be excluded from 

AMP. One commenter stated that in 

instances where a third party vendor is 


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used by the manufacturer to administer 

a coupon program on its behalf, that the 

coupon be considered redeemed 

directly to the manufacturer by the 

consumer. One commenter requested 

that CMS affirm that, when the only 

party receiving an economic benefit 

from the program is the patient, the 

value of the coupon will not be 

included in AMP. The commenter 

further requested that CMS confirm that 

the delegation of the operations of a 

coupon program to a fulfillment house 

or other agent does not by itself cause 

the coupon to be included in AMP. One 

commenter requested that CMS abandon 

its focus on redemption mechanics, as 

that focus will yield arbitrary results on 

the basis that the coupons would 

require disparate treatment for 

transactions that are indistinguishable 

in their substance. 

Response: We appreciate these 

comments and have provided in the 

final regulation at § 447.504(h)(15) that 

manufacturer coupons redeemed by any 

entity other than the consumer which 

meet the previously discussed criteria 

may be excluded from AMP. 

Comment: One commenter said that 

although coupon and voucher programs 

may appear similar, they are different in 

purpose and function. The commenter 

was concerned that ‘‘vouchers’’ may 

also be included in potential 

interpretations of the term coupon, 

whether or not this was CMS’ intent. 

The commenter used the term, coupons 

as certificates provided to patients that 

entitle them to discounts on their 

prescription drug purchases, either at 

the point of sale (through a reduction in 

the amount that consumer is required to 

pay the dispensing pharmacy) or 

subsequent to the purchase (by sending 

the coupon to the manufacturer or a 

clearinghouse with proof of purchase to 

receive a cash reimbursement from the 

manufacturer). In either case, the 

amount of the discount provides a 

dollar for dollar reduction in the 

amount paid out of pocket by the 

patient. In point-of-sale coupons, the 

dispensing pharmacy receives 

reimbursement for the discount passed 

on to the patient plus a small handling 

fee for administering the transaction. 

Vouchers are certificates provided to 

patient that entitle the patient to receive 

a specified number of units of a drug 

free of charge. The vouchers function 

similarly to product samples. The 

pharmacy dispenses the drug free-ofcharge to the patient and is then 

reimbursed by the vendor according to 

a formula negotiated between the 

vendor and the pharmacy, plus a 

dispensing fee. The vendor bills the 

manufacturer for this reimbursement 

expense, plus a bona fide service fee. 

The commenter further stated that CMS 

should require manufacturers to exclude 

from AMP any manufacturer coupon 

redeemed by a consumer either directly 

to the manufacturer or to a vendor 

under contract to the manufacturer to 

administer the coupon program; or 

alternately, any manufacturer coupon 

redeemed by an entity other than a 

consumer (after being presented by the 

consumer and honored by such entity) 

either directly to the manufacturer or to 

a vendor under contract to the 

manufacturer to administer the coupon 

program. If CMS does decide to treat 

manufacturer vouchers separately from, 

or as part of, manufacturer coupons, 

CMS should define manufacturer 

voucher to mean any certificate 

provided to a consumer that provides by 

its terms that the consumer is entitled 

to a specified number of units of a drug 

free of charge, without any co-payment 

from the consumer, or reimbursement to 

the entity that dispenses the drug from 

any insurance program of which the 

consumer may be a beneficiary. 

Furthermore, the commenter requested 

that CMS instruct manufacturers to 

exclude from their AMP: (i) any 

manufacturer voucher redeemed by a 

consumer either directly to the 

manufacturer or to a vendor under 

contract to the manufacturer to 

administer the voucher program; and (ii) 

any manufacturer voucher redeemed by 

an entity other than a consumer (after 

being presented by the consumer and 

honored by such entity) either directly 

to the manufacturer or to a vendor 

under contract to the manufacturer to 

administer the program; and specify that 

manufacturers should also exclude from 

AMP; (i) the reimbursement amount 

paid for any manufacturer vouchers; 

and (ii) any fees paid to an entity other 

than a consumer that redeems a 

manufacturer voucher where the fee 

satisfies the definition of ‘‘bona fide 

services fee.’’ If CMS does not adopt the 

approach to treating coupon and 

voucher programs, clear guidance from 

CMS as to how manufacturers should 

account for the value of point-of-sale 

coupons and vouchers in the calculation 

of AMP is needed, including specific 

mathematical examples as to how the 

value of such coupon and voucher 

should be accounted for in AMP. 

Response: We believe that vouchers 

for free sample products should be 

excluded from AMP in instances that 

the, voucher is not contingent on other 

purchase requirements and is redeemed 

by any entity other than the consumer, 

where the full value of the coupon is 

passed on to the consumer and the 

pharmacy does not receive any price 

concessions, it should be excluded from 

AMP. We have amended the final rule 

at § 447.504(h)(16) to incorporate these 

comments. 

Comment: One commenter said that 

no distinction should be made between 

manufacturer coupons and other 

manufacturer-sponsored point-of-sale 

discounts. 

Response: This policy only applies to 

manufacturer coupons and vouchers, as 

discussed in the previous response. 

Comment: A commenter said that 

CMS should provide further guidance 

concerning what arrangements it 

considers to constitute ‘‘coupons 

directly redeemable to the 

manufacturer.’’ It is unclear whether 

CMS intends for the term ‘‘coupon’’

only to cover coupon arrangements in 

their traditional sense or whether the 

term also is intended to cover other 

types of consumer subsidies. Another 

commenter requested that CMS provide 

an explanation of what arrangements 

CMS considers to be patient coupons 

and guidance regarding how such 

arrangements should be incorporated in 

AMP. 

Response: We have clarified in the 

final regulation at § 447.504(h)(15) the 

criteria that must be met for 

manufacturer coupons redeemed by the 

consumer to be excluded from AMP. 

Comment: One commenter requested 

that CMS explain how coupons other 

than those redeemed by the 

manufacturer are to be accounted for in 

those calculations. The commenter 

further stated that the proposed rule 

does not account for a variety of coupon 

arrangements that exist. 

Response: We have clarified in the 

final regulation at § 447.504(h)(15) that 

manufacturer coupons redeemed by the 

consumer that meet the criteria in this 

final rule are excluded from AMP. 

Comment: One commenter asked if 

patient assistance continue to be 

excluded from AMP. Another 

commenter requested that CMS provide 

guidance regarding how a manufacturer 

may properly structure a patient 

assistance program utilizing coupons. 

Response: In light of the comments 

received, we believe that patient 

assistance programs which extend free 

products to consumers without 

purchase contingencies and which do 

not provide any price concessions to the 

pharmacy, should be excluded from 

AMP. We are codifying guidance in this 

final rule at § 447.504(h)(12) to clarify 

that patient assistance programs should 

be excluded from AMP as long as the 

following criteria are met. 

1. The program is focused on 

extending free products not contingent 


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upon any purchase requirement or 

extending financial assistance to lowincome individuals and families, as 

determined by CMS. 

2. Each manufacturer establishes an 

amount of the subsidy to be given to 

individual patients, without any 

negotiation between the manufacturer 

and any other third party (such as an 

insurer or PBM) as to that amount. 

3. The entire amount of the free 

product or subsidy is made available to 

the individual patient, without any 

opportunity for the retail pharmacy or 

any third party (such as an insurer or 

PBM), to reduce that subsidy, or take a 

portion of it, for its own purposes. 

4. The pharmacy collects no 

additional payment, other than the 

benefit amount and a bona fide service 

fee, from the patient assistance program. 

Comment: One commenter said that 

CMS should provide in the final rule 

that any type of consumer program, be 

it a patient assistance, coupon, or debit 

card program, be exempted from AMP, 

and so as long as such program does not 

affect the price paid by the pharmacist 

to acquire the product. The commenter 

further said that CMS should clarify that 

programs should be excluded from AMP 

to the extent that the full amount of the 

discount goes to the consumer and does 

not affect the price realized by the 

pharmacist, or any end user other than 

a patient. 

Response: We have clarified in the 

final regulation at § 447.504(h) the types 

of programs; for example, patient 

assistance programs and manufacturer 

coupons that provide free goods which 

are not contingent upon future 

purchases to patients, that should be 

excluded from AMP. 

Comment: Many commenters said 

that coupons redeemed by pharmacists, 

just as those redeemed directly by 

manufacturers, should be excluded from 

AMP. In such cases the pharmacist is 

merely a pass-through entity as the 

pharmacist does not realize any 

monetary gain. Another commenter 

noted that patient coupons do not have 

an impact on prices for entities included 

in AMP and any requirement to include 

such arrangements in those calculations 

could impact the continued viability of 

the patient access programs. Other 

commenters stated that CMS should 

clarify that patient coupons transactions 

should not be included in AMP. 

Another commenter said that CMS 

incorrectly assumed that all indirect 

redemption arrangements necessarily 

affect the price realized by the 

redeeming pharmacy and that CMS 

should revise its proposed policy on 

manufacturer coupons to make clear 

that only arrangements that affect the 

price realized must be included in AMP. 

To count these coupons in AMP would 

distort those price figures and create a 

disincentive for manufacturers to 

continue offering these valuable 

programs. Several commenters said that 

manufacturer coupons should be 

excluded from AMP because these are 

not sales to traditional pharmacies. 

Response: We appreciate these 

comments and have clarified in 

§ 447.504(h)(15) that manufacturer 

coupons redeemed by any entity other 

than the consumer which meet the 

previously discussed criteria are 

excluded from AMP. 

Comment: A few commenters 

requested that CMS clarify the 

definition of ‘‘coupon.’’ A commenter 

further asked if CMS intended the term 

to refer only to paper coupons or to 

include patient assistance discount 

cards and other media provided to 

consumers. 

Response: We have not specified that 

coupons must be printed on paper so as 

not to limit these in the future. We have 

clarified in the final regulation the 

treatment of other patient assistance 

programs. 

Comment: One commenter urged 

CMS to expand the patient assistance 

program exception to cover those 

programs as a category, regardless of 

whether they provide goods free of 

charge or at limited cost to patients. 

Response: We appreciate this 

comment and have clarified in 

§ 447.504(h)(12) that patient assistance 

programs which met the previously 

discussed criteria are excluded from 

AMP. 

Comment: One commenter said that 

CMS should exclude all patient 

transactions; for example, direct patient 

sales, patient coupons, and patient 

assistance programs from AMP on the 

basis that patients are not part of the 

retail pharmacy class of trade. 

Response: We appreciate this 

comment and have clarified the 

treatment of these transactions in this 

final rule at § 447.504. 

Copayment Assistance Programs 

Comment: One commenter requested 

that CMS clarify the treatment of 

copayment assistance coupons. 

Response: We have clarified that 

copayment assistance programs are 

another form of patient assistance 

programs and should receive similar 

treatment provided they otherwise 

qualify for exclusion from AMP under 

this final rule at § 447.504(h)(12). 

Drug Discount Card Programs 

Comment: Some commenters stated 

that if the manufacturer drug discount 

program exclusion from best price is 

retained in the final rule, then the final 

rule should also provide a similar 

exclusion from AMP. The commenter 

further stated that a drug discount card 

program involving the pass-through of a 

manufacturer discount of 100 percent to 

the consumer and does not affect the 

price received by the manufacturer for 

drugs distributed to the retail pharmacy 

class of trade. 

Response: We have clarified at 

§ 447.504(h)(17) that manufacturersponsored discount card programs 

which meet the previously discussed 

criteria for patient assistance programs 

are excluded from AMP. 

Other Entities 

Comment: A few commenters 

requested that CMS provide clarification 

regarding the treatment of dialysis 

centers, surgical centers, ambulatory 

care centers, and mental health centers. 

Unlike walk-in pharmacies, these 

providers generally provide drugs 

incident to providing medical services 

to persons who are their private 

patients, although some physician 

practices sell self-administered products 

to patients who take the products home. 

Response: Sales to outpatient facilities 

such as dialysis centers, surgical 

centers, ambulatory care centers and 

mental health centers that are not 

hospital-affiliated entities are included 

in AMP. We have clarified at 

§ 447.504(g)(8) in the regulation text the 

treatment of outpatient facilities. 

Comment: A few commenters 

requested that CMS clarify whether 

sales to prisons are included in AMP. 

Response: We have clarified at 

§ 447.504(h)(9) in the regulation text 

that sales to prisons are not included in 

AMP. 

Comment: One commenter stated that 

examples of non-retail entities should 

be included in final rule; that is sold to 

other manufacturers, academic medical 

centers and physician investigators for 

research purposes. 

Response: We have provided 

clarification at § 447.504(g)–(h) 

regarding which sales are included and 

excluded in this final regulation. 

Comment: One commenter requested 

that CMS clarify whether sales to 

veterinary offices are within the 

definition of retail pharmacy class of 

trade. In the commenter’s view, 

veterinary offices are not licensed to 

provide drugs to people and thus could 

not provide them to the general public. 

Response: We have clarified in the 

regulation text at § 447.504(h)(8) that 

sales to veterinarians are excluded from 

AMP. 


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Comment: One commenter requested 

that CMS clarify whether State, county, 

and municipal entities are excluded 

from the retail pharmacy class of trade. 

Response: We have clarified in the 

regulation text at § 447.504(h)(11) that 

sales to State, county, and municipal 

entities are excluded from the retail 

pharmacy class of trade and, therefore, 

are excluded from AMP. 

Comment: One commenter requested 

that CMS explicitly state that the retail 

pharmacy class of trade does not 

include physician-administered drugs. 

The preamble to the proposed rule did 

not address whether to include prices to 

physicians in the retail pharmacy class 

of trade. In the same way that CMS 

excluded sales to long-term care 

pharmacies from the AMP calculation 

because they typically are closed 

operations that serve only residents of a 

specific long-term care facility, a 

physician’s office is not a retail location 

open to the general public. 

Response: In light of the definition of 

wholesaler set forth in the rule, 

physician-administered drugs are 

included in AMP because physicians 

operate to provide such drugs to the 

general public. Specifically, the sales to 

physicians for these drugs are included 

in AMP as well. 

Comment: One commenter requested 

that CMS provide clarification regarding 

the treatment of sales to facilities that 

may operate both a closed-door longterm care pharmacy (excluded from 

AMP in the proposed rule) and a retail 

pharmacy (included in AMP). For such 

a facility, it is impossible for the 

manufacturer to identify which units 

were sold through the long-term care 

pharmacy and which units were sold 

through the retail pharmacy, since their 

orders do not distinguish between the 

two. 

Response: Where a manufacturer does 

not have adequate documentation to 

substantiate whether these drugs are 

dispensed to a long-term care facility or 

to the general population, the 

manufacturer should include all of these 

sales in AMP. 

Comment: One commenter requested 

that CMS specify that closed-wall 

pharmacies which do not sell to the 

general public are not included in the 

retail pharmacy class of trade. 

Response: We are not familiar with 

the term ‘‘closed-wall pharmacy,’’ but 

we have clarified the definition of retail 

pharmacy class of trade. If a pharmacy 

meets this definition, sales to it would 

be including in AMP. 

Comment: A commenter asked that 

CMS provide guidance regarding price 

concessions offered by generic 

companies. The commenter 

recommended that CMS specify that all 

discounts, rebates, payments and fees 

(other than bona fide service fees) 

provided to entities in the retail 

pharmacy class of trade or related sales 

flowing through the retail pharmacy 

class of trade be included in the 

calculation of AMP. This would include 

off-invoice discounts, rebates, and 

payments of preferred product 

positioning, payments for the number of 

products carried or preferred, floor stock 

adjustments, new store credits, ‘‘meet 

the competition’’ price adjustments, and 

the like. 

Response: We have clarified at 

§ 447.504(g) those sales that are 

included in AMP in this final rule. We 

do not agree that price concessions 

offered by generic manufacturers are to 

be included in AMP if they do not relate 

to the sale of the drug and do not 

otherwise meet the criteria in this final 

rule. 

Discounts and Rebates 

Comment: One commenter said that 

rebates, kickbacks, allowances, 

discounts and all other schemes should 

be declared illegal or not counted in 

AMP. 

Response: Issues regarding health care 

fraud and abuse are not addressed in the 

proposed rule. Concerns regarding 

health care fraud and abuse should be 

addressed to the IG of the U.S. 

Department of Health and Human 

Services. 

Comment: One commenter said that 

the calculation of AMP for the purpose 

of establishing FULs should exclude 

discounts or incentives that are not 

available for Medicaid prescriptions. 

Response: We disagree. Under the 

law, AMP has the same definition for 

purposes of rebates and the FULs 

program. 

Comment: One commenter stated that 

it is inappropriate to include cash 

discounts and price reductions in AMP. 

Response: The rebate agreement 

provides that AMP includes cash 

discounts and price concessions which 

reduce the price amount received by the 

manufacturer with respect to drugs 

distributed to the retail pharmacy class 

of trade. 

Comment: One commenter said that 

discounts included in the retail 

pharmacy class of trade should reflect 

only those prices that are provided to 

wholesalers for drugs distributed to 

retail pharmacies. 

Response: AMP includes cash 

discounts, free goods that are contingent 

on any purchase requirement, volume 

discounts, chargebacks, incentives, 

administrative fees, service fees, 

distribution fees (except bona fide 

service fees), other 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. 

Free Goods 

Comment: Several commenters stated 

that non-contingent free goods should 

be excluded from AMP because 

community pharmacies do not receive 

them. Exclusion of free goods from the 

AMP calculation effectively penalizes 

the manufacturer for engaging in this 

type of marketing by not lowering the 

AMP which bases the Federal rebate on 

a higher value and by not reducing the 

difference between AMP and best price. 

However, another commenter supported 

the exclusion of free goods from the 

calculation of AMP. 

Response: When a free good is noncontingent on any other purchase 

requirement, there is no sale of this drug 

and it is appropriately excluded from 

AMP. We have retained in the final rule 

at § 447.504(h)(18) the requirement that 

free goods not contingent upon any 

purchase requirement are excluded from 

AMP. 

Comment: One commenter asked 

CMS to make clear in the final rule that 

a free goods coupon that is redeemed 

through a pharmacy that either used 

consigned product or its own product 

but receives replacement product, plus 

a bona fide service fee, is excluded from 

AMP. A few commenters said that CMS 

should clarify that coupons for free 

drugs, such as starter prescriptions, that 

are not contingent on the purchase of 

the same or any other drugs, should be 

excluded from AMP. 

Response: As previously discussed, 

we believe that vouchers for free 

samples should be excluded from AMP 

in instances that the pharmacy receives 

a replacement product or collects no 

payment greater than the cost of the 

sample and a bona fide service fee. We 

have amended the final rule at 

§ 447.504(h)(21) to incorporate these 

comments. 

Nominal Price 

Comment: One commenter stated that 

nominal prices are not available to the 

retail pharmacy class of trade and 

should be excluded from AMP. 

Response: In order to be included in 

AMP, nominal prices must be available 

to the retail pharmacy class of trade. As 

we explain elsewhere in this final rule, 

we consider the retail pharmacy class of 

trade to encompass more than walk-in 

pharmacies. 


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Future Clarification of AMP Calculation 

Comment: One commenter said that 

CMS should commit to updating the 

Medicaid regulations and/or guidance 

on a regular basis so that manufacturers 

have clear guidance with regard to the 

treatment of new and evolving classes of 

trade within the retail channel. Such 

regular updating will prevent a 

recurrence of the situation where 

ambiguity of the AMP definition leads 

to different practices across 

manufacturers. 

Response: We appreciate this 

comment. We believe that the final rule 

clarifies the determination of AMP. We 

are unable to commit to a schedule for 

the issuance of Medicaid regulations at 

this time. We expect to continue to issue 

subregulatory guidance regarding these 

regulations and other policy 

clarification, as appropriate, in a timely 

manner. In addition, given some of the 

revisions, we have decided that this 

final rule with comment period should 

allow for further public comment on 

AMP. 

Comment: One commenter believed 

that any future clarifications by CMS 

should be prospectively effective, 

providing manufacturers with a 

reasonable period of time to implement 

necessary changes in order to ensure 

accuracy. 

Response: We appreciate this 

comment and will address this concern 

when we issue the subregulatory 

guidance. 

Comment: One commenter expressed 

concern that other new classes of trade 

which receive prices not available to 

community pharmacy should not be 

included in AMP. 

Response: We disagree. New classes 

of trade which provide sales to the 

general public are by definition 

included in the retail pharmacy class of 

trade and AMP. 

Comment: One commenter expressed 

the concern that some areas of 

clarification will likely reflect policy 

choices, as opposed to being technical 

clarifications. For those more 

substantive areas, a regulatory, due 

process method of proposing and 

receiving comments on proposed 

rulemaking should be used. Another 

commenter requested that CMS 

reconsider the strategy to address future 

clarifications of AMP and to publish a 

proposed rule for public comment. 

Response: We appreciate this 

comment. We believe that the final rule 

clarifies the determination of AMP, 

thereby eliminating ambiguity, 

confusion and need for additional 

clarification. However, we do not 

believe that rulemaking is the most 

appropriate or efficient mechanism to 

provide interpretations or additional 

guidance as may be necessary. 

Other Issues 

Comment: One commenter stated that 

CMS should provide more explanation 

for ‘‘reasonable assumptions’’

manufacturers are to use when data are 

insufficient or not available to calculate 

prices. 

Response: We believe that reasonable 

assumptions are those made by 

manufacturers consistent with Medicaid 

drug rebate statute, regulation, and 

general business practice. 

Comment: One commenter said that 

should CMS provide clarification 

regarding whether FFP is available for 

drugs included in a package with a nondrug item and if so, how is pricing to 

be reported. 

Response: These issues are not 

addressed in the proposed rule and are 

outside the scope of this rulemaking 

document. Therefore, we cannot 

consider these comments as we consider 

revisions to the final rule. 

Comment: One commenter 

recommended that a formal appeals and 

adjudication process is needed at CMS 

to provide a forum in which retailers 

can bring forth concerns regarding the 

method by which AMP is calculated, as 

well as which products are included in 

the determination of AMP. 

Response: We appreciate this 

comment. The proposed rule was 

designed to provide the public with an 

opportunity to provide meaningful 

comments; however, retailers and 

manufacturers have the option of raising 

additional concerns directly to CMS to 

the extent necessary. Retailers can also 

raise concerns to the states as may be 

necessary. 

Comment: One commenter said that 

CMS should specify a timeframe for 

review of manufacturer methodology 

change requests so that manufacturers 

can resolve their financial liability for 

past quarters. 

Response: We cannot specify a 

timeframe; however, in the absence of 

guidance, manufacturers may make 

reasonable assumptions consistent with 

the statute, regulations, and reasonable 

business practices. 

Comment: One commenter said that 

CMS should avoid including in the 

calculation of AMP data that is not 

readily available to manufacturers, or 

that would significantly increase the 

number of calculations and assumptions 

to be made. 

Response: The provision of the DRA 

does not provide for the exclusion of 

AMP data that is not readily available to 

manufacturers. To the extent that we 

were able to do so within the law, we 

have considered the impact this 

calculation will have on manufacturers. 

We believe that this final rule provides 

a clear, precise and adequate definition 

of AMP consistent with the provisions 

of the DRA and helps resolve 

ambiguities and confusion associated 

with the pre-DRA definition. 

Comment: One commenter suggested 

that CMS consider implementing a 

tolerance level for quarterly AMP 

variation, within which an AMP 

restatement (positive or negative) would 

not be permitted. This would reduce the 

burden on States, CMS and 

manufacturers to comply with the 

requirement that a manufacturer must 

adjust the AMP if cumulative discounts, 

rebates, or other arrangements 

subsequently adjust the prices actually 

realized. 

Response: We disagree. The 

calculation of AMP is based on actual 

sales data, and the AMP must be revised 

when errors or omissions are found, 

consistent with the regulations. 

Comment: A few commenters 

requested that CMS define the terms 

‘‘include’’ and ‘‘exclude’’ with respect 

to the dollars and units components of 

the AMP calculation. The proposed rule 

is not clear as to how to treat such terms 

for purposes of performing the AMP 

calculation. The commenter requested 

that CMS include a sample AMP 

calculation and a chart indicating each 

of the various entities that may affect 

the AMP and best price calculation 

whether sales, discounts, and/or units 

are deducted from the gross (for 

example, factor dollar and unit 

numbers) for purposes of AMP. The 

commenter suggested that the list of 

excluded entities should have an 

identifier such as a Drug Enforcement 

Administration (DEA) number or Health 

Industry Number and updated as 

frequently as AMP reports are filed. 

Response: We have provided 

clarification in § 447.504(g)–(h) 

regarding which sales are included and 

excluded in this final regulation. We 

have not provided a sample calculation 

or chart of included AMP and best price 

sales here but will consider doing so in 

subregulatory guidance, depending on 

whether we get more specific questions. 

Comment: One commenter cautioned 

CMS to carefully weigh the OIG’s 

recommendation against the Agency’s 

own significant expertise in the area. 

Because the OIG lacked a working 

understanding of the history of many of 

these issues, the commenter feared that 

its recommendation could lead to the 

inconsistent treatment of important 

issues related to the program. 


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Response: The DRA required the OIG 

to review how AMP is determined and 

recommend changes to the Secretary of 

the Department of Health and Human 

Services by June 1, 2006. It also required 

CMS to consider the IG’s 

recommendations and promulgate a 

regulation that clarifies the 

requirements for and the manner in 

which AMP is determined no later than 

July 1, 2007. We have evaluated the 

OIG’s recommendations and have 

incorporated them where we believe 

they are appropriate. 

Comment: One commenter requested 

that CMS confirm and provide guidance 

regarding whether rebates paid to 

Medicaid as a secondary payer under 

this title and the national rebate 

agreement on outpatient drugs are 

excluded from AMP. 

Response: Rebates paid under this 

title are excluded from AMP, including 

those rebates paid for Medicare claims 

where Medicaid is the secondary payer. 

PBMs 

Comment: Many commenters 

requested that PBM rebates, discounts, 

or other price concessions be excluded 

from the calculation of AMP because 

PBMs receive discounts, rebates, or 

other price concessions that are not 

available to community retail 

pharmacies. Commenters stated that the 

fact that these discounts, rebates, or 

other price concessions are not paid to 

community retail pharmacies clearly 

indicates that they should not be 

included in a cost-based benchmark that 

may become the determining factor 

associated with reimbursement for 

community retail pharmacies. The 

commenters contended that PBMs are 

not included within the retail pharmacy 

class of trade. They argued that, in light 

of the rationale used by CMS to exclude 

nursing facility sales from the definition 

of retail pharmacy class of trade, CMS 

should similarly exclude PBM sales, 

discounts, rebates, and other price 

concessions. 

Other commenters stated that 

excluding PBM pharmacies from the 

definition of retail pharmacy class of 

trade offers numerous benefits, 

including reduced recordkeeping 

requirements, reduced risk of price 

fluctuations, and limiting the need for 

additional regulatory burdens. In 

addition, commenters argued that PBMs 

do not dispense to the public, and that 

patients have to belong to a specific 

health plan in order to access drugs 

through a particular PBM. 

Consequently, commenters stated that 

PBM rebates, discounts, or other price 

concessions are not typically available 

to the public. Commenters argued that 

for PBMs to purchase prescription drugs 

from a manufacturer or wholesaler, or to 

dispense drugs to the public, PBMs 

generally need to be licensed as 

pharmacies under the applicable State’s 

law. Commenters stated that they were 

not aware of any State that licenses 

PBMs as pharmacies to purchase, 

receive, or dispense drugs to the public. 

Response: We have decided to 

exclude PBM rebates, discounts, or 

other price concessions from the 

determination of AMP, except for 

purchases through PBM mail order 

pharmacies in § 447.504(h)(22). We 

believe this is consistent with previous 

guidance issued in manufacturer 

releases and to the extent that PBM 

discount rebates and price concessions 

did not meet these criteria, the impact 

on the calculation of AMP is likely to be 

minor. 

Furthermore, we understand that 

PBMs do not generally take possession 

of pharmaceutical products. Only in 

their role as mail order pharmacies do 

PBMs participate directly in the 

purchase or delivery of prescription 

drugs. Accordingly, except with respect 

to such mail order activities, we have 

decided that PBM sales and associated 

rebates, discounts, or other price 

concessions fall outside of our 

definition of AMP. 

Comment: Many commenters 

requested that PBM rebates, discounts, 

or other price concessions be excluded 

from the calculation of AMP because 

they believe that PBMs are not 

wholesalers; therefore, transactions with 

them should not fall within the 

definition of AMP. The commenters 

argued that the proposed definition is 

contrary to how the term wholesaler is 

defined in the national rebate agreement 

and that Manufacturer Releases 28 and 

29 support that PBMs do not meet the 

definition of a wholesaler in that they 

do not purchase, or take delivery of 

drugs or redistribute drugs to retail and 

institutional pharmacies. Commenters 

indicated that they were not aware of 

any PBM arrangements currently in 

existence where PBMs are acting as 

wholesalers, as they do not buy 

pharmaceuticals directly from the 

manufacturers and resell them to 

pharmacies, which then dispense to the 

public. Commenters suggested that we 

define the term wholesaler to be 

consistent with its traditional meaning 

and the definition in the national rebate 

agreement to mean any entity that 

purchases drugs from a manufacturer for 

purposes of resale. 

Response: We agree with the 

commenters that many of the sales to 

PBMs do not flow through wholesalers 

so the discounts received by PBMs 

generally do not affect the price actually 

realized. The distribution functions 

typically performed by wholesalers are 

different from the functions performed 

by PBMs. Furthermore, because rebates, 

discounts, or other price concessions 

obtained by PBMs are not passed on to 

the retail pharmacy class of trade, 

including PBMs in the definition of 

wholesalers would permit the inclusion 

of price concessions to which 

community retail pharmacies do not 

have access. Therefore, in § 447.504(g), 

we are not classifying PBMs as 

wholesalers. 

Comment: Some commenters 

requested that PBM rebates, discounts, 

or other price concessions (except for 

mail order sales) be excluded from the 

calculation of AMP because to include 

them in the calculation of AMP could 

increase drug costs for Medicare Part D 

and lower Medicaid rebate payments. 

Response: As discussed elsewhere in 

this regulation, we have decided to 

exclude PBM rebates, discounts, or 

other price concessions from the 

determination of AMP, except for 

purchases through PBM mail order 

pharmacies in § 447.504(h)(22). 

Comment: Some commenters stated 

that reporting PBM rebates, discounts, 

or price concessions can cause 

operational difficulties and competitive 

concerns. The degree to which 

manufacturer rebates are passed through 

or shared with PBM clients is privately 

held, competitively sensitive 

information that can differ from contract 

to contract. Drug manufactures are not 

privy to this information and would 

need to review thousands of rebate 

arrangements to require PBMs to share 

this information. 

Response: We agree with the 

commenters that the administrative 

burden for manufacturers to gather 

confidential information from PBMs and 

others in the drug chain regarding 

rebates, discounts, or other price 

concessions is significant. Therefore, as 

discussed above and in § 447.504(h)(22), 

we have decided to exclude PBM 

rebates, discounts, or other price 

concessions from the determination of 

AMP, except for purchases through 

PBM mail order pharmacies. 

Comment: One commenter stated that 

CMS should clarify that there is no 

automatic requirement that 

manufacturers affirmatively obtain 

information concerning transactions 

between downstream entities. The 

commenter believes that such a 

requirement would create serious 

administrative difficulties. 

Manufacturers have no authority to 

require recipients of these payments to 

disclose to the manufacturers whether 


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they have shared the payment with their 

customers or clients, and there is no 

guarantee that payment recipients 

would agree to such disclosure. 

Response: As discussed previously, 

we have decided to exclude PBM 

rebates, discounts, or other price 

concessions from the calculation of 

AMP, except for purchases by PBM mail 

order pharmacies in § 447.504(h)(22). 

Therefore, manufacturers do not have to 

collect rebate data with respect to such 

transactions between such downstream 

entities. 

Comment: Many commenters raised 

other concerns about PBMs, such as that 

there is a need for PBM transparency, 

that PBMs should be regulated, that 

PBMs continue to impose nonnegotiable contracts on independent 

pharmacies, or that PBMs are making 

too much profit. 

Response: These issues are not 

addressed in the proposed rule and are 

outside the scope of this rulemaking 

document. Therefore, we cannot 

consider these comments as we consider 

revisions to this final rule. 

Comment: Some commenters stated 

that the proposed rule included 

confusing language about how to treat 

price concessions to PBMs in the AMP 

calculation. The commenters requested 

that CMS clarify that the AMP 

calculation includes all PBM rebates, 

discounts, or other price concessions in 

the AMP calculations. The commenters 

believed that such a requirement would 

be administratively less burdensome to 

implement and would not affect the 

overall value of manufacturer AMP 

calculations. While manufacturers can 

track price concessions provided to 

PBMs, the commenters stated that it is 

neither realistic nor appropriate for 

them to track which price concessions 

PBMs pass through to the retail 

pharmacy class of trade. To include all 

PBM rebates, discounts, or other price 

concessions would also help promote 

greater uniformity in AMP calculations 

and preclude the possibility of 

confusion regarding the treatment of 

PBM price concessions. Conversely, 

requiring additional granularity in 

allocating PBM rebates could require 

manufacturers to make significant 

modifications to existing systems and 

could result in inaccurate and 

inconsistent AMP calculations. 

Commenters also stated that if CMS 

include discounts for products that flow 

through the retail pharmacy class of 

trade in AMP, CMS also should include 

rebates paid directly to health plans by 

manufacturers, unless the health plan is 

a staff model HMO. 

Response: As discussed previously, 

we have decided to exclude PBM 

rebates, discounts, or other price 

concessions from the calculation of 

AMP, except for purchases through 

PBM mail order pharmacies in 

§ 447.504(h)(22). We believe this will 

alleviate some of the administrative 

burden associated with the calculation 

of AMP and result in more accurate and 

consistent AMPs across manufacturers. 

Comment: While some commenters 

supported CMS’ proposal to include 

PBM rebates and discounts in the AMP 

calculation, they and other commenters 

stated that there would be operational 

difficulties if manufacturers were 

required to segregate price concessions 

provided on mail order utilization from 

that provided on other PBM utilization 

as such detail is not available from the 

PBMs to quantify these two figures. The 

commenters stated that it is often 

impractical, if not impossible, for a 

manufacturer to obtain precise retail 

and non-retail analysis on a PBM’s nonmail order sales. The commenters also 

stated that some PBMs may provide data 

that may allow some manufacturers to 

segregate their non-mail order sales data 

into retail and non-retail sales under 

some circumstances. However, the 

commenters argued this is not always 

the case. The commenters contended 

that many PBMs are unwilling or unable 

to provide this data to manufacturers 

and that some PBMs do not compile 

such data. Due to the lack of PBM data, 

commenters argued that manufacturers 

should be able to make reasonable 

assumptions with respect to PBM sales 

and discounts. 

Response: We have decided to 

exclude PBM rebates, discounts, or 

other price concessions from the 

determination of AMP except for 

purchases through PBM mail order 

pharmacies in § 447.504(h)(22). 

Therefore, manufacturers will not need 

to obtain retail and non-retail analysis 

with respect to PBM non-mail order 

sales. 

Comment: Some commenters 

supported the inclusion of PBM rebates, 

discounts, or other price concessions in 

the determination of AMP. However, the 

commenters stated that CMS needs to 

clarify what factors are included and 

excluded in PBM price concessions and 

be more direct and specific as to what 

types of PBM rebates and discounts 

should be included in AMP. If CMS fails 

to define the term PBM for the purpose 

of AMP calculations, manufacturers 

would include sales from any entity that 

a manufacturer considers to be a PBM, 

including sales to MCOs, which are 

specifically excluded from AMP under 

the national rebate agreement. The 

commenters believed that CMS needs to 

clearly define the attributes of entities 

qualifying as PBMs for purposes of 

including price concessions from such 

entities and/or establish a list of 

excluded entities. This would allow 

manufacturers to use uniform criteria to 

distinguish between PBMs and nonPBMs for purposes of incorporating 

rebates and fees into AMP calculations. 

The commenters argued that if CMS 

fails to set forth guidance regarding 

PBMs, manufacturers would continue to 

treat PBM price concessions disparately, 

resulting in inconsistent AMP 

calculations across manufacturers. 

Response: We have decided to 

exclude PBM rebates, discounts, or 

other price concessions from the 

determination of AMP, except for 

purchases through PBM mail order 

pharmacies in § 447.504(h)(22). 

Therefore, we do not need to define the 

attributes of entities qualifying as PBMs 

for purposes of including price 

concessions from such entities and/or 

establish a list of excluded entities. 

Comment: One commenter agreed that 

PBM discounts should be included in 

the calculation of AMP since most 

Americans, including dual eligible 

beneficiaries enrolled in the Medicare 

prescription drug program, benefit from 

these discounts. 

Response: We appreciate the 

comment, but we have decided to 

exclude PBM discounts from AMP 

calculations, except in certain situations 

where the PBM is operating a mail order 

pharmacy. The issue regarding the 

benefits associated with PBM 

arrangements is outside the scope of this 

rulemaking document. 

Comment: One commenter supported 

the inclusion of Medicare Part D PDPs 

and PBM rebates, discounts, or other 

price concessions for drugs provided to 

the retail pharmacy class of trade for the 

purpose of determining AMP. However, 

the commenter asked that CMS clarify 

the treatment of sales associated with 

PBMs and how these differ from 

payments to PDPs. The commenter 

believes that PDPs are functioning as 

PBMs for Medicare Part D beneficiaries. 

Another commenter also argued that it 

seems inconsistent that prices to PDPs, 

which are PBMs, be excluded from best 

price calculations but included in AMP 

calculations. 

Response: We appreciate the 

comment and have decided to exclude 

PBM rebates, discounts, or other price 

concessions from the calculation of 

AMP, except for purchases through 

PBM mail order pharmacies in 

§ 447.504(h)(22). 

Comment: A few commenters agreed 

that the exclusion of PBM rebates, 

discounts, or other price concessions 

would cause AMP to be higher than it 


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would be if these discounts were 

included. However, the commenters 

disagreed with the characterization of 

this higher amount as artificial inflation. 

Instead, the commenters believed that 

the exclusion of these amounts results 

in a more accurate reflection of AMP, 

and that their inclusion artificially 

depresses AMP because PBMs are not 

wholesalers nor are PBM rebates 

reflected in the prices paid by 

community retail pharmacies. 

Response: As discussed previously, 

we agree with the commenters that 

excluding PBM rebates, discounts, or 

other price concessions would result in 

a more accurate reflection of AMP. 

Therefore, in § 447.504(h)(22) we have 

excluded them from the determination 

of AMP in this final rule, except for 

purchases through PBM mail order 

pharmacies. 

Comment: Some commenters argued 

that because CMS excluded 

manufacturer rebates paid to State 

Medicaid programs, to the DoD under 

TRICARE, and to the DVA from the 

AMP calculation, CMS should also 

exclude rebates paid to PBMs from the 

AMP calculation. The commenters 

reasoned that these rebates are not 

available to the retail pharmacy class of 

trade, and none of the funds are ever 

received by community retail 

pharmacies. They also argued that the 

retail pharmacy class of trade does not 

have access to these direct-to-patient 

sale prices and thus these transactions 

should also be excluded from the AMP 

calculation. 

Response: We agree that these PBM 

rebates, discounts, or other price 

concessions are not generally available 

to the retail pharmacy class of trade and 

should be excluded from AMP. We have 

excluded them from the determination 

of AMP in this final rule in 

§ 447.504(h)(22), except for purchases 

through PBM mail order pharmacies. 

Comment: Some commenters said 

best price was included as a factor in 

the rebate calculation so that States 

receive a rebate that more closely 

matches pricing in the marketplace. 

Manufacturers must pay States the 

greater of a percentage of AMP or the 

difference between AMP and best price. 

In this context, the commenters 

suggested that best price is the most 

appropriate place to include PBM 

rebates, discounts, or other price 

concessions as well as direct-to-patient 

sales and manufacturer coupons. 

Response: We appreciate the 

commenters’ suggestion to include PBM 

rebates, discounts, or other price 

concessions in best price; however, we 

have decided to exclude PBM rebates, 

discounts, or other price concessions 

from the determination of AMP in 

§ 447.504(h)(22) and best price in 

§ 447.505(d)(13), except for purchases 

through PBM mail order pharmacies. 

Comment: A few commenters stated 

that rebates and discounts offered to 

PBMs typically are based on 

relationships between the PBM and 

HMO or Medicaid MCO. Given that 

CMS proposed to exclude rebates and 

discounts to HMOs and Medicaid MCOs 

from the calculation of AMP, the 

commenter believed that rebates and 

discounts to their associated PBMs 

should be excluded as well. 

Response: As discussed previously, 

we have decided to exclude PBM 

rebates, discounts, or other price 

concessions from the determination of 

AMP, except for purchases through 

PBM mail order pharmacies in 

§ 447.504(h)(22). 

Reimbursement Based on AMP 

We received numerous comments 

regarding the option for State Medicaid 

Agencies to use AMP as a benchmark to 

calculate pharmacy payment rates, as 

discussed below: 

Comment: Many commenters opposed 

the proposal to permit States to use 

AMP as a benchmark for pharmacy 

reimbursement because the commenters 

believed that AMP is not representative 

of pharmacy providers’ acquisition costs 

and does not consider the markup 

applied within the distribution chain 

between the manufacturer and the 

purchasing pharmacy. Other 

commenters expressed concern that the 

proposal to permit States to use AMP to 

calculate pharmacy payment rates 

would result in a decrease in 

reimbursement to retail pharmacies. 

Many commenters stated that using 

AMP for reimbursement targets 

independent pharmacies because AMP 

does not adequately address the costs 

incurred by independent pharmacies. 

These commenters predicted that the 

proposal will result in decreased 

pharmacy reimbursement and decreased 

profits on the dispensing of generic 

medications and may drive independent 

pharmacies out of business. Many 

commenters estimated that retail 

pharmacy profit margins are less than 

ten percent of gross sales and 

pharmacists will be unable to dispense 

drugs to Medicaid patients if 

reimbursement rates are set by using the 

proposed definition of AMP. One 

commenter said that the proposed AMPbased reimbursement is unfair to retail 

pharmacies as their profit margins are 

being set by insurers when other 

entities, such as manufacturers and 

wholesalers, are able to set their prices 

and determine their profit margins. 

Another commenter opposed using 

AMP as a benchmark for Medicaid 

reimbursement stating that pharmacies 

save money for State Medicaid agencies, 

have provided many hours of free 

counseling services to Medicaid 

patients, spent uncompensated hours 

resolving Medicare Part D issues and 

deserve actual acquisition costs for 

dispensed medications. 

Response: The DRA does not require 

States to use AMP as a benchmark to 

calculate pharmacy payment rates. To 

the extent that States opt to use AMP in 

their payment methodologies, they will 

be required to submit SPAs. We will 

review the amendments to ensure that 

proposed payment methodologies are 

consistent with State plan requirements, 

and will allow for fair and reasonable 

payments to providers for drugs to 

protect beneficiaries’ access to quality 

pharmacy services. 

Comment: Several commenters 

requested that CMS clarify how AMP 

will be balanced to benefit all entities 

within the pharmaceutical industry and 

the retail pharmacy class of trade since 

lower AMPs will benefit manufacturers 

in lower rebate payments to States and 

higher AMPs will allow pharmacies to 

receive increased reimbursement rates 

but may not reflect all market pricing. 

Response: As discussed elsewhere in 

this rule, we have decided to exclude 

rebates, discounts and price concessions 

to PBMs (except those to PBMs’ mail 

order pharmacies) while maintaining 

our position that prices to mail order 

pharmacies should be included in the 

determination of AMP. We believe that 

we have carefully considered the impact 

that our decisions made in this final 

rule will have on AMP and all of the 

entities that may be affected by it. 

Comment: A few commenters stated 

that there is a conflict in using AMP as 

a baseline for reimbursement and an 

index for rebates that manufacturers pay 

to States. 

Response: The law does not require 

that AMP be used for reimbursement. 

Rather, the law provides that AMP be 

used as a basis for the calculation of 

rebates and the FULs (based on 250 

percent of the relevant AMP) and that 

States may also use AMP data when 

determining pharmacy reimbursement. 

Comment: One commenter stated that 

a publicly reported, widely available 

AMP that includes all supply chain 

discounts will lead to higher prices for 

the entire pharmaceutical market, as the 

AMP will become the benchmark below 

which manufacturers will not lower 

their prices. In addition, an AMP that 

includes all supply chain discounts will 

reduce competition, particularly in the 

generic market, as manufacturers make 


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the decision to stop the production of 

certain products. The commenter 

believed that these factors together will 

raise pharmaceutical prices. 

Response: The DRA provides for the 

public release of AMP data. We have no 

reason to believe the market will not 

adjust to the availability of this 

information. 

Comment: A few commenters stated 

that AWP better reflects true costs to 

independent retail pharmacies as it has 

allowed payment to exceed the 

estimated acquisition costs of generic 

drugs, compensating pharmacies for 

counseling services and medical advice 

offered to Medicaid patients. Another 

commenter suggested that AWP would 

be a better benchmark for 

reimbursement than AMP because it is 

a publicly available list price and it is 

easily accessible. One commenter stated 

that the proposal to allow States to use 

AMP as a benchmark for pharmacy 

reimbursement eliminates pharmacists’

ability to cover their costs as opposed to 

using AWP as a benchmark, in that 

pharmacies benefit from the difference 

between the actual cost of the drug and 

AWP. One commenter stated that AMP 

may offer a closer estimate of ingredient 

cost than AWP but recommended that 

CMS consider both the cost of the drug 

and the cost of dispensing in the final 

rule as dispensing fees in most States 

are far below the actual cost pharmacies 

incur to dispense prescriptions. One 

commenter expressed concern that not 

only will pharmacy reimbursement for 

generic drugs be reduced but that the 

President’s Fiscal Year 2008 budget 

proposes to further reduce 

reimbursement to pharmacists to 150 

percent of AMP and urged CMS to 

oppose any further cuts to pharmacy 

reimbursement. 

Response: We do not believe that 

AWP reflects acquisition cost. In the 

OIG report, ‘‘Determining Average 

Manufacturer Prices for Prescription 

Drugs Under the Deficit Reduction Act 

of 2005’’ (A–06–06–0063), it was noted 

that Medicaid pharmacy reimbursement 

based on AWP often exceeds 

pharmacies’ actual acquisition costs. 

GAO also stated in its report, ‘‘Medicaid 

Outpatient Prescription Drugs: 

Estimated 2007 Federal Upper Limits 

for Reimbursement Compared With 

Retail Pharmacy Acquisition Costs’’

(GAO–07–239R), that the AMP-based 

FUL is preferable to an AWP-based FUL 

as long as States ensure adequate 

pharmacy reimbursement. As discussed 

previously, we believe that States who 

opt to use AMP, as opposed to AWP, to 

determine pharmacy payment rates will 

ensure that such payment rates have 

greater transparency, as consistent with 

the DRA amendments. Elsewhere in this 

regulation, we have encouraged States 

to examine their dispensing fees to 

determine whether they reasonably 

cover the cost of dispensing the drug. 

Comment: Several commenters stated 

that using AMP to set reimbursement is 

flawed and would not be an appropriate 

indicator of community pharmacy costs 

because it does not include wholesaler 

costs to pharmacies. One commenter 

stated that the proposal requires 

manufacturers to calculate AMP using 

prices that are inaccessible to 

community retail pharmacies and will 

result in skewed calculations and 

misinterpretation that could negatively 

affect provider reimbursement. Another 

commenter noted the importance of 

accurately incorporating the acquisition 

costs of providers and suppliers in the 

AMP calculation if AMP is to be used 

as a benchmark for pharmacy 

reimbursement. 

Response: There is no requirement 

that States use AMPs to set payment 

rates for pharmacy providers. The DRA 

amended section 1927 of the Act to 

require that CMS use AMP, as opposed 

to AWP, in the FUL calculation. States 

may continue to use methodologies that 

they believe will accurately reflect 

pharmacy acquisition costs. We believe 

that we have made States aware in our 

discussions of AMP in this rule of what 

AMP represents and that States will use 

this as a factor when determining a 

reasonable reimbursement methodology 

for pharmacy providers. 

Comment: One commenter suggested 

that CMS consider a definition of AMP 

that differentiates between various 

practice settings so that reimbursement 

will adequately address true costs 

associated with each setting. Another 

commenter recommended that CMS 

consider using one AMP such as the 

monthly AMP for the calculation of the 

FUL (and a benchmark for 

reimbursement) and the quarterly AMP 

for use as the basis for Medicaid rebates. 

Response: We disagree that AMP 

should be calculated separately for each 

entity within the retail pharmacy class 

of trade or that monthly and quarterly 

AMPs should be defined and used 

differently. The law makes no 

distinction in AMP by entity or use. 

Comment: A few commenters 

suggested that setting reimbursement 

rates based on AMP is complicated and 

would result in States reimbursing 

pharmacy providers below the 

acquisition costs of generic drugs. For 

this reason, the commenters requested 

that CMS not implement this portion of 

the proposed rule. A few commenters 

expressed concern that AMP is not a 

true indicator of market prices because 

business transactions may cause 

periodic changes in AMP from monthto-month. Therefore, the AMP may 

fluctuate depending on the timing of the 

original sale and transactions that occur 

after the original sale that could span 

across multiple periods. 

Response: The DRA amended the 

statute to require that, effective January 

1, 2007, the Secretary calculate FULs 

based on 250 percent of the AMP (as 

computed without regard to customary 

prompt pay discounts extended to 

wholesalers). The statute also provides 

that, by July 1, 2007, the Secretary 

promulgate a regulation clarifying the 

requirements for AMP calculations. 

AMPs are based on the average prices 

paid to manufacturers, net of discounts 

and price concessions, and will be more 

useful than prices reported to drug 

pricing compendia that have been 

shown to often have no relationship to 

market prices. 

Comment: One commenter expressed 

concern that drug rebates and other 

complicated payment arrangements 

account for high costs for prescription 

drugs. The commenter cited a report by 

the McKinsey Global Institute, 

‘‘Accounting for The Cost of Healthcare 

in the United States (January 2007),’’

that found that although Americans use 

fewer drugs per capita, they pay about 

70 percent more for prescription drugs 

than citizens of peer nations. This 

commenter recommended that CMS 

bring greater transparency and accuracy 

by exposing hidden rebates and 

discounts and determining the true cost 

of prescription drugs to enable more 

purchasers to obtain lower prices for 

drugs. 

Response: The law only provides for 

making AMPs publicly available. 

However, we believe that the public 

availability of monthly and quarterly 

AMPs will bring greater transparency 

and accuracy to manufacturer pricing. 

Comment: Several commenters 

recommended alternatives to States’ use 

of AMP as a benchmark for 

reimbursement. One commenter 

recommended that AMP not be used to 

set pharmacy reimbursement rates and 

recommended that CMS instruct States 

to use actual net acquisition costs, 

allowing for a reasonable profit and 

dispensing fee. One commenter 

recommended that CMS urge States to 

consider the markup applied within the 

distribution chain between the 

manufacturer and the purchasing 

pharmacy when setting pharmacy 

payment rates. A few commenters 

recommended that CMS consider a 

reimbursement formula that pays 

pharmacies actual acquisition costs for 

drugs plus a fair retail markup and 


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incorporates a dispensing fee and an 

education fee to compensate 

pharmacists for Drug Utilization Review 

services, including checking for 

interactions with medicine and food 

and educating patients regarding their 

medications. One commenter suggested 

that CMS refocus efforts to save 

Medicaid dollars on brand name drugs 

by mandating an additional rebate on 

brand name drugs and stated that this 

would result in far greater savings for 

the Medicaid Program than reducing 

payment for generic drugs. One 

commenter recommended that CMS 

require States to include a minimum 

profit margin for low-cost generic drugs 

in their reimbursement methodologies 

for independent pharmacies that at least 

covers the cost of dispensing that drug. 

Several commenters expressed concern 

that the proposal that States use AMP as 

a benchmark for reimbursement does 

not address dispensing fees and suggests 

that the lack of guidance allows States 

to continue to underpay pharmacists for 

dispensing-related services. One 

commenter recommended that CMS 

consider an alternate proposal that 

would cap the cost of medications from 

the pharmaceutical companies, charge 

all pharmacies the same price without 

preferential treatment or pricing for one 

type of pharmacy over another, and set 

all Medicaid dispensing fees at the same 

rate for all pharmacies based on the 

Grant Thornton LLP National Study to 

Determine the Cost of Dispensing 

Prescriptions in Community Retail 

Pharmacies, prepared for the CCPA, 

published in January 2007, and 

accessible at http://www.aphanet.org/ 

AM/Template.cfm?Section=Home&

CONTENTID=7641&TEMPLATE=/CM/ 

ContentDisplay.cfm. Another 

commenter recommended that CMS 

require reimbursement to be based on 

the WAC plus a professional fee of $10 

for brands and $15 for generics to more 

accurately account for pharmacy 

acquisition costs and ensure that 

pharmacy providers are reimbursed 

fairly. One commenter recommended 

that CMS set a standard reimbursement 

methodology for pharmacy providers 

based on AWP or the average price per 

unit that a pharmacy pays for a drug. 

Another commenter recommended that 

CMS offer guidance to the States to 

establish a meaningful percentage 

differential to be applied to all FULs 

(AMPs) for all small pharmacies that 

meet the definition of ‘‘small business’’

as defined by the Small Business 

Administration (SBA). Other 

commenters stated that pharmacy 

provider acquisition costs surveys 

should be used to estimate pharmacy 

acquisition costs. Another commenter 

recommended that CMS instruct States 

to use the monthly Retail Price Survey 

(RPS) data as a benchmark for pharmacy 

reimbursement as this data represents 

the weighted average reimbursement 

received by independent community 

pharmacies for each drug. One 

commenter requested that CMS define 

the pharmacy reimbursement 

methodology for States and set the 

dispensing fee in a manner that 

adequately compensates independent 

retail pharmacies, as independent 

pharmacies will not be offered drug 

products from their suppliers at AMP or 

near the AMP. One commenter agreed 

with CMS that States should be allowed 

to use AMPs as a benchmark for 

pharmacy reimbursement and suggested 

that CMS conduct studies to identify 

manufacturers whose products 

consistently have atypically large 

spreads between AMP and AWP or 

WAC. The commenter suggested that 

States may then implement alternative 

payment rates on products distributed 

by these manufacturers, thus preventing 

revenue enhancing schemes and 

retaining the usefulness of their current 

reimbursement techniques. Another 

commenter stated that AMP should be 

considered by States as the minimum 

allowable reimbursement. 

Response: We do not agree with these 

proposals that CMS should establish 

dispensing fees or reimbursement 

methodologies as the States are in a 

better position to determine such 

payment amounts. The statute does not 

give CMS the authority to assess higher 

rebates on certain brand name drugs or 

to regulate the price charged by 

manufacturers for drugs. 

Comment: One commenter noted that 

State MAC lists currently are 

significantly lower than the FUL for 

some products and that AMP-based 

reimbursement will not adequately 

cover pharmacy operating costs. The 

commenter suggested that CMS 

complete a study to evaluate whether 

States are currently reimbursing 

providers below 250 percent of AMP. 

Response: Since the FULs 

methodology is established in the DRA, 

we see no benefit at this time in 

completing a study to determine 

whether States are already paying less 

than this amount. We note that States 

continue to be able to establish their 

own MACs as well as adjust the 

individual prices of drugs provided they 

do not exceed the FULs in the aggregate. 

Comment: One commenter 

recommended that CMS review the 

price disparity between retail pharmacy 

class of trade and mail order 

pharmacies. 

Response: We appreciate the 

comment; however, as our definition of 

AMP is based on what we have defined 

as the retail pharmacy class of trade, we 

believe it is unnecessary for CMS to 

conduct the recommended review. As 

previously discussed in this final rule, 

we have decided that the retail 

pharmacy class of trade includes mail 

order pharmacies. We believe that, as 

with traditional pharmacies, mail order 

drugs are available to the general public. 

Comment: One commenter 

recommended that CMS offer grants to 

the States to (1) develop separate, 

differentiated payment to pharmacies 

for clinical services provided to 

Medicaid beneficiaries beyond OBRA 90 

mandates and (2) develop differential 

payments based on quality measures 

and implementation of patient safety 

measures. Other commenters requested 

that CMS encourage the use of 

incentives to support efforts of 

pharmacists to improve patient 

outcomes through patient education and 

medication compliance instead of 

reducing costs to States by decreasing 

reimbursement to pharmacies. 

Response: While we appreciate these 

comments, they are beyond the scope of 

this final rule. 

Comment: A few commenters 

expressed concern that AMP may serve 

as a benchmark for reimbursement by 

other third party payers. Other 

commenters stated that although the 

rule proposes that States may use AMP 

as a benchmark for reimbursement of 

generic drugs, it will also have 

implications for the reimbursement of 

single source products. 

Response: The use of AMPs by other 

payers is beyond the scope of this rule. 

Comment: One commenter requested 

that CMS use its authority to review and 

approve SPAs to prevent States from 

modifying pharmacy reimbursement 

methodologies before the final rule has 

been implemented and the new AMP 

data has been assessed. 

Response: We do not agree. While we 

will review SPAs to ensure compliance 

with the dictates of section 1902(a) of 

the Act, we do not have the authority to 

prevent States from submitting SPAs to 

modify pharmacy reimbursement 

methodologies before this final rule has 

been implemented and the new AMP 

data assessed. 

Comment: A few commenters 

recommended that CMS instruct States 

to provide appropriate reimbursement 

for clinical services provided by 

specialty pharmacies, including longterm care pharmacies and other 

pharmacies that specialize in unit dose 

packaging as these services help ensure 

the effectiveness of patients’ treatment 


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regimens, are not provided in the retail 

pharmacy setting and ultimately reduce 

costs to the Medicaid Program. One 

commenter requested that CMS consider 

the financial impact of the proposed 

AMP-based reimbursement 

methodology on specialty pharmacies as 

the average cost to dispense 

prescriptions in the specialty 

pharmacies is ten times greater than that 

of traditional retail pharmacies. Some 

commenters expressed concern that 

pharmacies’ cost of serving mentally ill 

Medicaid patients, particularly those 

whose drugs require pharmacies to 

provide special packaging, would not be 

covered by the FULs, resulting in many 

special needs patients being 

institutionalized at Medicaid’s expense. 

Response: States may differentiate 

dispensing fees for specialty pharmacies 

and other classes of providers to ensure 

appropriate reimbursement. 

Comment: One commenter stated that 

the proposal to permit States to use 

AMP as a benchmark for pharmacy 

reimbursement does not address a 

separate furnishing fee for antihemophilic clotting factors as set forth 

in section 303(e)(1) of the MMA. The 

commenter has requested that CMS 

consider a separate furnishing fee, a 

separate payment added into the 

payment rates, to allow Medicaid 

patients who are affected by bleeding 

disorders to maintain access to care and 

access to anti-hemophilic clotting factor 

medications. 

Response: Medicaid already has other 

service categories that can be used to 

appropriately reimburse providers for 

these other services. States are also able 

to establish a dispensing fee that is 

appropriate for the dispensing of antihemophilic clotting factor medications. 

Comment: One commenter expressed 

concern that CMS will not consider 

expert advice from pharmacists, 

pharmacy organizations and Congress 

regarding the proposal that States may 

use AMP as a basis for reimbursement. 

Response: We have considered and 

appreciate the advice that we received 

from all interested parties including the 

comments received on the proposed 

rule. 

Comment: Another commenter 

recommended that CMS require the use 

of therapeutic alternatives when an 

alternate product in the same class has 

a generic available in order to control 

the use of expensive brand name 

medications and save Medicaid dollars. 

Response: Since many States already 

require generic substitution and have 

other measures in effect to encourage 

the dispensing of generic drugs, we do 

not agree that there needs to be a further 

CMS requirement here. 

Determination of Best Price (§ 447.505) 

Comment: One commenter asked that 

if a manufacturer offers a price that is 

lower than any actual price paid, is best 

price set on the lowest price paid or the 

lowest price available. 

Response: The best price is the price 

from the manufacturer which is 

calculated to include all applicable sales 

and discounts; it is the price actually 

realized. Best price includes prices 

available to any purchaser, inclusive of 

cash discounts, free goods contingent on 

any purchase requirement, volume 

discounts, and rebates (other than 

rebates under section 1927 of the Act). 

Comment: One commenter stated that 

the proposed rule defines best price as 

‘‘* * * the lowest price available from 

the manufacturer during the rebate 

period to any entity in the United States 

* * *.’’ However, the national rebate 

agreement defines best price as ‘‘* * * 

the lowest price at which the 

manufacturer sells the covered 

outpatient drug to any purchaser in the 

United States * * *.’’ The commenter 

asked if CMS intends to materially 

change the definition of best price by 

using ‘‘entity’’ rather than ‘‘purchaser.’’

If CMS is not changing the definition, 

the commenter asked that we use the 

language from the national rebate 

agreement in the final rule. 

Response: We used the term ‘‘entity’’

in the proposed rule because this is the 

term used in the DRA. We are retaining 

this term in the final rule. We do not 

intend any material change, except that 

given the DRA amendments, the term 

entity may include sales to other 

manufacturers. 

Comment: One commenter questioned 

if all SPAPs are excluded from the 

determination of best price in the 

proposed rule or only SPAPs that 

qualify under the criteria set out in 

Manufacturer Release 68. 

Response: SPAPs should continue to 

meet the qualifications in program 

guidance, which is currently set out in 

Manufacturer Release 68, which can be 

found on the CMS Web site at http:// 

www.cms.hhs.gov/ 

MedicaidDrugRebateProgram/ 

03_DrugMfrReleases.asp. A list of 

designated Medicaid SPAPs can be 

found on the CMS Web site at http:// 

www.cms.hhs.gov/ 

MedicaidDrugRebateProgram/ 

Downloads/SPAPBestPriceList.pdf. 

Price concessions to SPAPs that do not 

meet these standards would not be 

exempt from best price. We have added 

language to this final rule to clarify this 

point. 

Comment: One commenter stated that 

SPAPs are generally third-party payers 

and do not typically purchase drugs 

directly. The commenter recommended 

that the exclusion from best price be 

expanded to include price concessions 

received by SPAPs including rebates. 

Response: We agree. SPAPs operate 

their programs similar to PBMs whose 

rebates, discounts, or other price 

concessions have been excluded from 

AMP and best price. These PBM rebates, 

discounts or price concessions are not 

available to the retail pharmacy class of 

trade and, therefore, are not passed on 

to community pharmacies. SPAPs, as 

with PBMs, are treated by 

pharmaceutical manufacturers as a 

different class of trade and are not 

accessible to the public. Therefore, in 

accordance with section 1927(c)(1)(C)(i) 

of the Act, we are excluding rebates 

obtained from designated SPAPs from 

manufacturers from the best price. 

Comment: One commenter noted that 

in § 447.505(b) of the proposed rule, 

CMS defined providers as ‘‘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’’. In 

§ 447.505(c)(3), CMS noted that ‘‘prices 

to providers (for example, hospitals, 

HMOs/MCOs, physicians, nursing 

facilities, and home health agencies)’’

are included in best price. The 

commenter asked if it is the intent of 

CMS to define home health providers as 

retail providers or non-retail providers. 

Response: We consider home health 

providers to be retail providers. Home 

health agencies (as well as hospices, 

hospitals, and skilled nursing facilities) 

are providers for purposes of Medicare 

(see section 1861(u) of the Act). 

Accordingly, we have decided, in light 

of section 1927(c)(1)(C) of the Act, that 

CMS should include sales to home 

health agencies within best price. 

Comment: One commenter expressed 

concern with the exemption from best 

price of payments made by PDPs and 

MA–PDs to manufacturers. With the 

advent of the Medicare Part D program, 

there are substantial sales attributable to 

PDPs and MA–PDs. If included in best 

price, the commenter believed these 

sales arrangements would result in more 

accurate pricing information and 

enhance the Medicaid Drug Rebate 

Program. 

Response: Section 1927(c)(1)(C)(i)(VI) 

of the Act provides that prices 

negotiated by a PDP under Part D and 

an MA–PD under Part C, both of Title 

XVIII of the Act, are excluded from best 

price. 

Comment: Several commenters agreed 

with the statement in the preamble to 

the proposed rule that to the extent that 


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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. 

Response: We agree and have retained 

this policy in the final rule. 

Comment: One commenter 

recommended that CMS publish a 

proposed rule for public comment when 

significant changes related to best price 

are being considered rather than issue 

program releases and post clarifications 

on the CMS Web site as proposed in the 

rule. Another commenter noted that 

clarifications to the definition of AMP 

should be made through formal notice 

and comment rather than through 

program releases and Web site postings. 

Response: We agree that substantive 

changes in policy should be made 

through the rulemaking process. We 

note, however, that policy established 

through regulation may need to be 

clarified to explain how it applies in 

specific situations or to new situations 

in the marketplace. CMS will continue 

to issue subregulatory guidance when 

we find this to be necessary or 

appropriate. 

Comment: Several commenters 

disagreed with limiting the exemption 

from best price for manufacturer 

coupons to those redeemed by the 

consumer with the manufacturer. The 

commenters believe that coupons 

redeemed by a pharmacy or other third 

party should also be exempt from best 

price when the pharmacy or other party 

passes through the full value of the 

coupon to the consumer and does not 

receive any price concession on 

acquisition cost from the manufacturer 

other than the coupon amount and the 

handling fee. 

Response: We concur. We are 

exempting coupons redeemed through a 

pharmacy from best price as long as the 

exact value of the coupon is paid to the 

pharmacy from the manufacturer or its 

agent, the full value of the coupon is 

passed on to the consumer, and the 

pharmacy does not receive any price 

concessions. 

Comment: One commenter requested 

that CMS reaffirm that multimanufacturer patient assistance 

programs continue to be exempt from 

the best price determination. 

Response: We agree, and as discussed 

previously with respect to AMP, we 

have decided to codify our existing 

policy in this rule. Accordingly, patient 

assistance programs are exempt from the 

best price determination under 

1927(c)(1)(C) of the Act as long as the 

following provisions are met: 

1. The program is focused on 

extending financial assistance to lowincome individuals and families, as 

determined by CMS, who are not 

otherwise eligible for Medicare and do 

not have public or private prescription 

drug coverage. 

2. Each manufacturer establishes an 

amount of the subsidy to be given to 

individual patients, without any 

negotiation between the manufacturer 

and any other third party (such as an 

insurer or PBM) as to that amount. 

3. The entire amount of the subsidy is 

made available to the individual patient, 

without any opportunity for the retail 

pharmacy or any third party (such as an 

insurer or PBM), to reduce that subsidy, 

or take a portion of it, for its own 

purposes. 

4. The pharmacy collects no 

additional payment, other than the 

benefit amount, from the patient 

assistance program. 

Comment: Several commenters stated 

that to include PBM rebates in best price 

poses significant operational issues 

because manufacturers often do not 

know the amount a PBM receives as 

rebates for retail mail order and nonmail order sales. The commenters 

suggested that the final rule should 

allow manufacturers to use reasonable 

assumptions to estimate PBM rebates. 

This would be similar to Medicare Part 

B ASP reporting requirements (71 FR 

69623 and 69676, Dec. 1, 2006). 

Response: We recognize the 

commenters’ concerns and have decided 

that, except in those situations where 

PBM rebates are designed to provide 

price concessions, discounts, or rebates, 

or to adjust prices recognized by 

providers or retailers, PBM rebates 

should not be included in best price 

calculations. 

Comment: Several commenters stated 

that some industry analysts appeared to 

misread the proposed rule to suggest 

that manufacturers may be obligated to 

add concessions paid to PBMs to the 

concessions paid to customers of the 

PBMs in calculating best price. This 

would effectively call for the combining 

of two separate prices, one offered to a 

PBM and the other to a customer of a 

PBM. The commenter stated that the 

statute is quite clear in defining best 

price as the lowest price to ‘‘any 

wholesaler, retailer, provider, health 

maintenance organization, non-profit 

entity, or government entity * * *.’’

The commenters argued that if Congress 

had intended anything other than a 

customer-by-customer analysis of 

separate prices, the statute would have 

combined each customer with the word 

‘‘and’’ instead of the disjunctive ‘‘or.’’

The commenters requested that CMS 

reaffirm that best price is the lowest 

price available from the manufacturers 

reflecting concessions provided by the 

manufacturers. 

Response: We do not agree with the 

commenters. Although we have deleted 

the requirement that manufacturers 

include PBM rebates and discounts and 

other price concessions in best price, 

there are instances where some PBM 

rebates and discounts may be designed 

to adjust prices at the retail or provider 

level. Best price is designed to reflect 

the lowest price available from the 

manufacturer to any purchaser, 

inclusive of rebates, discounts, or price 

concessions that adjust the price 

realized. Where PBM rebates, discounts, 

or price concessions do not operate to 

adjust prices, they should not be 

included in the best price calculation. 

Comment: Several commenters 

suggested that PBM rebates should be 

included in the best price calculation 

but not in the calculation of AMP 

because including these prices would 

reduce the FUL to an amount below 

available market price. The commenter 

stated that this would undermine the 

FUL and shrink rebates paid to States. 

Response: We appreciate the 

recommendation of the commenters. We 

believe that, as a general matter, PBM 

rebates, discounts, and price 

concessions obtained from 

manufacturers (except for PBM mail 

order purchases) should be excluded 

from both best price and AMP. We have 

concluded that we should not consider 

PBMs as falling within the retail 

pharmacy class of trade as they are not 

directly involved in the supply chain of 

pharmaceuticals. PBMs are treated by 

the pharmaceutical manufacturers as a 

different class of trade and the public 

does not necessarily have access to 

drugs supplied through PBMs. 

Therefore, we do not believe that it is 

appropriate to include PBM rebates, 

discounts, and prices in either AMP or 

best price, except for mail order 

purchases. 

Comment: One commenter requested 

that PBM price concessions should not 

be used in the best price calculation 

because they are not shared with 

pharmacies. 

Response: We have excluded PBM 

price concessions except for mail order 

purchases where rebates or price 

concessions are designed to adjust 

prices at the retail or provider level. 

Comment: One commenter disagreed 

with the proposed rule that prices of 

sales directly to patients should be 

included in best price because direct-topatient sales are not specified in the 

statute. Rather, the commenter believed 

that the statutory definition is intended 


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to capture prices to commercial entities, 

and that CMS’ interpretation goes 

beyond, and is inconsistent with, the 

plain language of the statute. 

Response: The statute clearly specifies 

at sections 1927(c)(i)(I)–(VI) of the Act 

those sales, including, for example, 

sales provided to patients through the 

endorsed discount card program, that 

are excluded from best price. As we 

discussed previously, we believe that 

sales directly to patients are included, 

except as specifically excluded by 

statute, as this is an alternate channel 

for sales that normally flow through 

included entities. 

Comment: One commenter requested 

that discounts negotiated on behalf of 

retirees enrolled in retiree prescription 

plans which are excluded from best 

price be extended to their dependents. 

The commenter stated that rebate 

agreements for retirees for qualified 

retiree prescription drug utilization 

apply the same price structure to all of 

the individuals covered by the plan and 

do not distinguish between utilization 

by retirees and of their dependents. 

Response: We proposed to exempt 

from best price any prices charged 

which are negotiated by a qualified 

retiree prescription drug plan under 

section 1860D–22(a)(2) of the Act. To 

the extent the prices are negotiated by 

a qualified retiree prescription drug 

plan under section 1860D–22(a), they 

are exempt from best price. 

Comment: Several commenters 

requested that CMS not include 

customary prompt pay discounts in the 

determination of best price to the extent 

that such discounts are excluded from 

AMP. They stated that Congress 

recognized that discounts serve an 

important role in providing a revenue 

stream for distributors to ensure the safe 

and effective distribution of drugs to 

patients. 

Response: We do not agree. Congress 

did not exclude customary prompt pay 

discounts from the determination of best 

price. Therefore, customary prompt pay 

discounts remain included in the 

determination of best price. 

Comment: One commenter requested 

that when best price is determined, 

customary prompt pay discounts 

extended to wholesalers should not be 

aggregated with price concessions 

available to an end-customer under a 

contract administered through a 

wholesaler chargeback arrangement, 

regardless of whether the manufacturer 

negotiated the contract directly with the 

end-customer or with a third party. 

Response: We do not agree. As we 

have previously stated, there is no basis 

to exclude these discounts. Both the 

customary prompt pay discounts and 

other price concessions available to the 

end-customer are to be included in the 

determination of best price. 

Comment: One commenter requested 

that the regulation not define fair market 

value for administrative and service fees 

that are excluded from best price. The 

commenter suggested that CMS mirror 

Medicare’s position on ASP which 

permits manufacturers to determine the 

most appropriate industry-accepted 

method to determine fair market value 

of the drug distribution services they 

receive. 

Response: We concur that 

manufacturers should be permitted to 

determine the fair market value of drug 

distribution services using industryaccepted methods and have not defined 

these terms in this final rule. 

Comment: One commenter requested 

that further guidance be given on when 

GPOs should be excluded from best 

price. The commenter suggested that 

fees to GPOs should not be treated as 

price concessions unless the fees (or any 

portion thereof) are passed on to the 

GPO’s members or customers. 

Response: GPOs may function as 

negotiators for price concessions on 

behalf of member pharmacies with 

GPOs receiving service fees for their 

services or they may function as a 

distributor to their member pharmacies 

of price concessions from manufacturers 

after volume sales benchmarks have 

been attained. If the service fees paid to 

GPOs are bona fide service fees, and 

there is no evidence or arrangement that 

the fee is passed on to the member 

pharmacy, client or customer of any 

entity, the manufacturer can exclude the 

fees from the determination of best 

price. 

Comment: One commenter stated that 

in 2004, the DoD restructured its 

pharmaceutical benefit plan TRICARE 

and placed the pharmacy benefit under 

contract with PBMs. DoD determined, 

and CMS agreed, that the TRICARE 

transactions, known as TRICARE Retail 

Pharmacy Program or TRRx, amounted 

to depot sales that qualified for Federal 

ceiling prices (FCP). Manufacturers paid 

rebates, called refunds on TRRx 

utilization, and those rebates were 

calculated in a manner intended to 

provide DoD with FCP for that 

utilization. In Manufacturer Release 69, 

CMS directed that both TRRx sales and 

refunds be excluded from AMP and best 

price because they qualified as depot 

sales. In September 2006, the Federal 

Circuit Court of Appeals raised 

significant concerns with the TRRx drug 

program holding that DoD could not 

require manufacturers to pay refunds 

without issuing a regulation through 

formal notice and comment rulemaking 

(464 F.3d 1306 (Fed. Cir. 2006)). It is our 

understanding that DoD has ceased the 

TRRx program and is refunding any 

rebates previously paid. The commenter 

requested that any voluntary price 

concessions provided to DoD by 

manufacturers on direct purchases, sales 

to TRICARE mail order pharmacy, or 

through rebates on TRICARE be exempt 

from best price even though the prices 

are not obtained from depot purchasing. 

Response: We recognize the Federal 

Circuit Court of Appeals remanded the 

DVA’s Dear Manufacturer Letter 

(October 24, 2004) for substantive 

rulemaking. However, to the extent 

section 1927(c)(1)(C)(i)(I) of the Act 

includes the DoD as an exclusion from 

best price, TRRx prices are excluded 

from best price. 

Comment: One commenter requested 

that if the final rule changes the AMP 

NDC reporting from 9 digits to 11 digits, 

CMS should also require that best price 

be reported for each package size. This 

would allow for more consistent, 

transparent, and accurate calculations 

between AMP and best price. 

Response: This final rule maintains 

that AMP reporting remain at nine 

digits. 

Authorized Generic Drugs (§ 447.506) 

Summary of Comments 

The DRA requires drug manufacturers 

to include drugs sold under an NDA 

approved under section 505(c) of the 

FFDCA in their AMPs and best prices. 

In the proposed rule, we would 

require the manufacturer holding title to 

the NDA of the authorized generic drug 

to include the direct and indirect sales 

of this drug in its AMP and to include 

in the computation of best price the 

price of the innovator multiple source 

drug as well as the single source drug. 

We received numerous and detailed 

comments concerning these proposed 

requirements that led us to agree with 

commenters that these requirements 

would be unduly burdensome on 

manufacturers, call into question the 

veracity of manufacturer pricing 

information reported to CMS, and 

potentially violate anti-trust statutes 

because they would require 

manufacturers to share pricing 

information and engage in anticompetitive practices. 

In the final rule, we limit the 

application of the requirement to the 

sale of an authorized generic product 

from the primary manufacturer; that is, 

the manufacturer that holds the NDA, to 

the secondary manufacturer; that is, the 

manufacturer that markets and sells the 

authorized generic drug. This eliminates 

the need for manufacturers to share 


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information on sales to other entities 

and potential competitors. We believe 

that the sale price of the drug from the 

primary to the secondary manufacturer 

will generally be lower than the lowest 

price paid for the authorized generic 

drug by subsequent purchasers. We 

have further supported this by stating 

that all price concessions, discounts and 

fees other than bona fide service fees 

must be reflected in the primary 

manufacturer’s calculations of best 

price. This will prevent the primary 

manufacturer from circumventing its 

rebate liability, impact the rebate owed 

by the primary manufacturer, and result 

in the savings contemplated by the 

provision. 

At this time, we do not require that 

subsequent sales of an authorized 

generic product by the secondary 

manufacturer be included in the AMP 

calculation of the primary manufacturer. 

We note that this is consistent with our 

reading of the DRA in that, unlike the 

best price amendment, the DRA did not 

amend the definition of AMP, which 

continues to require that AMP be 

calculated with respect to the covered 

outpatient drug of a manufacturer based 

on the price paid to the manufacturer 

‘‘by wholesalers for drugs distributed to 

the retail pharmacy class of trade.’’ The 

DRA did not amend the AMP definition 

to include prices paid to the 

manufacturer by other manufacturers. 

Furthermore, in light of the comments 

we have received with respect to the 

proposed rule, we believe that to require 

the primary manufacturer to include 

sales of the secondary manufacturer 

within its calculation would be 

problematic from an administrative 

accounting and anti-trust perspective. 

We also note that to include the sales of 

the authorized generic drug in the AMP 

of the primary manufacturer’s drug 

could lower the AMP and rebate 

liability, and present additional 

concerns with respect to the FUL 

calculation, contrary to our reading of 

the provision. 

In light of the comments received and 

our concerns given the statutory 

amendment, at this time we have 

decided not to include authorized 

generic products marketed by the 

secondary manufacturer in the AMP 

calculation. We will continue to review 

this issue, but we believe this 

interpretation best implements the DRA 

amendments. 

General Comments 

Comment: One commenter expressed 

general support for the authorized 

generic provisions in the proposed rule. 

Response: We appreciate the support 

the commenter expressed. 

Definition of Authorized Generic 

Comment: One commenter urged 

CMS to clarify that the term ‘‘authorized 

generic’’ is limited to those products for 

which the title passes to an authorized 

generic entity. 

Response: We disagree. We do not 

interpret the DRA amendment as 

necessarily limiting the application of 

this provision to drugs for which the 

secondary manufacturer holds title. 

Comment: One commenter suggested 

that CMS exclude from the definition of 

‘‘authorized generic,’’ drugs that are 

repackaged for use in institutions. The 

commenter requested that CMS clarify 

that private label arrangements 

involving distinct packaging due to 

variations in package size from the 

branded product do not constitute 

‘‘authorized generics’’ where the private 

label product is used in an institution. 

Another commenter recommended that 

CMS preserve its current policy of 

exempting manufacturers who 

repackage products (for sale) from 

reporting best price. The commenter 

recommended that CMS classify the 

secondary manufacturer of authorized 

generic products as a repackager. 

Response: The definition of 

authorized generic drugs excludes drugs 

that have been repackaged for use in 

institutions. Thus, any sales of the 

repackaged drug by the repackager 

would not be included in the primary 

manufacturer’s rebate calculation if it 

were simply repackaged in an 

institutional package size with the 

primary manufacturer’s NDC; however, 

the sale to the institution would be 

included in the primary manufacturer’s 

best price. 

AMP and Best Price Reporting 

Requirements 

Comment: Many commenters 

expressed concern regarding the 

proposed policy to require the price or 

sales of the authorized generic drug to 

be included in the AMP and the best 

price of the branded drug. Many 

commenters requested further guidance 

to clarify how the price or sales of 

authorized generic products should be 

gathered, shared and incorporated into 

the AMP and best price of the branded 

drug. One commenter stated that the 

proposed rule did not address whether 

the primary manufacturer must 

incorporate raw sales data into the 

brand drug calculations in order to 

derive a blended AMP and best price or 

whether the primary manufacturer can 

rely on the secondary manufacturer to 

provide the authorized generic AMPeligible units and dollars to derive the 

AMP. Several commenters 

recommended that CMS allow the 

primary manufacturer to calculate a 

blended AMP and determine the best 

price based on the pricing data provided 

by the secondary manufacturer. One 

commenter suggested two methods for 

blending authorized generic sales data 

with the sales data of the primary 

manufacturer. Several commenters 

suggested that CMS require the primary 

manufacturer to obtain from the 

secondary manufacturer either the AMP 

and best price or underlying authorized 

generic sales data. The primary 

manufacturer would then combine its 

own sales data with the sales data 

provided by the secondary manufacturer 

to calculate the AMP and determine the 

best price for the brand drug. One 

commenter asked for guidance regarding 

a method for calculating a weighted 

AMP value for authorized generic drugs. 

Several commenters recommended that 

CMS require manufacturers to use a 

weighted average to calculate the AMP 

for authorized generic drugs. 

Response: This final rule provides the 

requirements for manufacturers to use 

in calculating the AMP for covered 

outpatient drugs. Specific calculation 

methods are left up to the manufacturer 

consistent with this rule. 

In light of the comments, we have 

decided to reconsider our proposal that 

primary manufacturers include the 

authorized generic product pricing data 

of a secondary manufacturer in their 

best price and AMP calculations. At this 

time, we have revised the authorized 

generics provision to require the 

primary manufacturer to include in best 

price the authorized generic sales from 

the primary manufacturer to a 

secondary manufacturer or subsidiary of 

the brand company. 

At this time, based on concerns raised 

by the commenters, primary 

manufacturers would not be required to 

incorporate the sales of the authorized 

generic in the AMP of the brand drug. 

The primary manufacturer and the 

secondary manufacturer would be 

responsible for separately calculating 

their own AMP. The method for 

determining the AMP, as described 

elsewhere in this final rule, is the same 

for all covered outpatient drugs, 

including authorized generics. 

Comment: A few commenters 

expressed concern that a blended AMP 

and best price would distort the AMP 

and the best price of authorized generic 

drugs which in turn may cause 

pharmacies to receive substantially 

lower reimbursements for such drugs. 

One commenter stated that a blended 

AMP for the brand drug may be lower 

than a pharmacy’s acquisition cost for 

the product. A few commenters stated 


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that while CMS may allow the primary 

manufacturer to pay its rebate based on 

a blended AMP, it is not fair to use this 

blended AMP to potentially underpay 

pharmacies for dispensing the brand 

drug when prescribed by a physician. 

One commenter stated that this final 

rule would result in new AMP-based 

calculations that would apply to more 

medications, thereby compounding 

concerns regarding decreased 

reimbursement to pharmacies for 

authorized generic products. The 

commenter further stated that the 

broadened definition of authorized 

generic could create a disincentive for 

generic utilization, thereby increasing 

costs to the Medicaid Program. A few 

commenters suggested that separate 

AMPs should be posted on CMS’

website for the brand drug and the 

authorized generic drug. 

Response: We agree with these 

comments. The primary manufacturer 

should not include within its AMP 

calculation any pricing data concerning 

the sale by the secondary manufacturer 

regarding the authorized generic 

product. 

Comment: A few commenters 

requested further clarification on how to 

handle incomplete or inaccurate data 

reported by the secondary manufacturer. 

In addition, commenters wanted to 

know what should be done when 

information is not received from the 

secondary manufacturer in a timely 

manner. One commenter recommended 

that CMS allow the use of the prior 

month’s data to calculate the blended 

AMP to ensure compliance with 

reporting deadlines. Many commenters 

requested that CMS confirm that the 

primary manufacturer may rely on the 

AMP and sales data provided by the 

secondary manufacturer without having 

to review the underlying data and 

methodologies for accuracy. Several 

commenters also requested that the 

primary manufacturer not be held 

responsible for certifying (in accordance 

with the certification requirements set 

forth in this rule) the accuracy and 

completeness of the AMP and best price 

data provided by the secondary 

manufacturer. Another commenter 

requested that CMS allow the primary 

manufacturer to incorporate the AMP 

and best price of the authorized generic 

product into the AMP and the best price 

of the brand drug. 

Response: We appreciate the 

comments and have revised the 

authorized generics provision to require 

the primary manufacturer to include in 

best price the authorized generic sales 

from the primary manufacturer to a 

secondary manufacturer or subsidiary of 

the primary manufacturer. As discussed 

previously, based on the comments 

received, we have decided that the 

primary manufacturer should not 

incorporate the sales of authorized 

generic products by the secondary 

manufacturer in the AMP of the brand 

drug. At this time, we have decided that 

the primary manufacturer and the 

secondary manufacturer would 

separately calculate their own AMP. 

Comment: One commenter requested 

that CMS clarify whether the sales by 

the primary manufacturer of an 

authorized generic to a secondary 

manufacturer should be included in the 

primary manufacturer’s AMP and best 

price. The commenter indicated that 

inclusion of such manufacturer-tomanufacturer sales in the AMP would 

result in double-counting in AMP of 

every authorized generic unit; once 

when the unit is sold by the primary 

manufacturer to the secondary 

manufacturer, and again when the unit 

is sold by the secondary manufacturer to 

its customers, thereby resulting in a 

distortion of the AMP. A few 

commenters urged CMS to clarify that 

manufacturer-to-manufacturer sales are 

non-retail sales and, therefore, excluded 

from AMP. Another commenter stated 

that including inter-company transfer 

prices in the AMP for every unit of a 

drug would deflate the market price and 

skew the AMP to an inappropriately low 

level. The commenter suggested that the 

final rule clarify that inter-company 

transfer prices will be excluded from 

AMP or best price regardless of the 

circumstances surrounding the transfer 

of product within the same corporate 

company, even if the product is 

provided at a lower price from one 

member of the company to another 

member of the company. Another 

commenter recommended that CMS 

define the term ‘‘any entity’’ in the best 

price definition to exclude the sales 

price of authorized generics from the 

primary manufacturer to the secondary 

manufacturer so that this sales price 

would not set the best price. The 

commenter further explained that 

failure to exclude the sale price from the 

primary manufacturer to the secondary 

manufacturer would result in increased 

costs that will shift to payors and 

consumers because both the primary 

manufacturer and the secondary 

manufacturer will raise their prices in 

order to recoup reduced profit margins 

resulting from an inaccurate best price. 

Response: We appreciate the 

comments but have not revised our 

definition of ‘‘any entity’’ as we believe, 

in light of the DRA amendments, that 

any sales of covered outpatient drugs 

between manufacturers must be 

included in the best price. The DRA 

amended the definition of best price, in 

part, to specifically provide that the best 

price should be inclusive of the lowest 

price available from the primary 

manufacturer to ‘‘any manufacturer.’’ In 

accordance with the best price 

provisions in section 1927(c)(1)(C)(i) of 

the Act, we believe that all price 

discounts, except for bona fide service 

fees, should be included in the best 

price of the brand drug unless the 

discount is specifically excluded by 

statute or regulation. Therefore, the 

primary manufacturer will be required 

to include in the best price of its drug 

any price concession provided by the 

manufacturer to any entity (including 

the secondary manufacturer) that 

reduces the price of the authorized 

generic drug sold by the primary 

manufacturer and actually realized by 

the primary manufacturer, unless the 

price concession is specifically 

excluded by statute or regulation or falls 

within the definition of a bona fide 

service fee. 

Comment: Several commenters 

expressed concern that our proposed 

policy would require the primary 

manufacturer and the secondary 

manufacturer to share confidential 

pricing information that may result in 

anti-trust violations. Commenters 

strongly urged CMS to consult with the 

FTC before implementing the new 

reporting requirements outlined in the 

DRA. One commenter recommended 

that CMS consider eliminating or 

delaying implementation of the 

authorized generic reporting 

requirements until a later date. 

Response: We appreciate the 

comments and have revised the 

authorized generics provision to require 

the primary manufacturer, that is, is the 

NDA holder, to include its sales of the 

authorized generic to the secondary 

manufacturer in best price. We have 

revised the best price provision to 

provide, at this time, that best price 

should only include authorized generic 

sales from the primary manufacturer to 

a secondary manufacturer or subsidiary 

of the primary manufacturer and shall 

be the lowest price at which the primary 

manufacturer sells the drug. 

At this time, we believe this revision 

will avoid any anti-trust concerns that 

could potentially arise as a result of 

pricing data being exchanged between 

manufacturers. In light of the DRA 

amendments, we are not eliminating or 

delaying the implementation of this 

provision but we will continue to 

consider this issue as we receive AMP 

and best price data. 

Comment: Several commenters 

requested that CMS require the primary 

manufacturer and the secondary 


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manufacturer to separately report and 

calculate the AMP and determine the 

best price for their own products, using 

only the sales data based on the 

products’ NDCs, and include in each of 

their own AMP reports the number of 

units sold during the rebate period. 

Other commenters recommended that 

CMS allow the primary manufacturer 

and secondary manufacturer to submit 

separate pricing data regarding their 

own sales so that CMS may calculate the 

AMP and best price. 

Response: We have revised the 

provision to no longer require the 

primary manufacturer to include 

authorized generic sales of the 

secondary manufacturer in the AMP. 

The best price shall include authorized 

generic sales from the primary 

manufacturer to a secondary 

manufacturer or to a subsidiary of the 

primary manufacturer and shall be the 

lowest price at which the drug is sold 

by the primary manufacturer. 

Comment: A few commenters 

expressed concern that there are a 

number of transactions that may not 

have been intended to fall within the 

scope of the authorized generic 

provision. Several commenters 

requested that CMS clarify that intercompany transactions between the 

primary manufacturer and the 

secondary manufacturer will not be 

included in the primary manufacturer’s 

pricing calculations. Several 

commenters recommended that intercompany transactions such as transfer 

price, royalties and/or license payments 

made by the secondary manufacturer to 

the primary manufacturer should not be 

included in pricing calculations. A few 

commenters indicated support of CMS’

decision not to require manufacturers to 

include the transfer price of the 

authorized generic drug in best price. 

One commenter requested that CMS 

clarify how manufacturers should 

account for transfer prices when the 

product is sold from the primary 

manufacturer to the secondary 

manufacturer. Other commenters were 

concerned that transfer fees, licensing 

fees and manufacturer contracting fees 

would be inappropriately included in 

the best price and AMP for authorized 

generic sales. Several commenters stated 

that such fees should not be taken into 

account in the authorized generic 

provision and only the sales of the 

authorized generic products in the 

marketplace should be considered. One 

commenter requested that CMS clarify 

that the term ‘‘price’’ used in 

§ 447.506(c) would be considered to be 

either (1) the adjusted transfer price 

after the value of all profit-sharing, 

royalties, license fees and other 

adjustments to the contracted transfer 

price have been added; or (2) the lowest 

price at which the secondary 

manufacturer sells the authorized 

generic in the marketplace. The 

commenter stated that either 

clarification of the term ‘‘price’’ would 

help ensure a true and accurate 

reflection of the best price of the 

authorized generic in the marketplace. 

The commenter indicated that the sales 

of the authorized generic drugs by the 

secondary manufacturer to its own 

customers should be included in the 

best price, not the primary 

manufacturer’s sales price to the 

secondary manufacturer. Several 

commenters requested that the transfer 

price at which the primary 

manufacturer sells the drug to the 

secondary manufacturer not be taken 

into account or included in the best 

price or the AMP. One commenter 

stated that the transfer price should not 

be included in the best price even if this 

price would otherwise be the lowest 

price at which the drug is sold. The 

commenter stated that transfer prices 

involve complex royalty or profitsharing arrangements that would be 

difficult for the primary manufacturer to 

incorporate into its best price and 

difficult for CMS to evaluate. Another 

commenter recommended that CMS 

require manufacturers to include the 

transfer price from the primary 

manufacturer to the secondary 

manufacturer in the best price. 

Response: We believe that transfer 

prices and all fees paid by the secondary 

manufacturer to the primary 

manufacturer for the authorized generic 

product, other than bona fide service 

fees or other discounts excluded by 

statute or regulation, are price discounts 

which should be included in the best 

price of the primary manufacturer. The 

inclusion of such price reductions or 

fees ensures that the amount recognized 

by the primary manufacturer for the 

authorized generic product reflects all 

discounts and price concessions that are 

meant to be included in the best price. 

Therefore, we have revised the 

authorized generic provision to include 

in the best price of the brand drug, 

transfer prices and other fees paid for 

authorized generics by the secondary 

manufacturer to the primary 

manufacturer, unless such prices or fees 

are excluded by statute or regulation or 

fall within the definition of a bona fide 

service fee as defined in § 447.505 of 

this final rule. 

Comment: One commenter requested 

that CMS confirm that the best price for 

authorized generic products is the 

lowest price charged for the drug by the 

primary manufacturer in a best priceeligible sale. In addition, the best price 

for the secondary manufacturer is the 

lowest price charged for the drug by the 

secondary manufacturer in a best priceeligible sale. Another commenter 

requested that CMS allow the primary 

manufacturer to obtain from the 

secondary manufacturer the best price 

for the authorized generic and compare 

the secondary manufacturer’s best price 

to its own best price and then submit 

the lowest price of the two drugs. 

Response: In this final rule, we state 

that the best price includes authorized 

generic sales from the primary 

manufacturer to the secondary 

manufacturer or subsidiary of the 

primary manufacturer, and the best 

price is the lowest price at which that 

product is sold. 

Comment: One commenter 

recommended that CMS clarify that the 

proposed authorized generic provisions 

do not apply to situations in which a 

product is sold to a secondary 

manufacturer for purposes of 

incorporating the product into a ‘‘kit’’

consisting of multiple products. 

Response: The authorized generic 

provisions apply to the transaction 

between the primary and secondary 

manufacturers. Therefore, the price for 

any authorized generic product sold for 

the purpose of incorporating the 

product into a kit consisting of multiple 

products must be included in the best 

price of the primary manufacturer. 

Comment: One commenter stated that 

the authorized generic provisions 

negatively impact manufacturers and 

penalize them for entering into 

authorized generic arrangements. The 

commenter stated that CMS has 

prematurely taken a negative position 

on authorized generics before receiving 

results from an FTC study that is 

currently analyzing the impact of 

authorized generics in the marketplace. 

The commenter further indicated that it 

would be premature and unwise of CMS 

to adopt any policy that would impose 

a penalty on the authorized generic 

industry before conclusions of the FTC 

study are in hand. 

Response: We appreciate the 

comments, but the statute does not 

condition this policy on the results of 

the FTC study or its findings. The policy 

concerning authorized generics is 

intended to implement our 

understanding of the provisions of the 

DRA. The purpose of the authorized 

generic provisions is to ensure that 

prices for such drugs are accounted for 

in prices reported by manufacturers 

participating in the Medicaid Drug 

Rebate Program. 

Comment: One commenter 

recommended that CMS treat authorized 


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generic drugs as noninnovator multiple 

source drugs unless the manufacturer 

has licensed the drug to another labeler 

and has no control over pricing, 

marketing or distribution. 

Response: We disagree. Authorized 

generic drugs are single source or 

innovator multiple source drugs. In 

accordance with our understanding of 

the statute, drugs sold, marketed or 

distributed under an NDA must be 

treated as single source or innovator 

multiple source drugs for purposes of 

the Medicaid Drug Rebate Program. 

Comment: Several commenters 

requested further guidance regarding the 

inclusion of authorized generics in the 

AMP and best price when the drug is 

being sold by the primary manufacturer 

and a secondary manufacturer at the 

same time. The commenter suggested 

that all sales of the authorized generic 

product should be considered when 

calculating the AMP and best price and 

requested that CMS provide guidance in 

order to confirm this interpretation. 

Another commenter requested that CMS 

clarify in the final rule that the 

authorized generic provision applies to 

sales of the brand drug under a new 

labeler code. A few commenters asked 

if the authorized generic provision 

would apply to situations where the 

primary manufacturer has completely 

sold the drug to another manufacturer 

(including all rights to sell the 

authorized generic drug). Other 

commenters asked how sales should be 

treated when the primary manufacturer 

is no longer manufacturing the 

authorized generic product but is selling 

off existing inventory. One commenter 

requested that CMS confirm its 

interpretation that the licensed drug 

would meet the definition of a single 

source drug because the primary 

manufacturer is not a source of the drug. 

Another commenter recommended that 

the primary manufacturer not be 

required to take into account authorized 

generic sales after the date the primary 

manufacturer stops marketing the brand 

product. 

Response: The manufacturer that 

holds the title to the labeler code and 

whose NDC appears on the product 

when a Medicaid prescription is 

dispensed is responsible for reporting 

pricing and paying rebates. We have 

revised this final rule to state that the 

primary manufacturer will no longer be 

required to include the sales of 

authorized generics by the secondary 

company in the AMP or best price of the 

brand drug. Each manufacturer will be 

responsible for determining the AMP or 

best price for its own products 

consistent with the methodology 

described elsewhere in this rule. If the 

primary manufacturer no longer sells 

the brand drug and the secondary 

manufacturer buys an authorized 

generic version of the drug and changes 

the NDC, the primary manufacturer is 

responsible for paying rebates on its 

drugs still in the supply chain and must 

supply a termination date equal to the 

shelf life of the last lot/stock sold under 

the previous NDC. It must also supply 

pricing data for four quarters beyond the 

shelf life of the drug. The secondary 

manufacturer would be responsible for 

supplying pricing data starting with the 

quarter the authorized generic is for sale 

under its own NDC. 

Comment: A few commenters 

requested clarification regarding 

whether the secondary manufacturer or 

licensee should include the combined 

sales of two separate NDCs in its price 

reporting data where the licensee is 

selling both the brand and authorized 

generic version of the licensed 

innovator multiple source drug, or 

should the licensee continue to report 

data for two separate NDCs as is 

currently done under existing policy. 

Response: If the secondary company 

markets two drugs that have the same 

nine-digit NDC numbers, the pricing 

data with respect to both products 

should be used in AMP and best price 

calculations. 

Comment: One commenter 

recommended that CMS redefine the 

rebate period following the initial 

launch of an authorized generic by 

dividing the first quarter in which the 

authorized generic is launched into two 

separate rebate periods: (1) One period 

prior to the launch of the authorized 

generic; and (2) one period starting at 

the date of the launch. The commenter 

indicated that this change would allow 

the manufacturer to apply an AMP and 

weighted best price for the first quarter 

of the authorized generic entry. The 

commenter also mentioned a second 

option that would allow manufacturers 

to report, for the first quarter of the 

authorized generic entry, an AMP and 

weighted best price based on the 

number of days the authorized generic 

is available in the quarter. Additionally, 

the commenter suggested a third option, 

in which the incorporation of the 

authorized generic would begin with the 

first full quarter the authorized generic 

is available. Another commenter 

recommended that for authorized 

generic agreements effective during the 

middle of a quarter, CMS should not 

begin to apply the blending of AMP data 

until the following quarter. One 

commenter recommended that CMS 

require the brand manufacturer to 

incorporate authorized generic products 

into pricing calculations the first full 

quarter after the authorized generic 

product is launched. The commenter 

suggested CMS clarify that authorized 

generic products will not be taken into 

account in monthly AMP calculations 

until the first month of the first full 

quarter following the launch of the 

authorized generic. 

Response: We are not redefining the 

rebate period or adjusting the monthly 

and quarterly reporting requirements as 

they are currently defined under the law 

and this regulation. Like other 

manufacturer programs that start in the 

middle of a quarter or a month, the 

appropriate authorized generic sales 

must be reported for whatever part of 

the reporting period they occur. 

Comment: Several commenters 

indicated that there are several 

operational issues that may prevent the 

primary manufacturer from 

incorporating authorized generic AMP 

and best price data from the secondary 

manufacturer within the required 30- 

day timeframe. A few commenters 

stated that it would be infeasible for the 

primary manufacturer to calculate the 

AMP and best price for the brand drug 

within 30 days if the primary 

manufacturer is unable to rely on the 

information provided by the secondary 

manufacturer. In addition, a few 

commenters stated that the primary 

manufacturer would not have access to 

the proprietary data and records of the 

secondary manufacturer, who may be a 

competitor, and there may be 

intersystem incompatibility between the 

reporting systems of the primary 

manufacturer and the secondary 

manufacturer. Another commenter 

suggested that allowing the primary 

manufacturer to calculate a weighted 

AMP and determine the best price based 

on sales data provided by the secondary 

manufacturer would allow primary 

manufacturers to avoid the 

administrative burden and complexity 

of incorporating raw sales data of 

authorized generic products into the 

pricing calculations of the brand drug. 

Another commenter recommended that 

CMS allow the manufacturers to use 

aggregate data at the 11-digit NDC level 

(supplied by the secondary 

manufacturer to the primary 

manufacturer) to minimize operational 

and legal issues. Another commenter 

requested that CMS allow 

manufacturers flexibility in reporting in 

order to minimize operational issues. 

Response: We have revised this final 

rule to no longer require the primary 

manufacturer to include the sales of the 

secondary manufacturer or subsidiary in 

the AMP. The primary manufacturer 

will be required to include in best price 

its sales to the secondary manufacturer 


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or subsidiary of the primary 

manufacturer and the best price shall be 

the lowest price at which the drug is 

sold. 

Comment: One commenter expressed 

support for CMS’ assertion that the 

secondary manufacturer would continue 

to calculate AMP and best price and pay 

rebates for the authorized generic drug 

based on its own NDC according to its 

own utilization of the drug, as is done 

under current policy. 

Response: We appreciate the support 

this commenter expressed. 

Comment: One commenter 

recommended that CMS clarify that for 

store brand versions of the brand drug, 

the primary manufacturer must include 

in its AMP and best price the sales of 

such authorized generics to the 

secondary manufacturer, not sales to 

consumers by the secondary 

manufacturer. The commenter indicated 

that the sales of store brand products to 

retailers are commercial prices and are 

not subject to transfer pricing or other 

similar profit-sharing arrangements. The 

commenter mentioned that in many 

cases the primary manufacturer labels 

the store brand products under the 

retailer’s labeler code, thereby making 

the retailer a secondary manufacturer of 

those drugs. The commenter stated that 

unlike secondary manufacturers of 

prescription authorized generic 

products, a secondary manufacturer of 

an OTC authorized generic sells the 

authorized generic directly to 

consumers and typically does not 

participate in the Medicaid Drug Rebate 

Program. The commenter stated that the 

most appropriate sales data to include 

in the branded product’s AMP and best 

price calculations would be the primary 

manufacturer’s sales transactions with 

the retailer. The commenter further 

suggested that in calculating the 

blended AMP and best price figures for 

authorized generics sales, the primary 

manufacturer should incorporate the 

direct and indirect sales to secondary 

manufacturers of the store brand 

authorized generic. The commenter 

requested that CMS confirm that the 

primary manufacturer may comply with 

the authorized generics provisions by 

including its sales of the authorized 

generic to the secondary manufacturer 

when the primary manufacturer 

calculates the blended AMP and best 

price figures for the brand product. 

Response: The primary manufacturer 

would be responsible for including 

prices to the secondary manufacturer, 

but further sales from the secondary 

manufacturer to the consumer would 

not be included. 

Exclusion From Best Price of Certain 

Sales at a Nominal Price (§ 447.508) 

Comment: Several commenters did 

not agree with the statement in the 

preamble that using the nominal price 

exception as a marketing tool was not 

within the spirit and letter of the law 

and requested CMS to issue further 

guidance through the formal rulemaking 

process. Another commenter requested 

that until such guidance is forthcoming, 

manufacturers should be permitted to 

continue to exclude nominal price sales 

from best price. 

Response: CMS does not believe that 

further guidance is needed on this 

subject. We believe, in light of the DRA 

amendments, that the final regulation is 

clear concerning what sales at nominal 

price may be excluded from best price. 

Comment: Numerous commenters 

expressed concern that the proposed 

rule explicitly declined to exercise the 

Secretary’s statutory discretion to 

identify additional safety net providers 

that could receive nominal pricing on 

drugs that would be excluded from best 

price. They stated that CMS’ failure to 

define a fourth category to include other 

charitable health care providers is 

contrary to congressional intent, illadvised and unfair to providers that are 

the mainstay of the nation’s health care 

safety net. Many of these commenters 

suggested that a fourth category of safety 

net providers include non-profit entities 

that serve the uninsured and 

underinsured, regardless of their ability 

to pay and for whom a majority of their 

patients have income at less than 200 

percent of the Federal Poverty Level 

(FPL). Many commenters disagreed with 

the limited entities that qualify to 

purchase drugs under the proposed 

nominal price exclusion. These 

commenters suggested that other safety 

net providers who offer low-cost oral 

contraceptive drugs to their low-income, 

uninsured or underinsured patients 

should continue to be eligible for 

nominal pricing exceptions. 

Commenters requested that nominal 

pricing exceptions should continue to 

be extended to such reproductive health 

care centers, including college and 

university health centers, which have 

traditionally purchased contraceptive 

drugs from manufacturers at nominal 

prices. Commenters contended that the 

impact of the rule is significant because 

it would require the reproductive health 

care centers to close their doors or to 

charge the patients who are unable to 

pay and, therefore, eliminate access to 

oral contraceptives. These patients 

would be at risk for unplanned 

pregnancies and increased reliance on 

abortion. 

Response: The statute allows the 

Secretary to determine other entities to 

which sales of drugs at a nominal price 

would be excluded from best price. 

However, the statute does not mandate 

that the Secretary do so. This final rule 

exercises the Secretary’s authority to 

choose not to expand that list of entities. 

We believe the entities listed in the 

statute to be sufficiently inclusive. In 

addition, commenters indicated that 

many manufacturers routinely used the 

nominal price exclusion for other than 

charitable purposes. Furthermore, 

manufacturers who have chosen to 

make drugs available to indigent 

patients often do so through patient 

assistance programs, which are 

excluded from best price (as discussed 

previously in this rule), and not through 

nominal pricing. 

Comment: One commenter stated that 

sales of contraceptive drugs at a 

nominal price are not contingent on 

market share agreements or the 

purchase of other products, which were 

the concerns that prompted Congress to 

restrict the nominal price exemption. A 

few commenters stated that nominal 

pricing predated Medicaid best price 

and rebates and that keeping family 

planning providers as entities that can 

receive nominal prices would not 

suddenly have an adverse effect on the 

Medicaid Drug Rebate Program. Another 

commenter stated that family planning 

is a cost-effective public health strategy 

that saves money by preventing other, 

more costly health problems. In 

addition, several commenters noted that 

although family planning clinics that 

receive funding under Title X of the 

PHS Act and are funding covered 

entities under the PHS Drug Pricing 

Program, their 340B status is not 

permanent and could be lost due to 

funding deficits. Other commenters 

remarked that 340B clinics that rely on 

subsidies from non-340B clinics within 

the same organization to finance their 

operation may not be able to continue 

to keep their doors open because the 

non-340B clinics will no longer have 

access to excess funds when they can no 

longer purchase contraceptives at 

nominal prices. Numerous commenters 

wrote indicating that non-Title X family 

planning clinics are often the sole 

source of primary health care for 

uninsured or underinsured women and 

provide vital reproductive health care 

services including birth control drugs 

and supplies at deeply discounted 

prices, well-woman exams, screenings 

for breast and cervical cancer, and 

treatment for sexually transmitted 

diseases, diabetes, hypertension, and 

anemia. Many of these commenters also 


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noted that the ability of these providers 

to continue to provide quality health 

care at low or no cost rests on their 

ability to purchase contraceptives at 

nominal price. Other commenters noted 

that because Title X funding has not 

increased since 1977, newer clinics 

have not received Title X funding. 

Another commenter stated that where 

two non-profit entities perform the same 

function for similar populations and one 

is a 340B covered entity and the other 

is not, it is reasonable to believe that the 

Congress intended both to have access 

to the same discounted pricing 

structure. 

Response: CMS recognizes the 

important role that family planning 

clinics play in providing for the basic 

health care needs of a vulnerable patient 

population. However, we do not agree 

that the broad categories of populations 

served by the clinics suggested by the 

commenters, which include student 

health centers, constitute a vulnerable 

population. It would also be difficult for 

us to distinguish between agencies; for 

example, agencies with non-profit status 

under the Internal Revenue Code that 

are truly serving a public interest from 

others that may not be doing so. Such 

an expansion would be far in excess of 

the current definition in the 340B 

Program. Therefore, we do not believe 

that there is sufficient reason to include 

these entities in the nominal price 

exclusion. 

Comment: A few commenters noted 

that Congress established the nominal 

price exclusion to protect discounts 

offered to charitable organizations and 

clinics. One commenter noted that 

surveys conducted by the Senate 

Committee on Finance in 2004 and 2005 

found that not-for-profit, acute care, 

teaching and other hospitals appeared to 

be the primary recipients of nominal 

prices. This commenter, along with 

others, urged CMS to define safety net 

provider as non-profit organizations, 

comprised of an outpatient clinic or 

several clinics, which offer health care 

to patients regardless of their ability to 

pay, and for whom the majority of their 

patients have income at less than 200 

percent of the FPL. 

Response: In its 2004 and 2005 

surveys, the Senate Committee on 

Finance found that while hospitals 

appeared to be the primary recipients of 

nominal pricing, most manufacturers’

policies did not reflect the use of the 

nominal price exception for charitable 

purposes. (This discussion can be found 

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

eRulemaking/ECCMSR/list.asp; docket 

ID CMS–2238–P; paper comment 

number 33.) 

Manufacturers did not differentiate 

between for-profit and non-profit 

entities when offering nominal pricing, 

and manufacturers’ agreements 

frequently included market share 

requirements. Additionally, the surveys 

found that the use of the nominal price 

exception has declined since 2003. 

Comment: A few commenters noted 

that their purchase price for a month’s 

supply of oral contraceptives has 

increased more than tenfold. Other 

commenters reported that 

manufacturers are discontinuing 

nominal prices for oral contraceptives. 

Numerous commenters expressed 

concern that prices will increase for 

these patients, many of whom are on 

fixed incomes and unable to absorb 

additional expense to purchase these 

medications. Another commenter asked 

if a mechanism will be provided for 

non-Medicaid patients to continue to 

receive deeply discounted drugs if 

existing philanthropic programs no 

longer qualify for the best price nominal 

price exclusion. 

Response: As previously stated, we 

believe that there are already programs 

in place by which manufacturers can 

continue to make available drugs to the 

indigent and underinsured without 

raising best price concerns for drug 

manufacturers. 

Comment: One commenter expressed 

disappointment that we did not list 

community health providers that 

receive funding under Title V of the 

PHS Act as 340B covered entities 

because they serve the same populations 

as family planning clinics. They stated 

that by this oversight, the government 

would incur increased costs for 

maternity care and providing welfare. 

Additionally, the commenter noted that 

local health departments were 

considering no longer providing family 

planning services, which would have a 

tremendous impact on underserved 

populations and that this may pave the 

way for civil rights action. 

Response: CMS does not determine 

what entities qualify for the 340B 

Program. In this final rule, as discussed 

above, we have decided not to expand 

the entities which can have nominal 

price sales excluded from best price for 

purposes of the Medicaid Drug Rebate 

Program. 

Comment: One commenter requested 

that CMS clarify the scope of the best 

price exemption specifically to allow 

the best price exemption for nominally 

priced drugs to a 340B hospital to 

extend to drugs purchased for inpatient 

use and by other components of a large 

health system of which a 340B 

participating hospital is a part. Other 

commenters said that the loss of 

nominal pricing contracts in the non340B parts of their hospitals would be 

devastating to the amount of service 

they could continue to provide. 

Response: Section 1927(c)(1)(C)(i)(I) 

of the Act exempts inpatient prices 

charged to 340B hospitals from best 

price, so we believe that there is no 

need to address these prices in the 

context of the nominal price exemption. 

Section 1927(c)(1)(D)(i)(I) of the Act 

provides that nominal prices to 340B 

covered entities are exempt from best 

price; the statute does not extend the 

exemption to any part of a broader 

organization of which the 340B covered 

entity is a part. The Secretary has not 

chosen to expand the list of which 

entities qualify for the nominal price 

exclusion to include facilities not 

identified in the statute. 

Comment: One commenter noted that 

a study of manufacturers’ policies and 

practices with respect to nominal price 

practices indicated that the nominal 

price exclusion was used primarily as a 

competitive marketing tool and not used 

for charitable purposes as intended by 

Congress. 

Response: We appreciate this 

comment and believe that this was a key 

factor in the legislation to restrict the 

types of entities eligible for the nominal 

price exclusion from best price. 

Comment: One commenter requested 

that CMS provide a list of qualified 

safety net providers eligible for the best 

price exemption. Another commenter 

suggested that CMS maintain a current 

list of entities that qualify as ICFs/MR 

or State-owned or operated nursing 

facilities, similar to the CMS list of 

qualified SPAPs under Medicare Part D. 

Yet another commenter requested CMS 

to develop and publish procedures to be 

used to identify additional safety net 

providers. Yet another commenter 

recommended that safety net providers 

be required to complete a selfcertification process. Another 

commenter stated that they appreciated 

the clear guidance given by CMS in 

delineating the covered entities eligible 

for the nominal pricing exemption. 

Response: The Secretary has chosen 

not to designate a fourth category of 

safety net providers; therefore, the 

argument for a certification process is 

unnecessary, as is the need to establish 

and publish procedures for the 

identification of additional safety net 

providers. The Health Resources and 

Services Administration (HRSA) 

administers the 340B Program and we 

rely on that agency to identify providers 

in the 340B Program. Furthermore, 

ICFs/MR and State-owned or operated 

nursing facilities fall under State 

jurisdiction and we expect the State 


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Medicaid Agencies to identify these for 

manufacturers. 

Comment: A few commenters 

requested that we add language in the 

preamble or in the regulation text of the 

final rule to state that the Secretary 

intends to retain his discretionary 

authority to add to the list of safety net 

provider entities for which sales at 

nominal prices are excluded from best 

price should CMS choose not to exercise 

the authority at this time. Several 

comments urged CMS not to relinquish 

the authority to establish nominal price 

exemptions for additional classes of 

providers. 

Response: In accordance with the 

reasons stated above, the Secretary has 

chosen not to exercise his authority at 

this time. The Secretary retains the 

authority to propose expansion of this 

list for any appropriate safety net 

providers at a future time through the 

notice and comment process. 

Comment: One commenter agreed 

with the proposed rule directing 

manufacturers to exclude nominal sales 

from the AMP calculation stating it 

would be unfair to allow deeply 

discounted prices offered only to safety 

net providers and not available in 

commercial transactions to put 

downward pressure on AMPs and 

depress Medicaid reimbursement to 

retail pharmacies. 

Response: We agree that nominal 

price sales that are excluded from best 

price should not be included in AMP 

and we have retained that provision in 

the final rule. 

Comment: One commenter asked 

whether the AMP used in determining 

a nominal price for purposes of the best 

price exclusion should be the combined 

AMP for the brand manufacturer who 

also has sold or licensed an authorized 

generic. 

Response: Brand manufacturers who 

also have sold or licensed rights to an 

authorized generic should compute the 

AMP for the brand drugs according to 

the requirement in § 447.506. 

Comment: A few commenters 

believed that nominally priced products 

should be excluded from best price 

calculations because those prices are not 

representative of the acquisition costs 

available to retail pharmacies. Several 

commenters stated that nominal prices 

are not available to the retail pharmacy 

class of trade and should therefore be 

excluded from any calculations. 

Response: CMS concurs with the 

commenter that nominal priced sales to 

certain specified entities such as 340B 

entities, ICFs/MR and State-owned or 

operated nursing facilities are to be 

excluded from best price calculations. 

For purposes of this exclusion, nominal 

price is defined as less than ten percent 

of AMP in the same quarter for which 

the AMP is computed. 

Requirements for Manufacturers 

(§ 447.510) 

Electronic Data Submission 

Comment: A few commenters 

expressed support for CMS’ proposal to 

require manufacturers to submit all 

product and pricing data in an 

electronic format. 

Response: We appreciate the support 

for this provision and have retained this 

requirement in the final rule. 

Data Reported to CMS 

Comment: One commenter asked 

CMS to revise the regulation text at 

§ 447.510(a) to clarify that 

manufacturers are responsible to ensure 

that they report to CMS only those 

products/NDCs that are truly covered 

outpatient drugs. The commenter also 

asked CMS to coordinate with the FDA 

or other Federal agencies to ensure that 

the products manufacturers report to 

CMS actually are covered outpatient 

drugs. Finally, if any products are 

subsequently determined to not be 

covered outpatient drugs, the 

commenter asked that CMS clarify that 

States are not to be held accountable for 

any expenditures or rebates collected for 

the products in the interim. 

Response: CMS already coordinates 

with the FDA to ensure that drugs 

covered by the Medicaid Program meet 

the statutory definition of covered 

outpatient drugs. 

Comment: A few commenters 

expressed support for our position that 

AMP should be reported on a monthly 

basis and AMP, best price, and 

customary prompt pay discounts should 

be reported on a quarterly basis. 

Another commenter urged us to 

eliminate the monthly AMP reporting 

requirement. 

Response: We continue to believe that 

in accordance with the DRA, AMP 

should be reported monthly, while 

AMP, best price, and customary prompt 

pay discounts should be reported 

quarterly. 

Comment: Several commenters 

suggested that AMP must be reported 

weekly in order to accurately realize 

market costs and reimburse retail 

pharmacy accordingly. One commenter 

noted that the monthly reporting system 

would be inadequate and unfair, if not 

illegal. Some commenters noted that 

pricing changes daily; therefore, 

monthly reporting will cause too long of 

a delay in updated AMP prices. Another 

commenter noted that with 

manufacturers supplying CMS the 

pricing data 30 days after the month 

closes, the published pricing data will 

be at least 60 days behind the 

marketplace pricing. One commenter 

asked CMS to revise the AMP reporting 

period to a timeframe that is available 

in the private sector. 

Response: The DRA requires 

manufacturers to report AMP monthly 

to CMS. While we acknowledge that 

prices change in the marketplace more 

frequently than monthly, we are 

implementing the monthly AMP 

reporting requirement in this final rule. 

We note that States are not required to 

base their Medicaid pharmacy 

reimbursement on AMP. AMP will be 

one of many prices that States can look 

at when setting their pharmacy 

reimbursement rates. Furthermore, we 

note that the FULs will be calculated 

based on 250 percent of the AMP, in 

accordance with the statute, which 

should allow for some market 

fluctuations. 

Comment: A few commenters noted 

that the lag time between the timeframe 

covered by monthly AMP and when the 

AMPs are available may result in 

inaccurate AMPs due to the reporting 

delay. The commenters urged CMS to 

address this timing issue directly and in 

detail before we encourage States and 

others to use it as a reimbursement 

benchmark. One way to do this would 

be to compare AMPs to WACs, and only 

publish those AMPs that approximate 

the WAC for a brand name drug. 

Another commenter suggested that CMS 

issue new FULs within seven to ten 

days of receiving monthly AMP data. 

Response: We share the commenters’

interest in making sure that AMPs 

reported to CMS and released to the 

public are as accurate as possible. Also, 

we note that States have been notified 

of the limitations of the AMP data. We 

appreciate such concerns and have 

decided to establish a timeframe 

sufficient for initial implementation of 

the new FUL prices. CMS has posted a 

timeline for implementation of the FUL 

on its Web site (http:// 

www.cms.hhs.gov/DeficitReductionAct/ 

Downloads/ 

AMPFULTentativeTimeline.pdf). 

Comment: A few commenters noted 

that the record layout for the quarterly 

pricing report that CMS issued in 

December 2006 did not include a field 

for customary prompt pay discounts. 

The commenters asked for clarification 

as to how customary prompt pay 

discounts should be reported. 

Response: We will issue a revised 

record layout to manufacturers to 

include customary prompt pay 

discounts in accordance with this final 

rule. 


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Comment: A few commenters asked 

for operational guidance on reporting 

customary prompt pay discounts to 

CMS. Specifically, should 

manufacturers recognize discounts 

given at the time of sale of the product 

to the customer? Also, should 

manufacturers report customary prompt 

pay discounts at the 9-digit NDC, 11- 

digit NDC, or at the labeler code level? 

Should the information be provided in 

whole dollars, units, or by percentage? 

Would reporting an accrued amount by 

NDC suffice? One commenter noted that 

the statement in the proposed rule, that 

these discounts should be reported at an 

aggregate level, including discounts 

paid to all purchasers in the rebate 

period is too vague to know what level 

of detail is required. The commenter 

asked CMS to include additional 

specification in this final rule. 

Other commenters noted that it is 

difficult for a manufacturer to quantify 

the discounts taken by a purchaser, or 

deducted from payments made during 

the rebate period, as doing so requires 

the manufacturer to reconcile the 

deductions relating to customary 

prompt pay discounts and deductions 

taken for other reasons, such as 

shortages in the amount of product 

shipped. Even if the manufacturer could 

quantify such deductions, that amount 

would relate to the invoices paid rather 

than the sales made in the rebate period. 

In contrast, the commenters believed 

that manufacturers can readily quantify 

the customary prompt pay discounts 

offered during a rebate period, and ask 

that CMS clarify the reporting 

requirement accordingly. 

Response: We want this reporting 

requirement to be as simple as possible. 

Therefore, manufacturers may report 

customary prompt pay discounts offered 

during a rebate period aggregated with 

respect to all purchasers. All of the 

pricing information reported to CMS, 

including customary prompt pay 

discounts, should be reported at the 

nine-digit NDC level. We also clarified 

in § 447.510(a)(3) that manufacturers 

should report customary prompt pay 

discounts provided to all wholesalers in 

the rebate period. We will clarify this 

requirement further when we issue a 

revised record layout after publication 

of this final rule. 

Comment: One commenter asked for 

guidance on whether manufacturers 

should combine customary prompt pay 

discounts for authorized generics with 

customary prompt pay discounts for the 

brand name drug. Similarly, should 

nominal prices for authorized generics 

be combined with nominal prices for 

brand name drugs? The commenter 

believed there is no purpose to report a 

combined figure for these values. 

Response: We agree with the 

commenter. A primary manufacturer 

should not include customary prompt 

pay discounts or nominal prices for 

authorized generic drugs marketed by 

another manufacturer when reporting 

these data to CMS. 

Comment: One commenter asked for 

clarification about what format will be 

used to report nominal sales. Another 

commenter asked for clarification as to 

whether nominal price reporting should 

be at the gross or net level, with a 

preference for reporting at the net level. 

The commenter also asked CMS to 

provide an example of how nominal 

price data should be reported. 

Response: In the proposed rule, we 

stated that nominal prices shall be 

reported as an aggregate dollar amount 

and shall include all sales to the entities 

listed in § 447.508(a) of this subpart. 

The dollar value of all sales should be 

aggregated for each drug at the 9-digit 

NDC level. We will issue further 

instructions and a revised record layout 

to clarify the format manufacturers 

should use to report nominal prices 

after the publication of this final rule. 

Comment: One commenter asked 

CMS to clarify that quarterly AMP 

submissions should be based on 

quarterly sales, not the aggregate or 

average of the three monthly AMPs 

submitted during the same quarterly 

period. Other commenters urged CMS to 

allow manufacturers to calculate their 

quarterly AMPs based on the weighted 

average of monthly AMPs in the quarter 

and to clarify that manufacturers that 

select this option would not be required 

to restate their quarterly AMP, other 

than to correct an error. The 

commenters believed this approach 

would minimize discrepancies between 

monthly and quarterly AMP and would 

be administratively simple for 

manufacturers and CMS to administer. 

Response: We concur with the 

commenters who suggested we define 

quarterly AMP as the weighted average 

of monthly AMPs. Accordingly, we have 

revised the regulation text at 

§ 447.504(i)(2) to require manufacturers 

to calculate quarterly AMP as the 

weighted average of monthly AMPs in 

the quarter. We agree that this approach 

will minimize discrepancies between 

monthly and quarterly AMPs. However, 

because we do not agree that this will 

eliminate the need for manufacturers to 

correct their quarterly AMPs, we have 

retained in the final rule the 

requirement that manufacturers report 

revisions to quarterly AMPs for up to 12 

quarters from the quarter in which the 

data were due. Furthermore, 

manufacturers should restate their 

quarterly AMPs if there are subsequent 

restatements of the monthly AMPs on 

which the quarterly AMPs are based. 

In addition, we are revising the 

regulation text at § 447.510(d)(2) to 

clarify that monthly AMP should be 

calculated as the weighted average of 

prices for all the manufacturer’s package 

sizes for each covered outpatient drug 

sold by the manufacturer during a 

month. 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. 

Comment: One commenter expressed 

concern with the provision in the 

regulation that allows manufacturers to 

revise their quarterly AMPs for up to 

twelve quarters from the quarter in 

which the data were due. The 

commenter recommended that CMS 

address the ability of a payer to recoup 

erroneous payments or the ability of a 

provider to claim shortages based on 

incorrect AMPs in this final rule. 

Response: We intend to use monthly 

AMPs in the calculation of the FULs. 

Although manufacturers will be allowed 

to restate their monthly AMPs, we do 

not anticipate that there will be any 

retroactive adjustments to the FULs 

because we will calculate the FULs 

based on the current monthly AMPs and 

we do not intend to recalculate the 

FULs if the monthly AMPs are 

subsequently revised by manufacturers. 

However, we note that States may 

need to revise payments to the extent 

they base their reimbursement 

methodologies on AMPs that are 

subsequently revised by manufacturers. 

Comment: One commenter asked for 

guidance on monthly reporting of AMP 

when a product is discontinued. 

Another commenter asked CMS to 

clarify that a manufacturer’s reporting 

obligation for monthly AMP ceases with 

the product’s termination date, 

beginning with the first monthly report 

after the expiration date of the last lot 

sold. Also, States should not be able to 

set reimbursement rates based on 

expired AMPs as they do not reflect the 

acquisition price of a product that is 

currently available for purchase by the 

retail pharmacy class of trade. 

Response: Manufacturers should 

continue to report monthly AMP for 

twelve months past the product’s 

termination date. The purpose of 

reporting a terminated product is that a 

product may be billed by the pharmacy 

for up to a year past the date the drug 

was dispensed. We have clarified this 

requirement in the final rule at 

§ 447.510(d)(5). 


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In regard to the issue of State payment 

rates, we will continue to review SPAs 

to ensure that payment complies with 

section 1902(a)(30) of the Act. 

Comment: A few commenters 

suggested that CMS implement a 

process that would trigger an alert if 

there is a severe shift in AMP from one 

reporting period to another. The 

commenters suggested that the OIG be 

alerted of all AMP price shifts and the 

OIG would research and then 

recommend an updated AMP figure to 

CMS. Such a trigger mechanism would 

limit the effects of price posting lag, 

mitigate potential market manipulation, 

mitigate a possible disincentive to fill 

generics by the retail pharmacies, limit 

incorrect public data, and provide CMS 

with the most up-to-date calculation of 

AMP. One commenter noted that there 

is even greater concern regarding the 

heightened risks of error and 

inconsistency among manufacturers 

because AMP is potentially a 

reimbursement metric that will be 

calculated and reported on a monthly 

basis. Other commenters urged CMS to 

implement systems checks and 

measures to hold manufacturers 

accountable for the quality of the data 

they provide, including reporting or not 

reporting accurate data. The 

commenters requested that CMS include 

representation from State Medicaid 

Agencies in developing this system of 

checks and accountability measures. 

One commenter suggested that CMS 

compare the NDCs reported by 

manufacturers with the NDCs listed on 

databases maintained by First DataBank 

and Medispan in order to help assure 

that all NDCs and their AMPs are 

reported to CMS. 

Response: We are not implementing a 

trigger mechanism at this time; we will 

use the monthly AMPs that are 

submitted by manufacturers to calculate 

the FULs, and we will post the monthly 

and quarterly AMPs on our Web site. In 

regard to the NDCs reported by 

manufacturers, we will address these 

ongoing operational issues at a later 

time. 

Comment: One commenter suggested 

that CMS allow First DataBank, the 

pricing source used by most States, to 

have access to the AMP data 

electronically. This would centralize 

administrative tasks and allow efficient 

and cost-effective integration of AMPs 

into State data warehouses. The 

commenter also suggested that the AMP 

files include specific data elements to 

streamline importing AMPs into State 

databases. Those data elements are the 

11-digit NDC, brand name, strength, 

dose form, metric billing unit (for 

example, each, milliliter, or gram), 

termination date, metric unit AMP, 

AMP begin date, AMP end date, and file 

reporting date. 

Response: The monthly and quarterly 

AMPs will be on our Web site, so we do 

not see a need to provide them 

separately to First DataBank. In regard 

to the specific data elements, we expect 

to address these concerns in operational 

guidance after this final rule is 

published. 

Comment: A few commenters noted 

that CMS’ Drug Data Reporting System 

(DDR) requires that the employee 

posting submissions to provide his or 

her Social Security number (SSN). The 

commenters recommended that access 

to the DDR be revised to include the 

corporation’s tax ID number (TIN) or 

SSN associated with the corporation 

instead of the individual’s SSN. One of 

the commenters urged CMS to destroy 

records of employee SSNs once a 

company has been enrolled under its 

TIN and notify the technical contacts of 

the destruction. 

Response: This issue is not addressed 

in the proposed rule; therefore, we 

cannot consider this comment as we 

consider revisions to be included in the 

final rule. We intend to address this 

issue in the future in guidance or 

regulations, as appropriate. 

Comment: One commenter suggested 

that CMS revise the DDR system to 

allow manufacturers to submit a text 

document along with their AMP and 

best price reports. 

Response: We are not revising the 

DDR system to permit manufacturers to 

submit a text document at this time. The 

DDR system was specifically designed 

to streamline the collection of product 

and pricing data from manufacturers. 

We believe that any alterations to the 

system at this time may hamper its 

functionality. Manufacturers that wish 

to submit documentation regarding their 

AMP and best price reports may do so 

outside the DDR system. 

Comment: One commenter asked for 

guidance on how manufacturers may 

report pricing corrections on the record 

layout. 

Response: We will clarify how 

manufacturers should report pricing 

corrections in future operational 

instructions. 

Comment: A few commenters asked 

for guidance on how to handle zero or 

negative monthly AMPs. The 

commenters noted that for quarterly 

reports, CMS has instructed 

manufacturers to use the last quarter’s 

positive value when the current quarter 

is a zero or negative value. 

Response: Manufacturers should 

report the most recent positive AMP 

value. This is consistent with our past 

policy and we believe it best represents 

the AMP for each drug. This will assure 

that manufacturers pay a rebate and will 

prevent offsets due to a negative AMP. 

Comment: A few commenters asked 

whether product reports must be filed 

monthly. 

Response: As set forth in the national 

rebate agreement, initial product 

information must be submitted within 

30 days after the first month in which 

the drug is marketed in order for the 

program to identify the relevant drug 

products covered by the program. Initial 

product data must be submitted once 

before any prices can be reported. 

Comment: One commenter suggested 

that we require manufacturers to report 

AMP and best price information using 

NCPDP standard units, and that CMS 

report the FUL using the same. 

Response: NCPDP standard units are 

based on package pricing. The AMP and 

best price information that 

manufacturers report is based on unit 

pricing, without regard to package size; 

therefore, we do not see a basis for using 

the NCPDP units given the Medicaid 

statute reporting requirements. 

Monthly AMP 

Comment: Several commenters 

focused on the issue of revising monthly 

AMPs. A few commenters agreed with 

the position we stated in the proposed 

rule, that manufacturers should not be 

permitted to revise their monthly AMPs. 

Otherwise, the commenters noted that 

the revised monthly AMPs could be 

used as a basis for reducing 

reimbursements already paid for the 

drugs. Another commenter urged CMS 

to allow manufacturers to revise their 

monthly AMPs for up to twelve quarters 

after initially submitted, as is currently 

allowed for quarterly AMP data. One 

commenter noted that a prohibition on 

restatements of monthly AMPs could 

have financial consequences for 

manufacturers, pharmacies, physicians 

and outpatient hospital departments. 

Other commenters expressed concern 

with allowing manufacturers to revise 

their monthly AMPs for up to 30 days 

after each month. The commenters 

urged CMS to enforce the prohibition 

against adjusting monthly AMP beyond 

the 30-day period. 

Response: After consideration of these 

comments, we have decided to allow 

manufacturers to revise their monthly 

AMPs for a period not to exceed 36 

months from the month in which the 

data were due and have revised the 

regulation at § 447.510(d)(3). We 

reached this decision in part because we 

want to minimize the disparities 

between monthly and quarterly AMPs. 

If a manufacturer discovers an error one 


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year after the AMP is reported, we want 

the correction to be reflected in the 

monthly and quarterly AMPs. 

We also recognize that because we are 

using monthly AMP in the calculation 

of the FULs, it would be impractical and 

burdensome for States and pharmacies 

if we revised the FULs based on revised 

monthly AMPs for up to three years. 

Furthermore, we note in § 447.510(d)(2) 

that manufacturers are required to 

submit monthly AMPs based on the best 

data available and to certify the 

accuracy of those submissions. As a 

result, we do not expect that we will 

need to revise the FULs. We will 

consider revisiting this issue if monthly 

AMP submissions become problematic. 

Comment: One commenter noted that 

in our December 15, 2006 guidance to 

manufacturers, CMS stated that 

‘‘adjustments, such as those resulting 

from sales data, received after the 

reporting period ends, should be 

reflected in the next monthly AMP 

submission.’’ The commenter noted that 

the addition of data attributable to a 

previous month’s transactions into a 

later month’s AMP could artificially 

inflate or deflate the later month’s AMP. 

Response: Our intent in the December 

2006 release was to advise 

manufacturers that they should submit 

a revised monthly AMP in the next 

monthly AMP submission if they 

receive sales data after the reporting 

period ends. In this final rule, as noted 

above, we are permitting manufacturers 

to make revisions to monthly AMP for 

up to 36 months after the month in 

which the data were due. Therefore, 

data attributable to a previous month’s 

transactions should not result in the 

artificial inflation or deflation of a later 

month’s AMP. We further believe this 

concern will be addressed by requiring 

manufacturers to estimate their lagged 

price concessions, as discussed in detail 

below. 

Comment: One commenter asked 

whether it is acceptable for 

manufacturers to run monthly reports of 

sales and discounts to be included in 

the AMP calculations based on the 

‘‘post’’ date of chargebacks, which 

indicates when a chargeback has been 

‘‘paid.’’

Response: We will continue to allow 

manufacturers the flexibility to count 

chargebacks based on their GAAPs, 

provided they use one methodology 

uniformly. 

Comment: One commenter asked 

what procedure CMS will put in place 

if a manufacturer believes the monthly 

AMP on CMS’ Web site is incorrect. 

Response: We will establish a 

procedure to address this and will issue 

operational guidance after publication 

of this final rule. 

Comment: One commenter suggested 

that CMS address the requirements for 

monthly AMPs under Determination of 

AMP, § 447.504, rather than addressing 

monthly AMP under Requirements for 

Manufacturers, § 447.510. 

Response: We appreciate this 

comment but have decided to address 

the requirements for monthly AMP 

under § 447.510. 

Comment: One commenter 

recommended that we include the 11- 

digit NDC on the monthly AMP file that 

we distribute to States. 

Response: The 11-digit NDC will be 

included on the monthly file distributed 

to States. 

Comment: One commenter asked 

CMS to consider defining monthly and 

quarterly AMPs differently. Another 

commenter agreed with CMS’ proposal 

that monthly AMP be defined the same 

as quarterly AMP, except the monthly 

AMP would represent data for one 

calendar month. 

Response: For reasons noted in the 

preamble to the proposed rule, we 

continue to believe that monthly and 

quarterly AMPs should be defined the 

same. 

Lagged Price Concessions 

In the proposed rule, we proposed 

allowing manufacturers to rely on 

estimates regarding the impact of their 

end-of-quarter rebates or other price 

concessions for purposes of calculating 

monthly AMP. We suggested a 12- 

month rolling average of all lagged price 

concessions for purposes of calculating 

monthly and quarterly AMPs and 

requested comments on the appropriate 

methodology for calculating monthly 

AMP. 

Comment: Many commenters favored 

allowing manufacturers the flexibility to 

estimate lagged price concessions for 

monthly and quarterly AMPs. Many of 

these commenters expressed a 

preference for using a 12-month rolling 

average. Several commenters pointed 

out that a 12-month smoothing 

methodology for AMP would mirror the 

smoothing methodology CMS 

established for ASP; therefore, it would 

be easier for manufacturers to 

implement, would reduce the risk of 

errors, and would minimize the 

volatility in the data. One commenter 

noted that a 12-month rolling average is 

an auditable approach, but there are 

other, more credible approaches that 

would result in potentially more 

accurate AMPs (but the commenter did 

not elaborate on what those approaches 

are). Another commenter urged CMS to 

mandate that all manufacturers use a 

rolling 12-month average for reporting 

monthly AMP, but require actual 

discounts to be used in reporting the 

quarterly best price. Some commenters 

suggested manufacturers should be 

allowed to employ a variety of 

smoothing methodologies to calculate 

accurate quarterly and monthly AMPs, 

while one suggested that manufacturers 

be allowed to choose a preferred 

method, provided that the method is 

used consistently. One commenter 

asked that manufacturers be given the 

option to estimate lagged price 

concessions for quarterly AMP through 

a smoothing methodology or an 

estimation method based on accruals 

and sales experience. One commenter 

asked us to clarify that manufacturers 

can estimate all lagged rebates or 

concessions regardless of whether they 

are quarterly or on a different period. 

Other commenters asked us to specify 

whether manufacturers should calculate 

the 12-month rolling average using the 

date the rebate is earned versus the date 

the rebate is paid. 

Commenters suggested a modification 

of the 12-month rolling percentage 

methodology. They suggested requiring 

manufacturers to look to the four full 

calendar quarters before the reporting 

period to calculate the rolling 12-month 

percentage, which could then be 

applied to all three monthly AMPs and 

the quarterly AMP. As an alternative, 

chargebacks and rebates could be 

singled out for lagged treatment on a 

routine basis. In addition, the 

commenters urged CMS to provide 

examples showing how the 

methodology should be applied in both 

the monthly and the quarterly context, 

taking into account the proper treatment 

of the various types of bundled sales. 

Other commenters recommended that 

manufacturers be permitted to use a 

four-quarter rolling average of rebates to 

sales, and apply that percentage to 

monthly sales. The commenters believe 

that using a four-quarter rolling average 

for smoothing is more operationally 

feasible than a 12-month rolling average 

because rebates and other price 

concessions are typically invoiced by 

customers and paid by the manufacturer 

on a quarterly basis. The commenters 

also asked that CMS allow 

manufacturers to estimate excluded 

sales for the month using a four-quarter 

rolling average based on gross sales 

units divided by excludable AMP units. 

One commenter noted that end-ofyear rebates or chargebacks should be 

excluded from the AMP calculation in 

order to avoid significant 12 to 18- 

month revisions to AMP data. Such 

revisions would render AMP data 

unusable for reimbursement purposes. 


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An alternative would be to require 

manufacturers to estimate their end-ofyear settlements at minimum discount 

levels. 

Response: We have decided to require 

manufacturers to use a 12-month rolling 

average to estimate the value of lagged 

price concessions in their calculation of 

monthly and quarterly AMPs and have 

added this requirement to the regulation 

at § 447.510(d)(2). We believe this 

methodology will ensure the greatest 

stability and accuracy for AMP data. 

Comment: One commenter noted that 

if CMS changes its position with regard 

to the treatment of Medicaid units and 

rebates to Federal programs such as 

Medicare Part D, that CMS should 

consider allowing discretionary 

smoothing of those units and removal of 

a corresponding value from gross sales 

dollars. 

Response: We are not changing our 

position with regard to the treatment of 

Medicaid units and rebates to Federal 

programs such as Medicare Part D. 

Comment: One commenter asked 

CMS to clarify what we consider to be 

‘‘lagged price concessions.’’ Another 

commenter urged us to only allow 

manufacturers to estimate the value of 

price concessions between 

manufacturers and true wholesalers. 

Response: We consider lagged price 

concessions to be any discounts or 

rebates that are realized after the sale of 

the drug, except for customary prompt 

pay discounts. Lagged price concessions 

are not limited to discounts or rebates 

offered to wholesalers. Accordingly, we 

have added a definition of lagged price 

concessions to the regulation text at 

§ 447.502. 

Comment: A few commenters asked 

CMS to clarify whether the current 

month should be included in the 12- 

month rolling average. 

Response: Manufacturers should 

include the current month in calculating 

the 12-month rolling average they use to 

determine the value of lagged price 

concessions. 

Comment: One commenter asked that 

manufacturers who estimate lagged 

price concessions be exempt from the 

requirement to report revised quarterly 

AMPs in § 447.510(b). 

Response: The purpose of requiring 

manufacturers to report revised 

quarterly AMPs in § 447.510(b) is to 

ensure the Medicaid rebate amounts are 

as accurate as possible. In this final rule, 

we are requiring manufacturers to 

estimate the value of lagged price 

concessions using a 12-month rolling 

average; however, we do not expect this 

requirement will eliminate the need for 

manufacturers to correct their quarterly 

AMP calculations for other reasons, 

such as errors in the initial AMP 

calculation. Therefore, we are not 

creating a broad exemption from this 

requirement. Instead, we have clarified 

in this final rule at § 447.510(b)(2) that 

manufacturers should report revised 

AMPs except when the revision would 

be solely as a result of data pertaining 

to lagged price concessions. 

Comment: One commenter asked that 

smoothing not be required for the first 

partial year of sales for new products 

because the base date AMP can be 

skewed by non-recurring post-launch 

start-up payments. 

Response: We disagree with the 

commenter’s suggestion about 

estimating lagged price concessions 

during the first partial year of sales for 

new products. We believe such an 

exception would run counter to the 

intent of the DRA, which is to provide 

for increased transparency in AMP 

pricing. 

Comment: One commenter expressed 

concern that in light of the increasing 

vertical integration of the pharmacy 

market, manufacturers could use the 

monthly and quarterly ‘‘dual reporting’’

timeframes to manipulate AMP, thereby 

manipulating the market. This concern 

stems from the ability of manufacturers 

to restate their quarterly AMPs for 

twelve quarters from the quarter in 

which the data were due, as well as the 

ability of manufacturers to estimate 

their end-of-quarter discounts and 

allocate these discounts in the monthly 

AMPs reported to CMS throughout the 

rebate period. The commenter was also 

concerned that this situation could lead 

to a loss of price transparency. 

Response: We disagree with the 

commenter that the possibility exists for 

a lack of price transparency. Beginning 

with the data for January 2007, we 

interpret the law to provide for posting 

of monthly and quarterly AMPs on our 

Web site, which allows full 

transparency for monthly and quarterly 

AMPs. The intent behind the decision to 

require manufacturers to estimate their 

end-of-quarter discounts was to 

minimize volatility in the monthly AMP 

data, which is used to set the FUL and 

which States may consider in setting 

their pharmacy reimbursement rates. 

Without this requirement, we anticipate 

there would be significant volatility in 

the data from month to month, thereby 

eroding its usefulness. 

The provision requiring 

manufacturers to restate their quarterly 

AMPs for a period not to exceed twelve 

quarters from when the data were due 

became effective on October 1, 2003. 

Prior to that time, the national rebate 

agreement did not provide a specific 

period for recalculations. As noted in 

the final rule with comment period 

published on August 29, 2003 (68 FR 

51912) we believe this provision helps 

streamline the administration of the 

Medicaid Drug Rebate Program. 

Pricing Lag 

Comment: A few commenters 

expressed concern with the lag time 

between when manufacturers calculate 

and report their monthly AMPs to CMS 

and when those AMPs are made public. 

They noted that the process could result 

in data being up to 90 days old and 

asked CMS to provide guidance to 

States and other users of AMP on the 

proper method to address any issues 

resulting from this lag time. One 

commenter noted that this problem 

highlights the challenges CMS faces in 

implementing AMP’s new dual purpose 

of serving as a measure for quarterly 

Medicaid rebates and potentially as a 

reimbursement benchmark. Another 

commenter speculated that the lag time 

would likely result in brand name drug 

prices being higher than AMP, with the 

result that pharmacies will be 

underpaid if they are reimbursed based 

on AMP. 

Response: While we will make every 

reasonable effort to publish this data as 

soon as possible after we receive it, we 

are aware that the monthly AMP data 

we make available to the public will 

likely be 45–60 days old, given the 

timeframes in the reporting 

requirements. While we will make these 

limitations known to the States and 

other parties, it will generally be up to 

them to determine how to best use this 

data. 

Base Date AMP 

Comment: Many commenters 

expressed support for allowing, but not 

requiring manufacturers to recalculate 

their base date AMPs. Noting the 

difficulty in performing a calculation 

using data that may be more than ten 

years old, several of these commenters 

further suggested that CMS permit 

manufacturers to estimate their 

recalculated base date AMPs by relying 

on reasonable assumptions, 

extrapolation or other accepted methods 

of estimation where partial data are 

available. One commenter suggested 

that CMS allow manufacturers to use a 

ratio derived from a comparison to the 

current AMP and the AMP calculated in 

accordance with this final rule. Another 

commenter asked CMS to allow 

manufacturers to use an alternate 

methodology to restate base date AMP 

when the original source data or 

systems are not available, such as a 

decrease of two percent. Several 

commenters urged CMS to clarify that 


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manufacturers have discretion to 

recalculate their base date AMPs on a 

product-by-product basis. 

Response: Our intent in permitting 

manufacturers to report a revised base 

date AMP is to allow all manufacturers 

the opportunity to recalculate their base 

date AMPs in accordance with the 

definition of AMP in this final rule. We 

want this requirement to be minimally 

burdensome to manufacturers. 

Therefore, we have added a provision to 

the regulation at § 447.510(c)(2)(ii) to 

allow manufacturers to choose to 

recalculate their base date AMPs on a 

product-by-product basis. As with other 

pricing calculations, in the absence of 

specific guidance, manufacturers may 

make reasonable assumptions consistent 

with the statute, Federal regulations, 

and customary business practices. 

However, because the base date AMPs 

will be used to determine all future 

rebate calculations, we are not 

permitting manufacturers to rely solely 

on estimates or reasonable assumptions 

for calculating a revised base data AMP. 

Manufacturers must use actual data to 

calculate revised base date AMPs. We 

have clarified this requirement in the 

regulation text at § 447.510(c)(iii). 

Comment: A few commenters noted 

that the preamble and regulation text 

appear to permit recalculation of base 

date AMP only in accordance with 

§ 447.504(e), the provision defining 

retail pharmacy class of trade. The 

commenters asked CMS to clarify that 

manufacturers are permitted to 

recalculate base date AMP in light of all 

of the revisions and clarifications to the 

definition of AMP. 

Response: We have clarified the 

regulatory text at § 447.510(c)(2)(i) such 

that a manufacturer’s recalculation of 

the base date AMP should only reflect 

the revisions to AMP as provided for in 

§ 447.504 of this subpart, rather than the 

provisions of § 447.504(e) of this 

subpart. 

Comment: A few commenters 

requested that CMS consider a longer 

implementation timeframe for resetting 

base date AMP than two quarters 

following release of the final rule. One 

commenter suggested that CMS 

establish a date certain within which 

manufacturers must submit revised base 

date AMPs, but require that all 

manufacturers who choose to 

recalculate must refile their AMPs as of 

the effective date of the final rule. The 

commenter noted that given the 

importance of the base date AMP in 

determining a manufacturer’s rebate 

liability, any recalculation should be 

undertaken in a manner that allows 

adequate time for thorough review and 

analysis. Another commenter 

specifically recommended that CMS 

allow manufacturers to restate their base 

date AMPs during the first four quarters 

after the publication of this final rule. 

One commenter suggested that revised 

base date AMPs can be reported during 

the third full calendar quarter following 

the publication of the final rule. 

Response: We concur with the 

commenters about importance of an 

accurate base date AMP in the 

calculation of the Medicaid rebate 

amount. Therefore, in light of the 

comments we received, we will permit 

manufacturers to submit a revised base 

date AMP within the first four calendar 

quarters following publication of this 

final rule at § 447.510(c)(1). We expect 

that this extended timeframe will allow 

manufacturers to perform the necessary 

research and analysis regarding the 

decision to revise their base date AMPs 

in accordance with the definition of 

AMP in § 447.504. 

Comment: One commenter asked 

CMS to explain how the revised base 

date AMP would be used for purposes 

of calculation of the Medicaid rebate 

amount. 

Response: The revised base date AMP 

will be incorporated in the formula that 

CMS uses to calculate the Medicaid 

rebate on a prospective basis, beginning 

with the quarter in which the revised 

base date AMP is submitted. It will not 

be used to revise the rebate for prior 

periods. 

Comment: Commenters asked CMS to 

allow manufacturers to restate base date 

AMPs back to January 1, 2007 to 

account for the impact caused by the 

implementation of the customary 

prompt pay discount and authorized 

generic provisions of the DRA that 

became effective on that date. 

Response: In this final rule, we are 

permitting manufacturers to restate their 

base date AMPs in accordance with all 

of the clarifications to the determination 

of AMP. We believe it would be 

impractical to allow base date AMPs to 

be restated twice because, in accordance 

with the effective date of this rule, the 

restated base date AMPs will be used on 

a prospective basis. We don’t see the 

administrative practicality of delaying 

restatements of base date AMP longer 

than four quarters after this final rule is 

published. 

Comment: A few commenters asked 

CMS to clarify which quarter’s AMP 

should be submitted for the base date 

AMP requirement. 

Response: Manufacturers should 

submit the AMP for the same calendar 

quarter that is currently used as the base 

date AMP for each of its active NDCs. 

Comment: One commenter asked for 

clarification as to how base date AMP is 

to be reported. The commenter noted 

that the record layout CMS issued in 

December 2006 for the quarterly report 

does not include a field for base date 

AMP. 

Response: We will issue a revised 

record layout to manufacturers and will 

clarify how base date AMP is to be 

submitted after publication of this final 

rule. 

Certification Requirement 

Comment: Commenters noted several 

difficulties with complying with the 

requirement that the CEO or the CFO 

certify the pricing reports submitted to 

CMS. First, it may be difficult to obtain 

signatures from senior executives on a 

routine basis, and they may not be the 

best individuals to attest to the accuracy 

of the reporting to CMS. Further, these 

titles do not fit into the organizational 

structure of every manufacturer. One 

commenter suggested that CMS clarify 

that certification can be done by an 

individual with authority and 

accountability equivalent to an 

individual holding such a title. Another 

commenter suggested that the 

certification could be done by an 

individual who reports indirectly to the 

CEO or CFO. One commenter suggested 

that the individual designated as being 

responsible for reporting of pricing 

information be the one accountable for 

certification purposes. Commenters 

suggested that a quarterly certification 

could be applied to the quarterly and 

monthly data submissions; otherwise, 

the timeliness of the monthly data 

submissions would be compromised. 

Another commenter asked CMS to 

clarify whether an electronic signature 

or an e-mail will suffice in complying 

with this requirement. 

Response: We recognize that 

manufacturers anticipate that it will be 

challenging to obtain signatures from a 

CEO or CFO on a monthly basis for 

purposes of complying with the 

certification requirements. We also 

recognize that those titles may not apply 

to the management structure of every 

company. Therefore, we are revising the 

regulation at § 447.510(e) to specify that 

the certification may be made by the 

CEO, the CFO, or an individual with 

another title who has authority 

equivalent to one of those positions. In 

addition, the certification may be made 

by an individual with the authority 

directly delegated to perform the 

certification on behalf of that 

individual. 

In light of the fact that we are 

requiring manufacturers to submit data 

to CMS in an electronic format, we will 

provide that the certification be made 

electronically. In addition, the 


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certification must be made with every 

data submission to CMS, regardless of 

whether submission is for monthly data 

or quarterly data. We will issue further 

operational guidance on the mechanism 

manufacturers must use to certify their 

data after publication of this final rule. 

Comment: A few commenters noted 

that the certification language for AMP 

should not be identical to the 

certification language for ASP. The 

commenters specifically recommended 

that the certification language for AMP 

include a knowledge qualifier until the 

AMP calculation standards are no 

longer in a state of flux. One commenter 

suggested that the certification language 

should be expressly qualified and 

should read as follows, ‘‘To the best of 

my knowledge and belief, the reported 

average manufacturer prices and best 

prices were calculated accurately and 

all information and statements made in 

this submission are true, complete, and 

current.’’ Another commenter asked 

CMS to clarify the certification 

requirements. 

Response: We appreciate the 

commenters’ suggestions regarding the 

certification language. As noted above, 

we will issue further guidance or 

regulation, as may be necessary, on the 

certification requirements after 

publication of this final rule. 

Comment: One commenter noted 

serious reservations regarding the 

certification of data from other 

manufacturers or data submitted based 

on the company’s best estimates 

regarding price concessions that may be 

redeemed in any given month. The 

commenter also asked for further 

elaboration as to how the certification 

requirements would be enforced. 

Response: As of the effective date of 

this rule, we will not accept data from 

a manufacturer unless the certification 

requirement has been met. As discussed 

above, we are not requiring brand 

manufacturers to report sales by generic 

manufacturers for authorized generic 

drugs. We believe this decision will 

alleviate concerns regarding 

certification of data from other 

manufacturers. 

Recordkeeping 

Comment: One commenter asked 

CMS to clarify what customary prompt 

pay information is needed for retention 

under the recordkeeping requirements. 

Response: These recordkeeping 

requirements are the same as for the rest 

of the manufacturer’s data for 

computing the amount of the Medicaid 

drug rebate. As we noted in the 

proposed regulations text at 

§ 447.510(f)(1), a manufacturer must 

retain the customary prompt pay data 

and any other materials from which the 

customary prompt pay information is 

derived, including a record of any 

assumptions made in the calculations. 

Comment: One commenter suggested 

that CMS reduce the recordkeeping 

timeframe from ten years to seven years. 

Response: CMS finalized the ten-year 

recordkeeping requirement for 

manufacturers in a final rule published 

on November 26, 2004 (69 FR 68815). In 

that rule, we provided a thorough 

rationale for requiring manufacturers to 

retain their pricing data for a period of 

ten years. We have not received 

information to support a lesser period; 

therefore, we are retaining the ten-year 

recordkeeping requirement at 

§ 447.510(f). 

Recalculations 

Comment: One commenter asked 

CMS to specify whether manufacturers 

need to obtain CMS’ approval of 

methodology changes where those 

changes are being made to comply with 

provisions of this final rule. Other 

commenters asked CMS to describe in 

this final rule the circumstances in 

which we would either expect or permit 

manufacturers to recalculate their 

AMPs. In particular, one commenter 

asked for guidance regarding whether, 

in light of the need to maximize stability 

in reimbursement metrics, restatements 

remain an appropriate means for 

correcting subsequently discovered 

AMP calculation errors. Another 

commenter suggested that the timeframe 

for restatements be shortened from 

twelve quarters to four quarters. One 

commenter asked CMS to permit, but 

not require manufacturers to restate 

their quarterly AMPs when actual data 

become available. 

Response: Manufacturers do not need 

to obtain CMS’ approval of methodology 

changes where those changes are being 

made to comply with provisions of this 

final rule. In regard to all other AMP 

restatements, manufacturers should 

submit their written requests to CMS 

and wait for CMS’ response before 

submitting revised AMPs for 

retrospective restatements. For 

prospective restatements, manufacturers 

should submit their written requests to 

CMS, but they are not required to wait 

for CMS’ approval to submit revised 

AMPs. We note that requirements 

regarding timeframes for recalculations 

at §§ 447.510(b) and (d)(3) apply to all 

restatements. Manufacturers should 

restate their quarterly AMPs if there are 

subsequent restatements of the monthly 

AMPs on which the quarterly AMPs are 

based. 

We disagree with the suggestion that 

the timeframe for restatements be 

shortened from twelve quarters to four 

quarters. Quarterly data can be revised 

for up to twelve quarters after the 

quarter in which the data were due. 

Similarly, monthly AMP can be revised 

for up to 36 months after the month in 

which the data were due. 

Drugs: Aggregate Upper Limits of 

Payment (§ 447.512) 

Comment: One commenter asked that 

CMS clarify proposed § 447.512 to allow 

a physician to certify through electronic 

means that a brand is medically 

necessary. Another commenter stated 

that CMS should reconsider the 

requirement that a physician must 

certify in his or her own handwriting 

that a drug is medically necessary in 

order to indicate that a specific brand 

drug is to be dispensed to a patient, as 

this is inconsistent with State and 

Federal efforts to transition to eprescribing and other health 

information technology innovations. 

Response: We appreciate these 

comments and have revised the final 

regulation at § 447.512(c)(1) to permit 

certification by an electronic alternative 

approved by the Secretary. CMS intends 

to address electronic certification in 

future program guidance or regulations, 

as appropriate. 

Upper Limits for Multiple Source Drugs 

(§ 447.514) 

Comment: Several commenters 

support the agency’s goal of paying 

appropriately for generic drugs. One 

commenter raised concerns regarding 

the pre-DRA FUL system including 

infrequent adjustments to the FULs, 

which did not necessarily reflect market 

trends. 

Response: We agree. Numerous OIG 

reports found that the published prices 

used to set FUL amounts often greatly 

exceeded prices available in the 

marketplace. As noted in those reports, 

the pre-DRA FUL amounts often greatly 

exceeded pharmacy acquisition costs, 

and thus, could have unnecessarily 

increased costs to the State and Federal 

Governments. 

Implementation of FULs 

Comment: Another commenter stated 

that CMS should suspend 

implementation of the FULs until States 

are able to adopt the changes necessary 

to ensure that pharmacies are properly 

compensated for providing generic 

drugs; that is, until States have 

evaluated their dispensing fees. 

Response: We disagree. The DRA 

changed the formula used to establish 

the FUL. Effective January 1, 2007, the 

DRA required CMS to calculate the FUL 

at 250 percent of the AMP (computed 


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without regard to customary prompt pay 

discounts extended to wholesalers) for 

the least costly therapeutic equivalent 

drug. The States have been advised that 

they should evaluate the reasonableness 

of their dispensing fees in light of the 

changes in payment methodology for 

multiple source drugs under the DRA. 

Comment: One commenter proposed 

that the effective date of the new FUL 

should be 90 days after release of the 

new source file to provide time for CMS 

to issue guidance to States regarding the 

source of the revised FULs, including 

the file parameters, in order to allow 

advance programming to take place. 

Another commenter said that at least a 

60-day timeframe should be allowed for 

the implementation of FULs. 

Response: We appreciate such 

concerns and have decided to establish 

a timeframe sufficient for initial 

implementation of the new FUL prices. 

CMS has posted a timeline for 

implementation of the FUL on its Web 

site (http://www.cms.hhs.gov/ 

DeficitReductionAct/Downloads/ 

AMPFULTentativeTimeline.pdf). 

Comment: One commenter requested 

CMS to release its best estimate of FULs 

based on AMPs in order to analyze their 

impact. One commenter also requested 

an extension of the formal comment 

period to the proposed rule to analyze 

the data. 

Response: We appreciate the 

comment. CMS has stated that the new 

FULs would not be issued until the 

AMPs for 2007, which reflect the 

exclusion of customary prompt pay 

discounts and authorized generic drugs, 

are available and processed. CMS is 

required by the DRA to publish a 

regulation by July 1, 2007. Given this 

deadline, we do not feel that an 

extension or complete reopening of the 

formal comment period is appropriate. 

Comment: One commenter stated that 

the FULs published data should be in a 

format that allows importing data into 

Excel. One commenter also stated that 

all unique and identifiable data 

elements should be included on the file; 

that is, name, strength, dosage, billing 

unit, FUL implementation date, NDC, 

and AMP file reporting date used to 

establish the FUL. 

Response: CMS will publicly post the 

FUL data in a format similar to the 

current Web site posting of FUL 

reimbursement prices. We expect that 

further specifications will be provided 

in future program instructions. 

Comment: One commenter stated that 

the final rule should state our schedule 

of FULs updates. 

Response: CMS expects to publish the 

updated FULs reimbursement prices on 

a monthly basis consistent with our 

understanding of congressional intent to 

keep FUL reimbursement in line with 

market pricing trends. 

Comment: One commenter stated that 

the FUL data on the CMS website 

should indicate the effective date. 

Another commenter stated that the 

identity of the manufacturer whose 

product is used to set the FUL should 

be made public to provide a checks-andbalance system whereby the pharmacy 

community could supply feedback on 

the availability of the drug product. 

Response: CMS expects to publish the 

AMP data when it finds them 

sufficiently complete and accurate. The 

AMP data will have corresponding 

NDCs; thus, specific drug product 

prices, as well as the manufacturer, will 

be available to the public and 

transparent. CMS expects that the FULs 

will be established monthly for all 

groups and will be in effect until the 

next monthly update. 

Comment: A commenter questioned 

whether CMS will calculate and 

disseminate the FUL list, or if the 

individual States will be responsible for 

calculating the FUL based on the 

published AMP data. The commenter 

proposes that CMS post the FUL. 

Response: We agree. We will calculate 

the FUL based on the criteria 

established in the final rule, and post 

the FULs on our website. 

Comment: One commenter expressed 

concern that it will be difficult for CMS 

to establish an accurate FUL if all AMPs 

are not submitted monthly on a timely 

basis by manufacturers. 

Response: Manufacturers are required 

to submit monthly AMP data to CMS 

not later than 30 days after the last day 

of the month. Manufacturers must 

comply with this reporting requirement 

to continue participation in the 

Medicaid Drug Rebate Program and 

avoid potential penalties, as set forth in 

section 1927(b)(3)(C) of the Act. CMS 

will monitor compliance rates from 

manufacturers and initiate action or 

make referrals to the OIG, as may be 

necessary, for non-compliance of data 

submission. 

Comment: One commenter expressed 

concern that updating the FUL on a 

monthly basis could increase 

administrative burden on States and 

make planning of inventory levels for 

pharmacies difficult. 

Response: Timely updating of FULs is 

necessary in order that States and the 

Federal Government receive the cost 

savings benefits of market changes. This 

regulation encourages pharmacy 

providers to buy the lowest priced 

generic available in the market, as may 

be appropriate, to ensure to bill for 

drugs at or below the FUL price. 

Comment: Another commenter 

supported the provision in law that 

CMS determine whether a drug product 

should have a FUL within seven days 

after receiving notification from the RPS 

contractor to assure the FULs are 

updated in a timely manner. 

Response: We agree. CMS is required 

to determine if a drug is eligible for a 

FUL within seven days of notification 

by the RPS contractor. CMS intends to 

make additions to the FUL list in a 

timely manner to achieve cost savings 

for States and the Federal Government. 

Comment: Several commenters stated 

that additions or changes to the FUL 

should be disseminated to the larger 

pharmacy community for their input on 

availability and pricing before releasing 

as final. 

Response: We disagree. The 250 

percent markup of the lowest priced 

drug with respect to the FUL 

calculation, and our outlier policy 

which assures that two drugs are 

available at or below the FUL price 

should assure the availability of those 

drugs at or below the FUL price for the 

pharmacists. 

Comment: Several commenters stated 

that CMS should provide a timely 

appeals mechanism, to allow providers 

and States an opportunity to seek 

removal or modification of a FUL which 

is not consistent with changing market 

conditions. One commenter said that 

severe price shifts and significant issues 

associated with pricing lags could be 

effectively addressed by a 

redetermination process similar to the 

exceptions and appeals process under 

Medicare Part D, including a toll-free 

number which would be monitored by 

CMS. The commenter further suggested 

that the OIG or other Federal agency 

could review appeals and recommend 

an updated AMP figure to CMS. 

Another commenter stated that changes 

to the FUL list should be allowed on a 

State-by-State basis to reflect 

availability. One commenter stated that 

CMS should be vigilant in monitoring 

the marketplace for signs of negative 

effects of using AMP as a basis for FULs, 

and be prepared to alert Congress of the 

negative effects and recommend any 

changes to ameliorate them. 

Response: We believe that basing 

reimbursement on actual sales data such 

as AMP will help capture transparent 

pricing data to assure that the Federal 

Government and State Medicaid 

programs are paying appropriately for 

generic drugs. We do not agree that an 

appeal or redetermination process is 

necessary or would be useful because 

AMPs will be updated on a monthly 

basis to reflect changes in prices. We 

also note that the 250 percent markup 


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of the lowest priced NDC used to 

compute the FUL, and the outlier policy 

established in this regulation, will help 

to ensure that two or more drugs can be 

purchased at or below the FUL. To 

address the need for a State variation in 

the FUL, we note that States may pay 

above the FUL for an individual drug, 

given that the FUL is designed as an 

‘‘aggregate’’ limit. 

Comment: Many commenters urged 

that the implementation of the new 

FULs based on the DRA provisions be 

permanently suspended because the 

new generic reimbursement 

methodology of 250 percent of AMP 

will be below acquisition cost. One 

commenter who analyzed AMP and 

drug acquisition cost data said that the 

proposed FULs poorly estimate 

pharmacy acquisition costs. 

Response: We disagree. The DRA 

requires that, effective January 1, 2007, 

CMS calculate the FUL at 250 percent 

of the AMP (computed without regard to 

customary prompt pay discounts 

extended to wholesalers) for the least 

costly therapeutic equivalent drug. The 

250 percent markup of the lowest priced 

drug, along with our outlier policy will 

assure the availability of drugs at or 

below the FUL price for pharmacies. 

Comment: One commenter stated that 

a pharmacy’s acquisition cost may 

exceed the FUL reimbursement for a 

particular drug because wholesalers sell 

to independents under contractual 

agreements which are not readily 

transferable, and independent retail 

pharmacies are not able to ‘‘cherry pick’’

between wholesalers on a product-byproduct basis. 

Response: We believe that the FULs 

will be sufficient to allow all 

pharmacies to purchase drugs at or 

below the FUL price. If a State finds it 

necessary to pay a higher price than the 

FUL price, it can do so as long as it 

remains within the aggregate limit. 

Comment: Several commenters stated 

that AMP was never meant to be a 

reimbursement metric. 

Response: The law requires the FULs 

to be based on AMP and permits States 

to use AMP in their reimbursement 

methodologies. We believe that basing 

reimbursement, in part, on AMPs will 

help capture transparent pricing data to 

assure that the Federal Government and 

State Medicaid programs are paying 

appropriately for generic drugs. 

Comment: Many commenters stated 

that AMP and the resulting FUL will not 

only impact Medicaid Programs, but 

will substantially impact the entire 

private market. Therefore, it is 

imperative that the FUL represent actual 

acquisition costs. Another commenter 

stated that the impact of using AMP for 

reimbursement cannot be gauged at this 

time. 

Response: The law provides that 

AMPs be publicly available. Therefore, 

they may have an impact on 

reimbursement from other payers. AMP 

will be based, in part, on the average 

price paid to manufacturers by 

wholesalers for drugs distributed to the 

retail pharmacy class of trade. The 250 

percent markup of the lowest priced 

drug should assure the availability of 

those drugs at or below the FUL price 

for the pharmacies. 

Comment: One commenter stated that 

pharmacies will seek further price 

reductions from manufacturers to 

maintain their margins and that this will 

further reduce AMPs and FULs, creating 

a downward cycle that will continue to 

lower profits for pharmacies. 

Response: CMS appreciates the 

comment but has no reason or evidence 

to believe the use of AMP data would 

lead to price reductions or a downward 

cycle of prices. 

Comment: One commenter stated that 

the FUL amount should be the 

minimum reimbursement amount that 

the States can reimburse pharmacies for 

a multiple source drug. The State 

maximum allowable cost (MAC) 

programs should be discouraged with 

the implementation of the AMP-based 

FULs, which will better reflect 

acquisition cost to pharmacies. 

Response: We disagree. The DRA 

clearly mandates that the FUL amount 

be the upper limit for payment. States 

retain the authority to implement a 

MAC program to limit reimbursement 

amounts for certain drugs. Individual 

States retain the authority to determine 

the types of drugs that are included in 

their MAC programs and the method by 

which the MAC for a drug is calculated. 

Methodology of FUL 

Comment: Many comments were 

submitted pertaining to the new 

calculation/methodology for 

establishing a FUL for multiple source 

drugs. Some commenters recommended 

using an AMP ‘‘average’’ instead of the 

lowest AMP to establish a FUL. 

Response: The DRA provides, 

effective January 1, 2007, that the upper 

limit for multiple source drugs 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. Therefore, 

we do not believe that the statute allows 

for an AMP average to be used to set the 

FUL amount. 

Comment: One commenter requested 

that CMS clarify how an aggregate 

payment system can be implemented 

prospectively given the uncertainty of 

utilization for multiple source drugs 

subject to a FUL. 

Response: States have flexibility with 

respect to implementation. For example, 

they can look at the previous years’

claims data to estimate their aggregate 

caps. 

Comment: Many commenters 

expressed concern that the new FULs 

methodology will create a disincentive 

to dispense generic drugs. One 

commenter stated that the proposed rule 

does not affect brand name drugs that 

have the greatest budgetary impact on 

State Medicaid programs. 

Response: The commenter is correct 

that the FULs apply to multiple source 

drugs. However, we do not believe that 

this will lead to a decrease in the 

dispensing of generic drugs. States will 

continue to require the use of generic 

drugs when appropriate. We also 

believe that drug pricing transparency 

will lead to more equitable and 

appropriate reimbursement for 

prescription drugs as States gain greater 

knowledge about the actual market price 

of prescription drugs. Because AMPs for 

all covered outpatient drugs will be 

available to States, they will have more 

information to use in setting appropriate 

prices for brand name drugs as well as 

generic drugs. 

Disincentive To Market or Dispense 

Generic Medications 

Comment: Other commenters stated 

that manufacturers may choose to not 

introduce new generics to the market 

and wholesalers may not buy generic 

products because pharmacies will prefer 

to dispense brand name drugs. 

Response: We do not agree that these 

changes with respect to the calculation 

of the FUL will so dramatically change 

market dynamics. 

Net Payments to States 

Comment: A few commenters said 

that FULs should be compared to net 

payments after rebates, since that will 

allow the State to take advantage of 

higher rebates on brand name drugs. 

Response: We disagree. In accordance 

with provisions of the DRA which 

amend section 1927(e) of the Act, the 

FUL is based on 250 percent of the 

AMP. Thus, we have based the FULs on 

AMP, as opposed to any payments by 

States net of rebates. 

Comment: Several commenters stated 

that it is not uncommon for a State to 

designate a multiple source brand name 

drug as preferred when the 

supplemental rebate offered by a 

manufacturer results in the brand name 

drug being less expensive than the Arated generic equivalent. The new FULs 


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will require States to reanalyze these 

arrangements, and possibly require 

States to cancel or amend supplemental 

rebate contracts with manufacturers. 

Response: In accordance with the 

DRA amendments, States’ payments for 

multiple source drugs must not exceed, 

in the aggregate, the FULs. States may 

need to consider how this may affect 

their preferred drug lists. 

Nine-Digit Versus Eleven-Digit NDC 

Comment: Some commenters 

supported using the 9-digit NDC 

weighted AMP to calculate the FUL and 

noted that this method is sufficient 

because per-unit pricing differences 

between package sizes are not generally 

significant. Other commenters 

expressed concern that significant 

system changes would be required to 

move to the 11-digit NDC method. 

Response: We agree that the AMP 

should continue to be weighted at the 9- 

digit NDC level, and retain this 

requirement in the final rule. CMS has 

used the weighted 9-digit AMP since the 

start of the rebate program and there is 

nothing in the statute or legislative 

history to indicate that the Congress 

meant for this to change when AMP is 

used for FULs. 

Comment: With the changes in the 

DRA to compute the FUL based on 

AMP, some commenters questioned if 

the weighted AMP, calculated at the 9- 

digit NDC level (as currently reported 

for the Medicaid Drug Rebate 

calculation) will result in adequate 

reimbursement levels that will be in line 

with market-based acquisition costs and 

preferred that we set FULs using the 11- 

digit NDC. 

Response: We believe that using a 

weighted AMP will result in adequate 

reimbursement and have retained this in 

the final rule. 

Comment: One commenter stated that 

the use of the 9-digit weighted AMP to 

calculate the FUL will be problematic 

when the weighted average is controlled 

by high volume sales of larger-sized 

packages with a lower unit cost. 

Response: We disagree. We believe a 

weighted average will adequately reflect 

all package sizes. 

Comment: Some commenters stated 

that using the 11-digit AMP to set the 

FUL would allow the FUL to be based 

on individual package sizes, or would 

allow a FUL to be established on the 

most commonly used package size. 

Other commenters stated that using the 

11-digit AMP would reflect the 

difference in the popularity of a drug in 

different areas of the country, or the 

package size that is most economical for 

a pharmacy provider to purchase. 

Several commenters said that AMP 

prices should be based on the most 

commonly prescribed package sizes as 

the current FULs are calculated. 

Response: We disagree. Using an 11- 

digit level NDC specific to a package 

size to calculate the AMP may allow 

manufacturers to avoid best price 

implications for certain products by 

manipulating sales. The use of the 11- 

digit level NDC to calculate AMP would 

also have an effect on rebates paid by 

manufacturers which we believe is 

inconsistent with the statute. 

Comment: Commenters expressed 

concern that AMPs calculated and 

reported at the 9-digit NDC level, would 

adversely affect 340B covered entities, 

whose ceiling prices are based on AMP, 

because of a lack of transparency and 

efficiency in setting prices. 

Response: We continue to believe that 

in accordance with the statute, AMPs 

should be uniform across package sizes. 

Comment: Several commenters stated 

that the 11-digit NDC should be used to 

calculate the AMP, as this aligns with 

State Medicaid Agencies’ drug 

payments that are based on package 

size. 

Response: We continue to believe that 

in accordance with the statute, AMPs 

should be uniform across package sizes. 

Manufacturer-Submitted Utilization 

Comment: One commenter stated that 

manufacturers should submit drug 

utilization numbers so that FULs can be 

based on the most commonly prescribed 

package size. Also, the commenter 

suggested that CMS could calculate the 

9-digit weighted AMP from this 

information for rebate purposes, and 

this information could also be used to 

identify outliers by noting supply 

numbers. One commenter suggested that 

CMS require manufacturers to submit 

information on their net units shipped 

for each product so CMS can determine 

if a product is widely available, bearing 

in mind that such information is 

confidential. The commenter noted that 

this requirement would mirror the 

requirement for ASP reporting. The 

commenter also suggested that CMS 

consider additional factors when setting 

FULs, such as whether the product is 

available from several wholesalers. The 

net unit information could also be used 

for weighting, as required for the rebate 

calculation process. 

Response: We disagree. While CMS 

appreciates the comment, it does not 

believe that such information is 

necessary in light of the DRA 

amendments. 

Therapeutic Equivalency 

Comment: One commenter stated that 

the inclusion of B-rated multiple source 

drugs in the FUL reimbursement means 

that CMS is sanctioning the practice of 

dispensing generic drugs which are not 

therapeutically equivalent. This 

commenter further stated that if CMS 

chooses to include B-rated drugs, then 

it must indemnify retail pharmacies 

from all adverse patient reactions and/ 

or negative outcomes. One commenter 

states that some Medicaid Programs will 

only reimburse A-rated equivalent 

drugs. 

Response: We disagree. We believe 

that in light of the provisions of section 

1927(e) of the Act, as amended, it is 

appropriate to continue to apply the 

FUL to B-rated drugs. To do otherwise 

may encourage pharmacies to substitute 

B-rated drugs to avoid the FUL. Based 

on section 1927(e)(4) of the Act, while 

the FUL would apply to a B-rated drug, 

the FUL will only be set based on the 

AMP of formulations that are 

therapeutically and pharmaceutically 

equivalent. 

Number of Suppliers 

Comment: Several commenters 

expressed concern that the FUL criteria 

should be revised to require an adequate 

number of suppliers, or that drug 

supplies should be nationally available. 

One commenter stated that CMS should 

develop a method to survey 

manufacturers to determine if the 

products included in the calculation of 

the AMP are actually widely available 

in the marketplace. A reasonable 

threshold for marketplace penetration 

should be defined and applied to ensure 

that products are available nationally 

and in consistent supply. One 

commenter pointed out that smaller 

generic manufacturers seek to capture 

market share when entering the market 

by discounting their prices by 20–30 

percent, but do not have product 

inventories sufficient to serve the entire 

Medicaid population. One commenter 

stated that repackagers of drugs may 

often have limited availability, yet the 

prices of such drugs could be used to set 

a FUL. One commenter suggested that 

three suppliers of ‘‘A’’ rated products 

should be necessary to establish a FUL. 

One commenter stated that the FUL 

should not be applied until there are 

two or three different suppliers in the 

market, because establishing a FUL with 

just an innovator multiple source drug 

and an authorized generic by a 

subsidiary of the company may not 

show much price difference between the 

two. One commenter stated that a drug 

should not be considered to be available 

unless it is available from the top five 

wholesalers in each CMS region. 

Another commenter said that CMS 

should include a provision for a 


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product-specific exemption or 

adjustment by State or region when 

products are unavailable in those 

markets at the FUL price. Another 

commenter agreed that revision of 

criteria to establish a FUL for ingredient 

groups with two therapeutically 

equivalent drugs was a positive step. 

Response: We proposed to revise the 

methodology we use to establish FULs 

for multiple source drugs based on the 

provisions of the DRA. Specifically, 

sections 6001(a)(3) and (4) of the DRA 

changed the definition of multiple 

source drug established in 

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 amended section 1927(e)(4) of 

the Act to require that a FUL be 

established for each multiple source 

drug for which the FDA has rated two 

or more products therapeutically and 

pharmaceutically equivalent. We do not 

agree, in light of these DRA revisions, 

with the comment that CMS should 

survey manufacturers regarding 

availability or make product-specific 

exemptions when products are not 

available at the FUL price. We believe 

that our policy of applying the FUL in 

the aggregate, not using terminated 

products when setting FULs, and 

adopting an outlier policy on the use of 

AMPs to set FULs addresses the 

commenters’ concerns. 

Listing in National Compendia 

Comment: One commenter raised 

concerns with the upper limit 

methodology set forth in 

§ 447.514(a)(1)(ii) and specifically 

questioned if CMS would consider a 

drug to be available for sale nationally, 

and thus consider it eligible to set the 

FUL, if the drug otherwise meeting the 

criteria in § 447.514(a)(1)(i) is not listed 

in a current edition or update of 

published compendia of cost 

information. 

Response: In this final rule, CMS is 

revising the text language in 

§ 447.514(a)(1)(ii) by deleting ‘‘based on 

all listings contained in current editions 

(or updates) of published compendia of 

cost information for drugs available for 

sale nationally,’’ because in light of the 

DRA amendments CMS will not be 

using the published compendia of cost 

information, (for example, Red Book, 

First DataBank, or Medi-Span) to 

establish and set the FUL. CMS will be 

using AMPs submitted by 

manufacturers to establish the FUL. 

National Availability 

Comment: One commenter stated that 

CMS should consider revising 

§ 447.514(b) to read, ‘‘for the least costly 

therapeutic equivalent available for sale 

nationally’’ to ensure that AMPs used to 

set the FUL are available nationally and 

will yield sufficient FUL prices. 

Response: We disagree. We believe 

that the FUL will be calculated to 

ensure that a drug is available nationally 

at or below the FUL price. The FUL will 

be calculated based on a 250 percent 

markup of AMP, will be applied in the 

aggregate, will not be set using 

terminated products, and will 

incorporate an outlier policy on the use 

of AMPs. We believe these 

considerations address the commenter’s 

concern. 

Outlier AMPs 

Comment: Many commenters 

submitted recommendations pertaining 

to the FUL outlier policy, under which 

one or more of the lowest AMPs for an 

ingredient group would be passed over 

when setting the FUL in order to avoid 

a FUL reimbursement below the cost at 

which the drug is nationally available. 

Commenters agreed with CMS that an 

outlier policy should be implemented, 

but differed on the metrics that should 

be used. Several commenters proposed 

that we set the FUL on the lowest AMP 

that is not less than 80 percent of the 

next highest AMP. Another commenter 

stated that we should set the FUL on the 

lowest AMP that is not less than 60 

percent of the next highest AMP. 

Another commenter stated that, to 

reduce the potential for volatility in the 

AMP-based reimbursement system, we 

should exclude outliers that are more 

than 10 percent below the next highest 

AMP, looking at each AMP available in 

the ingredient group. Another 

commenter stated that AMPs no more 

than 20 percent less than the next 

highest AMP should be excluded. 

Another commenter proposed that CMS 

should establish a different outlier 

policy for immunosuppressive multiple 

source drugs due to the critical access 

need for these drugs by transplant 

recipients, under which the FUL would 

be based on the lowest AMP that is not 

less than 70 percent of the next-highest 

AMP in the multiple source drug group. 

Another commenter stated that the 

rationale behind the 30 percent outlier 

rule proposed by CMS is not readily 

apparent, because verifiable data was 

not supplied in the proposed rule. One 

commenter suggested that the 30 

percent outlier rule was appropriate, but 

wanted CMS to remove all outlier AMPs 

that are less than 30 percent of the next 

highest AMP, and use the industry-wide 

weighted average AMP to establish the 

FUL. 

Several commenters agreed with 

CMS’ proposal to set the FUL based on 

the lowest AMP that is not less than 30 

percent of the next highest AMP. One 

commenter stated that CMS should use 

a statistical calculation of a standard 

deviation for each group of 

therapeutically equivalent drugs. Any 

manufacturer’s AMP falling below one 

standard deviation would be removed as 

an outlier. The AMP would then be 

based upon the lowest value within one 

standard deviation. Another commenter 

suggested that AMPs falling at or below 

the 25th percentile of drug prices within 

the ingredient group should be excluded 

from establishing the FUL. Several 

commenters stated that the FUL should 

be calculated using the AMP of the 

lowest priced drug that is not less than 

50 percent of the next highest AMP. In 

other words, look at the lowest AMP, 

and then the next lowest AMP, and so 

on, rejecting AMPs until an AMP is at 

least 50 percent of the next highest 

AMP. 

Other commenters suggested that 

manufacturers should report AMPs at 

the 11-digit NDC level with their 

respective unit volume. These 

commenters state that the final rule 

should include a FUL outlier 

methodology that examines AMPs on a 

cumulative market share basis, starting 

with the lowest AMP, then the next 

lowest and so on, rejecting AMPs until 

a cumulative market share of 50 percent 

has been reached. 

Response: We appreciate the many 

suggestions for how we could determine 

outlier AMPs. We have expanded our 

outlier policy in the final rule by 

excluding the lowest AMP if it is less 

than 40 percent of the next highest AMP 

in § 447.514(c)(2). 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 60 

percent below the second lowest AMP. 

In those cases, the second lowest AMP 

will be used in the FUL calculation. By 

setting this as our outlier exclusion 

policy, we ensure that at least two drugs 

are available at or below the FUL price. 

Also, further analysis of the 

manufacturer-submitted AMP data 

revealed that we could exclude more 

outlier prices by using the 40 percent 

standard. We have also decided to 

publish § 447.514(c)(2) as a final rule 

with comment period. This will allow 

for further public comment after the 

clarified definition of AMP becomes 


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effective and States would then have an 

opportunity to analyze AMPs, as revised 

by the DRA, and FULs. It will also give 

CMS an opportunity to receive further 

comments based on a broader analysis 

of the data. CMS will accept comments 

on the outlier (and as discussed 

previously on the AMP) policy for a 

period of 180 days from the date of 

publication of this final rule in the 

Federal Register. 

Comment: Several commenters 

strongly recommended that, in lieu of 

an outlier, CMS should set FULs based 

on the weighted average AMP of the 

therapeutically equivalent products 

available in the market. One commenter 

stated that this would avoid regional 

pricing that may not be widely available 

for a specific product, ‘‘fire sale’’ pricing 

on short-dated products, and prices that 

are not sustainable over a consistent 

period of time. 

Response: We disagree. The DRA 

provides, effective January 1, 2007, that 

the upper limit for multiple source 

drugs 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. 

Comment: One commenter stated that 

if the calculated FUL exceeds the AWP 

of the innovator multiple source drug, 

or exceeds the innovator multiple 

source drug’s AMP by 25 percent or 

more, CMS should not publish a FUL 

for that ingredient group. 

Response: We do not agree that a FUL 

should not be set if it exceeds the AWP 

for the innovator multiple source drug. 

There is no basis, given the statutory 

amendments, to calculate a FUL using 

an AWP standard. We agree that States 

may not find a FUL useful if it exceeds 

the AMP of the innovator multiple 

source drug by 25 percent; however, we 

do not believe we should make an 

exception in this instance. The FUL is 

designed to be an aggregate upper limit, 

not necessarily a payment rate for drugs. 

Terminated Drugs 

Comment: Some commenters 

submitted comments regarding the use 

of a terminated drug to set the FUL. One 

commenter expressed concern that the 

proposed rule does not take into 

account that an AMP may be from a 

terminated product. One commenter 

stated that CMS should provide 

notification of terminated NDCs 

associated with the establishment of 

FULs, so that State Medicaid agencies 

do not continue to reimburse for a 

terminated drug. One commenter stated 

that CMS should clarify the meaning of 

‘‘terminated.’’

Response: The proposed rule would 

exclude terminated NDCs from 

consideration when setting a FUL 

beginning with the first day of the 

month after the actual termination date 

reported by the manufacturer to CMS. 

We are retaining this provision in the 

final rule. A FUL reimbursement applies 

to all drugs within an ingredient group, 

including drugs that are being 

terminated by the manufacturer, but still 

being produced by a manufacturer. 

However, a terminated NDC would not 

be used to set the FUL. We continue to 

define a terminated drug according to 

the reason the product is being 

discontinued. If it is being pulled from 

the shelf immediately due to a health or 

safety reason, whether it is by FDA or 

labeler directive, the termination date is 

the date removed. If, however, it is 

being replaced by an improved version, 

or discontinued, the termination date is 

the shelf life of the last batch sold. 

Upper Limits for Drugs Furnished as 

Part of Services (§ 447.516) 

Comment: One commenter pointed 

out that while the FUL will be revised 

monthly, managed care capitation 

arrangements are negotiated for longer 

periods of time, making it difficult for 

State Medicaid Agencies to comply with 

frequent FUL changes when setting 

capitation rates. Another commenter 

stated that the final rule should be 

amended to exclude FULs from 

capitation arrangements to address this 

concern. 

Response: States will need to consider 

possible fluctuations in FULs when 

negotiating future MCO contracts and 

modify current contracts, if necessary, 

to address any revisions needed to 

capitation rates as a result of monthly 

FUL changes. Also, to note the FULs are 

designed to be aggregate upper limits, 

and do not represent individual 

payments for drugs. In accordance with 

§ 447.516, the upper limits for payment 

for prescribed drugs also apply to 

payment for drugs provided under 

prepaid capitation arrangements. CMS 

has not changed this requirement. 

State Plan Requirements, Findings and 

Assurances (§ 447.518) 

Comment: One commenter requested 

that CMS insert language in the final 

rule that would require States to consult 

with Tribes in the development of any 

SPA which would modify existing 

payment methodologies for prescription 

drug reimbursement. This would allow 

each Tribe the opportunity to work with 

its State to assess local impacts prior to 

submission of SPAs. 

Response: A State Medicaid Director 

letter dated November 9, 2006 was sent 

encouraging States to consult with 

Tribes in open, good faith dialogue, on 

the DRA provisions that have the 

potential to impact Tribes and American 

Indian and Alaska Native Medicaid 

beneficiaries. The letter stated that it is 

important to maintain ongoing 

communication between States and 

Tribes in the redesign of Medicaid 

Programs and services. 

Comment: One commenter requested 

that CMS insert language in the final 

rule to encourage States to maintain 

their current level/type of 

reimbursement and filling fees to Tribal 

and IHS pharmacies. Tribal and IHS 

providers should be explicitly 

recognized as essential safety net 

pharmacies. 

Response: We appreciate the 

comment and will take this suggestion 

into consideration as we consider 

revisions to State payment rates. In 

accordance with longstanding policy, 

we believe that States should have the 

flexibility to establish payment rates 

and reasonable dispensing fees, 

consistent with the upper limits and 

standards set forth in our regulations. 

Comment: One commenter believed 

that the SPA process must be more 

deliberative and transparent than the 

process that has been used to date by 

States to make changes in their payment 

methodologies. States need to be more 

diligent and transparent in providing 

public notice about reimbursement 

methodologies and substantiating the 

impact that the changes could have on 

Medicaid beneficiaries’ access to 

community retail pharmacies. 

Response: We disagree with the 

commenter. States must follow Federal 

regulations at 42 CFR 430 subpart B for 

all State plans. 

Comment: One commenter suggested 

to amend § 447.518(b)(1) by adding 

another § 447.518(b)(1)(iii), which 

would say, ‘‘in the aggregate, the 

dispensing fees paid to pharmacies 

cover the costs described in § 447.502 

and are designed to encourage the 

utilization of multiple source drugs 

where appropriate.’’

Response: We disagree with the 

commenter. In accordance with 

longstanding policy, we believe that 

States should have the flexibility to 

establish payment rates and reasonable 

dispensing fees, consistent with the 

upper limits and standards set forth in 

our regulations. 

FFP: Conditions Relating to PhysicianAdministered Drugs (§ 447.520) 

We received many comments 

regarding the requirement that State 

Medicaid Agencies provide for the 

submission of NDCs on claims for 


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physician-administered drugs, as 

discussed below: 

Comment: Several commenters stated 

that CMS has failed to define outpatient 

drugs that are physician-administered as 

required by the statute. The commenter 

further stated that CMS is incorrectly 

interpreting the law by including drugs 

administered in the outpatient hospital 

setting. 

Response: In light of the definition of 

covered outpatient drug provided in 

section 1927 of the Act, we have chosen 

not to define what is meant by a covered 

outpatient drug that is administered by 

a physician. We believe that the DRA 

amendments to section 1927 of the Act 

were intended to emphasize that where 

covered outpatient drugs are 

administered by a physician and 

separately billed to Medicaid, States are 

required to collect rebates from 

manufacturers for these drugs. The law 

requires that States obtain information 

on the claims forms that will allow them 

to bill manufacturers for rebates for 

specific covered outpatient drugs in 

accordance with section 1927 of the Act. 

Comment: A few commenters stated 

that the statute permits the use of Jcodes as well as NDCs. 

Response: The statute allows the 

Secretary to specify the required codes. 

We proposed to allow J-codes, also 

known as HCPCS codes, to be used 

beginning January 1, 2006 for single 

source physician-administered drugs. 

We also specified that the NDC be 

required for single source drugs and the 

20 multiple source drugs identified by 

the Secretary beginning January 1, 2007. 

We are finalizing these requirements in 

this final rule. 

Comment: Several commenters asked 

that CMS provide a list of NDCs within 

the J series of HCPCS codes that are 

subject to rebates under the Medicaid 

Drug Rebate Program. 

Response: At this time, CMS does not 

intend to publish a list of NDCs for each 

physician-administered drug that is 

subject to Medicaid rebates, as such a 

list would be quite expansive. However, 

CMS provides monthly files of drugs of 

manufacturers that have a national 

rebate agreement under the Medicaid 

Program. CMS also maintains a list of 

NDCs within HCPCS that can be found 

on our Web site at http:// 

www.cms.hhs.gov/ 

McrPartBDrugAvgSalesPrice/ 

01a_2007aspfiles.asp#TopOfPage. 

Comment: One commenter asked that 

CMS revise the HCPCS J-code crosswalk 

to NDCs on our Web site to identify: (1) 

physician-administered drugs not 

routinely covered by Medicare but 

covered by Medicaid, (2) the sole source 

and 20 multiple source drugs for which 

NDCs must be collected, and (3) NDCs 

for manufacturers that participate in the 

Medicaid Drug Rebate Program. 

Response: At this time, we do not 

intend to revise the HCPCS crosswalk to 

identify drugs not routinely covered by 

Medicare but covered by the Medicaid 

Drug Rebate Program. However, the 

publicly available AMP pricing data 

will be listed with NDCs which will 

indicate manufacturers participating in 

the Medicaid Drug Rebate Program as 

well as the products covered by the 

program. The list of the top 20 multiple 

source physician-administered drugs are 

posted on CMS’ Web site at http:// 

www.cms.hhs.gov/DeficitReductionAct/ 

Downloads/ 

Top20PhysicianAdministered.pdf. 

Comment: Several commenters asked 

that CMS clarify the prospective nature 

of the proposed definition of physicianadministered drug. 

Response: The DRA requirement that 

States collect information sufficient to 

bill for rebates on single source drugs 

was effective January 1, 2006 and States 

must bill for rebates to collect a Federal 

match on these drugs. For single source 

physician-administered drugs and the 

20 specified multiple source physicianadministered drugs, States must collect 

NDCs beginning January 1, 2007. 

However, Federal match remains 

available until January 1, 2008, at which 

time we expect that States will be in 

compliance with this requirement. We 

would note that the requirement for 

States to submit utilization data to 

collect rebates on covered outpatient 

drugs in section 1927(b) of the Act 

predates the DRA requirements and 

inasmuch as physician-administered 

drugs are covered outpatient drugs, we 

believe that the January 1, 2006 effective 

date was reasonable. The DRA 

emphasized physician-administered 

drugs because these drugs historically 

have been billed by providers in such a 

way that prevented States from 

collecting rebates for these drugs. 

Comment: Many commenters 

expressed the opinion that manufacturer 

rebate liability should be proportional to 

State Medicaid expenditures when 

Medicaid is the secondary payer. They 

contended that this is more consistent 

with the overall intent of the rebate 

program to reduce the cost of drugs to 

Medicaid and to ensure Medicaid the 

best price provided to other purchasers. 

Other commenters believed that CMS’

position concerning the intent of the 

Medicaid statute that full rebates are 

due when Medicaid pays any amount of 

the claim is incorrect and is 

procedurally invalid because this policy 

was not established through formal 

notice-and-comment rulemaking. 

Another commenter wished CMS to 

continue with the historical practice of 

having Medicaid claim rebates on the 

total amount paid for the drug by all 

parties. 

Response: We disagree that the rebate 

should be proportional to the amount of 

the claim paid by Medicaid. Neither the 

law nor the national rebate agreement 

makes provision to reduce the rebate 

liability based on the amount of 

payment made by the Medicaid 

Program. Rather, the law provides 

formulas for rebate payments for single 

source, innovator multiple source, and 

noninnovator multiple source drugs that 

are used when Medicaid makes 

payment for a drug. This has been the 

consistent policy position of the Agency 

since the start of the Medicaid Drug 

Rebate Program. 

Comment: One commenter said that 

CMS should not deny Federal matching 

funds for physician-administered drugs 

not covered by the national rebate 

agreement. 

Response: The statute requires drug 

manufacturers to participate in the 

Medicaid Drug Rebate Program in order 

for their drugs to be covered by 

Medicaid. We recognize that States may 

not always be aware of what drug was 

administered when a bill is submitted 

using a HCPCS code. However, when 

the law requires billing with an NDC, a 

State Medicaid Agency cannot 

knowingly pay that claim and collect 

the Federal match. 

Comment: Some commenters said that 

the requirement that outpatient 

hospitals record NDCs would have a 

negative impact on patient safety 

because it would disrupt the workflow 

for dispensing drugs and divert limited 

staff from accurate dispensing. 

Response: We have no reason to 

believe that patient safety will be 

affected by this requirement. 

Comment: One commenter stated the 

belief that contrast agents, typically 

used during hospital-based radiological 

procedures, are excluded from Medicaid 

rebates. 

Response: Only physicianadministered drugs that are separately 

billed to Medicaid as covered outpatient 

drugs will be considered physicianadministered drugs for the purposes of 

this rule. If the contrast agents are not 

billed to Medicaid as outpatient drugs, 

they would not be considered 

physician-administered drugs for 

purposes of this provision. 

Comment: One commenter stated that 

the regulation should exempt drugs 

administered in an emergency room 

from this provision because physicians 

should not need to concern themselves 

with whether the patient is a Medicaid 


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beneficiary and because the physician 

does not know at the time drugs are 

administered if the patient will be 

admitted or sent home. 

Response: Drugs administered 

incident to an emergency room service 

that are billed separately as covered 

outpatient drugs, as defined by section 

1927(k)(2) of the Act, are covered under 

the Medicaid Drug Rebate Program and 

must be billed using the NDC in order 

for States to collect the Federal match. 

Drugs that are billed as part of an 

emergency room service as described in 

section 1927(k)(3) of the Act, where the 

cost of the drug is bundled within the 

cost of the service, are not covered by 

the Medicaid Drug Rebate Program. 

Comment: One commenter asked if 

HCPCS will be assigned to drugs that do 

not currently have them. 

Response: We do not plan to assign 

HCPCS to drugs as the provisions 

addressed in this rule require the 

submission of NDCs on claims when 

billing Medicaid for physicianadministered drugs. 

Comment: One commenter asked 

CMS to clarify in the final rule that 

claims for physician-administered drugs 

must meet all covered outpatient drug 

requirements, specifically, that the drug 

must be subject to a Medicaid rebate, 

not have a termination date prior to the 

date or service, and not be a drug with 

a DESI value of five or six. 

Response: The commenter is correct 

that all requirements for Medicaid drug 

coverage apply to physicianadministered drugs. 

Comment: Several commenters 

believe that CMS went beyond 

congressional intent by including 

outpatient hospitals and clinics in the 

requirement for States to collect NDClevel information on pharmacy claims. 

Commenters stated that the OIG report 

on this topic addressed only drugs 

administered in physicians’ offices and 

that this report was the impetus for the 

legislation. 

Response: We base our interpretation 

on the language in the statute which 

does not differentiate between providers 

in requiring that States collect 

information sufficient to bill for rebates 

for covered outpatient drugs under 

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

extent that providers bill for covered 

outpatient physician-administered 

drugs separately; that is, the cost of the 

drug administered is a separate line 

item from the service provided, we 

believe that, in accordance with the 

statute, States should be seeking rebates 

with respect to such drugs. 

Comment: Several commenters wrote 

that the DRA does not change the 

existing statute at section 1927(j)(2) of 

the Act that exempts from Medicaid 

drug rebates drugs administered to 

patients in hospital outpatient clinics 

and departments. 

Response: We agree that the DRA did 

not change the exclusion of drugs from 

Medicaid rebates when dispensed in an 

outpatient hospital setting as long as 

Medicaid is billed at the hospital’s 

purchasing costs. However, hospitals 

commonly bill Medicaid without regard 

to their costs and accept the full 

reimbursement provided under the 

Medicaid State plan. When this is the 

case, drug manufacturers are 

responsible for paying rebates with 

respect to those drugs that qualify as 

covered outpatient drugs under section 

1927(k)(3) of the Act. 

Comment: One commenter said that 

rebates should not be collected on 

hospital outpatient drugs because they 

are not part of the retail pharmacy class 

of trade for AMP. 

Response: The commenter is not 

correct in that sales to hospital 

outpatient departments are considered 

in the retail pharmacy class of trade and 

are included in the calculation of AMP 

at the option of the drug manufacturer, 

as specified in this final rule. Physicianadministered drugs will be excluded 

from the Medicaid Drug Rebate Program 

requirements only when hospital 

outpatient departments have dispensed 

these drugs using drug formulary 

systems, and have billed Medicaid at 

acquisition costs, consistent with 

section 1927(j)(2) of the Act. 

Comment: Several commenters stated 

that 340B hospitals should not need to 

forgo receiving discounts on drugs as a 

result of Medicaid collecting rebates on 

them and have asked to be exempted 

from the requirement. 

Response: This provision of the DRA 

does not apply to 340B hospitals that 

receive discounted drugs and bill 

Medicaid at the acquisition cost of the 

drug as determined under the State 

plan. 

Comment: One commenter noted that 

certain safety-net hospitals receive 

discounts under the 340B Program and 

that the law provides that such drugs 

not be also subject to Medicaid rebates. 

Response: We agree with the 

commenter that drug manufacturer sales 

to safety-net hospitals under the 340B 

Program are not subject to Medicaid 

rebates as long as they are billed to 

Medicaid at acquisition cost as 

determined under the State plan. 

Comment: One commenter asked that 

HRSA post the National Provider 

Identifiers (NPI) of providers who will 

be billing for physician-administered 

drugs from 340B covered entities on its 

Web site in addition to the NPIs of 340B 

covered entities. 

Response: We are not addressing the 

concerns of other agencies within the 

Department of Health and Human 

Services in this rule. Instead, we suggest 

that the commenter should address 

HRSA regarding the posting of NPIs on 

its Web site. 

Comment: One commenter noted that 

physicians will not know which drugs 

are included in the Medicaid Drug 

Rebate Program to be able to administer 

only those drugs to Medicaid patients. 

Several commenters noted that 

physicians need to know which 

manufacturers participate in the 

Medicaid Drug Rebate Program because 

drugs of non-participating 

manufacturers will not be covered by 

Medicaid. 

Response: We understand the 

commenter’s concern and believe that 

compliance with this provision will 

depend upon the level of education/ 

coordination provided by States to the 

provider community regarding the 

resources available to them. As 

previously discussed in this rule, AMPs 

for drugs covered by the Medicaid Drug 

Rebate Program will be publicly 

available and listed by NDC on our Web 

site. We believe that this resource, along 

with State information, will assist 

physicians to make informed decisions 

regarding the list of covered outpatient 

drugs available under Medicaid. 

Comment: Several commenters asked 

that CMS develop standard literature for 

physicians to assist in education and 

outreach about the requirement for 

including NDCs on bills for Medicaid. 

Response: States traditionally are 

responsible for provider outreach and 

education. Materials will vary by State 

based on processes and procedures 

determined by each State. We believe 

that States can avoid duplication of 

effort by working through the National 

Association of State Medicaid Directors 

to share materials and best practices 

concerning this new requirement. 

Comment: One commenter asked 

CMS to develop a form for hospitals to 

use to bill States with NDCs because the 

UB04 billing form does not allow for the 

inclusion of NDCs. The commenter 

believed this would be more efficient 

than each State developing its own 

form. 

Response: CMS would be happy to 

work with States if they wish to develop 

a model form. 

Comment: A few commenters asked 

that CMS develop a standard UB04 form 

that allows for the reporting of the NDC 

quantity and unit of measure. 

Response: CMS cannot specify what is 

included on the UB04 form. The 


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National Uniform Billing Committee 

determines the content of the form. Both 

CMS and State Medicaid Agencies are 

represented on this committee and need 

to work together to establish the need 

for any changes to the form and to 

obtain approval for the changes. 

Comment: A few commenters noted 

that not all Durable Medical Equipment 

Regional Carriers (DMERC) pass through 

the NDC to the Medicaid agency. The 

commenters believed that the provision 

that States allow for the submission of 

NDCs on claims for physicianadministered drugs should also apply to 

claims for supplies/durable medical 

equipment for which Medicaid is the 

secondary payer so that States are able 

to collect rebates on these claims. 

Response: We are aware that not all 

DMERCs provide the NDC to the 

Medicaid agency when Medicaid is the 

secondary payer. We also agree with the 

commenter that States should be 

collecting NDCs with respect to 

separately reimbursed drugs in order to 

secure rebates under section 1927 of the 

Act to the extent that they are not 

included within a bundled rate. 

Comment: Several commenters asked 

that the Secretary use the waiver 

authority provided by statute to delay 

the requirement for States to collect 

NDC-level information from hospitals to 

provide additional time for them to 

reconfigure their systems to capture this 

information. 

Response: The statute provides for a 

hardship waiver for States that require 

additional time to implement necessary 

changes to their reporting systems. We 

will consider States’ requests on a caseby-case basis. 

Comment: One commenter noted that 

CMS stated in the proposed rule that we 

do not expect States to need hardship 

waivers to postpone the requirement 

that States collect NDCs on claims for 

physician-administered drugs by 

January 2008. The commenter believed 

that States may find it difficult to meet 

this date because of other priorities for 

systems such as the NPI. 

Response: We anticipate that many 

States will have had ample time to meet 

the January 1, 2008 deadline to comply 

with the DRA requirements since the 

DRA was enacted nearly two years prior 

to that deadline and CMS guidance was 

given to State Medicaid Directors 

(SMDL 06–016, http:// 

www.cms.hhs.gov/smdl/downloads/ 

SMD071106.pdf) nearly 18 months prior 

to the deadline. 

Comment: One commenter suggested 

that CMS should re-examine this 

requirement as it will result in reduced 

access to care for Medicaid beneficiaries 

because of the non-standard billing 

requirements it imposes. 

Response: While we appreciate the 

comment, we have no reason to believe 

that the DRA requirement will result in 

reduced access to care. 

Comment: One commenter noted that 

not all package labels carry the 11-digit 

NDC which is needed for billing. Some 

carry a 10-digit number and knowledge 

of conversion conventions is needed to 

translate the number to the 11-digit 

NDC. Another commenter stated an 

inability of some billing systems to 

capture the 11-digit NDC. Another 

commenter noted that the billing units 

of certain drugs are different from the 

units used for Medicaid rebates. This 

will cause confusion and require 

translation. 

Response: As we have previously 

stated, the education of the provider 

community by the States will be 

paramount in ensuring proper billing 

procedures and the successful 

implementation of this requirement. 

Comment: Several commenters stated 

that it will be nearly impossible for 

hospitals to accurately record the NDCs 

for some drugs. This will occur when 

drugs are bought in bulk or for cases in 

which a portion of the drug unit is used. 

The commenter noted that the difficulty 

will likely be encountered in instances 

when multiple drugs are mixed into a 

treatment ‘‘cocktail’’ and injected or 

infused into the patient. 

Response: We recognize the 

operational difficulties that may exist 

for some hospitals but note that the law, 

as amended by the DRA, makes no 

exceptions for physician-administered 

drug claims billed by hospital 

outpatient departments. This process 

should be easier when hospitals use the 

Uniform Product Codes for drugs 

dispensed. 

Comment: One commenter asked that 

CMS bill manufacturers for rebates 

directly as opposed to implementing 

this requirement. 

Response: This request is not feasible 

because States, not CMS, receive claims 

data necessary to bill manufacturers for 

rebates. Drug manufacturers do not 

know which or how much of their drugs 

are supplied to Medicaid beneficiaries 

until States submit utilization data as 

required in section 1927(b)(2) of the Act. 

Comment: One commenter suggested 

that it would be more appropriate for 

States to obtain detailed NDC 

information from the drug 

manufacturers rather than from the 

community hospitals. The commenter 

noted that drug manufacturers have 

access to detailed NDC information and 

other detailed purchasing information 

because the drug company 

representatives often call the 

community hospital pharmacy directors 

to inform them of the number of items 

hospitals have purchased and how 

many items are returned for credit. 

Response: While we appreciate the 

commenter’s suggestion, this approach 

would not be operationally feasible 

because manufacturers would not have 

utilization data to determine the unit 

amounts of drugs dispensed to patients. 

Comment: One commenter stated that 

his hospital uses drug dispensing 

machines located throughout the 

hospital that have unit dosages of drugs 

that are not differentiated by NDC. 

Compliance with this provision would 

require the hospital to limit each slot on 

the machine to one NDC, ordering only 

one NDC for each drug, or billing by 

unit dose, all of which would be costly 

and inefficient. 

Response: We understand that some 

hospitals and providers’ offices will 

require systems modifications and 

changes in dispensing and billing 

procedures in order to comply with the 

billing requirements of this provision. 

Comment: One commenter asked 

CMS to specify how compounded drugs 

should be billed. The commenter 

suggested that only the NDC and 

quantity for the NDC that most closely 

ties to the HCPCS narrative description 

be required. 

Response: We require that NDCs and 

corresponding quantities for those NDCs 

for each drug be included on the claims 

for Medicaid reimbursement. 

Comment: One commenter expressed 

concern that the requirement that 

providers submit NDCs for physicianadministered drugs will create an 

administrative burden for both the 

providers and the State Medicaid 

Agencies. The requirement is 

impractical with respect to the CMS–

1500 because the claims are usually 

submitted after the drugs are 

administered making it difficult for the 

provider to capture the NDC 

administered to the patient on the 

claim. Providers will need access to a 

list of rebatable NDCs and have them in 

stock, which could result in a delay in 

administering the necessary medication. 

The requirement may in fact impair 

patients’ access to necessary 

medication. 

Response: The law requires States to 

collect rebates on physicianadministered covered outpatient drugs 

in order to receive a Federal match for 

the cost of the drugs. Because NDCs are 

required by the manufacturer in order 

for States to collect rebates on these 

drugs, providers are required to submit 

NDCs for physician-administered 

covered outpatient drugs. We encourage 


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States to educate the provider 

community regarding the resources 

available to them that may assist them 

in their transition to the requirements. 

We have no reason to believe that this 

requirement will have a negative impact 

on providers or patients’ access to 

medication therapies in an outpatient 

hospital setting. 

Comment: One commenter asked 

CMS to include a provision in the final 

rule to encourage States to provide a 

furnishing fee for blood clotting factors 

modeled after that provided by 

Medicare. 

Response: State Medicaid programs 

have sufficient latitude under other 

provisions of the statute to determine in 

their State plans how they will 

reimburse adequately for blood clotting 

factors. This final rule does not revise 

options that States have under other 

provisions of the statute and the State 

plan to ensure access. 

Comment: One commenter noted that 

the HCPCS crosswalk is only effective 

for single source drugs where there is a 

one-to-one relationship between HCPCS 

code and NDC. There are, in fact, 

several single source drugs for which 

there is one J-code but numerous NDCs. 

Response: We agree with the 

commenter that the HCPCS crosswalk is 

only effective for certain single source 

drugs and believe that this fact fully 

supports the need for NDCs to be 

submitted on claims for physicianadministered drugs as set forth in 

statute and required by this rule. 

Comment: Several commenters noted 

that Part B carriers will need to provide 

the NDC on the crossover claim for the 

Medicaid agency to have the 

information needed to invoice drug 

manufacturers for rebates. One 

commenter asked that CMS ensure that 

Medicare carriers provide NDCs on 

crossover claims sent to Medicaid. 

Another commenter noted that the 

quantity administered for each NDC 

must also be recorded. 

Response: If the NDC is on the 

electronic claim submitted (CMS–837), 

the Part B carrier will include it on the 

crossover claim sent to the Medicaid 

agency. Although the new CMS–1500 

claim form does allow entry of the NDC, 

the UB04 claim form does not contain 

a section to capture the NDC. As 

previously stated, States will need to 

make it clear that providers must submit 

claims, complete with the NDC 

information, to the Medicaid agency. 

We encourage States to provide 

educational outreach to providers to 

inform them of the manner in which the 

NDCs and corresponding quantities 

should be recorded on the claims forms 

as they deem necessary for the accurate 

billing of drug manufacturers for 

rebates. 

Comment: One commenter asked us 

to develop a better remedy for States 

than rejecting the claim and asking the 

provider to rebill when an NDC is not 

provided on a crossover claim. The 

commenter believes this method is 

costly, results in delay, is counter to the 

intent and spirit of HIPAA, and may 

result in a loss of access for Medicaid 

beneficiaries to needed drugs. 

Response: It is crucial for States to 

communicate to the provider 

community the importance of including 

NDCs on the claims when billing 

Medicaid for physician-administered 

drugs. In cases where providers have 

not included NDCs on claims for 

physician-administered drugs, we 

recommend that States coordinate with 

provider billing offices in any manner 

that they deem appropriate in order to 

obtain the NDCs necessary for States to 

bill manufacturers for rebates as 

required by the statute. 

Comment: One commenter stated that 

the burden of recording the NDC will 

fall on clinicians, not support staff. 

Because Medicaid is the secondary 

payer for most of these claims, the 

clinicians may note that the patient has 

Medicare, which does not require NDCs 

for billing, and may overlook the 

Medicaid requirement. 

Response: We encourage States 

through provider education to convey 

the importance of including the NDCs 

on the claim in order for States to 

process claims and payment for the 

service. 

Comment: One commenter believed 

that the top 20 list of multiple source 

drugs published on the CMS Web site 

incorrectly included Factor VII 

Recombinant and Factor VIII plasmaderived because the commenter did not 

believe these products meet the 

statutory definition of multiple source 

drug. 

Response: We agree with the 

commenter and will remove these 

products from the top 20 list of multiple 

source drugs published on our Web site. 

Comment: One commenter questioned 

the inclusiveness of the list of the 20 

multiple source physician-administered 

drugs for which billing with the NDC 

will be required. The commenter stated 

that the list should include all NDCs 

with a particular HCPCS code. 

Response: At this time, we do not 

intend to include all NDCs for a given 

HCPCS code. 

Comment: One commenter asked 

when the list of 20 drugs will be 

updated. 

Response: We intend to annually 

review the list of top 20 multiple source 

physician-administered drugs on our 

Web site and update it as necessary. 

Comment: One commenter asked that 

we specify the file format for the 

submission of claims for physicianadministered drugs using NDCs for the 

top 20 drug list. 

Response: States are responsible for 

determining the file format to be used 

for the submission of claims. We 

encourage the States through provider 

education to inform providers of the 

correct file format to use when billing 

for physician-administered drugs using 

NDCs. 

Comment: Several commenters said 

that State Medicaid Agencies should be 

required to bear the cost for hospitals to 

change their systems in order to meet 

the NDC reporting requirement, as some 

outpatient hospital departments’

systems do not currently capture NDC 

level utilization data for patient billing. 

Response: We do not believe that the 

law requires Medicaid agencies to pay 

hospitals for systems modifications that 

may be necessary to document claims 

for payment in a manner that would 

comply with DRA requirements to 

identify the NDC. States have the option 

to pay for overhead costs, such a 

provider billing systems, through 

dispensing fees to pharmacies or other 

providers. 

Comment: One commenter stated that 

many State Medicaid processing 

systems are not designed to capture 

NDCs on outpatient hospital bills and 

that implementation of this provision 

should be delayed until alternate 

systems can be designed. Another 

commenter stated that the manual 

coding of NDCs would come at the 

expense of staff resources and would 

disrupt administrative operations. 

Response: The timeframe for 

implementing this provision is set by 

statute. The DRA was signed into law on 

February 8, 2006. While States were 

required to start billing manufacturers 

for rebates for single source drugs on 

claims beginning January 1, 2006, States 

could crosswalk HCPCS to NDCs for 

these drugs. States continue to have 

until January 1, 2008 to collect NDCs on 

the 20 multiple source physicianadministered drugs identified by the 

Secretary before losing Federal match 

for these drugs. States that cannot meet 

this deadline can request a waiver from 

the Secretary to implement this 

requirement at a later date. 

Issues Not Addressed in the Proposed 

Rule 

We received several comments on 

issues that were not addressed in the 

proposed rule. A summary of those 

comments and our responses follow. 


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Posting AMP 

Comment: Many commenters 

requested that CMS should delay any 

public posting of the AMP data on a 

public Web site until after the final 

regulation has been issued and AMPs 

are determined to be reliable and 

accurately reflect the prices paid to 

manufacturers by wholesalers for sales 

to the retail pharmacy class of trade. 

Commenters contended that AMP data 

may be flawed and to post the flawed 

AMP data may cause confusion to the 

general public and adversely affect 

community retail pharmacies if 

Medicaid Programs and commercial 

markets use these data for 

reimbursement purposes. They pointed 

out that CMS already delayed release of 

these data once, and urged CMS to 

consider delaying the release of the data 

again. Delaying the posting of AMP data 

could permit manufacturers time to 

adjust the submission of their data 

consistent with the requirements of the 

final regulation and allow community 

retail pharmacies time to validate that 

the AMPs are consistent with 

congressional intent. 

One commenter concurred with the 

OIG’s findings in its May 2006 report 

that future errors or inconsistencies in 

manufacturers’ AMP calculations could 

lead to inaccurate or inappropriate 

reimbursement amounts as well as 

rebate errors. 

One commenter raised concerns that 

the public disclosure of manufacturerspecific AMPs negates the 

confidentiality provisions of section 

1927 of the Act. The commenter 

expressed the opinion that such 

disclosure must be implemented 

through notice-and-comment 

rulemaking, and that failure to do so 

would violate the Administrative 

Procedures Act. Another commenter 

asked that we not make AMPs publicly 

available. The commenter noted 

concern that public release of AMP 

would stifle competition among 

manufacturers, ultimately driving up 

the price of generic drugs. 

Response: We disagree with the 

commenters about the need to further 

delay the public release of AMP. By 

statute, CMS is required to update AMP 

data posted on a Web site accessible to 

the public. Furthermore, effective 

January 1, 2007, the confidentiality 

provisions of the statute were amended 

to permit public disclosure of AMP 

data. CMS has interpreted these 

provisions to mean that we must 

publicly disclose data that the 

manufacturers report following January 

1, 2007. We understand the importance 

of the accuracy of the AMP data; 

however, it is also important that we 

carry out the DRA amendments to make 

the AMP data publicly available. We 

also disagree that the public disclosure 

of AMP negates the confidentiality 

provisions of section 1927(b)(3)(D) of 

the Act. The DRA amended section 

1927(b)(3)(D)(v) to provide for the 

release of AMP data to the public. 

Comment: A few commenters 

expressed concern that CMS’ failure to 

provide AMP data to the retail industry 

has hampered its ability to provide 

definitive and accurate commentary 

related to this matter. The commenter 

further said the final rule should be 

delayed until adequate information is 

provided to the retail industry to allow 

for statistically significant evaluation of 

the AMP data. Another commenter 

urged CMS to provide AMPs to 

community retail pharmacies on a 

confidential basis for the 77 multiple 

source drugs provided to the GAO 

because this would allow community 

retail pharmacies to speak with 

specificity as to the costs that they will 

bear under the proposed regulation. 

Response: We disagree with the 

commenters. The DRA amended section 

1927(e) of the Act to require that the 

FULs be calculated based on AMP data. 

The DRA also required that we publish 

the regulation clarifying requirements 

concerning AMP by July 1, 2007. In 

accordance with the effective date of the 

amendments to section 1927(b)(3)(D) of 

the Act, we consider AMP data prior to 

January 1, 2007 to be confidential; 

therefore, we did not publicly disclose 

the AMP data in the proposed rule. 

However, in accordance with the 

amendments to the confidentiality 

provisions and section 1927(b)(3) of the 

Act, we will post this information on 

the Web site and update that 

information on at least a quarterly basis. 

Comment: A few commenters urged 

CMS to preface any Web postings of the 

AMP data with an introductory 

discussion explaining the current 

shortcomings of AMP as a measure of 

retail prices and pharmacy acquisition 

costs and highlighting the potential for 

changes in the calculation methodology 

underlying AMP over the next year. 

One commenter also expressed that 

CMS should post a disclaimer stating 

that limited instructions were provided 

to guide manufacturers’ January AMP 

calculations. Posted data should be 

viewed as preliminary and may not 

accurately reflect prices available in the 

market to community retail pharmacies. 

The commenter stated that similar 

disclaimers should be sent to the States 

with their download tapes or new 

electronically transmitted price report 

files. These disclaimers should also be 

reiterated in a State Medicaid Director 

letter. 

Response: We will consider this 

comment when we issue further 

clarification regarding the provisions of 

this final rule. 

Comment: A few commenters 

recommended that CMS develop clear 

guidelines for the electronic format and 

standardized unit reporting. Although 

the proposed rule requires submission 

of data by manufacturers in an 

electronic format, data specifications 

and unit reporting are not provided in 

adequate detail. 

Response: CMS will post the AMP 

data file including labeler code, product 

code, package size code, the calendar 

month and year of the most recently 

reported AMP, and the AMP per unit 

per product code for the month and year 

covered, based on the sales. If a drug is 

distributed in multiple package sizes, 

there is one weighted AMP for the 

product, which is the same for all 

package sizes. We will address most of 

the procedural issues, such as data 

specifications and unit reporting, in 

guidance documents and on our Web 

site. 

Comment: A few commenters 

recommended that AMP data should be 

posted on a secured password-protected 

internet Web site that can only be 

accessed by authorized practitioners, 

providers, and government agencies. 

The commenter argued that open access 

to this information could allow 

competitor manufacturers to access 

AMP information that can lead to 

information intelligence on specific 

products and affect both commercial 

and Medicaid supplemental rebate 

offers. 

Response: We disagree with the 

commenter. By statute, CMS is required 

to post AMP data on a Web site 

accessible to the public. To post the 

AMP data on a secured Web site would 

limit access to the AMP data. 

Comment: One commenter wanted to 

know how often the posted AMP data 

will be updated and which AMP data 

will be posted so that AMPs reflect the 

most accurate AMPs filed by the 

manufacturers. The commenter 

contended that failure to keep publicly 

available AMPs accurate and in 

agreement with revised AMPs reported 

by manufacturers is going to invite 

controversy from others interested in 

AMPs. 

Response: We expect that AMP data 

will be updated on a monthly basis once 

posted on a Web site accessible to the 

public. We will post the most recently 

reported monthly and quarterly AMP 

data received from manufacturers, as 

well as any revised monthly and 


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quarterly AMPs for a period not to 

exceed twelve quarters from the quarter 

in which the data were due. 

Comment: A few commenters 

recommended that AMP data should be 

made available in an easily 

downloadable format. 

Response: The AMP data will be 

posted in a flat text file format for easy 

conversion to other file formats. 

Comment: One commenter requested 

that CMS permit manufacturers to 

review monthly and quarterly AMP data 

prior to its publication by CMS to 

ensure its accuracy and give 

manufacturers opportunity to bring any 

concerns about the accuracy of the data 

to CMS’ attention before it is used by 

States for reimbursement purposes. 

Response: We disagree with the 

commenter. Monthly and quarterly 

AMP data that will be posted are those 

originally submitted by manufacturers; 

thus, manufacturers should be 

reviewing their data for accuracy prior 

to submitting them to us. 

Comment: A few commenters 

requested that CMS provide the U.S. 

territories with access to the new AMP 

data so they may leverage the 

information in their calculations for 

reimbursement on brand name and 

generic drugs, as well as on rebate 

negotiations with the drug companies. 

Access to the proposed new AMP data 

would provide a benchmark in the 

rebate negotiation process, maximizing 

the utilization of available Medicaid 

funds. 

Response: By statute, CMS is required 

to post the AMP data on a Web site 

accessible to the public. This 

requirement allows everyone to have 

access and to view the AMP data. 

Comment: One commenter requested 

that the AMP data accurately reflect the 

reimbursement methodologies for 

hemophilia factor therapies. The 

commenter stated that if the AMPs 

reported to the States under the DRA do 

not reference the additional furnishing 

fee for blood clotting factors, they can 

potentially create inadequate 

reimbursement. The commenter argued 

that if States rely solely on the AMPs in 

setting their reimbursement levels and 

do not take into account the furnishing 

fee payment that Congress recognized as 

critical, then payment amounts may be 

too low. The commenter recommended 

we include this information in the AMP 

data. 

Response: We disagree with the 

commenter. The AMPs to be posted are 

defined in the laws and these 

regulations. In accordance with these 

definitions, AMPs do not include 

wholesaler or retailer mark-up, 

dispensing fees, or furnishing fees. 

Elsewhere in this final rule, we have 

encouraged States to examine 

dispensing fees to assess whether they 

are reasonable. Some of the fees for 

furnishing hemophilia factors could also 

be paid in other Medicaid service 

categories. 

Comment: Several commenters 

offered alternatives to publishing the 

monthly and quarterly AMPs for each 

manufacturer’s drugs. A few 

commenters recommended that we 

publish an aggregated, industry-wide 

weighted average that combines 

individual manufacturer AMPs into one 

AMP for each drug. One commenter 

suggested that we publish an AMP that 

represents the weighted average of all of 

the 11-digit AMPs for the 

manufacturers’ most commonly 

dispensed retail package size that is 

widely and nationally available for 

purchase by community retail 

pharmacies. This commenter also 

suggested that CMS release a limited 

number of AMPs initially to allow the 

marketplace to assess the validity of the 

data. This would be similar to the 

approach CMS used in adopting the use 

of ASP for Part B drug reimbursement. 

Response: We considered these 

comments, but we want to reiterate our 

belief, which is supported by the 

legislative history of the DRA, that the 

intent in making AMPs available to the 

public is to bring about increased 

transparency in prescription drug 

pricing for the Medicaid Program. The 

OIG and the GAO have consistently 

found over the years that Medicaid 

reimbursement for prescription drugs is 

well in excess of the cost of the drugs. 

Limiting access to the data or masking 

individual manufacturer’s data by 

publishing aggregate AMPs across 

different manufacturers would 

counteract the overarching purpose of 

the Medicaid drug provisions of the 

DRA. 

Comment: One commenter raised 

concerns over the lack of controls and 

accountability measures for 

manufacturers submitting AMP data. 

The commenter suggested that CMS’

processes have been insufficient in 

monitoring and managing the 

prescription drug files submitted by 

manufacturers. The commenter stated 

that this lack of updated data will 

undoubtedly result in inappropriate 

calculations. The commenter also 

argued that these erroneous calculations 

will impose an unforeseen burden on 

States to identify and subsequently 

report any inaccuracies to CMS. The 

commenter urged CMS to implement 

system checks and measures to hold 

manufacturers accountable for the 

quality of data they provide, including 

the reporting or not reporting of 

accurate data. 

Response: We disagree with the 

commenter. Manufacturers are fully 

accountable for the accuracy of their 

data and subject to civil monetary 

penalties under section 1927(b)(3)(C) of 

the Act in situations where they report 

untimely or false information. While we 

encourage further scrutiny of these 

AMPs, there is no further burden on the 

States imposed by this regulation to 

review those numbers. 

Comment: A few commenters raised 

concerns that the monthly AMP data file 

that CMS sends to States contains only 

the drug name. States have to translate 

the drug descriptions in the file to 

analyze the impacts of the FUL with 

their processed claims. In addition, 

having only the drug name may lead to 

misinterpretations and lack of 

identification of applicable products 

with their NDCs that are necessary to 

process claims. The commenter 

recommended that CMS provide on at 

least a monthly basis descriptive drug 

information, unique identifiers, and 

pricing data, and include updated NDC 

codes to the nationally recognized 

pricing compendia. 

Response: CMS is not considering 

providing any data to the pricing 

compendia. CMS has been sending 

States AMP data files on a monthly 

basis since July 1, 2006. The AMP data 

file includes the labeler code, product 

code, package size code, the calendar 

month and year of the most recently 

reported AMP, and the AMP per unit 

per product code only for the month 

and year covered, based on the sales. If 

a drug is distributed in multiple package 

sizes, there is one weighted AMP for the 

product. The posted AMPs will also 

have this level of detail. 

Comment: One commenter asked that 

CMS refrain from making quarterly 

AMP data publicly available. The 

commenter contended that only 

monthly AMP data should be made 

available. Unlike monthly AMP, which 

may be used to set reimbursement rates, 

there is no need for the public to have 

access to quarterly data, which can lead 

to confusion. 

Another commenter also expressed 

concern with publishing both monthly 

and quarterly AMPs on the CMS Web 

site. The commenter noted that having 

two different AMP values could lead to 

confusion. The commenter urged CMS 

to only publish the last month’s AMP 

data for the quarter. Another commenter 

urged CMS to publish AMP quarterly, 

not monthly. 

Response: AMPs reported by 

manufacturers beginning January 1, 

2007 are no longer confidential. By 


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statute, CMS is required to post AMP 

data on a Web site accessible to the 

public. CMS has interpreted this 

provision to mean that we must publicly 

disclose AMP data, monthly or 

quarterly, that the manufacturers report. 

Comment: One commenter requested 

that CMS provide the AMP data for 

numerous drugs covered in the GAO 

study for review. The commenter was 

troubled by reports that CMS demanded 

data to support suggested changes to the 

AMP definition but refused to make the 

same data available for public review. In 

addition, the commenter contended that 

CMS rejected the findings of the GAO 

study on the issue and that if CMS was 

going to dismiss the GAO report it 

should make a sampling of the AMP 

data available for the public to review 

and use in their comments on the 

proposed rule. 

Response: In accordance with section 

1927(b)(3)(D) of the Act, AMP data prior 

to January 1, 2007 are considered 

confidential and cannot be released to 

outside parties. CMS rejected GAO’s 

findings because we found GAO’s 

conclusion to be premature, contrary to 

the DRA AMP revision, and 

unsupported by the report. The study 

could not be thoroughly analyzed or 

replicated because GAO was not willing 

to release the data on which the study 

was based. 

340B Drug Pricing Program 

Comment: Many commenters noted 

that HRSA has adopted a different 

definition of AMP from the definition of 

AMP described in this final rule. In 

effect, HRSA is asking manufacturers to 

report two different AMPs; one for 

Medicaid, and one for the 340B 

Program. Most of these commenters 

objected to HRSA’s interpretation and 

urged the Department to encourage 

consistency between the two agencies. 

One commenter provided a detailed 

analysis of alternatives available to CMS 

and HRSA to resolve the issue, while 

another noted that requiring different 

AMP calculations will further strain 

manufacturer resources. One commenter 

forwarded us a copy of the letter HRSA 

issued on January 30, 2007. 

Other commenters expressed support 

for HRSA’s position and asked CMS to 

clarify that the AMP described in this 

final rule is not applicable in calculating 

340B ceiling prices. One commenter 

urged CMS to support HRSA’s 

interpretation and for CMS to provide 

the data required for the calculation of 

two AMPs. The commenter also 

suggested that this final rule should 

specify that HRSA will receive the 

specific data needed to calculate the 

340B ceiling prices from drug 

manufacturers and/or from CMS. 

Response: The question of whether 

HRSA should use the same definition of 

AMP for the 340B Program that CMS 

uses for the Medicaid Program is 

beyond the scope of this regulation. 

This final rule implements the revisions 

to AMP and best price as described in 

the DRA, as well as regulatory 

provisions related to the Medicaid Drug 

Rebate Program. 

Comment: A few commenters 

expressed concern with the impact of 

the provisions in §§ 447.504 and 

447.505 on the calculation of prices 

available to covered entities that 

participate in the 340B Program under 

the PHS Act. Commenters also noted 

that the economic impact estimates do 

not include the potential costs to the 

340B Program and the costs 

manufacturers incur to meet the 340B 

Program requirements. Commenters 

asked CMS to analyze the fiscal effect of 

these changes and revise the rule in 

order to retain the most favorable 

pricing for covered entities. 

Response: This final rule is designed 

to implement the DRA amendments and 

other provisions concerning the 

Medicaid Drug Rebate Program, not 

provisions concerning section 340B of 

the PHSA. In addition, we note that 

because the 340B Program is 

administered by HRSA, that agency, not 

CMS, is the appropriate source for 

clarification on the rules for the 340B 

Program. 

Comment: A few commenters urged 

CMS to exempt hospital outpatient 

clinics from the requirement to bill 

Medicaid using the NDC code; 

otherwise, the facilities represented by 

the commenters will forego the benefits 

of 340B Program discounts. 

Response: The requirement to bill 

Medicaid using the NDC code for 

physician-administered drugs is 

established by statute; therefore, we are 

not creating an exemption for such 

facilities in the final rule. 

Comment: Section 6004 of the DRA 

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

to provide a basis for the participation 

of certain children’s hospitals in the 

340B Program. A few commenters noted 

that CMS did not address section 6004 

in the proposed rule. One commenter 

asked HHS to address this provision 

through a Federal Register notice. Other 

commenters noted that the Medicaid 

drug rebate statute was amended to 

include children’s hospitals in the 

definition of ‘‘covered entity’’ for 

purposes of the best price exclusion; 

however, the definition of ‘‘covered 

entity’’ under the PHS Act was not 

amended. Commenters asked us to 

clarify whether prices to such children’s 

hospitals will be eligible for the nominal 

price exclusion for AMP. 

Response: CMS believes that HRSA is 

the appropriate agency to address the 

issue of which entities may participate 

in the 340B Program. As to the question 

of whether prices to children’s hospitals 

will be eligible for the nominal price 

exclusion for AMP, section 6004 of the 

DRA amended section 1927(a)(5)(B) of 

the Act by adding certain children’s 

hospitals to the definition of covered 

entity. Section 6004 did not amend the 

PHS Act, which governs the 340B 

Program, nor did it amend section 

1927(c)(1)(D) of the Act, which 

addresses the nominal price exemption 

from best price. Therefore, we do not 

believe that prices to children’s 

hospitals can be considered within the 

list of entities addressed in the nominal 

price exemption. 

RPS 

Comment: Several commenters raised 

concern that 6001(e) of the DRA, which 

provides for a survey of retail prices and 

State performance rankings, is not 

addressed in the proposed regulation 

which does not allow for comment. 

Response: The DRA requires the 

Department to enter into a contract with 

a vendor to perform the survey. While 

this provision of the DRA did not 

necessitate public comment on the 

method of the survey, when the RPS is 

published, the methodology will be 

made available. 

Policy Inquiries 

Comment: One commenter noted that 

the drug rebate operations area at CMS 

has an e-mail address for manufacturers 

to send operational questions. The 

commenter asked whether the Division 

of Pharmacy in CMS’ Center for 

Medicaid and State Operations (CMSO) 

has a similar resource. If not, the 

commenter asked to whom 

manufacturers should send policy 

inquiries. 

Response: Formal policy inquiries 

should be addressed to the Director of 

CMSO within CMS. 

Cost of Healthcare 

Comment: Some commenters noted 

that a good way to control the cost of 

healthcare in America is to educate 

people about prevention, disease 

management, and the proper use of 

medications through medication 

therapy management programs. Other 

commenters pointed out that it should 

not be the entire responsibility of 

pharmacies to mitigate the cost of 

decreasing expenditures on prescription 

medication. All parties involved in the 


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production to dispensing of a 

prescription medication should share 

proportionately in the cost sharing 

involved in reducing medical 

expenditures. 

Response: We appreciate the ideas 

shared by the commenters about ways to 

control the cost of healthcare, but at this 

time, we are not planning to add new 

provisions to this regulation to control 

drug costs. 

Medicare Part B 

Comment: Commenters noted that 

revisions to the calculation of AMP 

could cause AMP to decrease for certain 

drugs and biologicals. A decrease in 

AMP would increase the likelihood that 

the applicable threshold percentage will 

be triggered, forcing the substitution of 

AMP for ASP under Medicare Part B. In 

such circumstances, the commenters 

asked CMS to refrain from substituting 

AMP for ASP when the threshold is 

triggered due to the revised definition of 

AMP. 

Response: This issue is not addressed 

in the proposed rule; therefore, we 

cannot consider these comments as we 

consider revisions to be included in the 

final rule. Issues regarding ASP 

substitution and the applicable 

threshold were discussed in recent 

Medicare notice-and-comment 

rulemaking concerning the payment for 

Part B drugs and biologicals (see 71 FR 

48981, 49004 (Aug. 22, 2006) and 71 FR 

69624, 69680 (Dec. 1, 2006)). 

Comment: One commenter noted that 

CMS advised manufacturers during an 

Open Door Forum to look to their 

customary business practices and their 

AMP procedures for guidance whenever 

the Act and the ASP regulations left 

doubts about the proper handling of a 

particular issue with regard to ASP 

reporting. Given the similarities 

between the calculation methodologies 

for AMP and ASP, the commenter urged 

CMS to consider including a discussion 

in the preamble to this final rule 

explaining when, or whether, 

manufacturers should apply new 

instruction from the AMP regulation to 

their ASP policies. Another commenter 

asked CMS to clarify that the treatment 

of bona fide service fee should be the 

same in ASP as it is for AMP. 

Response: These issues are not 

addressed in the proposed rule; 

therefore, we cannot consider these 

comments as we consider revisions to 

be included in the final rule. Inquiries 

regarding the definition of ASP should 

be addressed to the director of the 

Center for Medicare Management in 

CMS. 

Medicare Part D 

Comment: One commenter urged 

CMS to require electronic data transfer 

to support community pharmacy’s 

efforts to obtain electronic funds 

transfer (EFT) reimbursement payment 

from PBMs for Part D claims submitted 

via EFT by pharmacies. Other 

commenters expressed concern that 

Medicare Part D had already cut 

pharmacy profits by 30 percent. One 

commenter noted that independent 

pharmacies made Medicare Part D work 

by loaning medicine and taking out 

loans to make ends meet. Another 

commenter noted that his pharmacy has 

stopped charging copayments for 

Medicare Part D enrollees because they 

can’t afford the copayments. 

Response: These issues are not 

addressed in the proposed rule; 

therefore, we cannot consider these 

comments as we consider revisions to 

be included in the final rule. Questions 

regarding Medicare Part D should be 

addressed to the Director of the Center 

for Beneficiary Choices in CMS. 

Comment: One commenter noted that 

inconsistent policies in Medicaid and 

Medicare Part D will lead to confusion 

and burdensome administrative 

recordkeeping requirements for drug 

manufacturers, health plans, 

wholesalers, and pharmacies. 

Response: To the extent practicable, 

we have made every effort to ensure the 

provisions of this final rule are clear and 

concise, with the minimum 

administrative burden for all affected 

parties. The authorizing statutory 

provisions for the Medicaid Drug Rebate 

Program and Medicare Part D are 

fundamentally different, making it 

difficult to streamline the regulatory 

requirements for these two programs. 

Industry Price Controls 

Comment: One commenter suggested 

that CMS regulate the pharmaceutical 

industry so prices would only increase 

every six months, and there would be a 

60-day advance notice of pricing 

changes. Another commenter suggested 

that all drug companies should be 

required to sell their products to all 

pharmacies at the same price. Other 

commenters expressed concern that the 

government is promoting unfair 

competition because certain purchasers 

(for example, mail order pharmacies, 

hospital outpatient department, and 

outpatient clinics) can receive better 

prices than independent pharmacies. 

One commenter suggested that 

manufacturers be required to report to 

CMS any anticipated pricing increases 

with a 90-day advance notice. 

Response: This rule is not designed to 

promote unfair competition or negotiate 

drug prices. These issues are not 

addressed in the proposed rule; 

therefore, we cannot consider these 

comments as we consider revisions to 

be included in the final rule. 

Comment: One commenter urged 

CMS to address severe price 

fluctuations, which currently can take 

months to address and correct. Another 

commenter urged CMS to identify 

atypical manufacturer pricing practices 

and recommend remedies to Congress to 

address such practices. 

Response: These issues are not 

addressed in the proposed rule; 

therefore, we cannot consider these 

comments as we consider revisions to 

be included in the final rule. 

Comment: One commenter requested 

that CMS develop a specific 

methodology for timely verification of 

the integrity and accuracy of 

calculations and price information 

reported by manufacturers. 

Response: We appreciate the 

comment and will work with the OIG in 

HHS to ensure the integrity of drug 

rebate data. 

State Supplemental Rebate Agreements 

Comment: One commenter noted that 

some States are promoting the use of 

brand name versions of genericallyavailable drugs because they are 

receiving supplemental rebates from 

branded manufacturers that lower the 

net cost of the brand to that of the 

generic. This practice has potential 

negative implications for generic drug 

use in Medicaid because it can 

discourage the overall availability of 

generic drugs in the marketplace. The 

commenter urged CMS to prohibit 

States from entering into such 

agreements with manufacturers. 

Response: We believe any adverse 

impact on generic drug use by the 

implementation of State supplemental 

rebates is mitigated by the fact that the 

overall FULs cap is applied to multiple 

source brand name drugs as well as 

generics. 

State Rebate Claims 

Comment: A few commenters 

expressed concern with the lack of 

Federal regulation regarding the time 

limit for States to submit rebate claims 

to drug manufacturers under the 

Medicaid Drug Rebate Program. The 

commenters noted that CMS (then the 

Health Care Financing Administration) 

proposed a 60-day time limit in the 

1995 NPRM, but that provision was 

never promulgated in a final rule. The 

commenters requested that CMS enact a 

time frame not to exceed one year to 

prevent continued State submission of 


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untimely rebate claims to 

manufacturers. 

Response: We encourage States to 

submit timely rebate claims to 

manufacturers, but we are not 

establishing a regulatory timeframe in 

this final rule. 

Comment: One commenter urged 

CMS to require States to use an 

electronic claims system to invoice 

manufacturers for rebates. 

Response: States currently have the 

option to submit electronic invoices; we 

are not establishing this as a 

requirement in this final rule. 

Medicaid Eligibility 

Comment: One commenter expressed 

concern with individuals potentially 

abusing the public health system and 

costing taxpayers money. Rather than 

cut reimbursement to pharmacies, CMS 

should enforce who is covered under 

the Medicaid and Medicare Programs. 

Response: We appreciate the 

commenter’s concerns; however, this 

issue is not addressed in the proposed 

rule. We will keep this suggestion in 

mind for future revisions of the 

regulations. 

Consistency in CMS Policies 

Comment: One commenter noted that 

this final rule should be consistent with 

established Medicaid rebate policies, 

definitions and terms set forth in 

current CMS guidance, such as 

Medicaid Program Releases and the 

national rebate agreement created under 

the OBRA 90. The commenter also 

believed the final rule should be 

consistent in treating similarly-situated 

entities, while recognizing entities that 

are not similarly situated. 

Response: We believe the provisions 

in this final rule are, in large part, 

consistent with the policies we have 

previously adopted. To the extent that 

we have clarified or revised our 

policies, we have so noted in the final 

rule. 

IV. Provisions of the Final Regulations 

For the most part, this final rule 

incorporates the provisions of the 

proposed rule. Those provisions of this 

final rule that differ from the proposed 

rule are as follows: 

In § 447.300, we updated a statutory 

reference. 

In § 447.502, we added definitions of 

three terms: lagged price concession, 

noninnovator multiple source drug, and 

States. We also moved the definition of 

bona fide service fee to § 447.504 and 

clarified that bona fide service fees 

mean payment for an expense that 

would have been paid by the 

manufacturer at the same rate had these 

services been performed by the 

manufacturer or other entity. We also 

clarified that bona fide service fees are 

paid by a manufacturer to an entity. 

In § 447.502, in the definition of 

dispensing fee, we inserted ‘‘or service’’

after, ‘‘is incurred at the point of sale.’’

In § 447.502, we clarified that an 

innovator multiple source drug includes 

an authorized generic drug. We also 

clarified that term to include any 

labelers operating under the NDA. 

In § 447.502, we clarified that a single 

source drug includes a covered 

outpatient drug approved under a BLA. 

In § 447.504(c), we revised the 

definition of customary prompt pay 

discount by inserting ‘‘frame and 

consistent with industry standards and 

normal business practices for payment’’

after ‘‘a specified time.’’

In § 447.504(d), we revised the 

definition of net sales by inserting 

‘‘except customary prompt pay 

discounts extended to wholesalers,’’

after ‘‘cash discounts allowed.’’

In § 447.504(e), we removed PBMs 

from the definition of retail pharmacy 

class of trade. We also removed entities 

that arrange for the purchase of drugs 

from this definition. 

In § 447.504(f), we removed ‘‘a 

pharmacy, chain of pharmacies, or 

PBM’’ and ‘‘arranges for the sale of’’

from the definition of wholesaler. We 

also inserted ‘‘those entities in the retail 

pharmacy class of trade’’ after 

‘‘including.’’

In § 447.504(g)(3) and (h)(4), we 

clarified that direct and indirect sales to 

hospitals that cannot be identified with 

adequate documentation as being used 

in the outpatient pharmacy for 

outpatient use are not included in AMP. 

In §§ 447.504(g)(6), 447.504(h)(22), 

and 447.504(i)(1), we clarified that 

discounts, rebates, or other price 

concessions to PBMs are excluded from 

the determination of AMP, except for 

purchases through the PBMs’ mail order 

pharmacies. 

In § 447.504(g)(8), we clarified that 

sales to outpatient facilities (for 

example, clinics, surgical centers, 

ambulatory care centers, dialysis 

centers, and mental health centers) are 

included in AMP. 

In §§ 447.504(g)(9) through (13), we 

added sales to home infusion providers, 

specialty pharmacies, home health care 

providers, and physicians to the list of 

sales included in AMP. 

In § 447.504(g)(15), we removed 

manufacturer coupons redeemed by any 

entity other than the consumer from the 

list of entities included in AMP. In 

§ 447.504(h)(15), we clarified that 

manufacturer coupons redeemed by an 

agent, pharmacy, or other entity acting 

on behalf of the manufacturer are 

excluded from AMP. We further 

clarified that such coupons are excluded 

as long as the full value of the coupon 

is passed on to the consumer, pharmacy, 

agent, or other entity does not receive 

any price concession. 

In § 447.504(g)(15), we clarified that 

sales of drugs reimbursed by third party 

payers are included in AMP, provided 

such drugs are provided to the retail 

pharmacy class of trade. We further 

clarified that third party payers include 

a qualified retiree prescription drug 

plan under section 1860D–22(a)(2) of 

the Act, HMOs and MCOs that do not 

purchase or take possession of drugs, 

and TRRx. In § 447.504(h)(23) we added 

associated rebates, discounts, or other 

price concessions to third party payers 

including the Medicare Part D Program, 

an MA–PD, a qualified retiree 

prescription drug plan under section 

1860D–22(a)(2) of the Act, SCHIP, 

SPAPs, TRRx, and Medicaid programs 

to the list of prices excluded from AMP. 

In § 447.504(h)(5), we clarified that 

sales to HMO or MCO-operated 

pharmacies that purchase or take 

possession of drugs are excluded from 

AMP. 

In § 447.504(h)(6), we clarified that 

sales to nursing facility pharmacies, 

contract pharmacies for the nursing 

facility where these sales can be 

identified with adequate 

documentation, and other entities where 

the drugs are dispensed through a 

nursing facility pharmacy, such as 

assisted living facilities, are excluded 

from AMP. 

In §§ 447.504(h)(7) through (12), we 

added sales to hospices (inpatient and 

outpatient), veterinarians and prisons, 

sales outside the 50 States and the 

District of Columbia, sales to State, 

county, and municipal entities, and 

sales to patient assistance programs to 

the list of sales excluded from AMP. 

In § 447.504(h)(16) and (17), we added 

that manufacturer vouchers and 

manufacturer-sponsored drug discount 

card programs are excluded from AMP. 

In § 447.504(h)(19), we clarified that 

bona fide service fees to any entities 

included in the retail pharmacy class of 

trade are excluded from the 

determination of AMP. 

In § 447.504(h)(21), we clarified that 

returned or replaced goods, when 

accepted or replaced in good faith, are 

excluded from AMP. 

In § 447.504(h)(24), we added 

Medicaid rebates under the national 

rebate agreement or a CMS-authorized 

State supplemental rebate agreement are 

excluded from AMP. 

In § 447.504(i)(1), we clarified that 

AMP includes cash discounts except 


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customary prompt pay discounts 

extended to wholesalers. We also 

clarified that other fees are included in 

AMP. 

In § 447.504(i)(2), we revised the 

methodology for calculating quarterly 

AMP to be the weighted average of 

monthly AMPs in the quarter. 

In § 447.505(c)(2), we deleted PBMs 

from the list of entities included in best 

price. We also added ‘‘PBM rebates, 

discounts, or other price concessions 

except mail order purchases’’ to the list 

of prices excluded from best price in 

§ 447.505(d)(13). 

In § 447.505(c)(12), we removed 

‘‘manufacturer coupons redeemed by 

any entity other than the consumer’’

from the prices included in best price. 

We also added manufacturer coupons 

redeemed by an agent, pharmacy or 

other entity acting on behalf of a 

manufacturer, as long as the full value 

of the coupon is passed on to the 

consumer and the pharmacy, agent or 

other entity does not receive any price 

concession, to the list of prices excluded 

from best price in § 447.505(d)(8). 

In § 447.505(d)(3), we limited the 

SPAP best price exemption to any prices 

or price concessions provided to 

designated SPAPs. 

In § 447.505(d)(4), we deleted 

TRICARE from the list of prices 

excluded from best price. 

In § 447.505(e)(2), we clarified the 

reference to the nominal price 

provisions in § 447.508. 

In § 447.506(a), we removed the 

phrase ‘‘directly or indirectly’’ from the 

definition of authorized generic drug. 

In § 447.506(b), we revised the initial 

provision requiring the manufacturer 

holding title to the original NDA to 

include the authorized generic sales of 

the secondary manufacturer in the AMP 

of the brand drug by specifying that the 

manufacturer holding title to the 

original NDA of an authorized generic 

must include the sales of authorized 

generics in the AMP of the manufacturer 

holding title to the original NDA only 

when the products are sold directly to 

a wholesaler. 

In § 447.506(c), we removed the initial 

provision that requires the manufacturer 

holding title to the original NDA to 

include the sales of the secondary 

manufacturer in the best price of the 

brand drug. We added language that 

would require sales from the 

manufacturer holding title to the 

original NDA to the secondary 

manufacturer to be included in the best 

price of the manufacturer holding title 

to the original NDA. We also added 

language to state that the best price is 

the lowest price at which the authorized 

generic drug is sold. 

In § 447.510(a)(3), we clarified that 

customary prompt pay discounts shall 

be reported for each covered outpatient 

drug at the 9-digit NDC level. We also 

clarified that this term includes 

discounts provided to all wholesalers in 

the rebate period. 

In § 447.510(a)(4), we clarified that 

nominal prices include all sales of 

single source and innovator multiple 

source drugs to the entities listed in 

§ 447.508(a) of this subpart. 

We added § 447.510(b)(2) to specify 

that manufacturers should not revise 

AMP when the revision would solely be 

as a result of data pertaining to lagged 

price concessions. 

In § 447.510(c)(1), we changed the 

timeframe in which a manufacturer 

must report base date AMP to CMS from 

the first full calendar quarter following 

publication of this final rule to the first 

four full calendar quarters following 

publication of this final rule. 

In § 447.510(c)(2)(i), we clarified that 

a manufacturer’s recalculation of base 

date AMP must only reflect the 

revisions to AMP as provided for in 

§ 447.504 of this subpart, as opposed to 

§ 447.504(e) of the same. 

In § 447.510(c)(2)(ii), we added a 

provision to allow a manufacturer to 

choose to recalculate base date AMP on 

a product-by-product basis. 

In § 447.510(c)(2)(iii), we added a 

provision to require manufacturers to 

use actual and verifiable pricing records 

in the calculation of base date AMP. 

In § 447.510(d)(2), we revised the reg 

text by removing the reference to 

§ 447.504 and replacing it with the 

requirement that monthly AMP should 

be calculated as the weighted average 

for all the manufacturer’s package sizes 

of each covered outpatient drug sold by 

the manufacturer during a month. We 

also added a requirement that a 

manufacturer must estimate the impacts 

of its lagged price concessions using a 

12-month rolling average to estimate the 

value of those discounts. 

In § 447.510(d)(3), we removed the 

prohibition against reporting revised 

monthly AMP and replaced it with a 

requirement that a manufacturer report 

revisions to monthly AMP to CMS for a 

period not to exceed 36 months from the 

month in which the data were due. 

We added § 447.510(d)(4) to prohibit 

manufacturers from reporting revisions 

to monthly AMP if the revisions would 

be solely as a result of data pertaining 

to lagged price concessions. 

We added § 447.510(d)(5) to address 

monthly AMP reporting requirements 

for terminated products. 

In § 447.510(e)(3), we added a 

provision to allow pricing reports to be 

certified by an individual other than a 

CEO or CFO who has authority 

equivalent to a CEO or a CFO. 

In § 447.510(e)(4), we allowed pricing 

reports to be certified by an individual 

who has the directly delegated authority 

to perform the certification on behalf of 

a CEO, a CFO, or an individual with 

authority equivalent to a CEO or a CFO. 

In § 447.512(c)(1), we added language 

that would allow a physician to indicate 

that a specific brand is necessary when 

prescribing by an electronic means. 

In § 447.514(a)(1)(ii) we deleted ‘‘list 

the drug which has met’’ and ‘‘based on 

all listings contained in current editions 

(or updates) of published compendia of 

cost information for drugs available for 

sale nationally. 

In § 447.514(c)(2), we changed ‘‘30 

percent’’ to ‘‘40 percent’’ per the outlier 

policy which will be implemented 

during the period of the final rule with 

comment period. 

In § 447.514(c)(3), we clarified the 

regulation text by replacing ‘‘innovator 

single source’’ with ‘‘brand name.’’

V. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA), we are required to 

provide 30-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: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements: 

Section 447.510 Requirements for 

Manufacturers 

Section 447.510 states that a 

manufacturer must report, 

electronically, product and pricing 

information for covered outpatient 

drugs 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 


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pertaining to the manufacturer’s 

reporting requirements is located under 

§§ 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 § 447.510 is 

68,200 annual hours. These new 

reporting requirements for drug 

manufacturers participating in the 

Medicaid Drug Rebate Program 

associated with the Medicaid Drug 

Program Monthly and Quarterly 

Reporting Form (CMS–367) are 

approved under OMB# 0938–0578. CMS 

will revise this collection to include 

changes in burden based upon this 

regulation. Section 447.510(f) requires a 

manufacturer to retain records (written 

or electronic) 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 

§ 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 

is not a new requirement and is 

currently approved under OMB# 0938–

0578. 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. It may require 

some additional record-keeping to retain 

the monthly, as well as the quarterly 

data, in the AMP system for 

manufacturers that do not retain this 

information there now. However, we 

believe that most manufacturers already 

have such monthly sales data (for 

example, data of sale information) in 

their system and transferring this to the 

system for calculating monthly AMP 

would not be a significant burden. 

Section 447.520 FFP: Conditions 

Relating to Physician-Administered 

Drugs 

Section 447.520 requires providers, 

effective January 1, 2007, to submit 

claims to the State for physicianadministered 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 (for example, 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 (www.bls.gov/ 

news.release/pdf/ecec.pdf). The per 

claim cost would be under nine cents. 

Many hospital outpatient departments 

will also need to modify their billing 

systems to capture the NDC on 

Medicaid claims (hospitals that receive 

discounted drugs and bill Medicaid at 

the actual acquisition cost of the drug 

and hospitals that use a drug formulary 

system and bill at the hospital’s 

purchasing cost are exempted). The 

American Hospital Association (AHA) 

in 2002 estimated that it would cost 

$200,000 per hospital for changes 

needed to use NDC codes for billing. 

Inflating this figure by the Consumer 

Price Index (CPI) would make the 

current cost approximately $230,000 for 

each of the 5,655 hospitals that 

participate in Medicaid for the total cost 

to be $1.3 billion. 

We are not adopting this estimate as 

we believe it to be high. This estimate 

was developed in 2002 to implement a 

stand alone NDC system from scratch. 

Since its development, FDA in 2004 

issued a final rule requiring drug 

manufacturers to include Uniform 

Product Codes (bar codes) with NDC 

numbers on drug packages. In their final 

rule, FDA estimated a significant 

percent of hospitals would voluntarily 

start to implement bar-coding systems, 

in order to lower the number of 

medication errors and to realize other 

efficiency gains. Consistent with FDA’s 

findings, some commenters noted that 

hospitals are planning to use bar codes 

on drugs in the future. When use of 

these codes is adopted, hospitals will be 

able to take the NDC from the bar code 

when billing Medicaid, minimizing the 

cost of implementing this provision. 

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 

only a few States will apply. Therefore, 

we believe this requirement to be 

exempt as specified at 5 CFR 

1320.3(c)(4). We believe the total 

estimated annual burden for this rule is 

84,492 hours. 

OMB No. Requirements Number of respondents Number of burden hours Total annual burden 

0938–0578 ............................. 447.510 550 Drug Manufacturers ........ 31 hours per quarter .............. 68,200 hours. 

None ....................................... 447.520 20,000 Physicians .................. 15 seconds per claim ............ 16,292 hours. 

None/Exempt .......................... 447.520(c) Less than 10 States ............... NA .......................................... NA. 

Total Annual Burden ....... ........................ ................................................ ................................................ 84,492 hours. 

We have submitted a copy of this final 

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–FC] Room C4–26–

05, 7500 Security Boulevard, Baltimore, 

MD 21244–1850; and Office of 

Information and Regulatory Affairs, 

Office of Management and Budget, 

Room 10235, New Executive Office 


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Building, Washington, DC 20503, Attn: 

Katherine Astrich, CMS Desk Officer, 

CMS–2238–FC, 

katherine_astrich@omb.eop.gov. Fax 

(202) 395–6974. 

Comments and Responses on Collection 

of Information Requirements 

A. Section 447.510 Requirements for 

Manufacturers 

Comment: Some commenters stated 

that CMS greatly underestimated the 

burden on pharmaceutical 

manufacturers, including manufacturers 

that are small businesses, to implement 

the additional reporting requirement. 

Commenters asserted that the burden 

would be significant to implement a 

new methodology for AMP calculations 

while quickly implementing monthly 

reporting of AMP and quarterly 

reporting of both customary prompt pay 

discounts and nominal prices. 

Commenters did not provide revised 

estimates of the increased hourly annual 

burden on manufacturers. They believed 

that CMS’ estimated 31 hours per 

quarter is low by several hundred hours. 

Some commenters noted that 

pharmaceutical companies must pay to 

modify their drug price reporting 

systems, hire and train additional 

personnel to meet the reporting 

requirements, change operating 

procedures and government pricing 

systems, and dedicate additional 

employees to Medicaid price reporting. 

Response: Because the comments 

contained general estimates, but did not 

provide adequate documentation of the 

estimates of burden on manufacturers, 

we have no basis to revise the estimates; 

therefore, we have retained the same 

estimates in the final rule. 

Comment: One commenter asserted 

that the estimated start-up cost per 

manufacturer to implement the rule 

significantly exceeds the $50,000 

estimate stated in the proposed rule. 

The commenter suggested that CMS 

should conduct industry surveys on 

implementation costs before making 

such proposals. 

Response: The public comment 

process, of which this comment is a 

part, is intended to provide an 

opportunity for interested parties to 

submit additional information for us to 

consider before we finalize the 

estimates. We are not required to 

conduct a survey and, given the 

timeframe for issuance of this rule 

mandated by the DRA, do not have the 

time and resources to do so. 

Comment: One commenter stated that 

completing monthly AMP data will be 

very demanding, especially for smaller 

manufacturers. The commenter further 

explained that this burden is increased 

because the monthly AMP data will be 

collected using an internet-based system 

that requires manual data entry by the 

manufacturer rather than capturing data 

from an existing system. The commenter 

further asserted that this will have a 

major impact to manufacturers. 

Response: The commenter did not 

document the additional burden on 

manufacturers. We continue to believe 

that the estimates from the proposed 

rule best represent the costs that will be 

incurred by manufacturers. The new 

data collection system offers two types 

of data transmission, on-line data entry 

and file transfer to accommodate the 

manufacturers that use a file transfer. 

The new Web-based data collection 

method should not place any additional 

burden on manufacturer’s existing 

systems. 

Comment: Another commenter 

asserted that the approximate $50,000 

start-up cost per drug manufacturer 

appears quite low and that most of their 

larger pharmaceutical manufacturing 

clients have already spent more than 

this amount. The commenter further 

stated that the $50,000 start-up estimate 

does not include the ongoing impact of 

additional resources required to oversee 

the twelve additional annual 

submissions required by monthly AMP 

reporting and inclusion of authorized 

generics in AMP and best price. 

Response: Our estimate includes the 

costs to hire one full-time employee 

(FTE) to undertake the new reporting 

requirements for larger manufacturers 

and one half FTE costs for small 

manufacturers; therefore, we have 

retained the same estimated ongoing 

burden in the final rule. 

Comment: The commenter believed 

that the start-up burden for complying 

with the requirements of the proposed 

rule of $50,000 and 208 hours greatly 

underestimate the costs of developing a 

system for allocating bundled sales. The 

commenter further suggested redefining 

a bundled sale and how such a sale 

should be treated for purposes of 

determining AMP and best price. 

Response: The requirement for 

allocating discounts for bundled sales is 

not new with this regulation. Further 

discussion of the requirements for 

bundled sales is discussed earlier in this 

preamble. 

Comment: Commenters asked about 

how customary prompt pay discounts 

and nominal pricing data is to be 

reported and noted that they believe 

that these new data reporting 

requirements will have a major impact 

on manufacturers. 

Response: We are adopting in the 

final rule a quarterly reporting policy 

and will collect a single dollar value for 

nominal and customary prompt pay 

discounts for each drug. This is the 

minimal collection possible under the 

statute. 

B. Section 447.520 FFP: Conditions 

Relating to Physician-Administered 

Drugs 

Comment: Many commenters stated 

that the RIA concerning the collection of 

NDCs on outpatient hospital claims was 

seriously understated. These 

commenters said that most, if not all, 

hospital patient accounting systems are 

not designed to capture NDC data. One 

commenter estimated that a short-term 

workaround would require 500 to 1,500 

hours per hospital to design, build, and 

test. Other commenters estimated the 

cost to be from $.25 to $10 per dose. 

One commenter estimated the systems 

changes necessary to automate the 

process to cost $1.7 million over five 

years per hospital. Several commenters 

cited the cost estimate of $200,000 per 

hospital, or $1.3 billion for all hospitals, 

that was presented by the AHA when 

the final regulation for electronic health 

data standards for hospitals was under 

development in 2002. Other 

commenters estimated annual costs to 

update systems with ever-changing 

NDCs to be up to $200,000 per hospital 

per year. Many commenters noted that 

these costs far exceed the projected 

saving of $179 million over five years to 

Medicaid for this provision. 

Response: Based on the comments 

received, we believe that we may have 

underestimated the costs to outpatient 

departments of hospitals. The estimates 

provided by commenters varied widely 

and commenters offered little 

documentation to support their 

estimates. We have revised the Impact 

Analysis to acknowledge an estimate, 

cited by some commenters, provided by 

the AHA on the proposed rule to adopt 

modifications to standards for electronic 

transactions published by the Office of 

the Secretary on May 31, 2002 (67 FR 

38047–38048). The AHA estimated that 

it would cost a minimum of $200,000 

per hospital for hospital outpatient 

departments to switch from using 

HCPCS to NDCs. Costs would vary 

based on the size of the facility. If this 

estimate is accurate, the present cost, 

updating this amount by the CPI from 

2002 to 2007 the cost would be 

$230,000 for the 5,655 hospitals that 

participate in the Medicaid Program, or 

a total of $1.3 billion. 

We do not accept that the cost would 

be this high. We note, as did some 

commenters, that the Food and Drug 

Administration is planning on requiring 

drug manufacturers to place Uniform 


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Product Codes (bar codes) on drug 

products which will include the NDC of 

the drug. Commenters stated that 

hospitals are transitioning to use the bar 

codes on the drugs they dispense. Bar 

coding will allow hospitals to bill 

Medicaid with NDCs. 

Comment: Many commenters reported 

that outpatient hospital billing systems 

capture the NDC only for the primary 

drug. Hospitals often restock with the 

same drug of a different manufacturer, 

without recording the NDC for the 

restocked drug. Similarly, hospitals are 

increasingly using automated drug 

dispensing machines, which do not 

accommodate multiple NDCs. Drug 

products of multiple manufacturers are 

used in a single slot in the machines. 

The machines do not have the capacity 

to separate drugs by NDC. Response: We acknowledge that many 

hospitals will need to change their 

procedures to comply with this billing 

requirement. However, the statute 

requires States to collect utilization data 

with respect to covered outpatient drugs 

in order to identify the manufacturer of 

the drug to secure rebates. Comment: Several commenters raised 

other technical difficulties with 

recording an accurate NDC on the claim. 

These include the complexity of 

translating from units purchased to the 

amount of the drug dispensed and how 

to track and record multiple NDCs when 

a drug administered is comprised of 

multiple drugs or the same drug from 

multiple manufacturers; for example, 

with compounded drugs or injectible 

drugs. Response: We recognize that many 

hospitals will need to institute new 

procedures to obtain the information 

with respect to covered outpatient drugs 

that is required by the statute for billing 

Medicaid agencies. Comment: Several commenters noted 

that the requirement for billing using 

NDC codes would apply only to 

Medicaid patients, but that the 

clinicians delivering the medications do 

not know the source of payment for 

patients. 

Response: We understand from the 

comments received that hospitals may 

need to change procedures to meet this 

new requirement. 

Comment: One commenter said that 

physician billing systems currently 

allow for one HCPCS code and cannot 

accommodate multiple NDCs. The 

commenter also said that discussions 

with vendors of billing systems have not 

offered a solution to accommodate 

NDCs. 

Response: The statute, as revised by 

the DRA, requires States to collect NDCs 

with respect to covered outpatient drugs 

so that they can collect rebates from 

drug manufacturers. Physician offices 

and their vendors may need to revise 

systems as necessary to comply with 

this new requirement. 

Comment: One commenter stated that 

the claims processing system in the 

Medicaid agency in his State is 

incapable of processing outpatient 

pharmacy claims billed with the NDC, 

so that his hospital would incur 

additional costs, but it would not yield 

additional revenue to Medicaid. 

Response: The statute requires States 

to implement this provision or lose FFP 

for the drugs administered. The statute 

requires States to collect NDCs with 

respect to covered outpatient drugs in 

order to identify manufacturers and 

secure rebates. If a State cannot 

implement the provision, it may request 

a waiver from the Secretary until the 

State can come into compliance. 

Comment: Several commenters 

believed that the Regulatory Impact 

Statement should reflect costs to State 

Medicaid Agencies for outreach and 

education of providers concerning this 

requirement. 

Response: We agree that States will 

incur some costs for outreach and 

education of physicians and outpatient 

hospital staff. We have not included 

State administrative costs. We note 

again, as we did in the proposed rule, 

that States will save considerably more 

from this regulation than the costs they 

will incur to implement it. 

VI. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

VII. Regulatory Impact Analysis 

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 

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). An 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 will save $8.4 

billion over the next 5 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 final 

rule with comment to be a major rule for 

purposes of the CRA. 

STATE AND FEDERAL SAVINGS OVER 5 YEARS

[In millions] 

DRA section and provision 

FFY 

Federal 

State 

2007 2008 2009 2010 2011 

2007–11 

total savings 

Section 6001—Federal Upper Payment 

Limits and Other Provisions 

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

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

$465 

330 

$750 

535 

$1,075 

765 

$1,155 

825 

$1,250 

890 

$4,695 

3,345 

Total ................................. 795 1,285 1,840 1,980 2,140 8,040 

Section 6002—Rebates on Physician-Administered Drugs.Federal ..............................

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

18 

13 

19 

14 

20 

15 

22 

16 

24 

18 

103 

76 

Total ................................. 31 33 35 38 42 179 


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Federal Register / Vol. 72, No. 136 / Tuesday, July 17, 2007 / Rules and Regulations 39231 

STATE AND FEDERAL SAVINGS OVER 5 YEARS—Continued 

[In millions] 

DRA section and provision 

FFY 

Federal 

State 

2007 2008 2009 2010 2011 

2007–11 

total savings 

Section 6003—Reporting of Authorized 

Generics for Medicaid Rebates 

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

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

10 

7 

25 

19 

28 

21 

32 

24 

36 

27 

131 

98 

Total ................................. 17 44 49 56 63 229 

Total Savings for FFY Federal .............................. 493 794 1,123 1,209 1,310 4,929 

State .................................. 350 568 801 865 935 3,519 

Total ................................. 843 1,362 1,924 2,074 2,245 8,448 

All savings estimates were developed 

by the Office of the Actuary (OACT) in 

CMS. We note that the CBO, 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 

developed by CMS’ OACT were applied 

to project Medicaid prescription drug 

spending developed for the President’s 

fiscal year 2007 budget. Savings were 

phased in over 3 years to allow for 

implementation lags. On the previous 

chart, the estimate for FFY 2007 through 

FFY 2010 includes $5 million for the 

RPS. 

The savings estimates for section 6002 

of the DRA—rebates on physicianadministered 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 physicianadministered 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—were 

developed by CMS’ OACT and 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 

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 will be small as they involve 

changes in work processes rather than 

new activities. The resulting program 

savings will be many times these costs. 

The RFA requires agencies to prepare 

a regulatory flexibility analysis and 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 

substantial number of small entities.’’

For purposes of the RFA, small entities 

include small businesses, non-profit 

organizations, and small governmental 

jurisdictions. Individuals and States are 

not included in the definition of a small 

entity. For purposes of the RFA, three 

types of small 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 nonprofit providers) that bill Medicaid for 

physician-administered drugs. We will 

discuss each type of business in turn. 

According to the SBA’S size 

standards, drug manufacturers are small 

businesses if they have fewer than 500 

employees (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 will have a small impact on 

small drug manufacturers. The rule will 

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 will 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. Because drug 

manufacturers provide nominal prices 

and customary prompt pay discounts, 

we believe that these figures are 

available in the manufacturers’ existing 

data systems and do 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 rule will affect the 

level of rebates due from manufacturers. 

The DRA provides that customary 

prompt pay discounts be excluded from 

AMP. This will 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 will cost manufacturers up to 

$160 million (two percent of $8 billion 

in rebate payments annually). In this 

rule, we also will remove sales to PBMs 

and nursing home pharmacies from 

AMP as well as provide manufacturers 

the option to exclude hospital 

outpatient sales if information is 

insufficient to accurately identify sales 

of drugs to hospitals used in the 

outpatient department. We have been 

told by industry representatives that 

nursing home pharmacies and hospitals 

receive larger discounts than other 

sectors, thus potentially resulting in an 

increase in AMP from these changes. 

Likewise, some commenters believe that 

the exclusion of PBM sales will increase 

AMP. However, because we have no 

independent data on the cost of drugs to 

these entities, we cannot quantify the 


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effect of these provisions other than to 

say that we have been told by the 

industry that it will increase rebates 

owed by drug manufacturers. Public 

comments and responses specifically 

regarding small businesses including 

drug manufacturers are discussed under 

‘‘Comments and Responses on the 

Regulatory Impact 6. Effects on Small 

Business Entities.’’

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 (www.sba.gov/ 

size/sizetable2002.html). The SBA 

estimates that there are about 18,000 

small pharmacies. These pharmacies 

will 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 will 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 will provide States two new data 

points to use to set payment rates. After 

their release in January 2007, States may 

use AMP and retail survey prices in 

their payment methodologies when they 

are released. 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. Public comments and 

responses specifically regarding small 

businesses including retail pharmacies 

are discussed under ‘‘Comments and 

Responses on the Regulatory Impact 6. 

Effects on Small Business Entities.’’ The 

analysis in this section, together with 

the remainder of the preamble and the 

regulatory impact analysis, constitutes a 

Final Regulatory Flexibility Analysis 

(FRFA) for purposes of compliance with 

the RFA, section 605. 

According to the SBA’s size 

standards, physician practices are small 

businesses if they have revenues of $9 

million or less in 1 year (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 

will 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 will 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 (Calendar Year 2004 

Medicare Carrier Claims Data in the 

National Claims History extract). We 

believe most of the Medicaid 

beneficiaries who receive physicianadministered drugs are also in Medicare 

because of the severity of the medical 

conditions of people who require these 

drugs. We then assume that it will take 

15 seconds per claim. Multiplying 

3,910,000 by 15 seconds equals 

58,650,000 seconds or 16,292 hours 

(58,650,000/3,600 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 will be 

under 9 cents. Calculated another way, 

the annual cost per physician practice 

will 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 (www.sba.gov/ 

size/sizetable2002.html). As with 

physician practices, outpatient units of 

hospitals will need to include NDCs on 

claims for physician-administered 

covered outpatient drugs. Outpatient 

hospital claims for physicianadministered drugs are included in the 

3,910,000 annual total claims discussed 

in the previous paragraph. In addition 

we believe that most hospitals will need 

to change their billing systems to 

capture NDC codes. In 2002 when CMS 

proposed to rescind the use of NDCs for 

drug claims submitted by institutional 

providers, the AHA estimated that these 

changes would cost hospitals a 

minimum of $200,000 each ($230,000 in 

2007 adjusted by the CPI). Because this 

estimate is not documented, CMS is not 

adopting it for purposes of this impact 

analysis; however, we do accept that 

hospitals will incur some costs. We do 

not have an adequate basis to estimate 

this cost, however, several commenters 

noted that hospitals are in the process 

of instituting bar codes on drugs that 

contain the NDC. This will minimize 

the cost for hospitals to implement this 

provision. 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 these entities. In any case, 

the cost will be under nine 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 will impact small 

rural hospitals to the extent that billing 

systems will need to be changed to 

capture NDCs on claims for drugs 

administered by physicians in the 

outpatient department. We acknowledge 

the AHA estimate of $200,000 per 

hospital for these changes ($230,000 in 

2007 adjusted by the CPI), but we have 

no documentation to analyze or verify 

this estimate. We also believe that 

hospitals can minimize the cost to the 

extent that they use bar codes on the 

drugs they dispense, as this will identify 

the NDC of the drug needed to bill 

Medicaid. 

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 

1 year of $100 million in 1995 dollars, 

updated annually for inflation. That 

threshold level is currently 

approximately $125 million. This rule 

will 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: Effects 

on Drug Manufacturers) falls far below 

the threshold and we anticipate this rule 

will save States $3.5 billion over the 

five-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 rule will impose only 

minimal new administrative burden on 

States and yield substantial savings to 

States, we believe that these costs can be 


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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 will 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 will 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 

will 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 will 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 will 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 will cost manufacturers 

up to $160 million (two percent of $8 

billion in rebate payments annually). In 

this rule, we also will remove sales to 

PBMs and nursing home pharmacies 

from AMP and allow drug manufactures 

to exclude sales to outpatient 

departments of hospitals when data is 

not available to separate out drugs 

administered in the outpatient 

department from the hospital as a 

whole. We have been told by industry 

representatives that PBMs, nursing 

homes and hospital pharmacies receive 

larger discounts than other sectors. If 

this information is accurate, removing 

these prices will increase AMP. 

However, because we have no 

independent data on the cost of drugs to 

these entities, we cannot quantify the 

effect of this provision other than to say 

that we believe it will 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 5-year State savings of over 

$3.5 billion. State administrative costs 

associated with this regulation are 

minor as States currently pay at or 

below the 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 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 

will 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, total retail prescription sales in 

the United States, including chain drug 

stores, independent drug stores, and 

supermarkets totaled about $200 billion 

in 2006 (www.nacds.org/ 

wmspage.cfm?parm1=507). Based on 

comments, we decided to exclude mail 

order and reflect only community-based 

retail sales in the total sales because the 

savings will principally come from 

retail pharmacies. Assuming, 

conservatively, that sales will rise at 

only five percent a year, 2007 sales 

would be over $210 billion and 2011 

sales over $255 billion, for a 5-year total 

of $1160 billion. Dividing the $8 billion 

projected Medicaid savings by the 

$1,160 billion results in a loss in 

revenue of less than one percent. Thus, 

the effect of this rule will be to reduce 

retail prescription drug revenues by less 

than one percent, on average. Actual 

revenue losses will be even smaller 

because pharmacies have the ability to 

mitigate the effects of the 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 lowincome areas where there are high 

concentrations of Medicaid 

beneficiaries. We received general 

comments that these pharmacies will be 

greatly impacted by the provisions of 

this rule; however, we did not receive 

documented estimates of these effects. 

Because of the lack of evidence as to the 

true effect, we have retained our prior 

conclusion that this proposed rule is 

likely to have a ‘‘significant impact’’ on 

some pharmacies. 

4. Effects on Physicians 

This regulation will 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 will affect hospitals 

with outpatient departments that 

provide and bill Medicaid for physicianadministered covered outpatient drugs. 

As discussed above, hospitals with 

outpatient departments would need to 

include the NDC on claims for such 


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physician-administered drugs. We 

believe this will need to be done 

manually or will require a one-time 

systems change. We believe the cost of 

adding the NDC to each claim would be 

small. We are not able to estimate the 

cost to make needed systems changes 

but note that the AHA has estimated 

this to be at least $200,000 per hospital 

($230,000 in 2007 adjusted by the CPI). 

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 nonprofit 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 could also 

increase the amount of drug rebates that 

manufacturers will pay as a result of 

removing customary prompt pay 

discounts and nursing home sales from 

AMP, which is used in the rebate 

calculation. To the extent that PBMs are 

also excluded from best price, the 

amount of rebates could decrease. The 

exclusion of customary prompt pay 

discounts will cost manufacturers up to 

$160 million (two 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 will 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. 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 

could 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 may 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 covered 

outpatient 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 to 

manually include the NDC on the claim 

will be under nine 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. 

Small entity 

Number 

affected 

by rule 

Estimated economic impact 

Pharmaceutical Manufacturers in Medicaid Drug Rebate Program.550 $160 million (2 percent of $8 billion) higher rebates result from 

removal of customary prompt pay discounts from rebate calculations. Other clarifications of AMP may also raise AMP 

and result in higher rebate payments. 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. 

Physicians in their Offices, Hospital Outpatient Settings or Other 

Entities (e.g., Non-profit Facilities) that Specialize in Oncology, Rheumatology and Urology.

20,000 Under 9 cents per claim to enter NDC number. 

About $17 annual cost per physician practice to enter NDC 

number on claims for physician-administered drugs. Changes 

in hospital billing systems will be needed for many hospital 

outpatient departments. 

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 final 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 

and monthly reporting. 

We also considered redefining the 

entities included in ‘‘retail pharmacy 

class of trade’’ for purposes of the 


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definition of AMP. Options considered 

included whether to include or exclude 

sales to nursing home pharmacies, 

PBMs, mail order pharmacies, and 

hospital outpatient departments. We 

chose to exclude sales to PBMs and 

nursing home pharmacies and to allow 

drug manufacturers to include or 

exclude sales to hospital outpatient 

departments depending on the 

availability of information to document 

these sales. 

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 not required and it would 

create a financial burden on 

manufacturers that was not intended by 

section 6001 of the DRA. 

We considered whether and how to 

provide for manufacturers to ‘‘smooth’’

the AMP data to account for lagged 

discounts and other changes to monthly 

sales. We proposed to allow 

manufacturers to rely on estimates 

regarding the impact of their lagged 

price concessions when calculating 

monthly AMP. We also requested 

comments on the possible use of a 12- 

month rolling average. Many 

commenters asked for a 12-month 

rolling average as is used for Medicare 

Part B. Other commenters suggested that 

we allow manufacturers to use a four 

quarter rolling average. We have 

incorporated the 12-month rolling 

average in the final rule. 

We considered adding other entities 

to those that may receive drugs at 

nominal prices and have those sales 

excluded from best price. 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 not have a significant impact on 

how States pay for drugs. 

We considered various methods for 

determining outlier prices in order to 

avoid the use of such prices in the FUL 

calculation and to ensure sufficient 

national supply. We proposed to set the 

FUL on the lowest AMP that is not less 

than 30 percent of the next highest AMP 

for the drug. Based on comments, we 

considered substituting a greater 

percentage difference, expanding 

outliers to include drugs with AMPs 

above the lowest but below the next 

highest AMP by a set percentage, and 

using market share in determining 

outliers. We decided to change the 

outlier policy to set the FUL on the 

AMP that is not lower than 40 percent 

of the next highest AMP. 

D. Other Requirements in the Regulatory 

Flexibility Act 

The RFA lists five general 

requirements for a FRFA and four 

categories of burden-reducing 

alternatives. We know of no relevant 

Federal rules that duplicate, overlap, or 

conflict with the final rule. The 

preceding analysis, together with the 

rest of this preamble, addresses all these 

general requirements. 

We have not, however, adopted any of 

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 final 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 FFY 2007 TO FFY 2011 

[In millions] 

Category Transfers Discount rate 

(percent) From whom to whom? 

Total Federal Savings .................................................. $3,927.3 

4,459.0 

4,929.0 

7 

3 

0 

Reduction of transfers from the Federal Government 

to State Governments. 

Federal Annualized Monetized Transfers (Millions/ 

Year).

957.8 

973.6 

985.8 

7 

3 

0 

Total State Savings ...................................................... 2,803.6 

3,183.3 

3,519.0 

7 

3 

0 

Reduction of transfers from State Governments to 

Retail Pharmacies and increased transfers from 

Drug Manufacturers to the State Governments. 

State Annualized Monetized Transfers (Millions/Year) 683.8 

695.1 

703.8 

7 

3 

0 

F. Conclusion 

We estimate savings from this 

regulation of $8.4 billion over 5 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. 


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39236 Federal Register / Vol. 72, No. 136 / Tuesday, July 17, 2007 / Rules and Regulations 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the OMB. 

Comments and Responses on the 

Regulatory Impact 

A. Overall Impact 

We have retained most of the original 

estimates of burden; however, we have 

updated our impact analysis from what 

was presented in our December 22, 2006 

proposed rule. Our update reflects 

responses to public comments and 

improvements to the analysis based on 

additional information. 

B. Anticipated Effects 

1. Effects on Drug Manufacturers 

Comment: Commenters said that the 

proposed rule’s treatment of PBM 

rebates will lead to lower AMPs which 

will reduce the amount of rebates paid 

by manufacturers for some single source 

drugs. Commenters further asserted that 

they do not have access to the data 

needed to estimate this revenue 

reduction, but they are confident the 

losses will be significant. 

Response: In this final rule in 

§ 447.504(i), we have excluded PBM 

rebates, discounts or other price 

concessions from the determination of 

AMP and best price, except for 

purchases through the PBMs’ mail order 

pharmacies. Excluding PBM rebates and 

price concessions may affect AMP, and, 

thereby, rebates. However, we do not 

have information on how manufacturers 

currently calculate AMP. In its report, 

the OIG cited inconsistent treatment of 

PBM rebates by manufacturers in 

calculating AMP. Therefore, we have no 

data to estimate the impact of excluding 

PBM rebates and cannot conclude that 

the effect would be significant. 

2. Effects on State Medicaid Programs 

Comment: One commenter expressed 

concern that States will have 

insufficient time to prepare to 

implement the final regulations. States 

may need to make revisions in the 

Medicaid Management Information 

System and manual processes to 

implement the provisions. States may 

not have enough staff and funding to 

meet the deadline. The commenter 

further stated that the 2006 AMP data 

received by the States was inaccurate 

and insufficient to make firm policy 

decisions. Any changes that are needed 

to revise the State Medicaid plan or 

reimbursement structure will take 

considerable time. 

Response: We emphasize that the FUL 

is the only reimbursement change that 

States are required to address. States 

may need to adjust payments to stay 

below the FUL in the aggregate. Unless 

otherwise indicated, these regulations 

are effective on October 1, 2007 and any 

adjustments will not be necessary until 

after CMS issues any revised FULs. 

Comment: One commenter suggested 

that the State savings estimate in the 

proposed rule is overstated unless it 

took into account that reimbursement is 

lower than the FUL in those States that 

have State MAC programs. This would 

negate some or most of the savings 

projected in the proposed rule. 

Response: The savings estimates for 

section 6001 of the DRA were derived 

from simulations of the new FULs 

compared to States’ current 

reimbursement levels, including use of 

State MACs; therefore, we do not 

believe the savings estimates are 

overstated. 

Comment: One commenter expected 

that the FUL will be below the average 

retail acquisition cost and that States 

will have to increase the dispensing fee 

to offset the reimbursement reduction 

expected for pharmacies to ensure 

accessibility to the drugs. State financial 

support for increased dispensing fees 

will subsequently decrease the State 

savings projected in the proposed rule. 

Response: We believe that the new 

methodology for determining AMP will 

provide for adequate reimbursement 

and assure the availability of drugs at or 

below the FUL price for pharmacies. 

3. Effects on Retail Pharmacies 

Comment: One commenter stated that 

the FUL estimates should be published 

so that commenters can thoroughly and 

accurately analyze the impact of the 

proposed rule on the pharmaceutical 

supply chain and on retail pharmacies, 

especially those in low-income areas 

that serve a large percentage of 

Medicaid beneficiaries. The commenter 

requested that CMS provide the FUL 

and extend the comment period by a 

minimum of 60 days. 

Response: We share these concerns 

and we are analyzing the data to ensure 

that the new FULs will allow States to 

reimburse generic drugs adequately and 

appropriately. We continue to believe 

that the new FUL will be sufficient to 

allow all pharmacies to purchase most 

drugs at or below the FUL price. 

Additionally, we believe that it is 

important for us to be sure the data is 

complete and accurate prior to its 

release. In response to the commenters’

request to extend the comment period, 

we do not believe that we can reopen 

the comment period and meet the 

requirement in the DRA that we must 

promulgate a regulation by July 1, 2007. 

Comment: Many commenters 

indicated that the drug reimbursement 

levels will be inadequate under the 

revised formula used to establish the 

FUL. With inadequate reimbursement 

anticipated, the independent 

pharmacies asserted that they would go 

out of business, leaving Medicaid 

beneficiaries and other patients with 

limited access to drugs and resulting in 

loss of jobs for employees. Other 

commenters stated that pharmacy profit 

margins will be reduced so patient drug 

therapy, medication counseling, 

prescription services in a single 

location, home drug delivery, 

transportation services to the pharmacy, 

prescription services on holidays and 

translation services will be eliminated. 

One commenter stated that it may be 

necessary to increase fees for some 

patients in order to cover losses from 

Medicaid. 

Response: We are analyzing the FULs 

data to ensure that it will allow States 

to provide adequate reimbursement for 

generic drugs and avoid any serious 

consequences to the pharmacy 

community. Additionally, drugs subject 

to the FUL represent only 8.3 percent of 

the total drug expenditures under the 

Medicaid Drug Rebate Program. 

Medicaid policy allows States to pay 

above the FULs as long as total 

expenditures for FULs drugs do not 

exceed the aggregate FUL amount which 

is calculated at 250 percent of the 

relevant AMP. We are confident that 

FULs calculations for drug 

reimbursement will allow States to 

provide adequate reimbursement. 

Comment: Many commenters stated 

that the lack of access to drugs and 

prescription use services will lead to 

increased doctor visits, emergency room 

care, hospital stays and long-term care 

expenses, resulting in increased costs 

for Medicaid. 

Response: We are continuing to 

analyze the new FUL to assure that it is 

sufficient and adequately reimburses 

community pharmacies. As we have 

said elsewhere in this regulation, we 

believe the system for calculating the 

FUL will permit pharmacies to be 

reasonably compensated. 

Comment: One commenter noted that 

this rule will be particularly hard on 

pharmacies that serve Medicaid 

beneficiaries who suffer from HIV/AIDS 

which are often pharmacies which 

receive almost 50 percent of total 

revenue from Medicaid and participate 

in the 340B Program. The commenter 

further stated that even a ten percent cut 

in Medicaid reimbursement will render 

these pharmacies non-viable. 

Response: We believe that States will 

ensure that pharmacies serving HIV/ 

AIDS patients on Medicaid will be 


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compensated adequately to ensure their 

continued viability. 

Comment: One commenter stated that 

any changes in Medicaid reimbursement 

may have the unintended consequence 

of causing Indian health programs that 

operate in remote rural areas to close. 

Response: We believe that the impact 

of this regulation will be far less than 

many commenters believe and that 

States will be able to set appropriate 

reimbursement rates under the aggregate 

FULs to allow pharmacies to continue to 

serve Medicaid and other vulnerable 

populations. 

Comment: Other commenters noted 

that the impact on long-term care 

pharmacies and on rural independent 

pharmacies has not been addressed 

adequately in the proposed rule. These 

commenters believed that 

reimbursement to long-term care 

pharmacies should remain at the current 

levels in order for them to be able to 

afford to provide the needed services. 

The commenter would like the impact 

analysis to address long-term care 

pharmacies independently from retail 

pharmacies. 

Response: We do not have sufficient 

data to analyze the impact of this 

regulation on segments such as longterm care of the pharmacy market. 

However, states will continue to have 

flexibility to set reimbursement rates. 

We believe that States are in the best 

position to set payment levels to 

appropriately reimburse different 

sectors of the pharmacy market. 

Comment: One commenter stated that 

if the FUL decreased reimbursement by 

$3 to $4 per prescription, as some have 

asserted, this reduction will exceed the 

one percent decreased reimbursement 

estimated by CMS. 

Response: CMS estimates that total 

reimbursement for drugs will, on 

average, decline by less than one 

percent. We derived the $8 billion fiveyear savings by dividing it by an 

estimated $1,160 billion in total 

prescription drug revenues for 

community pharmacies to obtain this 

figure. 

Comment: One commenter noted that 

analysis in the proposed rule does not 

take into account decreases in State 

payments for drugs that are not on the 

FUL list, which may occur if States use 

AMP as a reimbursement metric. The 

commenter suggested that CMS should 

revise the impact analysis to reflect the 

projected impact of the use of AMP, 

rather than AWP, as a reimbursement 

benchmark for drugs other than those 

subject to the FUL. 

Response: We do not know what 

changes States may make to 

reimbursement for drugs not subject to 

FULs; therefore, we have no basis to 

estimate possible savings due to the 

availability of AMP to States. 

Comment: Some commenters believed 

that the estimate of a one percent loss 

to retail pharmacies should be revised to 

only reflect community-based retail 

pharmacy sales and not mail order sales 

since there is almost no mail order use 

in Medicaid. 

Response: We have reduced the fiveyear total sales by $50 billion to exclude 

mail order and reflect only communitybased retail pharmacy sales because the 

savings will principally come from 

retail pharmacies. Even with removing 

these sales, our original estimate stands; 

that is, the total loss in the retail 

prescription drug revenues will be less 

than one percent, on average. 

Comment: Some commenters believed 

that the reduction to pharmacy 

reimbursement will exceed the one 

percent cited. The commenters 

indicated that retail pharmacy profit 

ranges from 2.8 percent to 3.6 percent 

per prescription. Decreasing 

reimbursement to pharmacies does not 

change the prices that pharmacies pay 

to wholesalers or manufacturers or for 

their costs to support staff and operate 

stores. 

Response: As stated in our prior 

response, the one percent reduction is to 

total revenues for drugs to pharmacies, 

and does not reflect profit levels. We 

have no data to analyze the effect of 

these changes on profits. 

Comment: One commenter believed 

that the one percent estimated Medicaid 

pharmacy revenue reduction for retail 

pharmacies should be revised to 

account for the availability of AMP on 

the Web site which could result in 

additional reductions to 

reimbursements to retail pharmacies 

such as encouraging other non-Medicaid 

third party payers that represent a 

majority of the average retail pharmacy 

business to use the published AMP as 

a basis for their reimbursement to 

pharmacies too. Subsequently, this 

could potentially result in additional 

reductions of reimbursement to 

pharmacies beyond Medicaid. 

Response: We agree that there is 

potential for non-Medicaid third party 

payers to use the published 

reimbursement methodology established 

under this rule. However, we do not 

know if non-Medicaid third party 

payers will use AMP for reimbursement 

or what effect it would have on 

reimbursement levels. 

Comment: Another commenter 

asserted that the published AMP based 

on a reliable methodology may provide 

States with a more accurate estimate of 

prices available to wholesalers, but that 

this AMP methodology would not 

prevent drug manufacturers from 

continually pricing drugs at a premium. 

Response: Neither the DRA or this 

rule addresses prices set by drug 

manufacturers. 

Comment: One commenter asserted 

that it is unlikely that pharmacies will 

have the ability to mitigate the effects of 

the proposed rule by changing 

purchasing practices. 

Response: We believe that pharmacies 

will find it in their interest to seek the 

lower cost drugs. 

Comment: One commenter stated that 

when manufacturer prices are public, 

the manufacturers will no longer offer 

better prices to move the market share. 

In addition, if the manufacturers are 

forced to lower the prices to certain 

purchasers, they may need to make up 

for the loss by raising prices to larger 

buyers. Public posting of prices would 

lead to comparable or identical prices 

and would reduce incentives to offer 

lower prices because price increases 

would increase revenues and result in 

higher reimbursements to retail 

pharmacies. 

Response: We believe that 

transparency in pricing will introduce 

competition in the marketplace that will 

result in more appropriate drug pricing. 

Comment: One commenter expressed 

concern that the private PBMs sector 

will decrease their reimbursement levels 

and this could lead to a loss of revenue 

to pharmacies and cause them to go out 

of business. 

Response: As previously stated, we 

believe that Medicaid reimbursement 

will be sufficient to retain access to 

drugs for Medicaid beneficiaries and 

that transparency in pricing will 

introduce competition in the 

marketplace. 

Comment: A few commenters asserted 

that it is unlikely that most retail 

pharmacies can make up the estimated 

loss of pharmacy revenue with 

increased front-end store sales and sales 

of non-prescription drug products as 

these sales are a minority of total sales 

in most retail pharmacies. In addition, 

pharmacies would need to invest in 

larger front-end areas, relocate stores to 

high visibility areas, add staffing, and 

make other changes that many 

pharmacy retailers may not be able to 

afford or want to do. The commenters 

said that non-prescription revenue in 

chain pharmacies is 28 percent of total 

sales, and only 2 percent of total sales 

in independent pharmacies. 

Response: We agree that we cannot 

assess the ability of pharmacies to 

increase non-drug revenue and have 

removed this language from the impact 

analysis. 


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Comment: One commenter asserted 

that the $8 billion estimated savings in 

the RIA will be generated from the 

reduced reimbursement for multiple 

source drugs. Savings of $8 billion out 

of $27 billion in spending for generic 

drugs equates to a 30 percent reduction 

in reimbursement for generic drugs. 

Several commenters believed that this 

change to a lower reimbursement will 

not cover the pharmacy’s acquisition 

costs of purchasing generic medications. 

Response: The new FUL could reduce 

Medicaid payments to a more 

reasonable amount and eliminate the 

opportunity for profits through the 

reporting of artificially inflated prices. 

We agree that most of the savings result 

from lower prices paid for multiple 

source drugs, as this is what the DRA 

intended; however, we continue to 

believe that it is appropriate to compare 

the savings to overall revenues of drugs 

to show the impact on pharmacies. As 

we have said elsewhere in this 

regulation, we believe the system for 

calculating FUL will permit pharmacies 

to be reasonably compensated. 

Comment: Many commenters asserted 

that a reduction of $8 million in generic 

drug reimbursement could have a 

considerable impact on incentives to 

dispense medications when pharmacies 

have a choice of dispensing brand 

versus generic drugs. The commenter 

believed that pharmacies will receive far 

less revenue from a generic drug rather 

than it will with a brand name drug. 

When brand products are dispensed to 

Medicaid beneficiaries, they are likely 

to be paid above the FUL due to a 

‘‘dispense as written’’ designation. 

Response: The commenters correctly 

note that a brand name drug in a FUL 

group is subject to the FUL unless the 

physician asserts that the brand name 

drug is medically necessary for the 

Medicaid beneficiary. States frequently 

require prior authorization for 

dispensing a brand name drug; 

therefore, we do not agree that 

pharmacists will be able to substitute 

brand name drugs over generic drugs. 

Many States also have been requiring 

the substitution of a generic drug for a 

brand name drug; therefore, pharmacies 

do not always have a choice to 

substitute a brand drug for a generic 

drug. 

Comment: Commenters referred to 

findings in the GAO report that said the 

AMP-based FULs would be, on average, 

36 percent lower than the average retail 

pharmacy acquisition cost. 

Response: We do not concur with the 

GAO findings that the AMP-based FUL 

would be lower than average retail 

pharmacy acquisition cost. The GAO 

report looked at drugs subject to the 

FUL, which are 8.3 percent of Medicaid 

expenditures. The GAO also did not 

remove customary prompt pay 

discounts or outlier AMPs when 

calculating FULs as provided in this 

final rule, or account for the ability of 

States to set reimbursement levels below 

or above the FUL as long as 

expenditures for FUL drugs are less than 

the aggregate of all FUL prices. We also 

were not provided the price data used 

by the GAO. For these reasons, we do 

not concur with GAO’s conclusion. 

Comment: Several commenters 

estimated their losses based on the 36 

percent reduction reported in the GAO 

report. 

Response: As noted above, the GAO 

report only applies to drugs with a FUL 

which currently accounts for 8.3 percent 

of Medicaid drug expenditures. We 

believe that many commenters believed 

that reimbursement for all generic drugs 

would be reduced by 36 percent. We 

also believe that as discussed 

previously, reimbursement will be 

sufficient to meet acquisition costs. 

Comment: Commenters asserted that 

States will need to fill the financial gap 

caused by this rule to avoid pharmacy 

closings and maintain beneficiary access 

to community pharmacy services. 

Response: We do not believe that 

States will find that reimbursements 

under the FUL are insufficient for 

pharmacies and that they will need to 

cover a shortfall. We believe that the 

new FULs methodology sets pharmacy 

pricing at reasonable levels while 

allowing States to set reimbursement 

that is based on true prices, thus 

ensuring that taxpayers do not overpay 

for prescription drug benefits provided 

to Medicaid recipients. 

Comment: Several commenters stated 

that independent pharmacies have 

assisted CMS in providing outreach and 

information to Medicare Part D 

beneficiaries in their communities and 

it is inappropriate to decrease their 

Medicaid reimbursement after the 

pharmacies provided support to CMS. 

These commenters further stated that 

their pharmacies are still recovering and 

experiencing losses from Medicare Part 

D implementation due to low 

reimbursement and delays in payment. 

Response: We recognize that 

community pharmacy partners provided 

considerable assistance to Medicare 

beneficiaries and helped make the 

implementation of Medicare Part D a 

success. Nevertheless, the DRA requires 

CMS to calculate the FULs based on 250 

percent of the AMP for Medicaid 

outpatient drugs. 

Comment: One commenter said that 

this rule will have a far greater impact 

on pharmacies than implementation of 

the prescription drug sections of the 

Medicare Part D Program. 

Response: We recognize that the DRA 

and this rule will result in lower 

reimbursement for some drugs. 

However, as discussed previously, we 

believe that pharmacy reimbursement 

will be adequate for pharmacies to 

continue to serve Medicaid 

beneficiaries. 

4. Effects on Physicians 

See discussion under ‘‘V. Collection 

of Information Requirements for Effects 

on Physicians.’’

5. Effects on Hospitals 

See discussion under ‘‘V. Collection 

of Information Requirements for Effects 

on Hospitals’’. 

6. Effects on Small Business Entities 

Comment: One commenter believed 

that CMS grossly underestimated the 

administrative cost for small 

pharmaceutical manufacturing 

businesses participating in the Medicaid 

Drug Rebate Program to implement the 

additional reporting requirements. The 

commenter did not provide an estimate 

of the hourly annual burden but 

asserted that small pharmaceutical 

companies will be required to spend 

hundreds of thousands of dollars to 

modify their drug price reporting 

systems and hire additional personnel 

in order to meet the additional reporting 

requirements. 

Response: The commenter did not 

document the estimates provided; 

therefore, we have no basis to revise the 

estimated burden in the rule. We do not 

believe that the burden will be greater 

for small drug manufacturers than for 

other drug manufacturers. The data 

required for monthly reporting of AMP 

and reporting for customary prompt pay 

discounts and nominal prices should 

already exist in the manufacturer’s 

accounting systems. 

Comment: Several commenters asked 

that CMS revise the overall one percent 

impact on retail pharmacy revenues and 

quantify an impact specifically on 

small, predominately independent 

pharmacies, especially rural 

independents since small business 

pharmacies serve a disproportionate 

number of Medicaid patients and have 

significantly lower revenues than the 

broader retail pharmacy community. 

This could account for the higher cost 

of doing business in rural areas than in 

other areas. One commenter noted that 

data from a recent nationwide survey 

found that Medicaid accounted for 

approximately 12 percent of all 

prescriptions filled by rural pharmacies. 

(See Grant Thornton LLP, ‘‘National 


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Study to Determine the Cost of 

Dispensing Prescriptions in Community 

Retail Pharmacies’’ (January 2007)). 

Response: We recognize that 

pharmacies with a higher Medicaid 

prescription volume relative to their 

overall prescription volume could 

experience a greater financial impact. 

However, the method for setting FULs 

was established by the DRA and we do 

not have data by subgroups of 

pharmacies, such as small independent 

or rural pharmacies, to separately 

analyze the impact for these segments. 

Comment: Some commenters raised 

the concern that small rural pharmacies 

will be forced to go out of business as 

a result of inadequate reimbursements 

for all patients. The commenters 

believed a reduction in beneficiary 

access to prescriptions in rural areas 

could result in higher costs for other 

Medicaid services, such as 

hospitalizations, physician office visits 

and emergency room visits. The 

commenters further suggested that CMS 

provide a public opportunity for small 

businesses to comment on the revised 

analysis. 

Response: In the proposed rule, we 

noted that we did not have data to allow 

us to quantify the effect of this rule on 

small rural pharmacies. We further 

requested information to help us better 

assess those effects before we make final 

decisions. The commenters did not 

provide data to allow us to assess 

separately the burden on pharmacies 

that are small businesses. Nevertheless, 

as previously stated, we believe that 

reduction to reimbursement to 

pharmacies will not force them to go out 

of business. 

Comment: One commenter suggested 

that the one percent retail revenue 

reduction in the proposed rule be 

revised to comply with the Small 

Business Regulatory Enforcement 

Fairness Act (SBREFA). 

Response: We believe the estimate 

complies with the provisions under the 

SBREFA. It should also be noted that 

the commenter did not provide specific 

information as to how the estimated 

reduction does not comply with this 

law. 

Comment: Several commenters stated 

that we should analyze the impact on 

traditional retail pharmacies and 

institutional pharmacies separately. The 

institutional pharmacy industry is 

composed of hundreds of small 

pharmacies in addition to national 

companies. These commenters 

suggested that the number of small 

business pharmacies should be 

expanded to include pharmacies in 

retail chains because these pharmacies 

operate as independent pharmacies and 

must generate enough revenue to cover 

costs of purchasing, maintaining, and 

dispensing their pharmaceutical 

inventory. The commenters estimated 

that the average total sales in traditional 

pharmacies are about $4.5 million per 

year. 

Response: We used the SBA’s size 

standards for a retail pharmacy of $6.5 

million or less in revenue per year 

(http://www.sba.gov/size/ 

sizetable2002.html). The SBA estimates 

that there are about 18,000 small 

pharmacies. We do not believe it is 

appropriate to expand the number of 

small business pharmacies to include 

pharmacies that are not consistent with 

this standard. 

Comment: Several commenters 

suggested that the final rule should 

exempt small retail pharmacies from the 

new reimbursement formula, create a 

separate reimbursement formula for 

small retail pharmacies, or exempt 

pharmacies if their Medicaid business 

exceeds ten percent. 

Response: The law specifies that the 

FUL is to be set at 250 percent of the 

lowest AMP and does not provide the 

Secretary the authority to exempt small 

pharmacies. 

7. Effects on Other Issues 

Comment: Several commenters stated 

that pharmaceutical manufacturers are 

not impacted by the proposed rule and 

that Medicaid would achieve more 

savings if the pharmaceutical 

manufacturers would offer lower drug 

pricing as they do in other countries. 

The commenters also suggested that 

CMS should mandate more controls on 

drug payments to manufacturers and 

issue regulations that require lower 

payments to drug manufacturers. 

Response: The purpose of this 

regulation is to implement the Medicaid 

drug pricing provisions of the DRA. 

These comments are outside the scope 

of this rulemaking. 

Comment: Several commenters 

suggested that pharmacies under 

Medicaid and Medicare should have the 

same negotiating price and contract 

opportunities that HMOs and PBMs 

have under Medicare Part D. HMOs and 

PBMs negotiate cheaper drug prices, 

insist on mail order for maintenance 

drugs and sign yearly contracts where 

the net prices are at least ten times 

lower than the prices offered to 

independent pharmacies. 

Response: This comment is not within 

the scope of this rulemaking document. 

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 amends 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 NonInstitutional Services 

■ 2. Section 447.300 is revised to read 

as follows: 

§ 447.300 Basis and purpose. 

In this subpart, § 447.302 through 

§ 447.325 and § 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)(15) 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. 

§ 447.301 [Removed] 

■ 3. Section 447.301 is removed. 

§ 447.331 through § 447.334 [Removed] 

■ 4. Sections 447.331 through 447.334 

are removed. 

■ 5. 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 

§ 447.500 Basis and purpose. 

(a) Basis. This subpart—

(1) Interprets those provisions of 

section 1927 of the Act that set forth 


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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 physicianadministered 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. 

§ 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, drugs of 

different types (that is, at the nine-digit 

National Drug Code (NDC) level) or 

another product or some other 

performance requirement (for example, 

the achievement of market share, 

inclusion or tier placement on a 

formulary), or where the resulting 

discounts or other price concessions are 

greater than those which would have 

been available had the bundled drugs 

been purchased separately or outside 

the bundled arrangement. For bundled 

sales, the discounts are allocated 

proportionally to the total dollar value 

of the units of all drug sold under the 

bundled arrangement. For bundled sales 

where multiple drugs are discounted, 

the aggregate value of all the discounts 

in the bundled arrangement shall be 

proportionally 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 

calendar quarter for which the rebate is 

paid. 

Dispensing fee means the fee which—

(1) Is incurred at the point of sale or 

service and pays for costs in excess of 

the ingredient cost of a covered 

outpatient drug each time a covered 

outpatient drug is dispensed; 

(2) Includes only pharmacy costs 

associated with ensuring that possession 

of the appropriate covered outpatient 

drug is transferred to a Medicaid 

recipient. Pharmacy costs include, but 

are not limited to, reasonable costs 

associated with a pharmacist’s time in 

checking the computer for information 

about an individual’s coverage, 

performing drug utilization review and 

preferred drug list review activities, 

measurement or mixing of the covered 

outpatient drug, filling the container, 

beneficiary counseling, physically 

providing the completed prescription to 

the Medicaid beneficiary, delivery, 

special packaging, and overhead 

associated with maintaining the facility 

and equipment necessary to operate the 

pharmacy; and 

(3) Does not include administrative 

costs incurred by the State in the 

operation of the covered outpatient drug 

benefit including systems costs for 

interfacing with pharmacies. 

Estimated acquisition cost (EAC) 

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), including an authorized generic 

drug. It includes a drug product 

marketed by any cross-licensed 

producers, labelers, or distributors 

operating under the NDA and a covered 

outpatient drug approved under a 

product license approval (PLA), 

establishment license approval (ELA) or 

antibiotic drug approval (ADA). 

Lagged price concession means any 

discount or rebate that is realized after 

the sale of the drug, but does not 

include customary prompt pay 

discounts. 

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 (that is, 

the 9-digit numerical code). 

National rebate agreement means the 

rebate agreement developed by CMS 

and entered into by CMS on behalf of 

the Secretary or his designee and a 

manufacturer to implement section 1927 

of the Act. 

Nominal price means a price that is 

less than ten percent of the AMP in the 

same quarter for which the AMP is 

computed. 

Noninnovator multiple source drug 

means (1) a multiple source drug that is 

not an innovator multiple source drug 

or a single source drug, (2) a multiple 

source drug that is marketed under an 

abbreviated NDA or an abbreviated 

antibiotic drug application, or (3) a drug 

that entered the market before 1962 that 

was not originally marketed under an 

original NDA. 

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 


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product marketed by any cross-licensed 

producers or distributors operating 

under the NDA. It also includes a 

covered outpatient drug approved under 

a biological license application, PLA, 

ELA, or ADA. 

States means the 50 States and the 

District of Columbia. 

§ 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 paid to the 

manufacturer for the drug in the United 

States by 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 timeframe and consistent with 

customary business practices for 

payment. 

(d) Net sales means quarterly gross 

sales revenue less cash discounts 

allowed, except customary prompt pay 

discounts extended to wholesalers, and 

all other price reductions (other than 

rebates under section 1927 of the Act or 

price reductions specifically excluded 

by statute or regulation) which reduce 

the amount received by the 

manufacturer. 

(e) Retail pharmacy class of trade 

means any independent pharmacy, 

chain pharmacy, mail order pharmacy, 

or other outlet that purchases 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 those entities in the retail 

pharmacy class of trade) to which the 

manufacturer sells 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 the following sales 

and associated rebates, discounts, or 

other price concessions—

(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 

repackage/relabel under the purchaser’s 

NDC, including private labeling 

agreements; 

(3) Direct and indirect sales to 

hospitals, where the drug is used in the 

outpatient pharmacy, except those sales 

that cannot be identified with adequate 

documentation as being used in the 

outpatient pharmacy for outpatient use 

(for example hospital outpatient 

department, clinic, or affiliated entity); 

(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 § 440.150 of this 

chapter, or a State-owned or operated 

nursing facility providing services as set 

forth in § 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) Sales including discounts, rebates, 

or other price concessions provided to 

pharmacy benefit managers (PBMs) for 

their mail order pharmacy purchases; 

(7) Sales directly to patients; 

(8) Sales to outpatient facilities (for 

example, clinics, surgical centers, 

ambulatory care centers, dialysis 

centers, and mental health centers); 

(9) Sales to mail order pharmacies; 

(10) Sales to home infusion providers; 

(11) Sales to specialty pharmacies; 

(12) Sales to home health care 

providers; 

(13) Sales to physicians; 

(14) 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; and 

(15) Sales of drugs reimbursed by 

third party payers including the 

Medicare Part D Program, a Medicare 

Advantage prescription drug plan (MA–

PD), a Qualified Retiree Prescription 

Drug Plan under section 1860D–22(a)(2) 

of the Act, State Children’s Health 

Insurance Program (SCHIP), State 

pharmaceutical assistance programs 

(SPAPs), health maintenance 

organizations (HMOs) (including 

managed care organizations (MCOs)) 

that do not purchase or take possession 

of drugs, TRICARE Retail Pharmacy 

Program (TRRx), 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 section 1927(a)(5)(B) of the 

Act (including inpatient prices charged 

to hospitals described in section 

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

(2) Any prices charged under the 

Federal Supply Schedule (FSS) of the 

General Services Administration (GSA); 

(3) Any depot prices (including 

TRICARE) and single award contract 

prices, as defined by the Secretary, of 

any agency of the Federal Government; 

(4) Direct and indirect sales to 

hospitals, where the drug is used in the 

inpatient setting or in the outpatient 

pharmacy for outpatient use where the 

sales cannot be identified with adequate 

documentation; 

(5) Sales to HMOs (including MCOs, 

and HMO/MCO-operated pharmacies) 

that purchase or take possession of 

drugs; 

(6) Sales to long-term care facilities, 

including nursing facility pharmacies, 

contract pharmacies for the nursing 

facility where these sales can be 

identified with adequate 

documentation, and other entities where 

the drugs are dispensed through a 

nursing facility pharmacy, such as 

assisted living facilities; 

(7) Sales to hospices (inpatient and 

outpatient); 

(8) Sales to veterinarians; 

(9) Sales to prisons; 

(10) Sales outside the 50 States and 

the District of Columbia; 

(11) Sales to State, county, and 

municipal entities; 

(12) Sales to patient assistance 

programs; 


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(13) Sales to wholesalers where the 

drug is distributed to the non-retail 

pharmacy class of trade; 

(14) Sales to wholesalers or 

distributors where the drug is relabeled 

under the wholesalers’ or distributors’

NDC number; 

(15) Manufacturer coupons redeemed 

by a consumer, agent, pharmacy or 

another entity acting on behalf of the 

manufacturer, but only to the extent that 

the full value of the coupon is passed on 

to the consumer and the pharmacy, 

agent, or other entity does not receive 

any price concession; 

(16) Manufacturer vouchers; 

(17) Manufacturer-sponsored drug 

discount card programs; 

(18) Free goods, not contingent upon 

any purchase requirement; 

(19) Bona fide service fees; 

(20) Customary prompt pay discounts 

extended to wholesalers; 

(21) Returned or replaced goods when 

accepted or replaced in good faith; 

(22) Discounts, rebates, or other price 

concessions to PBMs, except for their 

mail order pharmacy’s purchases. 

(23) Associated rebates, discounts, or 

other price concessions to third party 

payers including the Medicare Part D 

Program, an MA–PD, Qualified Retiree 

Prescription Drug Plan under section 

1860D–22(a)(2) of the Act, SCHIP, 

SPAPs, HMOs (including MCOs that do 

not take possession of drugs) the 

TRICARE Retail Pharmacy Program, and 

Medicaid Programs; and 

(24) Rebates under the national rebate 

agreement or a CMS-authorized State 

supplemental rebate agreement paid to 

State Medicaid Agencies under section 

1927 of the Act. 

(i) Further clarification of AMP 

calculation. (1) AMP includes cash 

discounts except customary prompt pay 

discounts extended to wholesalers, free 

goods that are contingent on any 

purchase requirement, volume 

discounts, chargebacks, incentives, 

administrative fees, service fees, 

distribution fees, (except bona fide 

service fees), and any other rebates, 

discounts or other price concessions, 

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) Quarterly AMP is calculated as a 

weighted average of monthly AMPs in 

the quarter. 

(3) The manufacturer must adjust the 

AMP for a rebate period if cumulative 

discounts, rebates, or other 

arrangements subsequently adjust the 

prices actually realized. 

§ 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 rebates, 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 

provision of health care. 

(c) Prices included in best price. 

Except with respect to those prices 

identified in paragraph (d) of this 

section, best price for covered 

outpatient drugs includes the following 

prices and associated rebates, discounts, 

or other price concessions that adjust 

prices either directly or indirectly—

(1) Prices to wholesalers; 

(2) Prices to any retailer, including 

rebates, discounts or other price 

concessions that adjust prices either 

directly or indirectly on sales of drugs; 

(3) Prices to providers (for example, 

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, 

sold by the primary manufacturer in 

accordance with § 447.506(d) of this 

subpart; 

(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; and 

(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 nonexcluded entity. 

(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 section 

1927(a)(5)(B) of the Act (including 

inpatient prices charged to hospitals 

described in section 340B(a)(4)(L) of the 

PHSA); 

(2) Any prices charged under the FSS 

of the GSA; 

(3) Any prices provided to a 

designated SPAP; 

(4) Any depot prices and single award 

contract prices, as defined by the 

Secretary, of any agency of the Federal 

Government; 

(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 under the national rebate 

agreement or a CMS-authorized 

supplemental rebate agreement paid to 

State Medicaid Agencies under section 

1927 of the Act; 

(7) Prices negotiated under a 

manufacturer-sponsored drug discount 

card program; 

(8) Manufacturer coupons redeemed 

by a consumer, agent, pharmacy or 

another entity acting on behalf of the 

manufacturer; but only to the extent that 

the full value of the coupon is passed on 

to the consumer and the pharmacy, 

agent, or other entity does not receive 

any price concession; 

(9) Goods provided free of charge 

under a manufacturer’s patient 

assistance programs; 

(10) Free goods, not contingent upon 

any purchase requirement; 

(11) Nominal prices to certain entities 

as set forth in § 447.508 of this subpart; 

(12) Bona fide service fees; and 

(13) PBM rebates, discounts, or other 

price concessions except their mail 

order pharmacy’s purchases or where 

such rebates, discounts, or other price 

concessions are designed to adjust 

prices at the retail or provider level. 

(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, 


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and any other discounts or price 

reductions and rebates, other than 

rebates under section 1927 of the Act, 

which reduce the price available from 

the manufacturer. 

(2) Best price must be determined on 

a unit basis without regard to package 

size, special packaging, labeling or 

identifiers on the dosage form or 

product or package, and must not take 

into account prices that are nominal in 

amount as described in § 447.508 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. 

§ 447.506 Authorized generic drugs. 

(a) Authorized generic drug defined. 

For the purposes of this subpart, an 

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 under a 

different labeler code, product code, 

trade name, trademark, or packaging 

(other than repackaging the listed drug 

for use in institutions) than the brand 

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 sales of this drug in its AMP only 

when such drugs are being sold by the 

manufacturer holding title to the 

original NDA directly to a wholesaler. 

(c) Inclusion of authorized generic 

drugs in best price. A manufacturer 

holding title to the original NDA must 

include best price of an authorized 

generic drug in its computation of best 

price for a single source or innovator 

multiple source drug during a rebate 

period to any manufacturer, wholesaler, 

retailer, provider, HMO, non-profit 

entity, or governmental entity in the 

United States, only when such drugs are 

being sold by the manufacturer holding 

title to the original NDA. 

§ 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 § 440.150 of this chapter; or 

(3) A State-owned or operated nursing 

facility providing services as set forth in 

§ 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. 

§ 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 § 447.504 of this subpart; 

(2) Best price, calculated in 

accordance with § 447.505 of this 

subpart; 

(3) Customary prompt pay discounts, 

which shall be reported as an aggregate 

dollar amount for each covered 

outpatient drug at the nine-digit NDC 

level, provided to all wholesalers in the 

rebate period; and 

(4) Prices that fall within the nominal 

price exclusion, which shall be reported 

as an aggregate dollar amount and shall 

include all sales of single source and 

innovator multiple source drugs to the 

entities listed in § 447.508(a) of this 

subpart for the rebate period. 

(b) Reporting revised quarterly AMP, 

best price, customary prompt pay 

discounts, or nominal prices. (1) 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. 

(2) A manufacturer must report 

revisions to AMP, except when the 

revision would be solely as a result of 

data pertaining to lagged price 

concessions. 

(c) Base date AMP report. (1) A 

manufacturer may report a revised base 

date AMP to CMS within the first four 

full calendar quarters following [OFR: 

insert publication date of the final rule]. 

(2) Recalculation of base date AMP. 

(i) A manufacturer’s recalculation of the 

base date AMP must only reflect the 

revisions to AMP as provided for in 

§ 447.504 of this subpart. 

(ii) A manufacturer may choose to 

recalculate base date AMP on a productby-product basis. 

(iii) A manufacturer must use actual 

and verifiable pricing records in 

recalculating base date AMP. 

(d) Monthly AMP—(1) Definition of 

Monthly AMP. Monthly AMP means the 

AMP that is calculated on a monthly 

basis. A manufacturer must submit a 

monthly AMP to CMS not later than 30 

days after the last day of each prior 

month. 

(2) Calculation of monthly AMP. 

Monthly AMP should be calculated 

based on the methodology in section 

447.504 of this subpart, except the 

period covered should be based on 

monthly, as opposed to quarterly, sales. 

The monthly AMP should be calculated 

based on the weighted average of prices 

for all the manufacturer’s package sizes 

of each covered outpatient drug sold by 

the manufacturer during a month. 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. Monthly AMP should be 

calculated based on the best data 

available to the manufacturer at the time 

of submission. In calculating monthly 

AMP, a manufacturer must estimate the 

impact of its lagged price concessions 

using a 12-month rolling average to 

estimate the value of those discounts. 

(3) Timeframe for reporting revised 

monthly AMP. A manufacturer must 

report to CMS revisions to monthly 

AMP for a period not to exceed 36 

months from the month in which the 

data were due. 

(4) Exception. A manufacturer must 

report revisions to monthly AMP, 

except when the revision would be 

solely as a result of data pertaining to 

lagged price concessions. 

(5) Terminated products. A 

manufacturer must not report a monthly 

AMP for a terminated product beginning 

with the first month after the expiration 

date of the last lot sold. 

(e) Certification of pricing reports. 

Each report submitted under paragraphs 

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

certified by one of the following: 

(1) The manufacturer’s chief executive 

officer (CEO); 

(2) The manufacturer’s chief financial 

officer (CFO); 

(3) An individual other than a CEO or 

CFO, who has authority equivalent to a 

CEO or a CFO; or 

(4) An individual with the directly 

delegated authority to perform the 

certification on behalf of an individual 

described in subsections (1) through (3). 

(f) Recordkeeping requirements. (1) A 

manufacturer must retain records 

(written or electronic) for ten 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 ten-year timeframe 

applies to a manufacturer’s quarterly 

and monthly submissions of pricing 

data, as well as any revised pricing data 

subsequently submitted to CMS. 


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(2) A manufacturer must retain 

records beyond the ten-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. 

§ 447.512 Drugs: Aggregate upper limits of 

payment. 

(a) Multiple source drugs. Except for 

brand name drugs that are certified in 

accordance with paragraph (c) of this 

section, the agency payment for 

multiple source drugs must not exceed, 

in the aggregate, the amount that would 

result from the application of the 

specific limits established in accordance 

with § 447.514 of this subpart. If a 

specific limit has not been established 

under § 447.514 of this subpart, then the 

rule for ‘‘other drugs’’ set forth in 

paragraph (b) of this section applies. 

(b) Other drugs. The agency payments 

for brand name drugs certified in 

accordance with paragraph (c) of this 

section and drugs other than multiple 

source drugs for which a specific limit 

has been established under § 447.514 of 

this subpart must not exceed, in the 

aggregate, payment levels that the 

agency has determined by applying the 

lower of the—

(1) EAC 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 § 447.514 of this subpart does not 

apply if a physician certifies in his or 

her own handwriting (or by an 

electronic alternative means approved 

by the Secretary) that a specific brand is 

medically necessary for a particular 

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. 

§ 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 its 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 meet the 

criteria in paragraph (a)(1)(i) of this 

section. 

(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 

AMP (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, the AMP of the 

lowest priced therapeutically and 

pharmaceutically equivalent drug that is 

not less than 40 percent of the next 

highest AMP will be used to establish 

the FUL. 

(3) When the FUL group includes 

only the brand name drug and the first 

new generic or authorized generic drug 

which has entered the market, the 

criteria in paragraph (c)(2) of this 

section will not apply. 

§ 447.516 Upper limits for drugs furnished 

as part of services. 

The upper limits for payment for 

prescribed drugs in this subpart also 

apply to payment for drugs provided as 

part of skilled nursing facility services 

and intermediate care facility services 

and under prepaid capitation 

arrangements. 

§ 447.518 State plan requirements, 

findings and assurances. 

(a) State plan. The State plan must 

describe comprehensively the agency’s 

payment methodology for prescription 

drugs. 

(b) Findings and assurances. Upon 

proposing significant State plan changes 

in payments for prescription drugs, and 

at least annually for multiple source 

drugs and triennially for all other drugs, 

the agency must make the following 

findings and assurances: 

(1) Findings. The agency must make 

the following separate and distinct 

findings: 

(i) In the aggregate, its Medicaid 

expenditures for multiple source drugs, 

identified and listed in accordance with 

§ 447.514(a) of this subpart, are in 

accordance with the upper limits 

specified in § 447.514(b) of this subpart; 

and 

(ii) In the aggregate, its Medicaid 

expenditures for all other drugs are in 

accordance with § 447.512 of this 

subpart. 

(2) Assurances. The agency must 

make assurances satisfactory to CMS 

that the requirements set forth in 

§ § 447.512 and 447.514 of this subpart 

concerning upper limits and in 

paragraph (b)(1) of this section 

concerning agency findings are met. 

(c) Recordkeeping. The agency must 

maintain and make available to CMS, 

upon request, data, mathematical or 

statistical computations, comparisons, 

and any other pertinent records to 

support its findings and assurances. 

§ 447.520 FFP: Conditions relating to 

physician-administered drugs. 

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

has not required the submission of 

claims using codes that identify the 

drugs sufficiently for the State to bill a 

manufacturer for rebates. 

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

require providers to submit claims for 

single source, physician-administered 

drugs using Healthcare Common 

Procedure Coding System codes or NDC 

numbers in order to secure rebates. 

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

require providers to submit claims for 

the 20 multiple source physicianadministered drugs identified by the 


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Secretary as having the highest dollar 

value under 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: June 27, 2007. 

Leslie V. Norwalk, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: June 29, 2007. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 07–3356 Filed 7–6–07; 4:00 pm] 

BILLING CODE 4120–01–P 


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