[Federal Register Volume 72, Number 136 (Tuesday, July 17, 2007)]
[Rules and Regulations]
[Pages 39142-39245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-3356]



[[Page 39141]]

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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 447



Medicaid Program; Prescription Drugs; Final Rule

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

[[Page 39142]]


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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.

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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

[[Page 39143]]

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 physician-administered 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 State-owned or operated nursing facility, and any other facility 
or entity that the Secretary determines is a safety net provider to 
which sales of such drugs at a nominal price would be appropriate, 
based on certain factors such as type of facility or entity, services 
provided by the facility or entity, and patient population.
    Section 6001(e) of the DRA amends section 1927 of the Act to 
provide for a survey of retail prices and State performance rankings. 
These provisions 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 physician-administered drugs unless States 
submit the utilization data described in section 1927(a) of the Act. It 
also amends section 1927 of the Act to require the submission of 
utilization data for physician-administered drugs.
    Section 6003(a) of the DRA amends section 1927(b)(3)(A) of the Act 
to require manufacturers to include within AMP and best price all of 
its drugs that are sold under a new drug application (NDA) approved 
under section 505(c) of the Federal Food, Drug, and Cosmetic Act 
(FFDCA) when they report AMP and best price to the Secretary.
    Section 6003(b) of the DRA amends section 1927(c)(1)(C) of the Act 
to clarify that manufacturers must include the lowest price available 
to any entity for a drug sold under an NDA approved under section 
505(c) of the FFDCA when determining best price. Section 6003(b) also 
amends section 1927(k) 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 (Sec.  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 (Sec.  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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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 (Sec.  447.504)

Background

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

Provisions of the DRA

    Section 6001(c)(1) of the DRA amended section 1927(k)(1) of the Act 
to revise the definition of AMP to exclude customary prompt pay 
discounts to wholesalers, effective January 1, 2007. Section 6001(c)(3) 
of the DRA requires the OIG to review the requirements for and manner 
in which AMPs are determined and recommend changes to the Secretary by 
June 1, 2006. Section 6001(c)(3) of the DRA requires the Secretary to 
clarify the requirements for and the manner in which AMPs are 
determined by promulgating a regulation no later than July 1, 2007, 
taking into consideration the OIG's recommendations.

OIG Recommendations on AMP

    In accordance with 6001(c)(3) of the DRA, the OIG issued its 
report, ``Determining Average Manufacturer Prices for Prescription 
Drugs under the Deficit Reduction Act of 2005,'' (A-06-06-00063), in 
May 2006. In this report, the OIG recommended that CMS:
    <bullet> Clarify the requirements in regard to the definition of 
retail pharmacy class of trade and treatment of pharmacy benefit 
manager (PBM) rebates and Medicaid sales and
    <bullet> Consider addressing issues raised by industry groups, such 
as:

[[Page 39146]]

     [cir] Administrative and service fees,
     [cir] Lagged price concessions and returned goods,
     [cir] The frequency of AMP reporting,
     [cir] AMP restatements, and
     [cir] Base date AMP.
    The OIG also recommended that the Secretary direct CMS to:
    <bullet> Issue guidance in the near future that specifically 
addresses the implementation of the AMP-related reimbursement 
provisions of the DRA and
    <bullet> Encourage States to analyze the relationship between AMP 
and pharmacy acquisition cost to ensure that the Medicaid Program 
appropriately reimburses pharmacies for estimated acquisition costs.
    We 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

[[Page 39147]]

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

[[Page 39148]]

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 non-Medicaid expansion programs should be treated. Like the 
Medicaid Program, SCHIP non-Medicaid expansion programs do not directly 
purchase drugs. Because such programs are not part of the Medicaid 
Program, they are not covered under the provisions of section 1927 of 
the Act. As with Medicaid sales, these sales are included in AMP to the 
extent they concern sales at the retail pharmacy class of trade. 
Therefore, these sales should not be backed out of the AMP calculation 
to the extent that such sales are included within sales provided to the 
retail pharmacy class of trade. Rebates and units associated with those 
sales should also be included in the calculation of AMP.
    Treatment of Medicare Part D Sales: We 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

[[Page 39149]]

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 Sec. 447.504. In 
Sec. 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 Sec. 447.504(b), we proposed to define 
average unit price. In Sec. 447.504(c), we proposed to define customary 
prompt pay discount. In Sec. 447.504(d), we proposed to define net 
sales. In Sec. 447.504(e), we proposed to define retail pharmacy class 
of trade. In Sec. 447.504(f), we proposed to define wholesaler. In 
Sec. 447.504(g), we described in detail the sales, rebates, discounts, 
or other price concessions that must be included in AMP. In 
Sec. 447.504(h), we described the sales, rebates, discounts, or other 
price concessions that must be excluded from AMP. In Sec. 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 (Sec. 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:
    <bullet> Includes cash discounts, free goods that are contingent on 
any purchase requirement, volume discounts and rebates (other than 
rebates under section 1927 of the Act), which reduce the price paid;
    <bullet> Must be determined on a unit basis without regard to 
special packaging, labeling or identifiers on the dosage form or 
product or package;
    <bullet> 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

[[Page 39150]]

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 long-standing 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.

[[Page 39151]]

    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 CMS-authorized 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 Sec.  447.505. In Sec.  447.505(a), we 
provided a general definition of the term best price. In Sec.  
447.505(b), we proposed to define provider. In Sec.  447.505(c), we 
specified the sales and prices which must be included in best price. In 
Sec.  447.505(d), we specified which sales and prices must be excluded 
from best price. In Sec.  447.505(e), we further clarified the price 
reductions and other pricing arrangements included in the calculation 
of best price.
Authorized Generic Drugs (Sec.  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.

[[Page 39152]]

    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 Sec.  447.506(a), we proposed defining the term authorized 
generic drug for the purposes of the Medicaid Drug Rebate Program.
    In Sec.  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 Sec.  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 (Sec.  
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. Sec.  300); an entity receiving a grant under subpart II of 
part C of title XXVI of the PHSA (relating to categorical grants for 
outpatient early intervention services for HIV disease); a State-
operated AIDS drug purchasing assistance program receiving financial 
assistance under title XXVI of the PHSA; a black lung clinic receiving 
funds under section 427(a) of the Black Lung Benefits Act; a 
comprehensive hemophilia diagnostic treatment center receiving a grant 
under section 501(a)(2) of the Act; a Native Hawaiian Health Center 
receiving funds under the Native Hawaiian Health Care Act of 1988; an 
urban Indian organization receiving funds under the title V of the 
Indian Health Care Improvement Act, any entity receiving assistance 
under title XXVI of the PHSA (other than a State or unit of local 
government or an entity receiving a grant under subpart II of part C of 
title XXVI of the PHSA), but only if the entity is certified by the 
Secretary pursuant to section 340B(a)(7) of the PHSA; an entity 
receiving funds under section 318 of the PHSA (relating to treatment of 
sexually transmitted diseases) or section 317(j)(2) of the PHSA 
(relating to treatment of tuberculosis) through a State or unit of 
local government, but only if the entity is certified by the Secretary 
pursuant to section 340B(a)(7) of the PHSA; a subsection (d) hospital 
(as defined in section 1886(d)(1)(B) of the Act) that (i) is owned or 
operated by a unit of State or local government, is a public or private 
non-profit corporation which is formally granted governmental powers by 
a unit of State or local government, or is a private non-profit 
hospital which has a contract with a State or local government to 
provide health care services to low income individuals who are not 
entitled to benefits under title XVIII of the Act or eligible for 
assistance under the State plan under this title, (ii) for the most 
recent cost reporting period that ended before the calendar quarter 
involved, had a disproportionate share adjustment percentage (as 
determined under section 1886(d)(5)(F) of the Act) greater than 11.75 
percent or was described in section 1886(d)(5)(F)(i)(II) of the Act, 
and (iii) does not obtain covered outpatient drugs through a group 
purchasing organization (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

[[Page 39153]]

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 Sec.  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 (Sec.  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 Sec.  447.534(h) to Sec.  447.510(f) and 
revise them by adding the requirement that manufacturers must also 
retain records used in calculating the customary prompt pay discounts 
and nominal prices reported to CMS.
    Existing regulations at Sec.  447.534(i) require manufacturers to 
report revisions to AMP and best price for a period not to exceed 12 
quarters from the quarter in which the data were due. We proposed to 
move this provision to Sec.  447.510(b) and revise it to require 
manufacturers to also report revisions to customary prompt pay 
discounts and nominal prices for the same period.
    In order to reflect the changes to AMP as set forth in the DRA, we 
proposed allowing manufacturers to recalculate base date AMP in 
accordance with the definition of AMP in Sec.  447.504(e) of this 
subpart. Base date AMP is used in the calculation of the additional 
rebate described in section 1927(c)(2) of the Act. This additional 
rebate is defined as the difference between the quarterly AMP reported 
to CMS and the base date AMP trended forward using the CPI-U. We 
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 Sec.  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

[[Page 39154]]

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 Sec.  447.508(a) of this subpart for 
the rebate period.
    Section 1927(b)(3)(C) of the Act describes penalties for 
manufacturers that provide false information or fail to provide timely 
information to CMS. In light of these requirements, we proposed to 
require that manufacturers certify the pricing reports they submit to 
CMS in accordance with Sec.  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 (Sec.  447.512)
    We proposed that the existing Sec.  447.331 be revised and 
redesignated as a new Sec.  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 (Sec.  447.514)
    We proposed that the existing Sec.  447.332 be revised in a new 
Sec.  447.514.

A. Upper Limits for Multiple Source Drugs

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

[[Page 39155]]

``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 B-rated 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 Sec.  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 Sec.  447.332(b) specify that the agency's 
payments for multiple source drugs identified and listed must not 
exceed, in the aggregate, payment levels determined by applying, for 
each drug entity, a reasonable dispensing fee established by the 
agency, plus an amount that is equal to 150 percent of the published 
price for the least costly therapeutic equivalent (using all available 
national pricing compendia) that can be purchased by pharmacies in 
quantities of 100 tablets or capsules (or, if the drug is not commonly 
available in quantities of 100, the package size commonly listed) or, 
in the case of liquids, the commonly listed size.
    Section 6001(a)(2) of the DRA added section 1927(e)(5) to the Act 
that changed the formula used to establish the FUL for multiple source 
drugs. Effective January 1, 2007, the upper limit for multiple source 
drugs shall be established at 250 percent of the AMP (as computed 
without regard to customary prompt pay discounts extended to 
wholesalers) for the least costly therapeutic equivalent. The currently 
reported AMP is based on the nine-digit NDC and is specific only to the 
product code, combining all package sizes of the drug into the same 
computation of AMP. We 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

[[Page 39156]]

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 (Sec.  447.516)
    We proposed that the existing Sec.  447.334 be redesignated as a 
new Sec.  447.516.
State Plan Requirements, Findings and Assurances (Sec.  447.518)
    We proposed that the existing Sec.  447.333 be redesignated as a 
new Sec.  447.518.
FFP: Conditions Relating to Physician-Administered Drugs (Sec.  
447.520)
    Prior to the DRA, many States did not collect rebates on physician-
administered drugs when they were not identified by NDC number because 
the NDC number is necessary for States to bill manufacturers for 
rebates. In its report, ``Medicaid Rebates for Physician Administered 
Drugs,'' (April 2004, OEI-03-02-00660), the OIG reported that, by 2003, 
24 States either required providers to bill using NDC numbers or 
identified NDC numbers using a Healthcare Common Procedure Coding 
System (HCPCS)-to-NDC crosswalk for physician-administered drugs in 
order to collect rebates. Four of the 24 States were able to collect 
rebates for all physician-administered drugs, both single source and 
multiple source drugs (one State only collected these rebates from 
targeted providers). Section 6002 of the DRA added sections 1927(a)(7) 
and 1903(i)(10)(C) to the Act to require that States collect rebates on 
certain physician-administered drugs in order for FFP to be available 
for these drugs.
    Section 1927(a)(7)(A) of the Act requires that, effective January 
1, 2006, in order for FFP to be available, States must require the 
submission of utilization data for single source physician-administered 
drugs using HCPCS codes or NDC numbers. (HCPCS codes are numeric and 
alpha-numeric codes assigned by CMS to every medical or surgical 
supply, service, orthotic, prosthetic and generic or brand name drug 
for the purpose of reporting healthcare transactions for claims 
billing. Physician-administered drugs are assigned alpha-numeric HCPCS 
codes, and are commonly referred to as J-codes. However, physician-
administered drugs are also coded using other letters of the alphabet. 
For this reason, we 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 physician-administered drugs (both single source and 
multiple source drugs) using NDC numbers, unless the Secretary 
specifies that an alternative coding system can be used. The Secretary 
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 
physician-administered 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 
``physician-administered drugs'' be defined as covered outpatient drugs 
under section 1927(k)(2) of the Act (many are also covered by Medicare 
Part B) that are typically furnished incident to a physician's service. 
These drugs are usually injectable or intravenous drugs administered by 
a medical professional in a physician's office or other outpatient 
clinical setting. Examples include injectables: lupron acetate for 
depot suspension (primarily used to treat prostate cancer), epoetin 
alpha (injectable drug primarily used to treat cancer), anti-emetic 
drugs (injectable drug primarily used to treat nausea resulting from 
chemotherapy) intravenous drugs primarily used to treat cancer 
(paclitaxel and docetaxel), infliximab primarily used to treat 
rheumatoid arthritis, and rituximab primarily used to treat non-
Hodgkin's lymphoma. We 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

[[Page 39157]]

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 physician-administered 
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 Sec.  447.520. In Sec.  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 Sec.  447.520(b), 
we proposed requiring States to require providers to submit claims 
using NDC numbers. In Sec.  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 notice-and-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

[[Page 39158]]

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 Sec.  
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 (Sec.  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 Sec.  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

[[Page 39159]]

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 Sec.  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 Sec.  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 Sec.  
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

[[Page 39160]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 39161]]

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

[[Page 39162]]

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 Sec.  447.301 with a note specifying that FULs are 
placed on multiple source drugs complying with

[[Page 39163]]

the requirements in Sec. Sec.  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 Sec.  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 cross-licensed 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 Sec.  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 (Sec.  447.504)

Definition of Net Sales

    Comment: Several commenters requested that CMS clarify that the 
term

[[Page 39164]]

``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 Sec.  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 Sec.  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 Sec.  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

[[Page 39165]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 
Sec.  447.504(f).
    Response: We have clarified at Sec.  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 Sec.  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

[[Page 39166]]

``(including a pharmacy, chain of pharmacies or PBM).''
    Response: We have clarified the definition of wholesaler for these 
entities in the regulation text at Sec.  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 Sec.  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 Sec.  
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 Sec.  447.504(d) and (i).
    Response: We agree and have clarified what we mean by cash 
discounts in the regulation at Sec.  447.504(d). We have also changed 
Sec. Sec.  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 Sec.  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

[[Page 39167]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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

[[Page 39168]]

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 Sec.  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 Sec.  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 Sec.  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 Sec. 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 Sec. 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

[[Page 39169]]

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 Sec.  
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 Sec.  
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

[[Page 39170]]

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 Sec.  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 Sec.  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 Sec.  447.504(e), wholesalers at 
Sec.  447.504(f), and the list of sales included in the determination 
of AMP at Sec.  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 Sec.  447.504(i)(2) and Sec.  
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

[[Page 39171]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  
447.504(g) those sales and associated price concessions included in 
AMP.
    Comment: A commenter stated that Sec. Sec.  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 Sec.  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 Sec.  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

[[Page 39172]]

pharmacy class of trade, and, therefore AMP, in this final rule at 
Sec.  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 Sec.  
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 Sec.  
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 long-term 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 Sec.  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 
Sec.  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 Sec.  
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 Sec.  
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 Sec.  447.504(h)(9) that sales to prisons are 
excluded from AMP. We have further clarified at Sec.  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

[[Page 39173]]

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 walk-in 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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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

[[Page 39174]]

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 community-based 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 self-evident 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

[[Page 39175]]

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

[[Page 39176]]

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 Sec.  
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 Sec.  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

[[Page 39177]]

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 Sec.  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 Sec.  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

[[Page 39178]]

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 CMS-authorized 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 CMS-authorized 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 Sec.  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 Sec.  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

[[Page 39179]]

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 Sec.  
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 Sec.  
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 Sec.  
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 Sec.  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 Sec.  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

[[Page 39180]]

paid by these programs to pharmacies are included in AMP, but we have 
revised our policy and provide in this final rule at Sec.  
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 Sec.  
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 Sec.  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 Sec.  
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 Sec.  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 Sec.  447.504(g)(15) that the sale and units

[[Page 39181]]

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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 so-called ``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.

[[Page 39182]]

    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 Sec.  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 
Sec.  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 Sec.  
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 anti-kickback 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

[[Page 39183]]

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 Sec.  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 Sec. Sec.  447.504(h) and 447.505(e), fees 
paid by a manufacturer to a bona fide group purchasing organization, as 
defined at 42 CFR Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  
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 Sec.  
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.

[[Page 39184]]

    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 Sec.  
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,

[[Page 39185]]

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 Sec.  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

[[Page 39186]]

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 Sec.  
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 Sec.  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 Sec.  
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

[[Page 39187]]

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-of-purchase, 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 Sec.  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

[[Page 39188]]

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 Sec.  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-of-charge 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 Sec.  
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 Sec.  
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 Sec.  
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 Sec.  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

[[Page 39189]]

upon any purchase requirement or extending financial assistance to low-
income 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 Sec.  
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 Sec.  
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 Sec.  
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 Sec.  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 Sec.  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 Sec.  447.504(h)(17) that 
manufacturer-sponsored 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 Sec.  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 Sec.  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 Sec.  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 Sec.  
447.504(h)(8) that sales to veterinarians are excluded from AMP.

[[Page 39190]]

    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 Sec.  
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 long-term 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 Sec.  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 non-contingent 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 Sec.  
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 Sec.  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.

[[Page 39191]]

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 non-drug 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 Sec.  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.

[[Page 39192]]

    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 Sec.  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 Sec.  
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 Sec.  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 
Sec.  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

[[Page 39193]]

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 Sec.  
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 non-negotiable 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 Sec.  
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 non-mail 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 Sec.  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 non-PBMs 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 Sec.  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 Sec.  
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

[[Page 39194]]

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 Sec.  
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 Sec.  
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 Sec.  447.504(h)(22) and 
best price in Sec.  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 Sec.  
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 AMP-based 
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

[[Page 39195]]

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 month-to-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

[[Page 39196]]

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 long-term care pharmacies and other 
pharmacies that specialize in unit dose packaging as these services 
help ensure the effectiveness of patients' treatment

[[Page 39197]]

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 anti-hemophilic 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 anti-hemophilic 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 (Sec.  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 Sec.  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 Sec.  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

[[Page 39198]]

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 multi-
manufacturer 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 low-
income 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 non-mail 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-to-patient sales are not specified in the statute. Rather, the 
commenter believed that the statutory definition is intended

[[Page 39199]]

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 
industry-accepted 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 (Sec.  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 anti-
competitive 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

[[Page 39200]]

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 AMP-eligible 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

[[Page 39201]]

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-to-manufacturer 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

[[Page 39202]]

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 inter-company transactions between the primary 
manufacturer and the secondary manufacturer will not be included in the 
primary manufacturer's pricing calculations. Several commenters 
recommended that inter-company 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 Sec.  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 profit-sharing 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 Sec.  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 price-eligible 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 
price-eligible 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

[[Page 39203]]

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

[[Page 39204]]

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 (Sec.  
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, ill-advised 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

[[Page 39205]]

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 non-340B 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 self-certification 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

[[Page 39206]]

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 Sec.  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 (Sec.  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 
Sec.  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.

[[Page 39207]]

    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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  447.510(d)(5).

[[Page 39208]]

    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 Sec.  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

[[Page 39209]]

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 Sec.  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, Sec.  447.504, rather than 
addressing monthly AMP under Requirements for Manufacturers, Sec.  
447.510.
    Response: We appreciate this comment but have decided to address 
the requirements for monthly AMP under Sec.  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-of-year 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.

[[Page 39210]]

An alternative would be to require manufacturers to estimate their end-
of-year 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 Sec.  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 Sec.  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 Sec.  447.510(b).
    Response: The purpose of requiring manufacturers to report revised 
quarterly AMPs in Sec.  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 Sec.  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

[[Page 39211]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 
Sec.  447.504 of this subpart, rather than the provisions of Sec.  
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 Sec.  
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 Sec.  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 Sec.  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

[[Page 39212]]

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 
Sec.  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 Sec.  
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 Sec. Sec.  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 (Sec.  447.512)

    Comment: One commenter asked that CMS clarify proposed Sec.  
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 e-
prescribing and other health information technology innovations.
    Response: We appreciate these comments and have revised the final 
regulation at Sec.  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 (Sec.  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

[[Page 39213]]

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-and-balance 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

[[Page 39214]]

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-by-product 
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 A-rated generic equivalent. The 
new FULs

[[Page 39215]]

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

[[Page 39216]]

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 Sec.  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 Sec.  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 
Sec.  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 
Sec.  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 Sec.  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 Sec.  
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

[[Page 39217]]

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 (Sec.  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 Sec.  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 (Sec.  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 Sec.  447.518(b)(1) by 
adding another Sec.  447.518(b)(1)(iii), which would say, ``in the 
aggregate, the dispensing fees paid to pharmacies cover the costs 
described in Sec.  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 Physician-Administered Drugs (Sec.  
447.520)

    We received many comments regarding the requirement that State 
Medicaid Agencies provide for the submission of NDCs on claims for

[[Page 39218]]

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 J-codes 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 physician-administered 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 physician-administered 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 physician-administered drugs that are separately 
billed to Medicaid as covered outpatient drugs will be considered 
physician-administered 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

[[Page 39219]]

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 physician-administered 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 physician-administered drugs.
    Comment: Several commenters believe that CMS went beyond 
congressional intent by including outpatient hospitals and clinics in 
the requirement for States to collect NDC-level 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. Physician-
administered 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

[[Page 39220]]

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 physician-administered 
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 case-by-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 physician-administered 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 physician-
administered 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

[[Page 39221]]

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 
physician-administered 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 plasma-derived 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 physician-administered 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 physician-
administered 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.

[[Page 39222]]

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 
manufacturer-specific 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

[[Page 39223]]

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

[[Page 39224]]

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 Sec. Sec.  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

[[Page 39225]]

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 generically-available 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

[[Page 39226]]

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 Sec.  447.300, we updated a statutory reference.
    In Sec.  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 Sec.  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 Sec.  447.502, in the definition of dispensing fee, we inserted 
``or service'' after, ``is incurred at the point of sale.''
    In Sec.  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 Sec.  447.502, we clarified that a single source drug includes a 
covered outpatient drug approved under a BLA.
    In Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  447.504(h)(16) and (17), we added that manufacturer 
vouchers and manufacturer-sponsored drug discount card programs are 
excluded from AMP.
    In Sec.  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 Sec.  447.504(h)(21), we clarified that returned or replaced 
goods, when accepted or replaced in good faith, are excluded from AMP.
    In Sec.  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 Sec.  447.504(i)(1), we clarified that AMP includes cash 
discounts except

[[Page 39227]]

customary prompt pay discounts extended to wholesalers. We also 
clarified that other fees are included in AMP.
    In Sec.  447.504(i)(2), we revised the methodology for calculating 
quarterly AMP to be the weighted average of monthly AMPs in the 
quarter.
    In Sec.  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 Sec.  447.505(d)(13).
    In Sec.  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 Sec.  447.505(d)(8).
    In Sec.  447.505(d)(3), we limited the SPAP best price exemption to 
any prices or price concessions provided to designated SPAPs.
    In Sec.  447.505(d)(4), we deleted TRICARE from the list of prices 
excluded from best price.
    In Sec.  447.505(e)(2), we clarified the reference to the nominal 
price provisions in Sec.  447.508.
    In Sec.  447.506(a), we removed the phrase ``directly or 
indirectly'' from the definition of authorized generic drug.
    In Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  447.508(a) of this subpart.
    We added Sec.  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 Sec.  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 Sec.  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 Sec.  447.504 of this subpart, as opposed to Sec.  
447.504(e) of the same.
    In Sec.  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 Sec.  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 Sec.  447.510(d)(2), we revised the reg text by removing the 
reference to Sec.  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 Sec.  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 Sec.  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 Sec.  447.510(d)(5) to address monthly AMP reporting 
requirements for terminated products.
    In Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements:

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

[[Page 39228]]

pertaining to the manufacturer's reporting requirements is located 
under Sec. Sec.  447.510(a), (b), (c), (d), and (e).
    The burden associated with these new requirements is the time and 
effort it would take for a drug manufacturer to gather product and 
pricing information and submit it to CMS in an electronic format. We 
estimate that these requirements would affect the approximately 550 
drug manufacturers that currently participate in the Medicaid Drug 
Rebate Program. Our current reporting and recordkeeping hour burden for 
each manufacturer in the Medicaid Drug Rebate Program is 71 hours per 
quarter or 284 hours annually. We believe the new reporting 
requirements will require less than half of this time. Specifically, we 
believe it would take each manufacturer 31 hours per quarter or 124 
hours annually to report additional new information to CMS. The total 
estimated burden on all drug manufacturers associated with the new 
requirements under Sec.  447.510 is 68,200 annual hours. 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<greek-i> 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 Sec.  447.510(f)(2), 
there are certain instances when records must be maintained beyond the 
ten-year period.
    While this requirement is subject to the PRA, the retention of 
quarterly data is not a new requirement and is currently approved under 
OMB<greek-i> 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 physician-administered single source 
drugs and the 20 multiple source drugs identified by the Secretary 
using NDC numbers.
    Assuming all States impose this requirement, the burden associated 
with this requirement is the time and effort it would take for a 
physician's office, hospital outpatient department or other entity (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.

----------------------------------------------------------------------------------------------------------------
                                                        Number of         Number of burden
             OMB No.                Requirements       respondents             hours         Total annual burden
----------------------------------------------------------------------------------------------------------------
0938-0578........................         447.510  550 Drug             31 hours per         68,200 hours.
                                                    Manufacturers.       quarter.
None.............................         447.520  20,000 Physicians..  15 seconds per       16,292 hours.
                                                                         claim.
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

[[Page 39229]]

Building, Washington, DC 20503, Attn: Katherine Astrich, CMS Desk 
Officer, CMS-2238-FC, <a href="/cdn-cgi/l/email-protection#b3d8d2c7dbd6c1daddd6ecd2c0c7c1dad0dbf3dcded19dd6dcc39dd4dcc5"><span class="__cf_email__" data-cfemail="1c777d6874796e757279437d6f686e757f745c73717e3279736c327b736a">[email protected]</span></a>. 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

[[Page 39230]]

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]
----------------------------------------------------------------------------------------------------------------
                                                                                                        2007-11
  DRA section and provision      FFY  Federal      2007       2008       2009       2010       2011      total
                                    State                                                               savings
----------------------------------------------------------------------------------------------------------------
Section 6001--Federal Upper    Federal........       $465       $750     $1,075     $1,155     $1,250     $4,695
 Payment Limits and Other      State..........        330        535        765        825        890      3,345
 Provisions
                                               -----------------------------------------------------------------
                                Total.........        795      1,285      1,840      1,980      2,140      8,040
                                               =================================================================
Section 6002--Rebates on       Federal........         18         19         20         22         24        103
 Physician-Administered Drugs. State..........         13         14         15         16         18         76
                                               -----------------------------------------------------------------
                                Total.........         31         33         35         38         42        179
                                               =================================================================

[[Page 39231]]

 
Section 6003--Reporting of     Federal........         10         25         28         32         36        131
 Authorized Generics for       State..........          7         19         21         24         27         98
 Medicaid Rebates
                                               -----------------------------------------------------------------
                                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 
physician-administered drugs--are based on the 2004 OIG report, 
``Medicaid Rebates for Physician-Administered Drugs.'' A key finding of 
the report is the amount of additional rebates that could have been 
collected in 2001 if all States had collected rebates on physician-
administered drugs. This amount was then projected forward using 
historical data (2001-2005) and projections consistent with the 2007 
President's Budget forecast for Medicaid spending to develop the total 
estimated impact.
    The savings estimates for section 6003 of the DRA--Reporting of 
authorized generics for Medicaid rebates--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 non-profit 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

[[Page 39232]]

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 physician-administered 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 physician-administered 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

[[Page 39233]]

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 low-income 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 physician-administered covered 
outpatient drugs. As discussed above, hospitals with outpatient 
departments would need to include the NDC on claims for such

[[Page 39234]]

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 non-profit providers).
    According to the SBA's size standards, we believe that most of the 
550 pharmaceutical manufacturers in the Medicaid Drug Rebate Program 
are small businesses. We previously indicated that this rule impacts 
drug manufacturers by requiring them to submit pricing information 
(AMP) on each of their drug products on a monthly basis with an 
estimated impact that is minimal. The rule 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.

------------------------------------------------------------------------
                                      Number
           Small entity            affected by     Estimated economic
                                       rule              impact
------------------------------------------------------------------------
Pharmaceutical Manufacturers in            550  $160 million (2 percent
 Medicaid Drug Rebate Program.                   of $8 billion) higher
                                                 rebates result from
                                                 removal of customary
                                                 prompt pay discounts
                                                 from rebate
                                                 calculations. 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,            20,000  Under 9 cents per claim
 Hospital Outpatient Settings or                 to enter NDC number.
 Other Entities (e.g., Non-profit               About $17 annual cost
 Facilities) that Specialize in                  per physician practice
 Oncology, Rheumatology and                      to enter NDC number on
 Urology.                                        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

[[Page 39235]]

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]
----------------------------------------------------------------------------------------------------------------
                                                                 Discount rate
                   Category                        Transfers       (percent)           From whom to whom?
----------------------------------------------------------------------------------------------------------------
Total Federal Savings.........................        $3,927.3               7  Reduction of transfers from the
                                                       4,459.0               3   Federal Government to State
                                                       4,929.0               0   Governments.
Federal Annualized Monetized Transfers                   957.8               7
 (Millions/Year).                                        973.6               3
                                                         985.8               0
Total State Savings...........................         2,803.6               7  Reduction of transfers from
                                                       3,183.3               3   State Governments to Retail
                                                       3,519.0               0   Pharmacies and increased
                                                                                 transfers from Drug
                                                                                 Manufacturers to the State
                                                                                 Governments.
State Annualized Monetized Transfers (Millions/          683.8               7
 Year).                                                  695.1               3
                                                         703.8               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.

[[Page 39236]]

    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 Sec.  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

[[Page 39237]]

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 long-term 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 
five-year 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 five-year total sales by $50 billion 
to exclude mail order and reflect only community-based 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.

[[Page 39238]]

    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

[[Page 39239]]

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.

0
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

0
1. The authority citation for part 447 continues to read as follows:

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

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

0
2. Section 447.300 is revised to read as follows:


Sec.  447.300  Basis and purpose.

    In this subpart, Sec.  447.302 through Sec.  447.325 and Sec.  
447.361 implement section 1902(a)(30) of the Act, which requires that 
payments be consistent with efficiency, economy and quality of care. 
Section 447.371 implements section 1902(a)(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.


Sec.  447.301  [Removed]

0
3. Section 447.301 is removed.


Sec.  447.331 through Sec.  447.334  [Removed]

0
4. Sections 447.331 through 447.334 are removed.

0
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


Sec.  447.500  Basis and purpose.

    (a) Basis. This subpart--
    (1) Interprets those provisions of section 1927 of the Act that set 
forth

[[Page 39240]]

requirements for drug manufacturers' calculating and reporting average 
manufacturer prices (AMPs) and that set upper payment limits for 
covered outpatient drugs.
    (2) Implements section 1903(i)(10) of the Act with regard to the 
denial of Federal financial participation (FFP) in expenditures for 
certain physician-administered drugs.
    (3) Implements section 1902(a)(54) of the Act with regard to a 
State plan that provides covered outpatient drugs.
    (b) Purpose. This subpart specifies certain requirements in the 
Deficit Reduction Act of 2005 and other requirements pertaining to 
Medicaid payment for drugs.


Sec.  447.502  Definitions.

    Bona fide service fees mean fees paid by a manufacturer to an 
entity; that represent fair market value for a bona fide, itemized 
service actually performed on behalf of the manufacturer that the 
manufacturer would otherwise perform (or contract for) in the absence 
of the service arrangement; and that are not passed on in whole or in 
part to a client or customer of an entity, whether or not the entity 
takes title to the drug.
    Brand name drug means a single source or innovator multiple source 
drug.
    Bundled sale means an arrangement regardless of physical packaging 
under which the rebate, discount, or other price concession is 
conditioned upon the purchase of the same drug, 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

[[Page 39241]]

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.


Sec.  447.504  Determination of AMP.

    (a) AMP means, with respect to a covered outpatient drug of a 
manufacturer (including those sold under an NDA approved under section 
505(c) of the Federal Food, Drug, and Cosmetic Act (FFDCA)) for a 
calendar quarter, the average price 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 Sec.  440.150 of this chapter, 
or a State-owned or operated nursing facility providing services as set 
forth in Sec.  440.155 of this chapter;
    (5) Sales to retail pharmacies including discounts or other price 
concessions that adjust prices either directly or indirectly on sales 
of drugs to the retail pharmacy class of trade;
    (6) 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;

[[Page 39242]]

    (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.


Sec.  447.505  Determination of best price.

    (a) Best price means, with respect to a single source drug or 
innovator multiple source drug of a manufacturer (including any drug 
sold under an NDA approved under section 505(c) of the FFDCA), the 
lowest price available from the manufacturer during the rebate period 
to any entity in the United States in any pricing structure (including 
capitated payments), in the same quarter for which the AMP is computed. 
Best price shall be calculated to include all sales and associated 
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 Sec.  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 non-excluded 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 Sec.  
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,

[[Page 39243]]

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 Sec.  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.


Sec.  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.


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

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


Sec.  447.510  Requirements for manufacturers.

    (a) Quarterly reports. A manufacturer must report product and 
pricing information for covered outpatient drugs to CMS not later than 
30 days after the end of the rebate period. The quarterly pricing 
report must include:
    (1) AMP, calculated in accordance with Sec.  447.504 of this 
subpart;
    (2) Best price, calculated in accordance with Sec.  447.505 of this 
subpart;
    (3) Customary prompt pay discounts, which shall be reported as an 
aggregate dollar amount 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 Sec.  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 Sec.  447.504 of this subpart.
    (ii) A manufacturer may choose to recalculate base date AMP on a 
product-by-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.

[[Page 39244]]

    (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.


Sec.  447.512  Drugs: Aggregate upper limits of payment.

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


Sec.  447.514  Upper limits for multiple source drugs.

    (a) Establishment and issuance of a listing. (1) CMS will establish 
and issue listings that identify and set upper limits for multiple 
source drugs that meet the following requirements:
    (i) The FDA has rated two or more drug products as therapeutically 
and pharmaceutically equivalent in 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.


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

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


Sec.  447.518  State plan requirements, findings and assurances.

    (a) State plan. The State plan must describe comprehensively the 
agency's payment methodology for prescription drugs.
    (b) Findings and assurances. Upon proposing significant State plan 
changes in payments for prescription drugs, and at least annually for 
multiple source drugs and triennially for all other drugs, the agency 
must make the following findings and assurances:
    (1) Findings. The agency must make the following separate and 
distinct findings:
    (i) In the aggregate, its Medicaid expenditures for multiple source 
drugs, identified and listed in accordance with Sec.  447.514(a) of 
this subpart, are in accordance with the upper limits specified in 
Sec.  447.514(b) of this subpart; and
    (ii) In the aggregate, its Medicaid expenditures for all other 
drugs are in accordance with Sec.  447.512 of this subpart.
    (2) Assurances. The agency must make assurances satisfactory to CMS 
that the requirements set forth in Sec.  Sec.  447.512 and 447.514 of 
this subpart concerning upper limits and in paragraph (b)(1) of this 
section concerning agency findings are met.
    (c) Recordkeeping. The agency must maintain and make available to 
CMS, upon request, data, mathematical or statistical computations, 
comparisons, and any other pertinent records to support its findings 
and assurances.


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

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

[[Page 39245]]

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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