Friday, 

December 22, 2006 

Part IV 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CFR Part 447 

Medicaid Program; Prescription Drugs; 

Proposed Rule 


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77174 Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 447 

[CMS–2238–P] 

RIN 0938–AO20 

Medicaid Program; Prescription Drugs 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

implement the provisions of the Deficit 

Reduction Act of 2005 (DRA) pertaining 

to prescription drugs under the 

Medicaid program. The DRA requires 

the Secretary of Health and Human 

Services to publish a final regulation no 

later than July 1, 2007. In addition, we 

would add to existing regulations 

certain established Medicaid rebate 

policies that are currently set forth in 

CMS guidance. This rule would bring 

together existing and new regulatory 

requirements in one, cohesive subpart. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on February 20, 2007. 

ADDRESSES: In commenting, please refer 

to file code CMS–2238–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (no duplicates, please): 

1. Electronically. You may submit 

electronic comments on specific issues 

in this regulation to http:// 

www.cms.hhs.gov/eRulemaking. Click 

on the link ‘‘Submit electronic 

comments on CMS regulations with an 

open comment period.’’ (Attachments 

should be in Microsoft Word, 

WordPerfect, or Excel; however, we 

prefer Microsoft Word.) 

2. By regular mail. You may mail 

written comments (one original and two 

copies) to the following address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS–2238– 

P, P.O. Box 8015, Baltimore, MD 21244– 

8015. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments (one 

original and two copies) to the following 

address ONLY: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–2238–P, Mail Stop C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by mailing 

your comments to the addresses 

provided at the end of the ‘‘Collection 

of Information Requirements’’ section in 

this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Kimberly Howell, (410) 786–6762 (for 

issues related to the determination of 

average manufacturer price and best 

price). 

Yolanda Reese, (410) 786–9898 (for 

issues related to authorized generics). 

Madlyn Kruh, (410) 786–3239 (for 

issues related to nominal prices). 

Marge Watchorn, (410) 786–4361 (for 

issues related to manufacturer reporting 

requirements). 

Gail Sexton, (410) 786–4583 (for 

issues related to Federal upper limits). 

Christina Lyon, (410) 786–3332 (for 

issues related to physician-administered 

drugs). 

Bernadette Leeds, (410) 786–9463 (for 

issues related to the regulatory impact 

analysis). 

SUPPLEMENTARY INFORMATION:

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code CMS–2238–P 

and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http://www.cms.hhs.gov/ 

eRulemaking. Click on the link 

‘‘Electronic Comments on CMS 

Regulations’’ on that Web site to view 

public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–800–743–3951. 

I. Background 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Background’’ as the beginning of your 

comments.] 

A. Introduction 

Under the Medicaid program, States 

may provide coverage of outpatient 

drugs as an optional service under 

section 1905(a)(12) of the Social 

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

of the Act provides for Federal financial 

participation (FFP) in State 

expenditures for these drugs. In order 

for payment to be made available under 

section 1903 for certain drugs, 

manufacturers must enter into a 

Medicaid drug rebate agreement as set 

forth in section 1927(a) of the Act. 

Section 1927 of the Act provides 

specific requirements for rebate 

agreements, drug pricing submission 

and confidentiality requirements, the 

formula for calculating rebate payments, 

and requirements for States with respect 

to covered outpatient drugs. 

This proposed rule would implement 

sections 6001(a)–(d), 6002, and 6003 of 

the Deficit Reduction Act of 2005 

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

It also would codify those parts of 

section 1927 of the Act that pertain to 

requirements for drug manufacturers’ 

calculation and reporting of average 


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manufacturer price (AMP) and best 

price, and it would revise existing 

regulations that set upper payment 

limits for certain covered outpatient 

drugs. This proposed rule would also 

implement section 1903(i)(10) of the 

Act, as revised by the DRA, with regard 

to the denial of FFP in expenditures for 

certain physician-administered drugs. 

Finally, the proposed rule would 

address other provisions of the drug 

rebate program, to the extent those 

provisions are affected by the DRA. 

The Medicaid Drug Rebate Program 

was established by section 4401 of the 

Omnibus Budget Reconciliation Act of 

1990 (OBRA 90), Pub. L. 101–508 (Nov. 

5, 1990) and subsequently modified by 

the Veterans Health Care Act of 1992 

(VHCA), Pub. L. 102–585 (Nov. 4, 1992) 

and the Omnibus Budget Reconciliation 

Act of 1993, Pub. L. 103–66 (Aug. 10, 

1993). These provisions were 

implemented primarily through the 

national drug rebate agreement (56 FR 

7049 (Feb. 21, 1991)) and other informal 

program releases, which provide 

standards for manufacturer reporting 

and rebate calculations. The statutory 

changes that affect the provisions of this 

proposed rule are described below. 

B. Changes Made by the Deficit 

Reduction Act of 2005 

Section 6001(a) of the DRA amends 

section 1927(e) of the Act to revise the 

formula CMS uses to set Federal upper 

limits (FULs) for multiple source drugs. 

Effective January 1, 2007, the upper 

limit for multiple source drugs shall be 

established at 250 percent of the average 

manufacturer price (AMP) (as computed 

without regard to customary prompt pay 

discounts extended to wholesalers) for 

the least costly therapeutic equivalent. 

Section 6001(b) of the DRA amends 

section 1927(b)(3) of the Act to create a 

requirement that manufacturers report 

certain prices to the Secretary monthly. 

It also requires the Secretary to provide 

AMP to States on a monthly basis 

beginning July 1, 2006 and post AMP on 

a Web site at least quarterly. We are 

aware of concerns that the AMPs 

released to the States beginning July 1, 

2006, will not reflect changes to the 

definition of AMP made by the DRA and 

proposed in this rule. While we made 

the AMPs available to the States 

beginning July 1, 2006, States should 

keep these data confidential in 

accordance with section 1927(b)(3)(D) of 

the Act. Section 6001(b) of the DRA 

revises these confidentiality provisions 

to permit States to use AMP to calculate 

payment rates; however, these 

confidentiality amendments are not 

effective until January 1, 2007. This sixmonth period will give the States a 

chance to review the AMP data and 

revise their systems to address the DRA 

amendments. 

Section 6001(c) of the DRA modifies 

the definition of AMP to remove 

customary prompt pay discounts 

extended to wholesalers from the AMP 

calculation and requires manufacturers 

to report these customary prompt pay 

discounts to the Secretary. It requires 

the Inspector General of the Department 

of Health and Human Services (IG) to 

review the requirements for, and the 

manner in which, AMP is determined 

and submit to the Secretary and 

Congress any recommendations for 

changes no later than June 1, 2006. 

Finally, it requires the Secretary to 

promulgate a regulation that clarifies the 

requirements for, and the manner in 

which, AMP is determined no later than 

July 1, 2007, taking into consideration 

any IG recommendations. 

Section 6001(d) of the DRA requires 

manufacturers to report information on 

sales at nominal price to the Secretary 

for calendar quarters beginning on or 

after January 1, 2007. It also specifies 

the entities to which nominal price 

applies. It limits the merely nominal 

exclusion to sales at nominal prices to 

the following: A covered entity 

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

Public Health Service Act (PHSA), an 

intermediate care facility for the 

mentally retarded (ICF/MR), a Stateowned or operated nursing facility, and 

any other facility or entity that the 

Secretary determines is a safety net 

provider to which sales of such drugs at 

a nominal price would be appropriate, 

based on certain factors such as type of 

facility or entity, services provided by 

the facility or entity, and patient 

population. 

Section 6001(e) of the DRA amends 

section 1927 of the Act to provide for a 

survey of retail prices and State 

performance rankings. These provisions 

are not addressed in this proposed rule. 

Section 6001(f) of the DRA makes 

minor amendments to section 1927(g) of 

the Act which are self-implementing. 

Section 6001(g) of the DRA provides 

that the amendments in section 6001 are 

effective on January 1, 2007, unless 

otherwise noted. 

Section 6002 of the DRA amends 

section 1903(i)(10) of the Act by 

prohibiting Medicaid FFP for physicianadministered drugs unless States submit 

the utilization data described in section 

1927(a) of the Act. It also amends 

section 1927 of the Act to require the 

submission of utilization data for 

physician-administered drugs. 

Section 6003(a) of the DRA amends 

section 1927(b)(3)(A) of the Act to 

require manufacturers to include within 

AMP and best price all of its drugs that 

are sold under a new drug application 

(NDA) approved under section 505(c) of 

the Federal Food, Drug, and Cosmetic 

Act (FFDCA) when they report AMP 

and best price to the Secretary. 

Section 6003(b) of the DRA amends 

section 1927(c)(1)(C) of the Act to clarify 

that manufacturers must include the 

lowest price available to any entity for 

a drug sold under an NDA approved 

under section 505(c) of the FFDCA 

when determining best price. Section 

6003(b) also amends section 1927(k) to 

require that in the case of a 

manufacturer that approves, allows, or 

otherwise permits any of its drugs to be 

sold under an NDA approved under 

section 505(c) of the FFDCA, the AMP 

shall be calculated to include the 

average price paid for such drugs by 

wholesalers for drugs distributed to the 

retail pharmacy class of trade. Section 

6003(c) of the DRA provides that the 

amendments made by section 6003 are 

effective January 1, 2007. 

The statutory provisions in the DRA 

that affect the Medicaid Drug Rebate 

Program, as well as the regulatory 

provisions we are proposing to 

implement the program, are discussed 

in greater detail in the section entitled 

‘‘Provisions of the Proposed 

Regulations’’ below. 

C. Notice of Proposed Rulemaking 

Published September 19, 1995 

On September 19, 1995, CMS (then 

the Health Care Financing 

Administration) published a notice of 

proposed rulemaking (NPRM) in the 

Federal Register (60 FR 48442 (Sept. 19, 

1995)). The purpose of the 1995 NPRM 

was to propose regulations pertaining to 

the Medicaid Drug Rebate Program and 

to address the national rebate agreement 

(56 FR 7049 (Feb. 21, 1991)). On August 

29, 2003, CMS finalized two of the 

provisions in the 1995 NPRM through a 

final rule with comment period (68 FR 

51912). These regulations require 

manufacturers to retain records for data 

used to calculate AMP and best price for 

three years from when AMP and best 

price are reported to CMS. We also 

provided that manufacturers should 

report revisions to AMP and best price 

for a period not to exceed twelve 

quarters from the quarter in which the 

data are due. On November 26, 2004, we 

published final regulations (69 FR 

68815) that require a manufacturer to 

retain pricing data for 10 years from the 

date the manufacturer reports that data 

to CMS and for an additional time frame 

where the manufacturer is the subject of 

an audit or government investigation. 

Due to the time that has elapsed since 

publication of the 1995 NPRM and 


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changes in the prescription drug 

industry, we do not plan to finalize the 

other provisions of that proposed rule, 

and any comments on the 1995 NPRM 

are outside the scope of this proposed 

rule. This proposed rule does not 

address the entire Medicaid Drug Rebate 

Program, but focuses primarily on the 

provisions of the DRA that address the 

Medicaid Drug Rebate Program. 

II. Provisions of the Proposed 

Regulations 

Basis and Purpose of Subpart I—Section 

447.500 

This subpart would implement 

specified provisions of sections 1927, 

1903(i)(10), and 1902(a)(54) of the Act 

related to implementation of the DRA. It 

would include requirements related to 

State plans, FFP for drugs, and the 

payment for covered outpatient drugs 

under Medicaid. In this rule, we also 

propose to move the existing Medicaid 

drug provisions in the Federal 

regulations from subpart F to subpart I 

of 42 CFR part 447. 

Definitions—Section 447.502 

This section of the rule would include 

definitions of key terms used in 42 CFR 

part 447, subpart I. We propose to use 

definitions from several sources, 

including the Act, Federal regulations, 

program guidance, and the national 

rebate agreement. We invite the public 

to provide comments on the terms we 

have chosen to define as well as the 

proposed definitions described below. 

Bona fide service fee would mean a 

fee paid by a manufacturer to an entity, 

that represents fair market value for a 

bona fide, itemized service actually 

performed on behalf of the manufacturer 

that a manufacturer would otherwise 

perform (or contract for) in the absence 

of the service arrangement, and that is 

not passed in whole or in part to a client 

or customer of an entity, whether or not 

the entity takes title to the drug. 

Brand name drug would mean a 

single source or innovator multiple 

source drug. 

Bundled sale would mean an 

arrangement regardless of physical 

packaging under which the rebate, 

discount, or other price concession is 

conditioned upon the purchase of the 

same drug or drugs of different types 

(that is, at the nine-digit National Drug 

Code (NDC) level) or some other 

performance requirement (e.g., the 

achievement of market share, inclusion 

or tier placement on a formulary), or 

where the resulting discounts or other 

price concessions are greater than those 

which would have been available had 

the bundled drugs been purchased 

separately or outside the bundled 

arrangement. For bundled sales, the 

discounts are allocated proportionately 

to the dollar value of the units of each 

drug sold under the bundled 

arrangement. For bundled sales where 

multiple drugs are discounted, the 

aggregate value of all the discounts 

should be proportionately allocated 

across all the drugs in the bundle. 

Consumer Price Index ‘‘ Urban (CPI– 

U) would be defined the same as it is 

in the national rebate agreement, except 

we would replace ‘‘U.S. Department of 

Commerce’’ with ‘‘U.S. Department of 

Labor’’ to reflect that the Department of 

Labor is now responsible for updating 

the CPI–U. Therefore, the term CPI–U 

would mean the index of consumer 

prices developed and updated by the 

U.S. Department of Labor. For purposes 

of this subpart, it would be the CPI for 

all urban consumers (U.S. average) for 

the month before the beginning of the 

calendar quarter for which the rebate is 

paid. 

Dispensing fee would be defined 

similarly to how it is defined for the 

Medicare Part D program in 42 CFR 

423.100 in light of some of the parallels 

of Part D to Medicaid. We are defining 

this term in order to assist States in their 

evaluation of factors in establishing a 

reasonable dispensing fee to pharmacy 

providers. We note that while we 

propose to define this term, we do not 

intend to mandate a specific formula or 

methodology which the States must use 

to determine the dispensing fee. The 

formula is consistent with our 

regulation that defines estimated 

acquisition costs which give States 

flexibility to determine EAC. However, 

consistent with a recommendation made 

by the Office of the Inspector General 

(OIG) in its report, ‘‘Determining 

Average Manufacturer Prices for 

Prescription Drugs under the Deficit 

Reduction Act of 2005,’’ (A–06–06–

00063) May 2006, we encourage States 

to analyze the relationship between 

AMP and pharmacy acquisition costs to 

ensure that the Medicaid program 

appropriately reimburses pharmacies for 

estimated acquisition costs. 

Dispensing fee would be defined as 

the fee which—

(1) Is incurred at the point of sale and 

pays for costs other than the ingredient 

cost of a covered outpatient drug each 

time a covered outpatient drug is 

dispensed; 

(2) Includes only pharmacy costs 

associated with ensuring that possession 

of the appropriate covered outpatient 

drug is transferred to a Medicaid 

beneficiary. Pharmacy costs include, but 

are not limited to, any reasonable costs 

associated with a pharmacist’s time in 

checking the computer for information 

about an individual’s coverage, 

performing drug utilization review and 

preferred drug list review activities, 

measurement or mixing of the covered 

outpatient drug, filling the container, 

beneficiary counseling, physically 

providing the completed prescription to 

the Medicaid beneficiary, delivery, 

special packaging, and overhead 

associated with maintaining the facility 

and equipment necessary to operate the 

pharmacy; and 

(3) Does not include administrative 

costs incurred by the State in the 

operation of the covered outpatient drug 

benefit including systems costs for 

interfacing with pharmacies. 

Innovator multiple source drug would 

be defined based on the definition in 

section 1927(k)(7)(A)(ii) of the Act. We 

would also use the definition from the 

national rebate agreement. Innovator 

multiple source drug would mean a 

multiple source drug that was originally 

marketed under an original NDA 

approved by the Food and Drug 

Administration (FDA). It would include 

a drug product marketed by any crosslicensed producers or distributors 

operating under the NDA and a covered 

outpatient drug approved under an 

NDA, Product License Approval, 

Establishment License Approval or 

Antibiotic Drug approval. We believe 

this definition is consistent with our 

understanding of the drug rebate statute 

and section 6003 of the DRA which 

includes within the definition those 

drugs which often receive a certain 

amount of patent protection and/or 

market exclusivity. 

Manufacturer would be defined based 

on the definition in section 1927(k)(5) of 

the Act and the national rebate 

agreement. It would also mirror the 

current definition of manufacturer used 

by Medicare in the regulations regarding 

manufacturer’s average sales price (ASP) 

data. For purposes of the Medicaid 

program, manufacturer would be 

defined as any entity that possesses 

legal title to the NDC for a covered drug 

or biological product and—

(a) Is engaged in the production, 

preparation, propagation, compounding, 

conversion, or processing of covered 

outpatient drug products, either directly 

or indirectly by extraction from 

substances of natural origin, or 

independently by means of chemical 

synthesis, or by a combination of 

extraction and chemical synthesis; or 

(b) Is engaged in the packaging, 

repackaging, labeling, relabeling, or 

distribution of covered outpatient drug 

products and is not a wholesaler of 

drugs or a retail pharmacy licensed 

under State law. 


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(c) With respect to authorized generic 

products, the term ‘‘manufacturer’’ will 

also include the original holder of the 

NDA. 

(d) With respect to drugs subject to 

private labeling arrangements, the term 

‘‘manufacturer’’ will also include those 

entities that do not possess legal title to 

the NDC. 

Multiple source drug is currently 

defined in Federal regulations at section 

42 CFR 447.301. We propose removing 

the definition from that section and 

revising the definition to reflect the 

DRA amendments to section 1927 of the 

Act. We would define the term multiple 

source drug to mean, with respect to a 

rebate period, a covered outpatient drug 

for which there is at least one other drug 

product which—

(1) Is rated as therapeutically 

equivalent. For the list of drug products 

rated as therapeutically equivalent, see 

the FDA’s most recent publication of 

‘‘Approved Drug Products with 

Therapeutic Equivalence Evaluations’’

which is available at http:// 

www.fda.gov/cder/orange/default.htm 

or can be viewed at the FDA’s Freedom 

of Information Public Reading Room at 

5600 Fishers Lane, rm. 12A–30, 

Rockville, MD 20857; 

(2) Is pharmaceutically equivalent and 

bioequivalent, as determined by the 

FDA; and 

(3) Is sold or marketed in the United 

States during the rebate period. 

National drug code (NDC) would be 

defined as it is used by the FDA and 

based on the definition used in the 

national rebate agreement. For purposes 

of this subpart, it would mean the 11- 

digit numerical code maintained by the 

FDA that indicates the labeler, product, 

and package size, unless otherwise 

specified in the regulation as being 

without respect to package size (9-digit 

numerical code). 

National rebate agreement is 

described in section 1927 of the Act. 

Section 1927(b) of the Act outlines the 

terms of the rebate agreement, including 

reporting timeframes, manufacturer 

responsibilities, penalties, and 

confidentiality of pricing data. We 

propose that the national rebate 

agreement would continue to be defined 

as the rebate agreement developed by 

CMS and entered into by CMS on behalf 

of the Secretary or his designee and a 

manufacturer to implement section 1927 

of the Act. 

Nominal price would be defined as it 

is in the national rebate agreement. We 

propose incorporating this definition in 

this rule because it is the standard 

presently used in the Medicaid program 

and the Medicare Part B program, and 

is similar to that used by the 

Department of Veterans Affairs (DVA) in 

administering the Federal Supply 

Schedule (FSS). Nominal price would 

mean a price that is less than 10 percent 

of AMP in the same quarter for which 

the AMP is computed. 

Rebate period is defined in section 

1927(k)(8) of the Act as a calendar 

quarter or other period specified by the 

Secretary with respect to the payment of 

rebates under the national rebate 

agreement. The Medicaid Drug Rebate 

Program currently operates using a 

calendar quarter for the rebate period. 

While AMPs would be reported 

monthly for purposes of calculating 

FULs and for release to States, we can 

find no evidence in the legislative 

history of the DRA that Congress 

intended to change the definition of 

rebate period. Therefore, we would 

define rebate period as a calendar 

quarter. 

Single source drug is defined in 

section 1927(k)(7)(A)(iv) of the Act as a 

covered outpatient drug which is 

produced or distributed under an 

original NDA approved by the FDA, 

including a drug product marketed by 

any cross-licensed producers or 

distributors operating under the NDA. It 

is further defined in the national rebate 

agreement as a covered outpatient drug 

approved under a Product License 

Approval, Establishment License 

Approval, or Antibiotic Drug Approval. 

We propose to define the term single 

source drug as it is defined in the statute 

and the national rebate agreement. 

Determination of Average Manufacturer 

Price—Section 447.504 

Background 

Prior to the DRA, section 1927(k)(1) of 

the Act specified that the AMP with 

respect to a covered outpatient drug of 

a manufacturer for a rebate period is the 

average unit price paid to the 

manufacturer for the drug in the United 

States by wholesalers for drugs 

distributed to the retail pharmacy class 

of trade after deducting customary 

prompt pay discounts. 

The national rebate agreement (56 FR 

7049 (Feb. 21, 1991)) further specifies 

that: 

• Direct sales to hospitals, health 

maintenance organizations (HMOs) and 

wholesalers, where the drug is relabeled 

under that distributor’s national drug 

code number, and FSS prices are not 

included in the calculation of AMP; 

• AMP includes cash discounts and 

all other price reductions (other than 

rebates under section 1927 of the Act), 

which reduce the actual price paid; 

• AMP is calculated as net sales 

divided by the number of units sold, 

excluding free goods (i.e., drugs or any 

other items given away, but not 

contingent on any purchase 

requirements), and 

• Net sales means quarterly gross 

sales revenue less cash discounts 

allowed and all other price reductions 

(other than rebates under section 1927 

of the Act) which reduce the actual 

price paid. 

Consistent with these provisions, it 

has been our policy that in order to 

provide a reflection of market 

transactions, the AMP for a quarter 

should be adjusted by the manufacturer 

if cumulative discounts or other 

arrangements subsequently adjust the 

prices actually realized. 

AMP should be adjusted for bundled 

sales (as defined above) by determining 

the total value of all the discounts on all 

drugs in the bundle and allocating those 

discounts proportionately to the 

respective AMP calculations. The 

aggregate discount is allocated 

proportionately to the dollar value of 

the units of each drug sold under the 

bundled arrangement. Where discounts 

are offered on multiple products in a 

bundle, the aggregate value of all the 

discounts should be proportionately 

allocated across all the drugs in the 

bundle. The average unit price means a 

manufacturer’s quarterly sales included 

in AMP less all required adjustments 

divided by the total units sold and 

included in AMP by the manufacturer 

in a quarter. 

Provisions of the DRA 

Section 6001(c)(1) of the DRA 

amended section 1927(k)(1) of the Act to 

revise the definition of AMP to exclude 

customary prompt pay discounts to 

wholesalers, effective January 1, 2007. 

Section 6001(c)(3) of the DRA requires 

the OIG to review the requirements for 

and manner in which AMPs are 

determined and recommend changes to 

the Secretary by June 1, 2006. Section 

6001(c)(3) of the DRA requires the 

Secretary to clarify the requirements for 

and the manner in which AMPs are 

determined by promulgating a 

regulation no later than July 1, 2007, 

taking into consideration the OIG’s 

recommendations. 

OIG Recommendations on AMP 

In accordance with 6001(c)(3) of the 

DRA, the OIG issued its report, 

‘‘Determining Average Manufacturer 

Prices for Prescription Drugs under the 

Deficit Reduction Act of 2005,’’ (A–06–

06–00063), in May 2006. In this report, 

the OIG recommended that CMS: 

• Clarify the requirements in regard 

to the definition of retail pharmacy class 

of trade and treatment of pharmacy 


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77178 Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Proposed Rules 

benefit manager (PBM) rebates and 

Medicaid sales and 

• Consider addressing issues raised 

by industry groups, such as: 

» Administrative and service fees, 

» Lagged price concessions and 

returned goods, 

» The frequency of AMP reporting, 

» AMP restatements, and 

» Base date AMP. 

The OIG also recommended that the 

Secretary direct CMS to: 

• Issue guidance in the near future 

that specifically addresses the 

implementation of the AMP-related 

reimbursement provisions of the DRA 

and 

• Encourage States to analyze the 

relationship between AMP and 

pharmacy acquisition cost to ensure that 

the Medicaid program appropriately 

reimburses pharmacies for estimated 

acquisition costs. 

We address these recommendations as 

we discuss provisions of this proposed 

rule in the section below. 

Definition of Retail Pharmacy Class of 

Trade and Determination of AMP 

We recognize that there have been 

concerns expressed regarding AMP 

because of inconsistencies in the way 

manufacturers determine AMP, changes 

in the drug marketplace, and the 

introduction of newer business practices 

such as payment of services fees. We 

also realize that in light of the DRA 

amendments, AMP will serve two 

distinct purposes: For drug rebate 

liability and for payments. For the 

purpose of determining drug rebate 

liability, drug manufacturers would 

generally benefit from a broad definition 

of retail pharmacy class of trade which 

would include entities that purchase 

drugs at lower prices and which would 

lower rebate liability. Including these 

lower prices would decrease the AMP, 

decreasing manufacturers’ rebate 

liability. The retail pharmacy industry 

might benefit from a narrow definition 

of retail pharmacy prices that would be 

limited to certain higher priced sales 

given that, in light of the DRA 

amendments, States might use AMP to 

calculate pharmacy payment rates. 

Excluding low-priced sales would 

increase AMP, increasing, in all 

likelihood, manufacturers’ rebate 

payments. The pharmacy industry 

believes that mail order pharmacies and 

nursing home pharmacies (long-term 

care pharmacies) pay less for drugs than 

retail pharmacies (e.g., independents 

and chain pharmacies), and thus the 

inclusion of such prices would lower 

AMP below the price paid by such retail 

pharmacies. 

The statute mandates that, effective 

January 1, 2007, the Secretary use AMP 

when computing FULs. For this 

purpose, we would exclude certain 

outlier payments (see our discussion in 

the FULs section for a more complete 

description of outlier exclusions). The 

statute also requires that AMP be 

provided to States monthly and be 

posted on a public Web site. While there 

is no requirement that States use AMPs 

to set payment amounts, we believe the 

Congress intended that States have drug 

pricing data based on actual prices, in 

contrast to previously available data that 

did not necessarily reflect actual 

manufacturer prices of sales to the retail 

pharmacy class of trade. We considered 

several options to define what prices 

should be included in AMP. We 

considered including only prices of 

sales to retail pharmacies that dispense 

drugs to the general public (e.g., 

independent and chain pharmacies) in 

retail pharmacy class of trade and 

removing prices to mail order 

pharmacies, nursing home pharmacies 

(long-term care pharmacies), and PBMs. 

This definition would address the retail 

pharmacy industry’s contentions that an 

AMP used for reimbursement to retail 

pharmacies should only reflect prices of 

sales to those pharmacies which 

dispense drugs to the general public. 

The exclusion of prices to mail order 

pharmacies, nursing home facilities 

(long-term care facilities), and PBMs 

would substantially reduce the number 

of transactions included in AMP. 

Removal of these prices would simplify 

AMP calculations for manufacturers 

because it is our understanding that 

certain data (e.g., PBM pricing data) are 

difficult for manufacturers to capture. In 

addition, removal of these prices would 

address differing interpretations of CMS 

policy identified by the OIG and the 

Government Accountability Office 

(GAO) due to the lack of a clear 

definition of AMP or specific guidance 

regarding which retail prices should be 

included in AMP. However, such a 

removal would not be consistent with 

past policy, as specified in manufacturer 

Releases 28 and 29 (http:// 

www.cms.hhs.gov/ 

MedicaidDrugRebateProgram/ 

03_DrugMfrReleases.asp#TopOfPage), 

would likely result in a higher AMP, 

and would result in an increase in drug 

manufacturers’ rebate liabilities. 

We also considered not revising the 

entities included in the retail pharmacy 

class of trade. However, this would not 

address the issues identified by the OIG 

in its report, ‘‘Medicaid Drug Rebates: 

The Health Care Financing 

Administration Needs to Provide 

Additional Guidance to Drug 

Manufacturers to Better Implement the 

Program,’’ (A–06–91–00092), November 

1992 and GAO in its report ‘‘Medicaid 

Drug Rebate Program—Inadequate 

Oversight Raises Concerns about 

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

February 2005. 

We believe, based in part on the OIG 

and GAO reports, that retail pharmacy 

class of trade means that sector of the 

drug marketplace, similar to the 

marketplace for other goods and 

services, which dispenses drugs to the 

general public and which includes all 

price concessions related to such goods 

and services. As such, we would 

exclude from AMP the prices of sales to 

nursing home pharmacies (long-term 

care pharmacies) because nursing home 

pharmacies do not dispense to the 

general public. We would include in 

AMP the prices of sales and discounts 

to mail order pharmacies. We 

considered limiting mail order 

pharmacy prices to only those prices 

that are offered to all pharmacies under 

similar terms and conditions. However, 

given our belief that such prices are 

simply another form of how drugs enter 

into the retail pharmacy class of trade, 

we have decided to maintain these 

prices in the definition. We note that 

even were we to incorporate this 

change, retail pharmacies may not be 

able to meet the terms and conditions 

placed on mail order pharmacies to be 

eligible for some manufacturer price 

concessions. CMS seeks public 

comment on the inclusion of all mail 

order pharmacy prices in our definition 

of retail pharmacy class of trade for 

purposes of inclusion in the 

determination of AMP. 

We recognize that a major factor 

contributing to the determination of 

AMP is the treatment of PBMs. These 

entities have assumed a significant role 

in drug distribution since the enactment 

of the Medicaid Drug Rebate Program in 

1990. We are considering how PBM 

rebates, discounts, or other price 

concessions should be recognized for 

purposes of AMP calculations. 

A GAO report ‘‘Medicaid Drug Rebate 

Program—Inadequate Oversight Raises 

Concerns about Rebates Paid to States,’’

(GAO–05–102), in February 2005, 

indicated that the Medicaid Drug Rebate 

Program does not clearly address certain 

financial concessions negotiated by 

PBMs. The GAO recommended that we 

issue clear guidance on manufacturer 

price determination methods and the 

definitions of AMP and best price, and 

update such guidance as additional 

issues arise. 

The issue regarding PBMs was also 

addressed in the recently issued OIG 

report, ‘‘Determining Average 


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Manufacturer Prices for Prescription 

Drugs under the Deficit Reduction Act 

of 2005,’’ (A–06–06–00063), in May 

2006. In this report, the OIG 

recommended that we clarify the 

treatment of PBM rebates. This report 

says that manufacturers treat rebates 

and fees paid to PBMs in the calculation 

of AMP in three different ways. 

Specifically they found that 

manufacturers (1) did not subtract 

rebates or fees paid to PBMs from the 

AMP calculation; (2) subtracted the 

rebates or fees paid to PBMs; or (3) 

subtracted a portion of the PBMs rebates 

or fees from the AMP calculation. 

In developing this proposed rule, we 

considered including all rebates, 

discounts and other price concessions 

from PBMs in the determination of 

AMP. We also considered excluding 

rebates, discounts and other price 

concessions from PBMs in the 

determination of AMP. 

One of the most difficult issues with 

PBM discounts, rebates, or other price 

concessions is that manufacturers 

contend that they do not know what 

part of these discounts, rebates, or other 

price concessions is kept by the PBM for 

the cost of its activities and profit, what 

part is passed on to the health insurer 

or other insurer or other entity with 

which the PBM contracts, and what 

part, if any, that entity passes on to 

pharmacies. Despite the difficulties of 

including certain PBM rebates, 

discounts or other price concessions in 

AMP, excluding all of these price 

concessions could result in an artificial 

inflation of AMP. For this reason, we 

propose to include PBM rebates, 

discounts, or other price concessions for 

drugs provided to the retail pharmacy 

class of trade for the purpose of 

determining AMP; however, we invite 

comments on whether this proposal is 

operationally feasible. 

As discussed more fully below, we 

have proposed that PBM rebates and 

price concessions that adjust the 

amount received by the manufacturer 

for drugs distributed to the retail 

pharmacy class of trade should be 

included in the calculation of AMP. We 

acknowledge that manufacturers have a 

variety of arrangements with PBMs and 

thus invite comments on all aspects of 

our proposal as explained below. 

The rebate agreement defines AMP to 

include cash discounts and all other 

price reductions (other than rebates 

under section 1927 of the Act), which 

reduce the actual price paid to the 

manufacturer for drugs distributed to 

the retail pharmacy class of trade. As 

noted in Release 28 and reiterated in 

Release 29, manufacturers have 

developed a myriad of arrangements 

whereby specific discounts, 

chargebacks, or rebates are provided to 

PBMs which, in turn, are passed on to 

the purchaser. Those releases recognize 

that certain prices provided by 

manufacturers to PBMs should be 

included within AMP calculations. In 

accordance with those releases, our 

position has been that PBMs have no 

effect on the AMP calculations unless 

the PBM is acting as a wholesaler as 

defined in the rebate agreement. We are 

concerned, however, that this position 

may unduly exclude from AMP certain 

PBM prices and discounts which have 

an impact on prices paid to the 

manufacturer. 

We believe that AMP should be 

calculated to reflect the net drug price 

recognized by the manufacturer, 

inclusive of any price adjustments or 

discounts provided directly or 

indirectly by the manufacturer. We are 

interested in comments on this 

proposal, including the comments on 

the operational difficulties of including 

such PBM arrangements within AMP 

calculations. 

We recognize that the statute defines 

AMP as the average price paid to the 

manufacturer by wholesalers for drugs 

distributed to the retail pharmacy class 

of trade; however, in light of our 

understanding of congressional intent, 

we believe that the definition is meant 

to capture discounts and other price 

adjustments, regardless of whether such 

discounts or adjustments are provided 

directly or indirectly by the 

manufacturer. We invite comments on 

this definition and whether AMP should 

be calculated to include all adjustments 

that affect net drug prices. 

We acknowledge that there are many 

PBM/manufacturer arrangements. To 

the extent manufacturers are offering 

rebates, discounts, or other price 

concessions to the PBM that are not 

bona fide service fees, we propose that 

these lower prices should be included 

in the AMP calculations. We request 

comments on the operational difficulties 

of tracking these rebates, discounts, or 

chargebacks provided to a PBM for 

purposes of calculating AMP and on the 

inclusion of all such price concessions 

in AMP. Specifically, we solicit 

comments on the extent to which CMS 

should or should not define in 

regulation which rebates, discounts, or 

price concessions provided to PBMs 

should be included in AMP and how 

best to measure these. Also, we solicit 

public comment on how these PBM 

price concessions should be reported to 

CMS to assure that appropriate price 

adjustments are captured and included 

in the determination of AMP. 

Finally, we request comments on any 

other issues that we should take into 

account in making our final decisions. 

These include, but may not be limited 

to, possible Federal and State budgetary 

impacts (our savings estimates assumed 

no budgetary impacts as generic drugs 

are rarely, if ever, subject to PBM price 

adjustments in this context); possible 

future evolution in industry pricing and 

management practices (e.g., growth of 

‘‘preferred’’ generic drugs); and possible 

impacts on reimbursement for brand 

name drugs under Medicaid. We are 

generally interested in comments on 

how and to what extent PBMs act as 

‘‘wholesalers.’’ We propose to 

incorporate the explicitly listed 

exclusions in section 1927 of the Act, 

and in the national rebate agreement, 

which are direct sales to hospitals, 

HMOs/managed care organizations 

(MCOs), wholesalers where the drug is 

relabeled under that distributor’s NDC 

and FSS prices. 

The specific terms we propose to 

clarify and the proposed clarifications 

follow. 

Retail Pharmacy Class of Trade: We 

propose to include in the definition of 

retail pharmacy class of trade any entity 

that purchases prescription drugs from 

a manufacturer or wholesaler for 

dispensing to the general public (e.g., 

retail, independent, chain and mail 

order pharmacies), except as otherwise 

specified by the statute or regulation 

(such as, HMOs, hospitals). 

PBM Price Concessions: We proposed 

to include any rebates, discounts or 

other price adjustments provided by the 

manufacturer to the PBM that affect the 

net price recognized by the 

manufacturer for drugs provided to 

entities in the retail pharmacy class of 

trade. 

Customary Prompt Pay Discounts: 

Prior to the DRA, neither the statute nor 

the national rebate agreement defined 

customary prompt pay discounts. The 

DRA revises the definition of AMP to 

exclude customary prompt pay 

discounts extended to wholesalers; 

however, it does not revise or define 

customary prompt pay discounts. We 

propose to define customary prompt pay 

discounts as any discount off the 

purchase price of a drug routinely 

offered by the manufacturer to a 

wholesaler for prompt payment of 

purchased drugs within a specified time 

of the payment due date. 

Treatment of Medicaid Sales: The OIG 

recommended that we should address 

whether AMP should include Medicaid 

prices of sales; i.e., prices of sales where 

the end payer for the drug is the 

Medicaid program. In its May 2006 

report, the OIG noted confusion on this 


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issue and recommended that we clarify 

that these prices of sales are to be 

included in AMP. It is our position that 

these sales are included in AMP because 

they are not expressly excluded in the 

statute. In this proposed rule, we would 

also clarify that prices to State 

Children’s Health Insurance Program 

Title XIX (SCHIP) through an expanded 

Medicaid program are covered under 

the provisions of section 1927 of the Act 

and generally subsumed in Medicaid 

sales. As a general matter, Medicaid 

does not directly purchase drugs from 

manufacturers or wholesalers but 

instead reimburses pharmacies for these 

drugs. Therefore, Medicaid sales are 

determined by the entities that are 

actually in the sales chain and because 

Medicaid reimburses pharmacies for 

drugs for Medicaid beneficiaries, 

integrated into the chain of sales 

otherwise included in AMP. 

In this proposed rule, we would 

clarify that the units associated with 

Medicaid sales should be included as 

part of the total units in the AMP 

calculation. We have proposed that 

AMP be calculated to include all sales 

and associated discounts and other 

price concessions provided by the 

manufacturer for drugs distributed to 

the retail pharmacy class of trade unless 

the sale, discount, or other price 

concession is specifically excluded by 

the statute or regulation or is provided 

to an entity excluded by statute or 

regulation. Therefore, we would clarify 

that rebates paid to States under the 

Medicaid Drug Rebate Program should 

be excluded from AMP calculations but 

that price concessions associated with 

the sales of drugs in the retail pharmacy 

class of trade which are provided to 

Medicaid patients should be included. 

In this proposed rule, we also propose 

to clarify how the prices of sales to State 

Children’s Health Insurance Program 

Title XXI (SCHIP) non-Medicaid 

expansion programs should be treated. 

Like the Medicaid program, SCHIP nonMedicaid expansion programs do not 

directly purchase drugs. Because such 

programs are not part of the Medicaid 

program, they are not covered under the 

provisions of section 1927 of the Act. As 

with Medicaid sales, these sales are 

included in AMP to the extent they 

concern sales at the retail pharmacy 

class of trade. Therefore, these sales 

should not be backed out of the AMP 

calculation to the extent that such sales 

are included within sales provided to 

the retail pharmacy class of trade. 

Rebates and units associated with those 

sales should also be included in the 

calculation of AMP. 

Treatment of Medicare Part D sales: 

We would clarify that the treatment of 

prices of sales through a Medicare Part 

D prescription drug plan (PDP), a 

Medicare Advantage prescription drug 

plan (MA–PD), or a qualified retiree 

prescription drug plan for covered Part 

D drugs provided on behalf of Part D 

eligible individuals should be included 

in the AMP calculation. Like the 

Medicaid program, PDPs and MA–PDs 

do not directly purchase drugs, but are 

usually third party payers. As with 

Medicaid sales, these sales are included 

in AMP to the extent they are sales to 

the retail pharmacy class of trade. 

Therefore, we believe these prices of 

sales should not be backed out of the 

AMP. Rebates paid by the manufacturer 

to the PDP or MA–PD should be 

included in the calculation of AMP. 

SPAP price concessions: In this 

proposed rule, we also propose to 

clarify how the prices to State 

pharmaceutical assistance programs 

(SPAPs) should be treated. Like the 

Medicaid program, PDPs, and MA–PDs, 

SPAPs do not directly purchase drugs, 

but are generally third-party payers. As 

with Medicaid sales, these sales are 

included in AMP to the extent the sales 

are to an entity included in the retail 

pharmacy class of trade. Therefore, we 

propose that SPAP sales should not be 

backed out of the AMP calculation. 

Rebates paid by the manufacturer to the 

SPAP should be included in the 

calculation of AMP. 

Prices to other Federal Programs: We 

propose that any prices on or after 

October 1, 1992, to the IHS, the DVA, 

a State home receiving funds under 

section 1741 of title 38, United States 

Code, the Department of Defense (DoD), 

the Public Health Service (PHS), or a 

covered entity described in subsection 

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

inpatient prices charged to hospitals 

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

PHSA); any prices charged under the 

FSS of the GSA; and any depot prices 

(including Tricare) and single award 

contract prices, as defined by the 

Secretary, of any agency of the Federal 

government are excluded from the 

calculation of AMP. We propose that the 

prices to these entities should be 

excluded from AMP because the prices 

to these entities are not available to the 

retail pharmacy class of trade. 

Administrative and Service Fees: 

Current Medicaid drug rebate policy is 

that administrative fees which include 

service fees and distribution fees, 

incentives, promotional fees, 

chargebacks and all discounts or 

rebates, other than rebates under the 

Medicaid drug program, should be 

included in the calculation of AMP, if 

those sales are to an entity included in 

the calculation of AMP. The OIG has 

noted in its report, ‘‘Determining 

Average Manufacturer Prices for 

Prescription Drugs under the Deficit 

Reduction Act of 2005,’’ (A–06–06–

00063), May 2006, that confusion exists 

about the treatment of fees, such as 

service fees negotiated between a 

manufacturer and pharmaceutical 

distributor. Some believe that these fees 

should not be included in AMP because 

the manufacturer does not know if the 

fees act to reduce the price paid by the 

end purchasers. Others believe such fees 

should be included in the calculation, 

which would reduce AMP because they 

serve as a price concession. For the 

same reason as for sales to PBMs, we 

propose that all fees except fees paid for 

bona fide services should be included in 

AMP. We propose that bona fide service 

fees means fees paid by a manufacturer 

to an entity, which represent fair market 

value for a bona fide, itemized service 

actually performed on behalf of the 

manufacturer that the manufacturer 

would otherwise perform (or contract 

for) in the absence of the service 

arrangement, and which are not passed 

in whole or in part to a client or 

customer of an entity, whether or not 

the entity takes title to the drug. 

Medicare Part B also adopted this 

definition in its final rule with comment 

period that was published on December 

1, 2006 (71 FR 69623–70251) that 

implemented the ASP provisions 

enacted in the Medicare Prescription 

Drug, Improvement, and Modernization 

Act of 2003 (MMA). We are not 

proposing to define fair market value. 

However, CMS invites comments from 

the public regarding an appropriate 

definition for fair market value. 

Direct Patient Sales: In response to 

manufacturers’ questions, CMS has 

stated previously that covered 

outpatient drugs sold to patients 

through direct programs should be 

included in the calculation of AMP. 

These sales are usually for specialty 

drugs through a direct distribution 

arrangement, where the manufacturer 

retains ownership of the drug and pays 

either an administrative or service fee to 

a third party for functions such as the 

storage, delivery and billing of the drug. 

Some manufacturers have contended 

that direct patient sales for covered 

outpatient drugs sold by a manufacturer 

through a direct distribution channel 

should not qualify for inclusion in the 

calculation of AMP because the 

Medicaid rebate statute and the national 

rebate agreement do not address covered 

outpatient drugs that are not sold to 

wholesalers and/or not distributed in 

the retail pharmacy class of trade. We 

believe that the distributor is acting as 


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a wholesaler and these sales are to the 

retail pharmacy class of trade. In light 

of this, we propose in this regulation 

that these sales and the rebates 

associated with these sales to patients 

through direct programs would be 

included in AMP. CMS invites 

comments from the public on this 

proposed policy. 

Returned Goods: Current Medicaid 

Drug Rebate Program policy is that 

returned goods are credited back to the 

manufacturer in either the quarter of 

sale or quarter of receipt. This has 

caused difficulty for some 

manufacturers when these returns have 

substantially reduced AMP in a quarter 

or resulted in a negative AMP. In light 

of these concerns, we propose to 

exclude returned goods from the 

calculation of AMP when returned in 

good faith. CMS considers that goods 

are being returned in good faith when 

they are being returned pursuant to 

manufacturer policies which are not 

designed to manipulate or artificially 

inflate or deflate AMP. The Medicare 

Part B program excludes returned goods 

from the calculation of ASP. The 

exclusion of returned goods will allow 

the manufacturer to calculate and report 

an AMP that is more reflective of its true 

pricing policies to the retail pharmacy 

class of trade in the reporting period. It 

lessens the administrative burden and 

problems associated with allocating the 

returned goods back to the reporting 

period in which they were sold, as well 

as eliminating artificially low, zero or 

negative AMPs that may result from 

these adjustments. 

Manufacturer Coupons: In this 

proposed rule, we propose to clarify 

how manufacturer coupons should be 

treated. The treatment of manufacturer 

coupons has been problematic for CMS 

as well as some manufacturers. In this 

rule, we propose to include coupons 

redeemed by any entity other than the 

consumer in the calculation of AMP. We 

believe that the redemption of coupons 

by the consumer directly to the 

manufacturer is not included in the 

retail pharmacy class of trade. In this 

proposed rule, we propose to exclude 

coupons redeemed by the consumer 

directly to the manufacturer from the 

calculation of AMP. CMS invites 

comments from the public on this 

proposed policy. 

Future Clarifications of AMP: Based 

on past comments from the GAO and 

the OIG and recommendations of the 

OIG in its May 2006 report on AMP, we 

believe that we need to have the ability 

to clarify the definition of AMP in an 

expedited manner in order to address 

the evolving marketplace for the sale of 

drugs. We plan to address future 

clarifications of AMP through the 

issuance of program releases and by 

posting the clarifications on the CMS 

Web site as needed. 

Requirements for Average Manufacturer 

Price 

To implement the provisions set forth 

in sections 6001 and 6003 of the DRA 

related to AMP, we propose a new 

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

revised definition of AMP and clarify 

that AMP is determined without regard 

to customary prompt pay discounts 

extended to wholesalers. In 

§ 447.504(b), we propose to define 

average unit price. In § 447.504(c), we 

propose to define customary prompt pay 

discount. In § 447.504(d), we propose to 

define net sales. In § 447.504(e), we 

propose to define retail pharmacy class 

of trade. In § 447.504(f), we propose to 

define wholesaler. In § 447.504(g), we 

would describe in detail the sales, 

rebates, discounts, or other price 

concessions that must be included in 

AMP. In § 447.504(h), we would 

describe the sales, rebates, discounts, or 

other price concessions that must be 

excluded from AMP. In § 447.504(i), we 

would provide further clarification 

about how manufacturers should 

account for price reductions and other 

pricing arrangements which should be 

included in the calculation of AMP. 

Determination of Best Price—Section 

447.505 

Prior to the DRA, section 1927(c)(1)(C) 

of the Act provided that manufacturers 

must include in their best price 

calculation, for a single source or 

innovator multiple source drug, the 

lowest price available from the 

manufacturers during the rebate period 

to any wholesaler, retailer, provider, 

HMO, non-profit entity, or 

governmental entity within the United 

States except for those entities 

specifically excluded by statute. 

Excluded from best price are prices 

charged on or after October 1, 1992, to 

the IHS, the DVA, a State home 

receiving funds under section 1741 of 

title 38, United States Code, the DoD, 

the PHS, or a covered entity described 

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

(including inpatient prices charged to 

hospitals described in section 

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

charged under the FSS of the GSA; any 

prices used under an SPAP; any depot 

prices (including Tricare) and single 

award contract prices, as defined by the 

Secretary, of any agency of the Federal 

Government; and prices to a Medicare 

Part D PDP, an MA–PD, or a qualified 

retiree prescription drug plan for 

covered Part D drugs provided on behalf 

of Part D eligible individuals. 

The statute further specifies that: 

• Best price includes cash discounts, 

free goods that are contingent on any 

purchase requirement, volume 

discounts and rebates (other than 

rebates under section 1927 of the Act), 

which reduce the price paid; 

• Best price must be determined on a 

unit basis without regard to special 

packaging, labeling or identifiers on the 

dosage form or product or package; 

• Best price must not take into 

account prices that are merely nominal 

in amount. 

Consistent with these provisions and 

the national rebate agreement, it has 

been our policy that in order to reflect 

market transactions, the best price for a 

rebate period should be adjusted by the 

manufacturer if cumulative discounts or 

other arrangements subsequently adjust 

the prices actually realized. 

Best price should be adjusted for any 

bundled sale. The drugs in a ‘‘bundle’’

do not have to be physically packaged 

together to constitute a ‘‘bundle,’’ just 

part of the same bundled transaction. 

Section 1927(c)(1)(C)(ii)(I) of the Act 

specifies that best price must include 

free goods that are contingent on any 

purchase requirement. Thus, only those 

free goods that are not contingent on 

any purchase requirements may be 

excluded from best price. 

Section 103(e) of the MMA modified 

the definition of best price by excluding 

prices which are negotiated by a PDP 

under part D of title XVIII of the Act, by 

any MA–PD plan under part C of such 

title with respect to covered part D 

drugs, or by a qualified retiree 

prescription drug plan (as defined in 

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

respect to such drugs on behalf of 

individuals entitled to benefits under 

part A or enrolled under part B of such 

title. Section 1002(a) of the MMA 

modified section 1927(c)(1)(C)(i)(I) of 

the Act by clarifying that inpatient 

prices charged to hospitals described in 

section 340B(a)(4)(L) of the PHSA are 

exempt from best price. 

Section 6003 of the DRA amended 

section 1927(c)(1)(C) of the Act by 

revising the definition of best price to 

clarify that the best price includes the 

lowest price available to any entity for 

any such drug of a manufacturer that is 

sold under an NDA approved under 

section 505(c) of the FFDCA. 

In accordance with our understanding 

of congressional intent, in this proposed 

rule we propose to define best price 

with respect to a single source drug or 

innovator multiple source drug of a 

manufacturer, including any drug sold 

under an NDA approved under section 


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505(c) of the FFDCA, as the lowest price 

available from the manufacturer during 

the rebate period to any entity in the 

United States in any pricing structure 

(including capitated payments) in the 

same quarter for which the AMP is 

computed. It continues to be our policy 

that best price reflects the lowest price 

at which the manufacturer sells a 

covered outpatient drug to any 

purchaser, except those prices 

specifically exempted by law. We 

propose to define provider as a hospital; 

HMO, including an MCO or PBM; or 

other entity that treats individuals for 

illnesses or injuries or provides services 

or items in the provisions of health care. 

As with the determination of AMP, 

the DRA does not establish a 

mechanism to clarify how best price is 

to be determined should new entities be 

formed after this regulation takes effect. 

We believe that we need to have the 

ability to clarify best price in an 

expedited manner in order to address 

the evolving marketplace for the sale of 

drugs. We plan to address future 

clarifications to best price through the 

issuance of program releases and by 

posting the clarifications on the CMS 

Web site as needed. Even though the 

DRA did not require CMS to clarify the 

requirements for best price, we 

determined that it is reasonable to 

propose these provisions in this 

proposed rule, consistent with longstanding Medicaid Drug Rebate Program 

policy, the MMA, and our 

understanding of congressional intent 

with respect to best price as revised by 

the DRA. 

We propose to incorporate the 

explicitly listed exclusions in section 

1927 of the Act, which are prices 

charged on or after October 1, 1992, to 

the IHS, the DVA, a State home 

receiving funds under section 1741 of 

title 38, United States Code, the DoD, 

the PHS, or a covered entity described 

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

(including inpatient prices charged to 

hospitals described in section 

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

charged under the FSS of the GSA; any 

prices paid under an SPAP; any depot 

prices (including Tricare) and single 

award contract prices, as defined by the 

Secretary, of any agency of the Federal 

Government; and payments made by a 

Medicare Part D PDP, an MA–PD, or a 

qualified retiree prescription drug plan 

for covered Part D drugs provided on 

behalf of Part D eligible individuals. We 

propose to codify this policy and 

require that manufacturers exclude the 

prices to these entities from best price. 

Because best price represents the lowest 

price available from the manufacturer to 

any entity with respect to a single 

source drug or innovator multiple 

source drug of a manufacturer, 

including an authorized generic, any 

price concession associated with that 

sale should be netted out of the price 

received by the manufacturer in 

calculating best price and best price 

should be adjusted by the manufacturer 

if other arrangements subsequently 

adjust the prices actually realized. We 

propose to consider any price 

adjustment which ultimately affects 

those prices which are actually realized 

by the manufacturer as ‘‘other 

arrangements’’ and that such adjustment 

should be included in the calculation of 

best price, except to the extent that such 

adjustments qualify as bona fide service 

fees. 

Consistent with our understanding of 

congressional intent, we propose that 

best price be calculated to include all 

sales, discounts, and other price 

concessions provided by the 

manufacturer for covered outpatient 

drugs to any entity unless the 

manufacturer can demonstrate that the 

sale, discount, or other price concession 

is specifically excluded by statute or is 

provided to an entity not included in 

the rebate calculation. To the extent that 

an entity is not included in the best 

price calculation, both sales and 

associated discounts or other price 

concessions provided to such an entity 

should be excluded from the 

calculation. The specific terms we 

propose to clarify and the proposed 

clarification follow. 

The Medicaid drug rebate agreement 

defines best price, in part, as the lowest 

price at which the manufacturer sells 

the covered outpatient drug to any 

purchaser in the United States. We 

propose to codify this policy in this 

proposed rule. 

Customary Prompt Pay Discounts: 

The DRA revises the definition of AMP 

to exclude customary prompt pay 

discounts to wholesalers; however, we 

can find no evidence in the legislative 

history of the DRA that Congress 

intended to change the definition of best 

price to exclude customary prompt pay 

discounts. Therefore, we propose in this 

regulation to include customary prompt 

pay discounts in best price. 

PBM Price Concessions: We recognize 

that a major factor contributing to the 

determination of best price includes the 

treatment of PBMs. These entities have 

assumed a significant role in drug 

distribution since the enactment of the 

Medicaid Drug Rebate Program in 1990. 

As noted in Release 28 and reiterated 

in Release 29, manufacturers have 

developed a myriad of arrangements 

whereby specific discounts, 

chargebacks, or rebates are provided to 

PBMs which, in turn, are passed on to 

the purchaser. In such situations where 

discounts, chargebacks, or rebates are 

used to adjust drug prices at the 

wholesaler or retail level, such 

adjustments are included in the best 

price calculation. 

A GAO report, ‘‘Medicaid Drug Rebate 

Program—Inadequate Oversight Raises 

Concerns about Rebates Paid to States,’’

(GAO–05–102), in February 2005, 

indicated that the Medicaid Drug Rebate 

Program does not clearly address certain 

financial concessions negotiated by 

PBMs. The GAO recommended that we 

issue clear guidance on manufacturer 

price determination methods and the 

definitions of AMP and best price, and 

update such guidance as additional 

issues arise. 

The issue regarding PBMs was also 

addressed in the recently issued OIG 

report, ‘‘Determining Average 

Manufacturer Prices for Prescription 

Drugs under the Deficit Reduction Act 

of 2005,’’ (A–06–06–00063), in May 

2006. In this report, the OIG 

recommended that we clarify the 

treatment of PBM rebates. 

One of the most difficult issues with 

PBM discounts, price concessions, or 

rebates is that manufacturers contend 

that they do not know what part of these 

discounts, price concessions, or rebates 

are kept by the PBM for the cost of their 

activities and profit, what part is passed 

on to the health insurer or other insurer 

or other entity with which the PBM 

contracts, and what part that entity 

passes on to pharmacies. 

Despite the difficulties of including 

certain PBM rebates, discounts or other 

price concessions in best price, 

excluding these price concessions could 

result in an artificial inflation of best 

price. We propose to include PBM 

rebates, discounts, or other price 

concessions for the purpose of 

determining best price. 

To the extent manufacturers are 

offering PBMs rebates, discounts, or 

other price concessions, these lower 

prices should be included in the best 

price calculations. Therefore, where the 

use of the PBM by manufacturers affects 

the price available from the 

manufacturer, these lower prices should 

be reflected in best price calculations. 

We acknowledge that there are many 

PBM/manufacturer arrangements. 

We believe that PBMs often obtain 

rebates, discounts, or other price 

concessions which adjust prices, either 

directly or indirectly. Unless the fees/ 

discounts qualify as bona fide service 

fees (which are excluded), the PBM 

rebates, discounts, or chargebacks 

should be included in best price. We 

propose to consider these rebates, 


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discounts, or chargebacks in best price 

calculations. CMS invites public 

comment on the inclusion of certain 

PBM price concessions in the 

determination of best price. Also, we 

solicit public comment on how these 

PBM price concessions should be 

reported to CMS to assure that 

appropriate price concessions are 

captured and included in the 

determination of best price. 

We propose to incorporate the 

explicitly listed exclusions in section 

1927 of the Act and in the national 

rebate agreement. Because best price 

represents the prices available from the 

manufacturer for prescription drugs, 

best price should be adjusted by the 

manufacturer if other arrangements 

subsequently adjust the prices actually 

realized. We propose to consider that 

any price adjustment which ultimately 

affects those prices which are actually 

realized by the manufacturer as ‘‘other 

arrangements’’ and that such an 

adjustment should be included in the 

calculation of best price. The specific 

terms we propose to clarify and the 

proposed clarifications follow. 

Administrative and Service Fees: We 

propose that administrative fees which 

include service fees and distribution 

fees, incentives, promotional fees, 

chargebacks and all discounts or 

rebates, other than rebates under the 

Medicaid Drug Rebate Program, should 

be included in the calculation of best 

price, if those sales are to an entity 

included in the calculation of best price. 

As previously discussed, the OIG has 

noted in its report, ‘‘Determining 

Average Manufacturer Prices for 

Prescription Drugs under the Deficit 

Reduction Act of 2005,’’ (A–06–06–

00063), May 2006 that confusion exists 

about the treatment of fees, such as 

service fees negotiated between a 

manufacturer and pharmaceutical 

distributor for AMP and best price. We 

believe that price adjustments which 

ultimately affect those prices which are 

actually available from the manufacturer 

should be included in best price. We 

propose that manufacturers should 

include all such fees except bona fide 

service fees provided at fair market 

value in the best price calculation. 

Treatment of Medicare Part D Prices: 

In this proposed rule, we propose to 

clarify the treatment of prices which are 

negotiated by a Medicare Part D PDP, an 

MA–PD, or a qualified retiree 

prescription drug plan for covered Part 

D drugs provided on behalf of Part D 

eligible individuals. We propose that 

these prices are exempt from the best 

price. Section 1860D–2(d)(1)(C) of the 

Act specifically states that ‘‘prices 

negotiated by a prescription drug plan, 

by an MA–PD plan with respect to 

covered part D drugs, or by a qualified 

retiree prescription drug plan (as 

defined in section 1860D–22(a)(2)) with 

respect to such drugs on behalf of Part 

D eligible individuals, shall 

(notwithstanding any other provision of 

law) not be taken into account for the 

purposes of establishing the best price 

under section 1927(c)(1)(C).’’ Therefore, 

while we propose that the prices listed 

above be included for the purpose of 

calculating AMP, we propose that prices 

negotiated by a PDP, an MA–PD, or a 

qualified retiree prescription drug plan 

for covered Part D drugs provided on 

behalf of Part D eligible individuals not 

be taken into account for the purpose of 

establishing best price. 

Manufacturer Coupons: In this 

proposed rule, we propose to clarify 

how manufacturer coupons should be 

treated for the purpose of establishing 

best price. We believe that the 

redemption of coupons by any entity 

other than the consumer to the 

manufacturer ultimately affects the 

price paid by the entity (e.g., retail 

pharmacy). In this rule, we propose to 

include coupons redeemed by any 

entity other than the consumer in the 

calculation of best price. We believe that 

the redemption of coupons by the 

consumer directly to the manufacturer 

does not affect the price paid by any 

entity whose sales are included in best 

price. In this proposed rule, we propose 

to exclude coupons redeemed by the 

consumer directly to the manufacturer 

from the calculation of best price. CMS 

invites comments from the public on 

this proposed policy. 

Medicaid Rebates and Supplemental 

Rebates: Section 1927(c)(1)(C)(ii)(I) of 

the Act and the national rebate 

agreement provide that any rebates paid 

by manufacturers under section 1927 of 

the Act are to be excluded from the 

calculation of best price. Therefore, we 

propose to exclude Medicaid rebates 

from best price. Likewise, we consider 

rebates paid under CMS-authorized 

separate (supplemental) Medicaid drug 

rebate agreements with States to meet 

this requirement and propose that these 

rebates be excluded from best price. In 

accordance with section 1927 of the Act 

pertaining to the determination of best 

price and our understanding of 

congressional intent, we propose a new 

§ 447.505. In § 447.505(a), we would 

provide a general definition of the term 

best price. In § 447.505(b), we propose 

to define provider. In § 447.505(c), we 

would specify the sales and prices 

which must be included in best price. 

In § 447.505(d), we would specify which 

sales and prices must be excluded from 

best price. In § 447.505(e), we would 

further clarify the price reductions and 

other pricing arrangements included in 

the calculation of best price. 

Authorized Generic Drugs—Section 

447.506 

Under current law, drug 

manufacturers participating in the 

Medicaid Drug Rebate Program are 

required to report the AMP for each 

covered outpatient drug offered under 

the Medicaid program and the best price 

for each single source or innovator 

multiple source drug available to any 

wholesaler, retailer, provider, HMO, 

non-profit entity, or governmental entity 

with certain exceptions. 

For purposes of the Medicaid Drug 

Rebate Program, an authorized generic 

is any drug product marketed under the 

innovator or brand manufacturer’s 

original NDA, but labeled with a 

different NDC than the innovator or 

brand product. According to our reading 

of the statute, authorized generics are 

single source or innovator multiple 

source drugs for the purpose of 

computing the drug rebate and are 

classified based on whether the drug is 

being sold or marketed pursuant to an 

NDA. Responsibility for the rebate rests 

with the manufacturer selling or 

marketing the drug to the retail 

pharmacy class of trade. 

This rule would implement section 

6003 of the DRA. We propose to adopt 

the term ‘‘authorized generic’’ and 

define this term with respect to the 

Medicaid Drug Rebate Program, as any 

drug sold, licensed or marketed under a 

new drug application approved by the 

FDA under section 505(c) of the FFDCA 

that is marketed, sold or distributed 

directly or indirectly under a different 

product code, labeler code, trade name, 

trademark, or packaging (other than 

repackaging the listed drug for use in 

institutions) than the listed drug. 

Section 6003 of the DRA amended 

section 1927(b)(3)(A) of the Act to 

include drugs approved under section 

505(c) of the FFDCA in the reporting 

requirements for the primary 

manufacturer (NDA holder) for AMP 

and best price. We propose to interpret 

the language of section 6003 of the DRA 

to include in the best price and AMP 

calculations of the branded drugs, the 

authorized generic drugs that have been 

marketed by another manufacturer or 

subsidiary of the brand manufacturer (or 

NDA holder). We believe that to limit 

the applicability of this regulation to the 

sellers of authorized generic drugs 

would allow manufacturers to 

circumvent the intent of the provision 

by licensing rather than selling the 

rights to such drugs. This is why we 

propose a broad definition of authorized 


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generic drugs rather than a more narrow 

definition of such drugs. We propose to 

require the NDA holder to include sales 

of the authorized generic product 

marketed by the secondary 

manufacturer or the brand 

manufacturer’s subsidiary in its 

calculation of AMP and best price. We 

welcome comments on this issue. 

The secondary manufacturer or 

subsidiary of the brand manufacturer 

would continue to pay the single source 

or innovator multiple source rebate for 

the authorized generic drug products 

based on utilization under its own NDC 

number, as required under current law. 

We welcome comments on these issues. 

In § 447.506(a), we would define the 

term authorized generic drug for the 

purposes of the Medicaid Drug Rebate 

Program. 

In § 447.506(b), we would require the 

sales of authorized generic drugs that 

have been sold or licensed to another 

manufacturer to be included by the 

primary manufacturer as part of its 

calculation of AMP for the single source 

or innovator multiple source drug 

(including all such drugs that are sold 

under an NDA approved under section 

505(c) of the FFDCA). 

In § 447.506(c), we would require that 

sales of authorized generic drugs by the 

secondary manufacturer that buys or 

licenses the right to sell the drugs be 

included by the primary manufacturer 

in sales used to determine the best price 

for the single source or innovator 

multiple source drug approved under 

section 505(c) of the FFDCA during the 

rebate period to any manufacturer, 

wholesaler, retailer, provider, HMO, 

non-profit entity, or governmental entity 

within the United States. The primary 

manufacturer must include in its 

calculation of best price all sales of the 

authorized generic drug which have 

been sold or marketed by a secondary 

manufacturer or by a subsidiary of the 

brand manufacturer. 

Exclusion From Best Price of Certain 

Sales at a Nominal Price—Section 

447.508 

Pursuant to the terms of the national 

rebate agreement, manufacturers 

excluded from their best price 

calculations outpatient drug prices 

below 10 percent of the AMP. The 

rebate agreement did not specify 

whether this nominal price exception 

applied to all purchasers or to a subset 

of purchasers. Medicaid has used this 

definition since the start of the 

Medicaid Drug Rebate Program and 

Medicare Part B also adopted it in its 

April 6, 2004 interim final rule with 

comment period (69 FR 17935) that 

implemented the ASP provisions 

enacted in the MMA. It is also similar 

to the definition of nominal price in the 

VHCA. We propose to continue to 

define nominal prices as prices at less 

than 10 percent of the AMP in that same 

quarter; however, in accordance with 

the DRA, we further propose to specify 

that the nominal price exception applies 

only when certain entities are the 

purchasers. 

Section 6001(d)(2) of the DRA 

modified section 1927(c)(1) of the Act to 

limit the nominal price exclusion from 

best price to exclude only sales to 

certain entities and safety net providers. 

Specifically, it excluded from best price 

those nominal price sales to 340B 

covered entities as described in section 

340B(a)(4) of the PHSA, ICFs/MR, and 

State-owned or operated nursing 

facilities. In addition, the Secretary has 

authority to identify as safety net 

providers other facilities or entities to 

which sales at a nominal price will be 

excluded from best price if he deems 

them eligible safety net providers based 

on four factors: the type of facility or 

entity, the services provided by the 

facility or entity, the patient population 

served by the facility or entity and the 

number of other facilities or entities 

eligible to purchase at nominal prices in 

the same service area. 

Section 340B(a)(4) of the PHSA 

defines entities covered under that 

provision. Covered entities include: A 

federally qualified health center as 

defined in section 1905(l)(2)(B) of the 

Act; an entity receiving a grant under 

section 340A of the PHSA; a family 

planning project receiving a grant or 

contract under Section 1001 of the 

PHSA (42 U.S.C. § 300); an entity 

receiving a grant under subpart II of part 

C of title XXVI of the PHSA (relating to 

categorical grants for outpatient early 

intervention services for HIV disease); a 

State-operated AIDS drug purchasing 

assistance program receiving financial 

assistance under title XXVI of the 

PHSA; a black lung clinic receiving 

funds under section 427(a) of the Black 

Lung Benefits Act; a comprehensive 

hemophilia diagnostic treatment center 

receiving a grant under section 501(a)(2) 

of the Act; a Native Hawaiian Health 

Center receiving funds under the Native 

Hawaiian Health Care Act of 1988; an 

urban Indian organization receiving 

funds under the title V of the Indian 

Health Care Improvement Act, any 

entity receiving assistance under title 

XXVI of the PHSA (other than a State or 

unit of local government or an entity 

receiving a grant under subpart II of part 

C of title XXVI of the PHSA), but only 

if the entity is certified by the Secretary 

pursuant to section 340B(a)(7) of the 

PHSA; an entity receiving funds under 

section 318 of the PHSA (relating to 

treatment of sexually transmitted 

diseases) or section 317(j)(2) of the 

PHSA (relating to treatment of 

tuberculosis) through a State or unit of 

local government, but only if the entity 

is certified by the Secretary pursuant to 

section 340B(a)(7) of the PHSA; a 

subsection (d) hospital (as defined in 

section 1886(d)(1)(B) of the Act that (i) 

is owned or operated by a unit of State 

or local government, is a public or 

private non-profit corporation which is 

formally granted governmental powers 

by a unit of State or local government, 

or is a private non-profit hospital which 

has a contract with a State or local 

government to provide health care 

services to low income individuals who 

are not entitled to benefits under title 

XVIII of the Act or eligible for assistance 

under the State plan under this title, (ii) 

for the most recent cost reporting period 

that ended before the calendar quarter 

involved, had a disproportionate share 

adjustment percentage (as determined 

under section 1886(d)(5)(F) of the Act) 

greater than 11.75 percent or was 

described in section 1886(d)(5)(F)(i)(II) 

of the Act, and (iii) does not obtain 

covered outpatient drugs through a 

group purchasing organization or other 

group purchasing arrangement. We do 

not believe it necessary to elaborate 

further on these entities. We propose to 

define ICF/MR, for purposes of the 

nominal price exclusion from best price, 

to mean an institution for the mentally 

retarded or persons with related 

conditions that provides services as set 

forth in 42 CFR 440.150. Additionally, 

we propose to define nursing facility as 

a facility that provides those services set 

forth in 42 CFR 440.155. 

The statute allows the Secretary to 

determine other facilities or entities to 

be safety net providers to whom sales of 

drugs at a nominal price would be 

excluded from best price. The 

Secretary’s determination would be 

based on the four factors noted above 

established by the DRA. We considered 

using this authority to expand this 

exclusion to other safety-net providers. 

We considered proposing that we use 

the broader definition of safety net 

provider used by the Institute of 

Medicine (IOM). In its report, 

‘‘America’s Health Care Safety Net, 

Intact but Endangered,’’ the IOM defines 

safety-net providers as ‘‘providers that 

by mandate or mission organize and 

deliver a significant level of healthcare 

and other health-related services to the 

uninsured, Medicaid and other 

vulnerable patients.’’ We also 

considered proposing how the Secretary 

might use the four factors to allow the 


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nominal price exclusion to best price to 

apply to other safety net providers. 

However, we believe that the entities 

specified in the statute are sufficiently 

inclusive and capture the appropriate 

safety net providers. Therefore, we have 

chosen not to propose to expand the 

entities subject to this provision at this 

time. Additionally, we believe that 

adding other entities or facilities would 

have an undesirable effect on the best 

price by expanding the entities for 

which manufacturers can receive the 

best price exclusion beyond those 

specifically mandated by the DRA and 

lowering manufacturer rebates to the 

Medicaid Program. Because the statute 

gives the Secretary discretion not to 

expand the list of entities, we do not 

propose to do so at this time in this rule. 

CMS has concerns that despite the 

fact that the DRA limits the nominal 

price exclusion to specific entities, the 

nominal price exclusion will continue 

to be used as a marketing tool. 

Historically, patients frequently remain 

on the same drug regimen following 

discharge from a hospital. Physicians 

may be hesitant to switch a patient to 

a different brand and risk destabilizing 

the patient once discharged from the 

hospital. We believe that using nominal 

price for marketing is not within the 

spirit and letter of the law. We are 

considering crafting further guidance to 

address this issue. CMS invites 

comments from the public to assist us 

in ensuring that all aspects of this issue 

are fully considered. 

In accordance with the provisions of 

the DRA, the restriction on nominal 

price sales shall not apply to sales by a 

manufacturer of covered outpatient 

drugs that are sold under a DVA master 

agreement under section 8126 of title 

38, United States Code. 

We propose a new § 447.508 in which 

we would specify those entities to 

which a manufacturer of covered 

outpatient drugs may sell at nominal 

price and provide for the exclusion of 

such sales from best price. 

Requirements for Manufacturers—

Section 447.510 

On August 29, 2003, CMS finalized 

two of the provisions in the 1995 NPRM 

through a final rule with comment 

period (68 FR 51912). We required 

manufacturers to retain records for data 

used to calculate AMP and best price for 

three years from when AMP and best 

price are reported to CMS. We also 

required manufacturers to report 

revisions to AMP and best price for a 

period not to exceed twelve quarters 

from the quarter in which the data are 

due. On January 6, 2004, we published 

an interim final rule with comment 

period replacing the three-year 

recordkeeping requirement with a tenyear requirement on a temporary basis 

(69 FR 508 (Jan. 6, 2004)). We also 

required that manufacturers retain 

records beyond the ten-year period if 

the records were subject to certain 

audits or government investigations. On 

November 26, 2004, we published final 

regulations (69 FR 68815) that require 

that a manufacturer retain pricing data 

for ten years from the date the 

manufacturer reports that period’s data 

to CMS. We propose to move the 

recordkeeping requirements at 

§ 447.534(h) to § 447.510(f) and revise 

them by adding the requirement that 

manufacturers must also retain records 

used in calculating the customary 

prompt pay discounts and nominal 

prices reported to CMS. 

Existing regulations at § 447.534(i) 

require manufacturers to report 

revisions to AMP and best price for a 

period not to exceed twelve quarters 

from the quarter in which the data were 

due. We propose to move this provision 

to § 447.510(b) and revise it to require 

manufacturers to also report revisions to 

customary prompt pay discounts and 

nominal prices for the same period. 

In order to reflect the changes to AMP 

as set forth in the DRA, we propose 

allowing manufacturers to recalculate 

base date AMP in accordance with the 

definition of AMP in § 447.504(e) of this 

subpart. Base date AMP is used in the 

calculation of the additional rebate 

described in section 1927(c)(2) of the 

Act. This additional rebate is defined as 

the difference between the quarterly 

AMP reported to CMS and the base date 

AMP trended forward using the CPI–-U. 

We propose this amendment so that the 

additional rebate would not increase 

due to changes in the definition of AMP. 

We propose giving manufacturers an 

opportunity to submit a revised base 

date AMP with their data submission for 

the first full calendar quarter following 

the publication of the final rule. We 

propose to allow manufacturers the 

option to decide whether they will 

recalculate and submit to CMS a base 

date AMP based on the new definition 

of AMP or submit their existing base 

date AMP. We are giving manufacturers 

this option because we are aware that 

some manufacturers may not have the 

data needed to recalculate base date 

AMP or may find the administrative 

burden to be more costly than the 

savings gained. 

Under section 1927(b)(3)(A) of the Act 

and the terms of the national rebate 

agreement, manufacturers that sign the 

national rebate agreement must supply 

CMS with a list of all product data (e.g., 

date entered market, drug category of 

single source, innovator multiple 

source, or noninnovator multiple 

source) and pricing information for their 

covered outpatient drugs. In accordance 

with the statute, the rule would require 

manufacturers to report AMP and best 

price to CMS not later than thirty days 

after the end of the rebate period. 

Section 6001(b)(1) of the DRA 

amended section 1927(b)(3)(A)(i) of the 

Act by adding ‘‘month of a’’ before 

‘‘rebate period.’’ Section 6003(a) of the 

DRA restructured section 

1927(b)(3)(A)(i) of the Act. The statute, 

as amended by these provisions, can be 

read in different ways. One 

interpretation is that the revisions made 

by section 6003(a) of the DRA supersede 

the revisions made by section 6001(b)(1) 

of the DRA, effectively eliminating the 

requirement that manufacturers report 

data to CMS on a monthly basis. 

However, we do not believe that this 

reading is the better reading of the 

statute or consistent with congressional 

intent. It is unreasonable to presume 

that Congress would simultaneously 

establish and render meaningless a new 

provision of law and we do not propose 

to adopt this interpretation. Another 

interpretation is that the revisions made 

by section 6001(b)(1) of the DRA, when 

read with the amendments made by 

section 6003 of the DRA, create a new 

requirement that AMP, best price, and 

customary prompt pay discounts be 

reported on a monthly basis. However, 

there is no compelling evidence in the 

legislative history which indicates that 

Congress intended to change the rebate 

period from quarterly to monthly. Best 

price is reported to CMS quarterly for 

purposes of our calculation of the unit 

rebate amount for single source and 

innovator multiple source drugs. While 

Congress clearly intended that AMPs be 

reported and disclosed to States on a 

monthly basis, it did not establish any 

similar monthly use for best price or 

customary prompt pay discounts. For 

these reasons, we propose to interpret 

section 6001(b) of the DRA to require 

that manufacturers report only AMP to 

CMS on a monthly basis beginning 

January 1, 2007. To implement this 

provision, we would require in 

§ 447.510(d) that manufacturers must 

submit monthly AMP to CMS not later 

than 30 days after each month. We 

would also require manufacturers to 

report quarterly AMP, best price, and 

customary prompt pay discounts on a 

quarterly basis. 

We propose that the monthly AMP 

will be calculated the same as the 

quarterly AMP, with the following 

exceptions. The time frame represented 

by the monthly AMP would be one 

calendar month instead of a calendar 


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quarter and once reported, would not be 

subject to revision later than 30 days 

after each month. Because we recognize 

that industry pricing practices 

sometimes result in rebates or other 

price concessions being given by 

manufacturers to purchasers at the end 

of a calendar quarter, if the monthly 

AMP were calculated simply using sales 

in that month, these pricing practices 

might result in fluctuations between the 

AMP for the first two months and the 

AMP for the third month in a calendar 

quarter. In order to maximize the 

usefulness of the monthly AMP and 

minimize volatility in the prices, we 

propose allowing manufacturers to rely 

on estimates regarding the impact of 

their end-of-quarter rebates or other 

price concessions and allocate these 

rebates or other price concessions in the 

monthly AMPs reported to CMS 

throughout the quarter. We considered 

applying this same methodology to 

other cumulative rebates or other price 

concessions over longer periods of time, 

but are not certain that such rebates or 

other prices concessions could be 

allocated with respect to monthly AMP 

calculations. We invite comments on 

allowing the use of 12-month rolling 

average estimates of all lagged discounts 

for both the monthly and quarterly 

AMP. We also considered allowing 

manufacturers to calculate the monthly 

AMP based on updates of the most 

recent three-month period (i.e., a rolling 

three-month AMP). While this 

methodology may minimize volatility in 

the data, we believe it would be fairly 

complex for manufacturers to 

operationalize. We encourage comments 

on the appropriate methodology for 

calculating monthly AMP. 

Section 6001(b)(2)(C) of the DRA 

amended the confidentiality 

requirements at section 1927(b)(3)(D) of 

the Act by adding an exception for AMP 

disclosure through a Web site accessible 

to the public. The statute does not 

specify that this exception only applies 

to monthly AMP; therefore, we also 

propose to make the quarterly AMP 

publicly available. We note that the 

quarterly AMP would not necessarily be 

identical to the monthly AMP due to the 

potential differences in AMP from one 

timeframe to the next. 

Section 6001(d)(1) of the DRA 

modified section 1927(b)(3)(A)(iii) of the 

Act by adding a requirement that 

manufacturers report nominal prices for 

calendar quarters beginning on or after 

January 1, 2007 to the Secretary. To 

implement this provision, we propose to 

require that manufacturers report 

nominal price exception data to CMS on 

a quarterly basis. We further propose 

that nominal price exception data shall 

be reported as an aggregate dollar 

amount which includes all nominal 

price sales to the entities listed in 

§ 447.508(a) of this subpart for the 

rebate period. 

Section 1927(b)(3)(C) of the Act 

describes penalties for manufacturers 

that provide false information or fail to 

provide timely information to CMS. In 

light of these requirements, we propose 

to require that manufacturers certify the 

pricing reports they submit to CMS in 

accordance with § 447.510. We propose 

to adopt the certification requirements 

established by the Medicare Part B 

Program for ASP in the interim final 

rule with comment period published on 

April 6, 2004. Each manufacturer’s 

pricing reports would be certified by the 

manufacturer’s Chief Executive Officer 

(CEO), Chief Financial Officer (CFO), or 

an individual who has delegated 

authority to sign for, and who reports 

directly to, the manufacturer’s CEO or 

CFO. 

We propose that all product and 

pricing data, whether submitted on a 

quarterly or monthly basis, be submitted 

to CMS in an electronic format. When 

the Medicaid Drug Rebate Program was 

first implemented in 1991, electronic 

data transfer was one of three data 

submission options as the use of such 

electronic media was not yet as 

commonplace as it is today. Due to the 

new monthly data reporting 

requirements and additional quarterly 

data reporting requirements, we propose 

to require manufacturers to use one 

uniform data transmission format to 

transmit and collect these data. CMS 

will issue operational instructions to 

provide additional guidance regarding 

the new electronic data submission 

requirements. 

Aggregate Upper Limits of Payment—

Section 447.512 

We propose that the existing 

§ 447.331 be revised and redesignated as 

a new § 447.512. We propose to revise 

subsection (a) to clarify that the upper 

limit for multiple source drugs applies 

in the aggregate. We also propose to 

update several cross-references to 

provisions in subpart I. 

Upper Limits for Multiple Source 

Drugs—Section 447.514 

We propose that the existing 

§ 447.332 be revised in a new § 447.514. 

A. Upper Limits for Multiple Source 

Drugs 

Existing regulations at 42 CFR 

447.331, 447.332 and 447.334 address 

upper limits for payment of drugs 

covered under the Medicaid program. 

We propose to redesignate existing 

regulations at §§ 447.331, 447.332, and 

447.334 as new regulations at 

§§ 447.512, 447.514, and 447.516, 

respectively. 

Existing regulations at 

§ 447.332(a)(1)(i) state that an upper 

limit for a multiple source drug may be 

established if all of the formulations of 

the drug approved by the FDA have 

been evaluated as therapeutically 

equivalent in the current edition of the 

FDA’s publication, ‘‘Approved Drug 

Products with Therapeutic Equivalence 

Evaluations.’’

Section 1927(e)(4) of the Act, as 

amended by OBRA 90, expanded the 

criteria for multiple source drugs subject 

to FUL reimbursement. Specifically, the 

statute required CMS to establish an 

upper payment limit for each multiple 

source drug when there are at least three 

therapeutically and pharmaceutically 

equivalent multiple source drugs, 

regardless of whether all additional 

formulations are rated as such. Effective 

January 1, 2007, the DRA changed the 

requirement such that a FUL must be 

established for each multiple source 

drug for which the FDA has rated two 

or more products as therapeutically 

equivalent. 

Currently, if all formulations of a 

multiple source drug are identified as Arated in the FDA’s publication, 

‘‘Approved Drug Products with 

Therapeutic Equivalence Evaluations,’’

at least two formulations must be listed 

in that publication for CMS to establish 

a FUL for that drug. If all formulations 

of a multiple source drug are not Arated, there must be at least three Arated versions of the drug listed in 

‘‘Approved Drug Products with 

Therapeutic Equivalence Evaluations’’

for CMS to establish a FUL for the drug. 

If a product meets the FDA criteria 

described above, we confirm that at 

least three suppliers (i.e., 

manufacturers, wholesalers, repackagers, re-labelers or any other entity 

from which a drug can be purchased) 

list the drug in published compendia of 

cost information for drugs available for 

sale nationally (e.g., Red Book, First 

DataBank, or Medi-Span). Then, using 

these pricing compendia, we select the 

lowest price (e.g., the average wholesale 

price, wholesale acquisition cost, or 

direct price) from among the A-rated 

formulations of a particular drug and 

apply the formula described in existing 

§ 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. 


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By the term, ‘‘therapeutically 

equivalent,’’ we mean drugs that are 

identified as A-rated in the current 

edition of the FDA’s publication, 

‘‘Approved Drug Products with 

Therapeutic Equivalence Evaluations’’

(including supplements or successor 

publications). We propose that the FUL 

will be established, as per section 

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

rated drug. However, we propose to 

continue our current practice of 

applying the FUL to all drug 

formulations, including those drug 

versions not proven to be 

therapeutically equivalent, (e.g., B-rated 

drugs). We believe it is appropriate to 

apply the FUL to B-rated drugs in order 

not to encourage pharmacies to 

substitute B-rated drugs to avoid the 

FUL in the case where B-rated drugs 

would be excluded from the FUL. 

Current regulation does not prohibit or 

exclude B-rated drugs from the FUL 

reimbursement. 

We propose revising the methodology 

we use to establish FULs for multiple 

source drugs based on the modifications 

made by the DRA. Specifically, sections 

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

the definition of multiple source drug 

established in section 1927(k)(7)(A)(i) of 

the Act to mean, with respect to a rebate 

period, a covered outpatient drug for 

which there is at least one other drug 

product which is rated as 

therapeutically equivalent (under the 

FDA’s most recent publication of 

‘‘Approved Drug Products with 

Therapeutic Equivalence Evaluations’’). 

Also, section 6001(a)(1) of the DRA 

changed the requirement for a FUL to be 

established for each multiple source 

drug for which the FDA has rated three 

or more products therapeutically and 

pharmaceutically equivalent to a 

requirement for a FUL when the FDA 

has established such a rating for two or 

more products. Therefore, we propose 

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

set when at least two suppliers (e.g., 

manufacturers, wholesalers, repackagers, or re-labelers) list the drug in 

a nationally available pricing 

compendia (e.g., Red Book, First 

DataBank, or Medi-Span). 

Existing regulations at § 447.332(b) 

specify that the agency’s payments for 

multiple source drugs identified and 

listed must not exceed, in the aggregate, 

payment levels determined by applying, 

for each drug entity, a reasonable 

dispensing fee established by the 

agency, plus an amount that is equal to 

150 percent of the published price for 

the least costly therapeutic equivalent 

(using all available national pricing 

compendia) that can be purchased by 

pharmacies in quantities of 100 tablets 

or capsules (or, if the drug is not 

commonly available in quantities of 

100, the package size commonly listed) 

or, in the case of liquids, the commonly 

listed size. 

Section 6001(a)(2) of the DRA added 

section 1927(e)(5) to the Act that 

changed the formula used to establish 

the FUL for multiple source drugs. 

Effective January 1, 2007, the upper 

limit for multiple source drugs shall be 

established at 250 percent of the AMP 

(as computed without regard to 

customary prompt pay discounts 

extended to wholesalers) for the least 

costly therapeutic equivalent. The 

currently reported AMP is based on the 

nine-digit NDC and is specific only to 

the product code, combining all package 

sizes of the drug into the same 

computation of AMP. We propose to 

continue to use the AMP calculated at 

the nine-digit NDC for the FUL 

calculation. In accordance with the DRA 

amendments, we will no longer take the 

individual 11-digit NDC, and thereby 

the most commonly used package size 

into consideration when computing the 

FUL because the currently reported 

AMP does not differentiate among 

package sizes. 

We considered using the 11-digit NDC 

to calculate the AMP, which would 

require manufacturers to report the 

AMP at the 11-digit NDC for each 

package size and that doing so would 

offer other advantages to the program for 

FULs and other purposes. An AMP at 

the 11-digit NDC would allow us to 

compute a FUL based on the most 

common package size as specified in 

current regulations. We do not believe 

computing an AMP at the 11-digit NDC 

would be significantly more difficult 

than computing the AMP at the ninedigit NDC as the data from each of the 

11-digit NDCs is combined into the 

current AMP. The AMP at the 11-digit 

NDC would also align with State 

Medicaid drug payments that are based 

on the package size. It would also allow 

us to more closely examine 

manufacturer price calculations and 

allow the States and the public to know 

the AMP for the drug for each package 

size. It would also allow 340B covered 

entities, which are entitled to buy drugs 

at a discount that is in part based on 

calculations related to AMP, to know 

what the pricing is for each package 

size, as 340B ceiling prices are 

established per package size. 

Calculating the AMP at the 11-digit NDC 

level permits greater transparency, and 

may increase accuracy and reduce errors 

for the 340B covered entities where 

prices are established for a package-size 

product rather than a per unit cost using 

the product’s weighted average AMP. 

However, the legislation did not 

change the level at which manufacturers 

are to report AMP, and we find no 

evidence in the legislative history that 

the Congress intended that AMP should 

be restructured to collect it by 11-digit 

NDCs. We are proposing to use the 

currently reported 9-digit AMP for 

calculating the FUL. Changing the 

current method of calculating the AMP 

would require manufacturers to make 

significant changes to their reporting 

systems and have an unknown effect on 

the calculation of rebates in the existing 

Medicaid Drug Rebate Program. In State 

Medicaid payment systems that 

consider a number of different factors in 

deriving payment rates, we also believe 

it would offer minimal advantages. 

Furthermore, we expect that because the 

AMP is marked up 250 percent, the 

resultant reimbursement should be 

sufficient to reimburse the pharmacy for 

the drug regardless of the package size 

the pharmacy purchased and that to the 

extent it does have an impact, it would 

encourage pharmacies to buy the most 

economical package size. 

We specifically ask for comments on 

the alternative approach of using the 11- 

digit NDC to calculate the AMP. We will 

consider comments on the merits of 

using both approaches in calculating the 

AMP for the FUL. 

In computing the FUL, we propose 

that the monthly AMP submitted by the 

manufacturer will be used. Using the 

monthly AMP will provide for the 

timeliest pricing data and allow 

revisions to the FUL list on a monthly 

basis. It will also permit us to update 

the FULs on a timely basis in 

accordance with the provisions of 

section 1927(f)(1)(B) of the Act, wherein 

the Secretary, after receiving 

notification that a therapeutically 

equivalent drug product is generally 

available, shall determine within 7 days 

if that drug product should have a FUL. 

Section 6001(c)(1) of the DRA 

redefines AMP to exclude customary 

prompt pay discounts extended to 

wholesalers. Due to this change in the 

computation, and the requirement that 

monthly AMP first be reported as of 

January 1, 2007, we propose that a FUL 

update of drugs, using the new 

methodology first be published when 

the revised AMPs are available and 

processed. 

We propose to adopt additional 

criteria to ensure that the FUL will be 

set at an adequate price to ensure that 

a drug is available for sale nationally as 

presently provided in our regulations. 

When establishing a FUL, we propose to 

disregard the AMP of an NDC which has 

been terminated. The AMP of a 

terminated NDC will not be used to set 


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the FUL beginning with the first day of 

the month after the actual termination 

date reported by the manufacturer. This 

refinement may not capture all outlier 

AMPs that would offset the availability 

of drugs at the FUL price. It is possible 

that a product that is not discontinued 

may be available on a limited basis at 

a very low price. As a further safeguard 

to ensure that a drug is nationally 

available at the FUL price and that a 

very low AMP is not used by us to set 

a FUL that is lower than the AMP for 

other therapeutically and 

pharmaceutically equivalent multiple 

source drugs, we propose to set the FUL 

based on the lowest AMP that is not less 

than 30 percent of the next highest AMP 

for that drug. That is to say, that the 

AMP of the lowest priced 

therapeutically equivalent drug will be 

used to establish the FUL, except in 

cases where this AMP is more than 70 

percent below the second lowest AMP. 

In those cases, the second lowest AMP 

will be used in the FUL calculation. We 

propose to use this percentage 

calculation as a benchmark to prevent 

an outlier price from determining the 

FUL, but invite comments as to whether 

this percentage is an appropriate 

measure to use. We did consider other 

options, such as 60 percent below the 

next highest AMP so that at least drugs 

of two different manufacturers would be 

in the FULs group, but we were 

concerned that this percentage was 

insufficient to encourage competition 

where the cost of a particular drug was 

dropping rapidly. We also considered a 

test of a drug priced 90 percent below 

the next lowest priced drug, in line with 

how we look on nominal prices, as an 

indicator that the manufacturer was 

offering this drug on a not-for-profit 

basis. However, we note that nominal 

price relates to best price for some sales 

and it is unlikely a manufacturer would 

sell all of its drugs at this price. We 

welcome suggestions about other means 

to address outliers and whether outliers 

should be addressed at all. 

We are proposing an exception to the 

30 percent carve-out policy when the 

FUL group only includes the innovator 

single source drug and the first new 

generic in the market, including an 

authorized generic. In this event, we 

would not apply the 30-percent rule as 

we believe the DRA intends that a FUL 

be set when new generic drugs become 

generally available so as to encourage 

greater utilization of a generic drug 

when the price is set less than its brand 

name counterpart. 

We invite comments from the public 

on all issues set forth in this subpart. 

We invite suggestions on how best to 

accomplish the goal of ensuring that the 

use of AMP in calculating the FUL will 

ensure that a drug is available nationally 

at the FUL price. Please submit data 

supporting your proposal when 

available. 

Upper Limits for Drugs Furnished as 

Part of Services—Section 447.516 

We propose that the existing 

§ 447.334 be redesignated as a new 

§ 447.516. 

State Plan Requirements, Findings and 

Assurances—Section 447.518 

We propose that the existing 

§ 447.333 be redesignated as a new 

§ 447.518. 

FFP: Conditions Relating to PhysicianAdministered Drugs—Section 447.520 

Prior to the DRA, many States did not 

collect rebates on physicianadministered drugs when they were not 

identified by NDC number because the 

NDC number is necessary for States to 

bill manufacturers for rebates. In its 

report, ‘‘Medicaid Rebates for Physician 

Administered Drugs’’ (April 2004, OEI–

03–02–00660), the OIG reported that, by 

2003, 24 States either required providers 

to bill using NDC numbers or identified 

NDC numbers using a Healthcare 

Common Procedure Coding System 

(HCPCS)-to-NDC crosswalk for 

physician-administered drugs in order 

to collect rebates. Four of the 24 States 

were able to collect rebates for all 

physician-administered drugs, both 

single source and multiple source drugs 

(one State only collected these rebates 

from targeted providers). Section 6002 

of the DRA added sections 1927(a)(7) 

and 1903(i)(10)(C) to the Act to require 

that States collect rebates on certain 

physician-administered drugs in order 

for FFP to be available for these drugs. 

Section 1927(a)(7)(A) of the Act 

requires that, effective January 1, 2006, 

in order for FFP to be available, States 

must require the submission of 

utilization data for single source 

physician-administered drugs using 

HCPCS codes or NDC numbers. (HCPCS 

codes are numeric and alpha-numeric 

codes assigned by CMS to every medical 

or surgical supply, service, orthotic, 

prosthetic and generic or brand name 

drug for the purpose of reporting 

healthcare transactions for claims 

billing. Physician-administered drugs 

are assigned alpha-numeric HCPCS 

codes, and are commonly referred to as 

J-codes. However, physicianadministered drugs are also coded using 

other letters of the alphabet. For this 

reason, we will refer to the coding 

system, HCPCS, as opposed to one set 

of alpha-numeric codes in our 

discussion of section 6002 

requirements.) If States collect HCPCS 

codes for single source drugs, they can 

crosswalk these codes to NDC numbers 

because most HCPCS codes for single 

source drugs include only one NDC in 

order to collect rebates. 

Section 1927(a)(7)(C) of the Act 

requires that, beginning January 1, 2007, 

States must provide for the submission 

of claims data with respect to physicianadministered drugs (both single source 

and multiple source drugs) using NDC 

numbers, unless the Secretary specifies 

that an alternative coding system can be 

used. The Secretary does not plan to 

specify an alternative coding system 

because we believe that NDC numbers 

are well established in the medical 

community and provide States the most 

useful information to collect rebates. 

Section 1927(a)(7)(B) of the Act 

requires the Secretary, by January 1, 

2007, to publish a list of the 20 multiple 

source physician-administered drugs 

with the highest dollar volume 

dispensed under the Medicaid program. 

We propose that the list will be 

developed by the Secretary using data 

from the Medicaid Statistical 

Information System and published on 

the CMS Web site. 

Section 1927(a)(7)(B)(ii) of the Act 

(when read with other DRA 

amendments) requires that, effective 

January 1, 2008, in order for FFP to be 

available, States must provide for the 

submission of claims for physicianadministered multiple source drugs 

using NDC numbers for those drugs 

with the highest dollar volume listed by 

the Secretary. 

We propose, for the purpose of this 

section, that the term ‘‘physicianadministered drugs’’ be defined as 

covered outpatient drugs under section 

1927(k)(2) of the Act (many are also 

covered by Medicare Part B) that are 

typically furnished incident to a 

physician’s service. These drugs are 

usually injectable or intravenous drugs 

administered by a medical professional 

in a physician’s office or other 

outpatient clinical setting. Examples 

include injectables: Lupron acetate for 

depot suspension (primarily used to 

treat prostate cancer), epoetin alpha 

(injectable drug primarily used to treat 

cancer), anti-emetic drugs (injectable 

drug primarily used to treat nausea 

resulting from chemotherapy), 

intravenous drugs primarily used to 

treat cancer (paclitaxel and docetaxel), 

infliximab primarily used to treat 

rheumatoid arthritis, and rituximab 

primarily used to treat non-Hodgkin’s 

lymphoma. We believe that some oral 

self-administered drugs (administered 

in an outpatient clinical setting), such as 

oral anti-cancer drugs, oral anti-emetic 


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drugs should also be included in the 

designation of physician-administered 

drugs consistent with Part B policy and 

sections 1861(s)(2)(Q) and (T) of the Act. 

Section 1927(a)(7)(D) of the Act 

allows the Secretary to grant States 

extensions if they need additional time 

to implement or modify reporting 

systems to comply with this section. We 

are not proposing any criteria for 

reviewing these extension requests as 

we expect that most, if not all States 

will be able to meet the statutory 

deadlines for collection of NDC 

numbers on claims. Most States are 

already collecting rebates for single 

source drugs that are provided in a 

physician’s office. For multiple source 

drugs, the States have nearly two years 

following enactment of the DRA before 

FFP would be denied for the 20 

multiple source drugs specified by the 

Secretary as having the highest dollar 

volume. 

We expect that States will require 

physicians to submit all claims using 

NDC numbers, as using multiple billing 

systems would be burdensome for 

physicians and States. This will also 

advantage States because rebates will be 

collectible on all physicianadministered drugs. 

For States not currently billing 

manufacturers for rebates on single 

source drugs, we believe that the 

Medicare Part B crosswalk may be 

helpful to crosswalk HCPCS codes to 

NDC numbers. This crosswalk may be 

found on the CMS Web site at http:// 

new.cms.hhs.gov/ 

McrPartBDrugAvgSalesPrice/ 

02_aspfiles.asp. 

To implement the provisions set forth 

in section 6002, we propose a new 

§ 447.520. In § 447.520(a), we would 

require States to require that claims for 

physician-administered drugs be 

submitted using codes that identify the 

drugs sufficiently to bill a manufacturer 

for rebates in order for the State to 

receive FFP. In § 447.520(b), we would 

require States to require providers to 

submit claims using NDC numbers. In 

§ 447.520(c), we would allow States that 

require additional time to comply with 

the requirements of this section to apply 

to the Secretary for an extension. 

III. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA), we are required to 

provide 60-day notice in the Federal 

Register and solicit public comment 

before a collection of information 

requirement is submitted to the Office of 

Management and Budget (OMB) for 

review and approval. In order to fairly 

evaluate whether an information 

collection should be approved by the 

OMB, section 3506(c)(2)(A) of the PRA 

requires that we solicit comment on the 

following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements: 

Requirements for Manufacturers 

(§ 447.510) 

Proposed § 447.510 states that a 

manufacturer must report, 

electronically, product and pricing 

information to CMS not later than 30 

days after the end of the rebate period. 

In addition, customary prompt pay 

discounts and nominal prices must be 

reported quarterly. Detailed information 

pertaining to the manufacturer’s 

reporting requirements is located under 

§§ 447.510(a), (b), (c), (d), and (e). 

The burden associated with these new 

requirements is the time and effort it 

would take for a drug manufacturer to 

gather product and pricing information 

and submit it to CMS in an electronic 

format. We estimate that these 

requirements would affect the 

approximately 550 drug manufacturers 

that currently participate in the 

Medicaid Drug Rebate Program. Our 

current reporting and recordkeeping 

hour burden for each manufacturer in 

the Medicaid Drug Rebate Program is 71 

hours per quarter or 284 hours annually. 

We believe the new reporting 

requirements will require less than half 

of this time. Specifically, we believe it 

would take each manufacturer 31 hours 

per quarter or 124 hours annually to 

report additional new information to 

CMS. The total estimated burden on all 

drug manufacturers associated with the 

new requirements under § 447.510 is 

68,200 annual hours. 

Section 447.510(f) requires a 

manufacturer to retain records for ten 

years from the date the manufacturer 

reports data to CMS for that rebate 

period. The ten-year time frame applies 

to a manufacturer’s quarterly and 

monthly submissions of pricing data, as 

well as any revised quarterly pricing 

data subsequently submitted to CMS. As 

stated under § 447.510(f)(2), there are 

certain instances when records must be 

maintained beyond the ten-year period. 

While this requirement is subject to 

the PRA, the retention of quarterly data 

it is not a new requirement. While this 

requirement will now also apply to 

monthly AMP data, we believe a similar 

set of data is now retained to support 

the quarterly retention requirement. 

Therefore, we believe this regulation 

imposes no additional burden on the 

drug manufacturer. 

FFP: Conditions Relating to PhysicianAdministered Drugs. (§ 447.520) 

Section 447.520 requires providers, 

effective January 1, 2007, to submit 

claims to the State for physicianadministered single source drugs and 

the 20 multiple source drugs identified 

by the Secretary using NDC numbers. 

Assuming all States impose this 

requirement, the burden associated with 

this requirement is the time and effort 

it would take for a physician’s office, 

hospital outpatient department or other 

entity (e.g., non profit facilities) to 

include the NDC on claims submitted to 

the State. We estimate this requirement 

would affect an excess of 20,000 

physicians, hospitals with outpatient 

departments and other entities that 

would submit approximately 3,910,000 

claims annually. We believe this would 

take approximately 15 seconds per 

claim. We estimated the cost based on 

the average annual wage and benefits 

paid for office and administrative 

support services in 2006 of $21.14 per 

hour (http://www.bls.gov/news.release/ 

pdf/ecec.pdf). The per claim cost would 

be under 9 cents. 

Section 447.520(c) allows States 

requiring additional time to comply 

with the requirements of this section to 

apply for an extension. The burden 

associated with this requirement is the 

time and effort it would take for each 

State to apply for a one-time extension. 

We estimate that it would take five 

hours for each State to apply for the 

extension; however, we believe that no 

State will apply. Therefore, we believe 

this requirement to be exempt as 

specified at 5 CFR 1320.3(c)(4). 

We have submitted a copy of this 

proposed rule to the OMB for its review 

of the information collection 

requirements described above. These 

requirements are not effective until they 

have been approved by the OMB. 

If you comment on these information 

collection and recordkeeping 

requirements, please mail copies 

directly to the following: Centers for 

Medicare & Medicaid Services, Office of 

Strategic Operations and Regulatory 

Affairs, Division of Regulations 

Development, Attn: Melissa Musotto, 

[CMS–2238–P], Room C4–26–05, 7500 

Security Boulevard, Baltimore, MD 


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21244–1850; and Office of Information 

and Regulatory Affairs, Office of 

Management and Budget, Room 10235, 

New Executive Office Building, 

Washington, DC 20503, Attn: Katherine 

Astrich, CMS Desk Officer, CMS–2238–

P, katherine_astrich@omb.eop.gov. Fax 

(202) 395–6974. 

IV. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the ‘‘DATES’’ February 

20, 2007, and, when we proceed with a 

subsequent document, we will respond 

to the comments in the preamble to that 

document. 

V. Regulatory Impact Analysis 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Impact Analysis’’ at the 

beginning of your comments]. 

A. Overall Impact 

We have examined the impacts of this 

rule as required by Executive Order 

12866 (September 1993, Regulatory 

Planning and Review), the Regulatory 

Flexibility Act (RFA) (September 19, 

1980, Pub. L. 96–354), section 1102(b) of 

the Act, the Unfunded Mandates Reform 

Act of 1995 (Pub. L. 104–4), Executive 

Order 13132, and the Congressional 

Review Act (CRA, 5 U.S.C. 804(2)). 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely reassigns responsibility of 

duties) directs agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with ‘‘economically significant’’ effects 

($100 million or more in any 1 year). We 

believe this rule will have an 

economically significant effect. We 

believe the rule would save $8.4 billion 

over the next five years ($4.93 billion 

Federal savings and $3.52 billion State 

savings as shown in the table below). 

This figure represents a 5.6 percent 

reduction in total Medicaid drug 

expenditures in Federal fiscal years 

2007–2011. We consider this proposed 

rule to be a major rule for purposes of 

the CRA. 

STATE AND FEDERAL SAVINGS OVER 5 YEARS

[In millions] 

DRA section and provision 

FFY 

Federal 

State 

2007 2008 2009 2010 2011 

2007–11 

Total 

savings 

Section 6001—Federal Upper Payment Limits and 

Other Provisions.

Federal ............. $465 $750 $1,075 $1,155 $1,250 $4,695 

State ................. 330 535 765 825 890 3,345 

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

Section 6002—Rebates on Physician-Administered 

Drugs.

Federal ............. 18 19 20 22 24 103 

State ................. 13 14 15 16 18 76 

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

Section 6003—Authorized Generics in Rebate Best 

Price.

Federal ............. 10 25 28 32 36 131 

State ................. 7 19 21 24 27 98 

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

Total Savings for FFY ........................................ Federal ............. 493 794 1,123 1209 1310 4,929 

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

Total .......... 843 1,362 1,924 2074 2245 8,448 

All savings estimates were developed 

by the Office of the Actuary in CMS. We 

note that the Congressional Budget 

Office, in its estimates of the budgetary 

effects of these provisions of the DRA, 

reached an almost identical estimate for 

these years, about $4.8 billion in Federal 

outlay reduction compared to the CMS 

estimate of $4.9 billion. 

Savings estimates for section 6001 of 

the DRA—FULs and other provisions—

were derived from simulations of the 

new FULs performed using price and 

utilization data from the Medicaid Drug 

Rebate Program combined with generic 

group codes from First DataBank. 

Percent savings from these simulations 

were applied to projected Medicaid 

prescription drug spending developed 

for the President’s fiscal year 2007 

budget. Savings were phased in over 

three years to allow for implementation 

lags. On the previous chart, the estimate 

for FFY 2007 through FFY 2010 

includes $5 million for the retail price 

survey. 

The savings estimates for section 6002 

of the DRA—rebates on physicianadministered drugs—are based on the 

2004 OIG report, ‘‘Medicaid Rebates for 

Physician-Administered Drugs.’’ A key 

finding of the report is the amount of 

additional rebates that could have been 

collected in 2001 if all States had 

collected rebates on physicianadministered drugs. This amount was 

then projected forward using historical 

data (2001–2005) and projections 

consistent with the 2007 President’s 

Budget forecast for Medicaid spending 

to develop the total estimated impact. 

The savings estimates for section 6003 

of the DRA—Reporting of authorized 

generics for Medicaid rebates—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 


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forecast for Medicaid spending as well 

as adjustments given that the proposal 

is limited to a subset of the prescription 

drug market. 

None of the estimates include Federal 

or State administrative costs. We believe 

these costs would be small as they 

involve changes in work processes 

rather than new activities. The resulting 

program savings would be many times 

these costs. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses and other small entities if a 

proposed or final rule would have a 

‘‘significant impact on a substantive 

number of small entities.’’ For purposes 

of the RFA, small entities include small 

businesses, non-profit organizations, 

and small governmental jurisdictions. 

Individuals and States are not included 

in the definition of a small entity. For 

purposes of the RFA, three types of 

small business entities are potentially 

affected by this regulation. They are 

small pharmaceutical manufacturers 

participating in the Medicaid Drug 

Rebate Program, small retail 

pharmacies, and physicians and other 

practitioners (including small hospitals 

or other entities such as non-profit 

providers) that bill Medicaid for 

physician-administered drugs. We will 

discuss each type of business in turn. 

According to the Small Business 

Administration’s (SBA) size standards, 

drug manufacturers are small businesses 

if they have fewer than 500 employees 

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

sizetable2002.html). Approximately 550 

drug manufacturers participate in the 

Medicaid Drug Rebate Program. We 

believe that most of these manufacturers 

are small businesses. We anticipate that 

this rule would have a small impact on 

small drug manufacturers. The rule 

would require all drug manufacturers 

participating in the Medicaid Drug 

Rebate Program to submit pricing 

information (AMP) on each of their drug 

products on a monthly basis. Currently 

drug manufacturers are required to 

submit similar information quarterly. In 

addition, drug manufacturers would be 

required to submit two additional 

pricing data elements—customary 

prompt pay discounts and nominal 

prices—on each of their drugs on a 

quarterly basis. We believe that drug 

manufacturers currently have these 

data; therefore, the new requirement 

does not require new data collection. 

Rather, it simply requires that existing 

information be reported to CMS. For 

this reason, we believe the burden to be 

minimal. In addition, the proposed 

regulation would affect the level of 

rebates due from manufacturers. The 

DRA provides that customary prompt 

pay discounts be excluded from AMP. 

This would result in higher AMPs and, 

consequently, higher rebate payments. 

We have been told informally by 

manufacturers that customary prompt 

pay discounts are generally about 2 

percent. We have found no independent 

source to confirm this percentage. We 

also do not know what percent of sales 

qualify for customary prompt pay 

discounts. Based on this limited 

information, we believe that the removal 

of customary prompt pay discounts 

would cost manufacturers up to $160 

million (2 percent of $8 billion in rebate 

payments annually). In this proposed 

regulation we also would remove sales 

to nursing home pharmacies from AMP. 

We have been told by industry 

representatives that nursing home 

pharmacies receive larger discounts 

than other sectors, thus resulting in an 

increase in AMP from this change. 

However, because we have no 

independent data on the cost of drugs to 

nursing home pharmacies, we cannot 

quantify the effect of this provision 

other than to say that we believe it 

would increase rebates owed by drug 

manufacturers. 

According to the SBA’s size 

standards, a retail pharmacy is a small 

business if it has revenues of $ 6.5 

million or less in 1 year (http:// 

www.sba.gov/size/sizetable2002.html). 

The SBA estimates that there are about 

18,000 small pharmacies. These 

pharmacies would be affected by this 

regulation as the law will result in lower 

FULs for most drugs subject to the 

limits, thus reducing Medicaid 

payments to pharmacies for drugs. The 

revision to the FULs would generally 

reduce those limits and, thereby, reduce 

Medicaid payment for drugs subject to 

the limits. The savings for section 6001 

of the DRA reflect this statutory change. 

The other provisions concerning 

payment for drugs would provide States 

two new data points to use to set 

payment rates. Beginning in January 

2007, States may use AMP and retail 

survey prices in their payment 

methodologies. The savings for section 

6001 of the DRA do not reflect decreases 

to State payments for drugs not on the 

FUL list. As analyzed in detail below, 

we believe that these legislatively 

mandated section 6001 savings will 

potentially have a ‘‘significant impact’’

on some small, independent 

pharmacies. The analysis in this section, 

together with the remainder of the 

preamble, constitutes an Initial 

Regulatory Flexibility Analysis (IRFA) 

for purposes of compliance with the 

RFA. 

According to the SBA’s size 

standards, physician practices are small 

businesses if they have revenues of $9 

million or less in 1 year (http:// 

www.sba.gov/size/sizetable2002.html). 

Nearly all of the approximately 20,000 

physician’s practices that specialize in 

oncology, rheumatology and urology 

may experience some administrative 

burden due to new requirements that 

claims include the NDC for drugs 

administered by these physicians. These 

practices would be required to transfer 

the NDC code for drugs administered by 

a physician to the electronic or paper 

claim. We estimate that 3,910,000 

claims would be submitted a year. We 

derived this number by multiplying the 

23 million annual Part B claims by the 

percentage (17) of Medicare 

beneficiaries who are also Medicaid 

beneficiaries. We believe most of the 

Medicaid beneficiaries who receive 

physician-administered drugs are also 

in Medicare. We then assume that it 

would take 15 seconds per claim. 

Multiplying 3,910,000 by 15 seconds 

equals 58,650,000 seconds or 16,292 

hours (58,650,000/3600 seconds per 

hour). We multiplied 16,292 hours by 

the hourly wage and benefit rate of 

$21.14 for office and administrative staff 

published by the Department of Labor, 

Bureau of Labor Statistics for March 

2006 to estimate the annual cost to be 

$344,000. We divided the total cost of 

$344,000 by the 3,910,000 claims to 

estimate the cost per claim would be 

under 9 cents. Calculated another way, 

the annual cost per physician practice 

would be under $20 ($344,000 divided 

by 20,000 equals about $17). 

Accordingly, we believe that there is no 

‘‘significant impact’’ on these 

physicians. 

According to the SBA’s size 

standards, hospitals are small 

businesses if they have yearly revenue 

of $31.5 million or less (http:// 

www.sba.gov/size/sizetable2002.html). 

As with physician practices, outpatient 

units of hospitals would need to include 

NDCs on claims for physicianadministered drugs. Outpatient hospital 

claims for physician-administered drugs 

are included in the 3,910,000 annual 

total claims discussed in the previous 

paragraph. However, we believe that 

these costs could be reduced or 

eliminated with a one-time systems 

change to capture this code in the 

billing system. In any case, the total cost 

of this change to hospitals would be 

small, and we believe that there is no 

‘‘significant impact’’ on hospitals. 

Other small entities such as non-profit 

providers may also be affected by this 

provision. We do not have data to 

quantify how many of the 3,910,000 

annual total claims are submitted by 


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these entities. In any case, the cost 

would be under 9 cents per claim. 

Section 1102(b) of the Act requires us 

to prepare an RIA if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 603 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a Core-Based Statistical Area and has 

fewer than 100 beds. There are 

approximately 700 small rural hospitals 

that meet this definition. We do not 

know how many of these hospitals have 

outpatient departments. However, we 

believe that this rule would not have a 

significant impact on small rural 

hospitals because the only provision 

that would affect small rural hospitals is 

the requirement for those hospitals to 

include the NDC on bills for drugs 

administered by physicians in the 

outpatient department. As the national 

annual cost of this provision is 

estimated at $344,000, the impact on 

small rural hospitals would be minimal. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 also 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule whose mandates on States and 

private entities require spending in any 

one year of $100 million in 1995 dollars, 

updated annually for inflation. That 

threshold level is currently 

approximately $125 million. This 

proposed rule would mandate that drug 

manufacturers provide information on 

drug prices, and that these data be used 

in calculating FULs. However, our 

estimate of costs to manufacturers (see 

next section) falls far below the 

threshold and we anticipate this rule 

would save States $3.5 billion over the 

5-year period from October 1, 2006 

through September 30, 2011. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

Since this proposed rule would impose 

only minimal new administrative 

burden on States and yield substantial 

savings to States, we believe that these 

costs can be absorbed by States from the 

substantial savings they would accrue. 

B. Anticipated Effects 

1. Effects on Drug Manufacturers 

As previously indicated, 

approximately 550 drug manufacturers 

participate in the Medicaid Drug Rebate 

program. The rule would require all 

drug manufacturers participating in the 

Medicaid Drug Rebate Program to 

submit pricing information (AMP) on 

each of their drug products on a 

monthly basis. Currently drug 

manufacturers are required to submit 

similar information quarterly. In 

addition, drug manufacturers would be 

required to submit two additional 

pricing data elements—customary 

prompt pay discounts and nominal 

prices—on each of their drugs on a 

quarterly basis. We believe that drug 

manufacturers currently have these 

data; therefore, the new requirement 

would not require new data collection. 

Rather it simply requires that existing 

information be reported to CMS. For 

this reason, we believe the burden to be 

minimal. The estimated startup burden 

to the manufacturers is $27.5 million for 

a one-time systems upgrade, or $50,000 

for each of the 550 manufacturers that 

participate in the Medicaid Drug Rebate 

Program. To estimate the ongoing 

burden, we expect that the 

manufacturers would each spend 208 

hours annually (114,400 total hours 

annually) in complying with these 

requirements. The estimated annual 

operational expenses are $5.7 million, 

which is 114,400 total annual hours 

multiplied by $37.50 per labor hour in 

wages and benefits, or $4.3 million in 

labor burden, plus $1.4 million in 

technical support. 

In addition, the proposed regulation 

would affect the level of rebates due 

from manufacturers. The DRA provides 

that customary prompt pay discounts be 

excluded from AMP. This would result 

in higher AMPs and, consequently, 

higher rebate payments. We have been 

told informally by manufacturers that 

customary prompt pay discounts are 

generally about two percent. We have 

found no independent source to confirm 

this percentage. We also do not know 

what percent of sales qualify for 

customary prompt pay discounts. Based 

on this limited information, we believe 

that the removal of customary prompt 

pay discounts would cost manufacturers 

up to $160 million (2 percent of $8 

billion in rebate payments annually). In 

this proposed regulation, we also would 

remove sales to nursing home 

pharmacies from AMP. We have been 

told by industry representatives that 

nursing home pharmacies receive larger 

discounts than other sectors, thus 

resulting in an increase in AMP. 

However, because we have no 

independent data on the cost of drugs to 

nursing home pharmacies, we cannot 

quantify the effect of this provision 

other than to say that we believe it 

would increase rebates owed by drug 

manufacturers. 

2. Effects on State Medicaid Programs 

States share in the savings from this 

rule. As noted in the table above, we 

estimate five-year State savings of over 

$3.5 billion. State administrative costs 

associated with this regulation are 

minor as States currently pay based on 

a FUL for drugs subject to that limit, 

determine their drug reimbursement 

rates, and collect claims information on 

physician-administered drugs. 

3. Effects on Retail Pharmacies 

Retail pharmacies would be affected 

by this regulation, as the law will result 

in lower FULs for most drugs subject to 

the limits, thus reducing Medicaid 

payments to pharmacies for drugs. The 

revision to the FULs would generally 

reduce those limits and, thereby, reduce 

Medicaid payment for drugs subject to 

the limits. The savings for section 6001 

of the DRA reflect this statutory change. 

The other provisions concerning 

payment for drugs would provide States 

two new data points to use to set 

payment rates. Beginning in January 

2007, States may use AMP and retail 

survey prices in their payment 

methodologies. The savings for section 

6001 of the DRA do not reflect decreases 

to State payments for drugs not on the 

FUL list that may result if States change 

their payment methodologies. 

The savings to the Medicaid program 

would largely be realized through lower 

payments to pharmacies. As shown 

earlier in this analysis, the annual effect 

of lower FULs and related changes will 

likely reduce pharmacy revenues by 

about $800 million in 2007, increasing 

to a $2 billion reduction annually by 

2011. These reductions, while large in 

absolute terms, represent only a small 

fraction of overall pharmacy revenues. 

According to recent data summarized by 

the National Association of Chain Drug 

Stores (http://www.nacds.org/ 

wmspage.cfm?parm1=507), total retail 

prescription sales in the United States, 

including chain drug stores, 

independent drug stores, supermarket, 

and mail order, totaled about $230 

billion in 2005. Assuming, 

conservatively, that sales will rise at 

only five percent a year, 2007 sales 

would be over $250 billion and 2011 

sales well over $300 billion. Thus, the 

effect of this proposed rule would be to 

reduce retail prescription drug revenues 

by less than one percent, on average. 

Actual revenue losses would be even 

smaller for two reasons. First, almost all 

of these stores sell goods other than 

prescription drugs, and overall sales 

average more than twice as much as 


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prescription drug sales. Second, 

pharmacies have the ability to mitigate 

the effects of the proposed rule by 

changing purchasing practices. The 250 

percent FUL will typically be lower 

than the prices available to pharmacies 

only when one or more very low cost 

generic drugs are included in the 

calculation. Pharmacies will often be 

able to switch their purchasing to the 

lowest cost drugs and mitigate the effect 

of the sales loss by lowering costs. 

Although it is clear that the effects 

will be small on the great majority of 

pharmacies, whether chain or 

independent, we are unable to estimate 

quantitatively effects on ‘‘small’’

pharmacies, particularly those in lowincome areas where there are high 

concentrations of Medicaid 

beneficiaries. We request any 

information that may help us better 

assess those effects before we make final 

decisions. Because of these 

uncertainties, we have concluded that 

this proposed rule is likely to have a 

‘‘significant impact’’ on some 

pharmacies. 

4. Effects on Physicians 

This regulation would affect 

physician practices that provide and bill 

Medicaid for physician-administered 

drugs. This includes about 20,000 

physicians as well as hospitals with 

outpatient departments. The effect on 

physicians is the same as discussed in 

section A—Overall Impact above for 

small businesses because all or nearly 

all physician offices are small 

businesses. 

5. Effects on Hospitals 

This regulation would affect hospitals 

with outpatient departments that 

provide and bill Medicaid for physicianadministered drugs. As discussed above, 

hospitals with outpatient departments 

would need to include the NDC on 

claims for physician-administered 

drugs. We believe this would need to be 

done manually or would require a onetime systems change. We believe the 

cost of adding the NDC to each claim 

would be minimal. We are not able to 

estimate the cost to make this change. 

We also note that CMS has encouraged 

States to collect information on 

physician-administered drug claims to 

enable them to collect rebates. Some 

States have required that NDCs be 

included on claims and others are in the 

process of doing so. We expect that, in 

the absence of the DRA requirement, the 

number of States requiring NDCs on 

these claims would have increased. 

6. Effects on Small Business Entities 

As previously discussed, for purposes 

of the RFA, three types of small 

business entities are potentially affected 

by this regulation. This regulation 

would affect small pharmaceutical 

manufacturers participating in the 

Medicaid Drug Rebate Program, small 

retail pharmacies, and physicians and 

other practitioners (including small 

hospitals or other entities such as nonprofit providers). 

According to the SBA’s size 

standards, we believe that most of the 

550 pharmaceutical manufacturers in 

the Medicaid Drug Rebate Program are 

small businesses. We previously 

indicated that this rule impacts drug 

manufacturers by requiring them to 

submit pricing information (AMP) on 

each of their drug products on a 

monthly basis with an estimated impact 

that is minimal. The rule would also 

increase the amount of drug rebates that 

manufacturers would pay as a result of 

removing customary prompt pay 

discounts and nursing home sales from 

AMP, which is used in the rebate 

calculation. The exclusion of customary 

prompt pay discounts would cost 

manufacturers up to $160 million (2 

percent of $8 billion in rebate payments 

annually). Additional detail regarding 

the effects of this proposed rule for the 

determination of drug prices and 

calculation of drug rebate liability for 

drug manufacturers is described in the 

preamble under ‘‘Definition of Retail 

Pharmacy Class of Trade and 

Determination of AMP.’’

We estimate that 18,000 small retail 

pharmacies would be affected by this 

regulation. However, we are unable to 

specifically estimate quantitative effects 

on small retail pharmacies, particularly 

those in low income areas where there 

are high concentrations of Medicaid 

beneficiaries. We request any 

information that may help us better 

assess those effects before we make final 

decisions. The preamble under 

‘‘Definition of Retail Pharmacy Class of 

Trade and Determination of AMP’’

provides additional information 

regarding the entities included in the 

retail pharmacy class of trade and the 

discounts or other price concessions for 

drugs provided to the retail pharmacy 

class of trade. As shown earlier, the 

annual effect of lower FULs and related 

changes will likely reduce overall 

pharmacy revenues by about $800 

million in 2007, increasing to a $2 

billion reduction annually by 2011. 

Nearly all of the approximately 20,000 

physician practices that specialize in 

oncology, rheumatology and urology are 

considered small businesses. The rule 

would impose some administrative 

burden on these practices due to new 

requirements that claims include the 

NDC for physician-administered drugs. 

As shown earlier, we believe that the 

annual cost per claim would be under 

9 cents and the annual cost per 

physician practice would be under $20. 

Accordingly, we believe that there is no 

significant impact on these physician 

practices. 

We also previously indicated that this 

rule would not have a significant impact 

on the operations of small rural 

hospitals. There are approximately 700 

small rural hospitals that meet the small 

business standard. As previously 

discussed, small rural hospitals would 

need to include the NDC on claims for 

physician-administered drugs through 

outpatient departments. We do not have 

data to quantify how many of the overall 

claims for physician-administered drugs 

are submitted by these 700 small rural 

hospitals. In any case, the cost would be 

under 9 cents per claim. 

The following chart depicts the 

number of small entities and the 

estimated economic impact for each 

category of small entity affected by this 

rule. 

Small entity 

Number 

affected 

by rule 

Estimated economic impact 

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

removal of customary prompt pay discounts from rebate calculations. 

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. 


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Small entity 

Number 

affected 

by rule 

Estimated economic impact 

Physicians in their Offices, Hospital Outpatient Settings or 

Other Entities (e.g., Non-profit Facilities) that Specialize in 

Oncology, Rheumatology and Urology.

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

About $17 annual cost per physician practice to enter NDC 

number on claims for physician-administered drugs. 

Total estimated impact is $344,000. 

Small Rural Hospitals ................................................................. 700 Minimal impact. 

C. Alternatives Considered 

We considered a number of different 

policies and approaches during the 

development of the proposed rule. 

With regard to the definition of AMP, 

we considered one definition for 

quarterly AMP and a different definition 

for monthly AMP. However, we believe 

the better reading of statute is for AMP 

to be defined the same way for quarterly 

or monthly reporting. 

We also considered redefining the 

entities included in ‘‘retail pharmacy 

class of trade’’ for purposes of the 

definition of AMP. Options considered 

included whether to include or exclude 

sales to nursing home pharmacies, 

PBMs, and mail order pharmacies. We 

chose to propose to exclude sales to 

nursing home pharmacies. 

We considered retaining the current 

base date AMP rather than allowing 

manufacturers to recalculate their base 

date AMP to reflect the revised 

definition of AMP. However, we 

decided that retaining the current base 

date AMP is unwarranted because it 

would create a financial burden on 

manufacturers that was not intended by 

section 6001 of the DRA. 

We considered several options 

concerning the timeframe to be covered 

by the monthly AMP. We considered 

requiring manufacturers to report the 

same quarterly AMP three times over 

the quarter, and reflect any changes to 

the quarterly AMP vis-a`-vis the monthly 

reports. However, we did not believe 

that this timeframe would provide 

useful pricing information to States. We 

also considered establishing a rolling 

three-month period for the monthly 

AMP. While this may yield updated 

pricing information, we felt this would 

be too burdensome for manufacturers to 

implement. 

We considered proposing to extend 

the nominal price exclusion from best 

price to other facilities or entities that 

the Secretary determines to be safety net 

providers to which sales of drugs at 

nominal prices would be appropriate. 

However, we were concerned that 

expanding the list of entities eligible for 

nominal pricing would drive up best 

price, which would effectively lower the 

amount of rebates manufacturers pay for 

Medicaid drugs. 

We considered using a non-weighted 

AMP, which is specific to a package 

size, to establish the FUL. However, we 

decided to continue to base AMP on all 

package sizes for each drug. We did not 

find any indication that the Congress 

intended to change how package size is 

used for AMP. Such a change would be 

burdensome on manufacturers and 

would have no impact on how States 

pay for drugs. 

We considered not making an 

exception to using the lowest AMP for 

drugs in a FUL group to establish the 

upper limit for the group. However, we 

were concerned that low outlier prices 

might result in only one drug being 

available at or near the FUL price and 

that a sufficient supply of the drug to 

meet the national Medicaid need may 

not be available at that price. 

As discussed extensively earlier in the 

preamble, we believe that mail order 

sales and the activities of PBMs are an 

important part of the wholesale and 

retail markets for drugs. They reflect the 

realities of today’s marketplace for 

consumers of prescription drugs. 

However, there are difficulties in 

dealing with both segments of the 

market and we specifically request 

comments on ways to handle these 

components of the marketplace. We also 

welcome comments on any options that 

would maintain the overall savings of 

the proposed rule, appropriately 

encompass the entire retail marketplace, 

and reduce burden on small 

pharmacies. 

D. Other Requirements in the Regulatory 

Flexibility Act 

The RFA lists five general 

requirements for an IRFA and four 

categories of burden-reducing 

alternatives. We know of no relevant 

Federal rules that duplicate, overlap, or 

conflict with the proposed rule. The 

preceding analysis, together with the 

rest of this preamble, addresses all these 

general requirements. 

We have not, however, addressed the 

various categories of burden reduction 

listed in the RFA as appropriate for 

IRFAs. These alternatives, such as an 

exemption from coverage for small 

entities, establishment of less onerous 

requirements for small entities, or use of 

performance rather than design 

standards, simply do not appear to 

apply in a situation where uniform 

payment standards are being 

established. However, we welcome 

comments with suggestions for 

improvements we can make, consistent 

with the statute, to minimize any 

unnecessary burdens on pharmacies or 

other affected entities. 

E. Accounting Statement 

As required by OMB’s Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/circulars/ 

a004/a-4.pdf), in the table below, we 

have prepared an accounting statement 

showing the classification of the 

expenditures associated with the 

provisions of this proposed rule. This 

table provides our best estimate of the 

decreases in Medicaid payments under 

sections 6001 ‘‘ 6003 of the DRA. All 

expenditures are classified as transfers 

to the Federal and State Medicaid 

programs from retail pharmacies and 

drug manufacturers. 

ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM CY 2007 TO CY 2011 

[In millions/year] 

Category Transfers 

Discount 

rate 

(percent) 

From whom to whom? 

Federal Annualized Monetized Transfers.$957.8 7 Retail Pharmacies and Drug Manufacturers to the Federal Government. 


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ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM CY 2007 TO CY 2011—Continued 

[In millions/year] 

Category Transfers 

Discount 

rate 

(percent) 

From whom to whom? 

973.6 3 

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

695.1 3 

F. Conclusion 

We estimate savings from this 

regulation of $8.4 billion over five years, 

$4.9 billion to the Federal Government 

and $3.5 billion to the States. Most of 

these savings result from a change in 

how the FULs on multiple source drugs 

are calculated and from a change in how 

authorized generic drugs are treated for 

AMP and best price. The majority of the 

savings would come from lower 

reimbursement to retail pharmacies. The 

provision on physician-administered 

drugs does not change the legal liability 

of drug manufacturers for paying rebates 

but would make it easier for States to 

collect these rebates. 

While the effects of this regulation are 

substantial, they are a result of changes 

to the law. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the OMB. 

List of Subjects in 42 CFR Part 447 

Accounting, Administrative practice 

and procedure, Drugs, Grant programs—

health, Health facilities, Health 

professions, Medicaid, Reporting and 

recordkeeping requirements, Rural 

areas. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services propose to amend 42 

CFR chapter IV as set forth below: 

PART 447—PAYMENTS FOR 

SERVICES 

1. The authority citation for part 447 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

Act (42 U.S.C. 1302). 

Subpart F—Payment Methods for 

Other Institutional and Noninstitutional Services 

2. Section 447.300 is revised to read 

as follows: 

§ 447.300 Basis and purpose. 

In this subpart, § 447.302 through 

§ 447.325 and § 447.361 implement 

section 1902(a)(30) of the Act, which 

requires that payments be consistent 

with efficiency, economy and quality of 

care. Section 447.371 implements 

section 1902(a)(13)(F) of the Act, which 

requires that the State plan provide for 

payment for rural health clinic services 

in accordance with regulations 

prescribed by the Secretary. 

§ 447.301 [Removed] 

3. Section 447.301 is removed. 

§ 447.331 [Removed] 

4. Section 447.331 is removed. 

§ 447.332 [Removed] 

5. Section 447.332 is removed. 

§ 447.333 [Removed] 

6. Section 447.333 is removed. 

§ 447.334 [Removed] 

7. Section 447.334 is removed. 

8. Subpart I is revised to read as 

follows: 

Subpart I—Payment for Drugs 

Sec. 

447.500 Basis and purpose. 

447.502 Definitions. 

447.504 Determination of AMP. 

447.505 Determination of best price. 

447.506 Authorized generic drugs. 

447.508 Exclusion from best price of certain 

sales at a nominal price. 

447.510 Requirements for manufacturers. 

447.512 Drugs: Aggregate upper limits of 

payment. 

447.514 Upper limits for multiple source 

drugs. 

447.516 Upper limits for drugs furnished as 

part of services. 

447.518 State plan requirements, findings 

and assurances. 

447.520 FFP: Conditions relating to 

physician-administered drugs. 

Subpart I—Payment for Drugs 

§ 447.500 Basis and purpose. 

(a) Basis. This subpart—

(1) Interprets those provisions of 

section 1927 of the Act that set forth 

requirements for drug manufacturers’

calculating and reporting average 

manufacturer prices (AMPs) and that set 

upper payment limits for covered 

outpatient drugs. 

(2) Implements section 1903(i)(10) of 

the Act with regard to the denial of 

Federal financial participation (FFP) in 

expenditures for certain physicianadministered drugs. 

(3) Implements section 1902(a)(54) of 

the Act with regard to a State plan that 

provides covered outpatient drugs. 

(b) Purpose. This subpart specifies 

certain requirements in the Deficit 

Reduction Act of 2005 and other 

requirements pertaining to Medicaid 

payment for drugs. 

§ 447.502 Definitions. 

Bona fide service fees mean fees paid 

by a manufacturer to an entity, that 

represent fair market value for a bona 

fide, itemized service actually 

performed on behalf of the manufacturer 

that the manufacturer would otherwise 

perform (or contract for) in the absence 

of the service arrangement, and that are 

not passed on in whole or in part to a 

client or customer of an entity, whether 

or not the entity takes title to the drug. 

Brand name drug means a single 

source or innovator multiple source 

drug. 

Bundled sale means an arrangement 

regardless of physical packaging under 

which the rebate, discount, or other 

price concession is conditioned upon 

the purchase of the same drug or drugs 

of different types (that is, at the ninedigit National Drug Code (NDC) level) or 

some other performance requirement 

(for example, the achievement of market 

share, inclusion or tier placement on a 

formulary), or, where the resulting 

discounts or other price concessions are 

greater than those which would have 

been available had the bundled drugs 

been purchased separately or outside 

the bundled arrangement. For bundled 

sales, the discounts are allocated 

proportionally to the dollar value of the 

units of each drug sold under the 

bundled arrangement. For bundled sales 

where multiple drugs are discounted, 

the aggregate value of all the discounts 

should be proportionately allocated 

across all the drugs in the bundle. 

Consumer Price Index—Urban (CPI–

U) means the index of consumer prices 

developed and updated by the U.S. 

Department of Labor. It is the CPI for all 

urban consumers (U.S. average) for the 

month before the beginning of the 


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calendar quarter for which the rebate is 

paid. 

Dispensing fee means the fee which—

(1) Is incurred at the point of sale and 

pays for costs in excess of the ingredient 

cost of a covered outpatient drug each 

time a covered outpatient drug is 

dispensed; 

(2) Includes only pharmacy costs 

associated with ensuring that possession 

of the appropriate covered outpatient 

drug is transferred to a Medicaid 

recipient. Pharmacy costs include, but 

are not limited to, any reasonable costs 

associated with a pharmacist’s time in 

checking the computer for information 

about an individual’s coverage, 

performing drug utilization review and 

preferred drug list review activities, 

measurement or mixing of the covered 

outpatient drug, filling the container, 

beneficiary counseling, physically 

providing the completed prescription to 

the Medicaid beneficiary, delivery, 

special packaging, and overhead 

associated with maintaining the facility 

and equipment necessary to operate the 

pharmacy; and 

(3) Does not include administrative 

costs incurred by the State in the 

operation of the covered outpatient drug 

benefit including systems costs for 

interfacing with pharmacies. 

Estimated acquisition cost means the 

agency’s best estimate of the price 

generally and currently paid by 

providers for a drug marketed or sold by 

a particular manufacturer or labeler in 

the package size of drug most frequently 

purchased by providers. 

Innovator multiple source drug means 

a multiple source drug that was 

originally marketed under an original 

new drug application (NDA) approved 

by the Food and Drug Administration 

(FDA). It includes a drug product 

marketed by any cross-licensed 

producers or distributors operating 

under the NDA and a covered outpatient 

drug approved under a product license 

approval, establishment license 

approval or antibiotic drug approval. 

Manufacturer means any entity that 

possesses legal title to the NDC for a 

covered drug or biological product 

and—

(1) Is engaged in the production, 

preparation, propagation, compounding, 

conversion, or processing of covered 

outpatient drug products, either directly 

or indirectly by extraction from 

substances of natural origin, or 

independently by means of chemical 

synthesis, or by a combination of 

extraction and chemical synthesis; or 

(2) Is engaged in the packaging, 

repackaging, labeling, relabeling, or 

distribution of covered outpatient drug 

products and is not a wholesale 

distributor of drugs or a retail pharmacy 

licensed under State law. 

(3) With respect to authorized generic 

products, the term ‘‘manufacturer’’ will 

also include the original holder of the 

NDA. 

(4) With respect to drugs subject to 

private labeling arrangements, the term 

‘‘manufacturer’’ will also include the 

entity that does not possess legal title to 

the NDC. 

Multiple source drug means, with 

respect to a rebate period, a covered 

outpatient drug for which there is at 

least one other drug product which—

(1) Is rated as therapeutically 

equivalent. For the list of drug products 

rated as therapeutically equivalent, see 

the FDA’s most recent publication of 

‘‘Approved Drug Products with 

Therapeutic Equivalence Evaluations’’

which is available at http:// 

www.fda.gov/cder/orange/default.htm 

or can be viewed at the FDA’s Freedom 

of Information Public Reading Room at 

5600 Fishers Lane, rm. 12A–30, 

Rockville, MD 20857; 

(2) Is pharmaceutically equivalent and 

bioequivalent, as determined by the 

FDA; and 

(3) Is sold or marketed in the United 

States during the rebate period. 

National drug code (NDC) means the 

11-digit numerical code maintained by 

the FDA that indicates the labeler, 

product, and package size, unless 

otherwise specified in this part as being 

without respect to package size (i.e., the 

nine-digit numerical code). 

National rebate agreement means the 

rebate agreement developed by CMS 

and entered into by CMS on behalf of 

the Secretary or his designee and a 

manufacturer to implement section 1927 

of the Act. 

Nominal price means a price that is 

less than 10 percent of the AMP in the 

same quarter for which the AMP is 

computed. 

Rebate period means a calendar 

quarter. 

Single source drug means a covered 

outpatient drug that is produced or 

distributed under an original NDA 

approved by the FDA, including a drug 

product marketed by any cross-licensed 

producers or distributors operating 

under the NDA. It also includes a 

covered outpatient drug approved under 

a product license approval, 

establishment license approval, or 

antibiotic drug approval. 

§ 447.504 Determination of AMP. 

(a) AMP means, with respect to a 

covered outpatient drug of a 

manufacturer (including those sold 

under an NDA approved under section 

505(c) of the Federal Food, Drug, and 

Cosmetic Act (FFDCA)) for a calendar 

quarter, the average price received by 

the manufacturer for the drug in the 

United States from wholesalers for 

drugs distributed to the retail pharmacy 

class of trade. AMP shall be determined 

without regard to customary prompt pay 

discounts extended to wholesalers. 

AMP shall be calculated to include all 

sales and associated discounts and other 

price concessions provided by the 

manufacturer for drugs distributed to 

the retail pharmacy class of trade unless 

the sale, discount, or other price 

concession is specifically excluded by 

statute or regulation or is provided to an 

entity specifically excluded by statute or 

regulation. 

(b) Average unit price means a 

manufacturer’s quarterly sales included 

in AMP less all required adjustments 

divided by the total units sold and 

included in AMP by the manufacturer 

in a quarter. 

(c) Customary prompt pay discount 

means any discount off the purchase 

price of a drug routinely offered by the 

manufacturer to a wholesaler for prompt 

payment of purchased drugs within a 

specified time. 

(d) Net sales means quarterly gross 

sales revenue less cash discounts 

allowed and all other price reductions 

(other than rebates under section 1927 

of the Act or price reductions 

specifically excluded by statute or 

regulations) which reduce the amount 

received by the manufacturer. 

(e) Retail pharmacy class of trade 

means any independent pharmacy, 

chain pharmacy, mail order pharmacy, 

pharmacy benefit manager (PBM), or 

other outlet that purchases, or arranges 

for the purchase of, drugs from a 

manufacturer, wholesaler, distributor, or 

other licensed entity and subsequently 

sells or provides the drugs to the general 

public. 

(f) Wholesaler means any entity 

(including a pharmacy, chain of 

pharmacies, or PBM) to which the 

manufacturer sells, or arranges for the 

sale of, the covered outpatient drugs, 

but that does not relabel or repackage 

the covered outpatient drug. 

(g) Sales, rebates, discounts, or other 

price concessions included in AMP. 

Except with respect to those sales 

identified in paragraph (h) of this 

section, AMP for covered outpatient 

drugs shall include—

(1) Sales to wholesalers, except for 

those sales that can be identified with 

adequate documentation as being 

subsequently sold to any of the 

excluded entities as specified in 

paragraph (h) of this section; 

(2) Sales to other manufacturers who 

act as wholesalers and do not 


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repackage/relabel under the purchaser’s 

NDC, including private labeling 

agreements; 

(3) Sales (direct and indirect) to 

hospitals, where the drug is used in the 

outpatient pharmacy; 

(4) Sales at nominal prices to any 

entity except a covered entity described 

in section 340B(a)(4) of the Public 

Health Service Act (PHSA), an 

intermediate care facility for the 

mentally retarded (ICF/MR) providing 

services as set forth in § 440.150 of this 

chapter, or a State-owned or operated 

nursing facility providing services as set 

forth in § 440.155 of this chapter; 

(5) Sales to retail pharmacies 

including discounts or other price 

concessions that adjust prices either 

directly or indirectly on sales of drugs 

to the retail pharmacy class of trade; 

(6) Discounts, rebates, or other price 

concessions to PBMs associated with 

sales for drugs provided to the retail 

pharmacy class of trade; 

(7) Sales directly to patients; 

(8) Sales to outpatient clinics; 

(9) Sales to mail order pharmacies; 

(10) Rebates, discounts, or other price 

concessions (other than rebates under 

section 1927 of the Act or as otherwise 

specified in the statute or regulations) 

associated with sales of drugs provided 

to the retail pharmacy class of trade; 

(11) Manufacturer coupons redeemed 

by any entity other than the consumer 

that are associated with sales of drugs 

provided to the retail pharmacy class of 

trade; and 

(12) Sales and associated rebates, 

discounts and other price concessions 

under the Medicare Part D, Medicare 

Advantage Prescription Drug Program 

(MA–PD), State Children’s Health 

Insurance Program (SCHIP), State 

pharmaceutical assistance programs 

(SPAPs), and Medicaid programs that 

are associated with sales of drugs 

provided to the retail pharmacy class of 

trade (except for rebates under section 

1927 of the Act or as otherwise specified 

in the statute or regulations). 

(h) Sales, rebates, discounts, or other 

price concessions excluded from AMP. 

AMP excludes—

(1) Any prices on or after October 1, 

1992, to the Indian Health Service (IHS), 

the Department of Veterans Affairs 

(DVA), a State home receiving funds 

under 38 U.S.C. 1741, the Department of 

Defense (DoD), the Public Health 

Service (PHS), or a covered entity 

described in subsection (a)(5)(B) of the 

Act (including inpatient prices charged 

to hospitals described in section 

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

(2) Any prices charged under the 

Federal Supply Schedule (FSS) of the 

General Services Administration (GSA); 

(3) Any depot prices (including 

Tricare) and single award contract 

prices, as defined by the Secretary, of 

any agency of the Federal Government; 

(4) Sales to hospitals (direct and 

indirect), where the drug is used in the 

inpatient setting; 

(5) Sales to health maintenance 

organizations (HMOs), including 

managed care organizations (MCOs); 

(6) Sales to long-term care facilities, 

including nursing home pharmacies; 

(7) Sales to wholesalers where the 

drug is distributed to the non-retail 

pharmacy class of trade; 

(8) Sales to wholesalers or distributors 

where the drug is relabeled under the 

wholesalers’ or distributors’ NDC 

number; 

(9) Manufacturer coupons redeemed 

by a consumer; 

(10) Free goods, not contingent upon 

any purchase requirement; 

(11) Bona fide service fees; 

(12) Customary prompt pay discounts 

extended to wholesalers; and 

(13) Returned goods when returned in 

good faith. 

(i) Further clarification of AMP 

calculation. (1) AMP includes cash 

discounts, free goods that are contingent 

on any purchase requirement, volume 

discounts, PBM price concessions, 

chargebacks, incentives, administrative 

fees, service fees, (except bona-fide 

service fees), distribution fees, and any 

other discounts or price reduction and 

rebates, other than rebates under section 

1927 of the Act, which reduce the price 

received by the manufacturer for drugs 

distributed to the retail pharmacy class 

of trade. 

(2) AMP is calculated as a weighted 

average of prices for all the 

manufacturer’s package sizes for each 

covered outpatient drug sold by the 

manufacturer during a rebate period. It 

is calculated as net sales divided by 

number of units sold, excluding goods 

or any other items given away unless 

contingent on any purchase 

requirements. 

(3) The manufacturer must adjust the 

AMP for a rebate period if cumulative 

discounts, rebates, or other 

arrangements subsequently adjust the 

prices actually realized. 

§ 447.505 Determination of best price. 

(a) Best price means, with respect to 

a single source drug or innovator 

multiple source drug of a manufacturer 

(including any drug sold under an NDA 

approved under section 505(c) of the 

FFDCA), the lowest price available from 

the manufacturer during the rebate 

period to any entity in the United States 

in any pricing structure (including 

capitated payments), in the same quarter 

for which the AMP is computed. Best 

price shall be calculated to include all 

sales and associated discounts and other 

price concessions provided by the 

manufacturer to any entity unless the 

sale, discount, or other price concession 

is specifically excluded by statute or 

regulation or is provided to an entity 

specifically excluded by statute or 

regulation from the rebate calculation. 

(b) For purposes of this section, 

provider means a hospital, HMO, 

including an MCO or entity that treats 

or provides coverage or services to 

individuals for illnesses or injuries or 

provides services or items in the 

provisions of health care. 

(c) Prices included in best price. 

Except with respect to those prices 

identified in paragraph (d) of this 

section and § 447.505 of this subpart, 

best price for covered outpatient drugs, 

includes—

(1) Prices to wholesalers; 

(2) Prices to any retailer, including 

PBM rebates, discounts or other price 

concessions that adjust prices either 

directly or indirectly on sales of drugs; 

(3) Prices to providers (e.g., hospitals, 

HMOs/MCOs, physicians, nursing 

facilities, and home health agencies); 

(4) Prices available to non-profit 

entities; 

(5) Prices available to governmental 

entities within the United States; 

(6) Prices of authorized generic drugs; 

(7) Prices of sales directly to patients; 

(8) Prices available to mail order 

pharmacies; 

(9) Prices available to outpatient 

clinics; 

(10) Prices to other manufacturers 

who act as wholesalers and do not 

repackage/relabel under the purchaser’s 

NDC, including private labeling 

agreements; 

(11) Prices to entities that repackage/ 

relabel under the purchaser’s NDC, 

including private labeling agreements, if 

that entity also is an HMO or other nonexcluded entity; and 

(12) Manufacturer coupons redeemed 

by any entity other than the consumer. 

(d) Prices excluded from best price. 

Best price excludes: 

(1) Any prices on or after October 1, 

1992, charged to the IHS, the DVA, a 

State home receiving funds under 38 

U.S.C. 1741, the DoD, the PHS, or a 

covered entity described in subsection 

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

prices charged to hospitals described in 

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

(2) Any prices charged under the FSS 

of the GSA; 

(3) Any prices paid by an SPAP; 

(4) Any depot prices (including 

Tricare) and single award contract 

prices, as defined by the Secretary, of 

any agency of the Federal Government; 


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(5) Any prices charged which are 

negotiated by a prescription drug plan 

under Part D of title XVIII, by any MA–

PD plan under Part C of such title with 

respect to covered Part D drugs, or by 

a qualified retiree prescription drug 

plan (as defined in section 1860D–

22(a)(2) of the Act) with respect to such 

drugs on behalf of individuals entitled 

to benefits under Part A or enrolled 

under Part B of Medicare; 

(6) Rebates or supplemental rebates 

paid to Medicaid States agencies under 

section 1927 of the Act; 

(7) Prices negotiated under a 

manufacturer’s sponsored Drug 

Discount Card Program; 

(8) Manufacturer coupons redeemed 

by a consumer; 

(9) Goods provided free of charge 

under a manufacturers’ patient 

assistance programs; 

(10) Free goods, not contingent upon 

any purchase requirement; 

(11) Nominal prices to certain entities 

as set forth in § 447.508 of this subpart; 

and 

(12) Bona fide service fees. 

(e) Further clarification of best price. 

(1) Best price shall be net of cash 

discounts, free goods that are contingent 

on any purchase requirement, volume 

discounts, customary prompt pay 

discounts, chargebacks, returns, 

incentives, promotional fees, 

administrative fees, service fees (except 

bona fide service fees), distribution fees, 

and any other discounts or price 

reductions and rebates, other than 

rebates under section 1927 of the Act, 

which reduce the price available from 

the manufacturer. 

(2) Best price must be determined on 

a unit basis without regard to special 

packaging, labeling or identifiers on the 

dosage form or product or package, and 

must not take into account prices that 

are nominal in amount as described in 

§ 447.510 of this subpart. 

(3) The manufacturer must adjust the 

best price for a rebate period if 

cumulative discounts, rebates, or other 

arrangements subsequently adjust the 

prices available from the manufacturer. 

§ 447.506 Authorized generic drugs. 

(a) Authorized generic drug defined. 

For the purposes of this subpart, 

authorized generic drug means any drug 

sold, licensed or marketed under an 

NDA approved by the FDA under 

section 505(c) of the FFDCA; and 

marketed, sold or distributed directly or 

indirectly under a different product 

code, labeler code, trade name, trade 

mark, or packaging (other than 

repackaging the listed drug for use in 

institutions) than the listed drug. 

(b) Inclusion of authorized generic 

drugs in AMP. A manufacturer holding 

title to the original NDA of the 

authorized generic drug must include 

the direct and indirect sales of this drug 

in its AMP. 

(c) Inclusion of authorized generic 

drugs in best price. A manufacturer 

holding title to the original NDA of an 

authorized generic drug approved under 

section 505(c) of the FFDCA must 

include the price of such drug in the 

computation of best price for the single 

source or innovator multiple source 

drug during the rebate period to any 

manufacturer, wholesaler, retailer, 

provider, HMO, non-profit entity, or 

governmental entity within the United 

States. 

§ 447.508 Exclusion from best price of 

certain sales at a nominal price. 

(a) Exclusion from best price. Sales of 

covered outpatient drugs by a 

manufacturer at nominal prices are 

excluded from best price when 

purchased by the following entities: 

(1) A covered entity described in 

section 340B(a)(4) of the PHSA, 

(2) An ICF/MR providing services as 

set forth in § 440.150 of this chapter; or 

(3) A State-owned or operated nursing 

facility providing services as set forth in 

§ 440.155 of this chapter. 

(b) Nonapplication. This restriction 

shall not apply to sales by a 

manufacturer of covered outpatient 

drugs that are sold under a master 

agreement under 38 U.S.C. 8126. 

§ 447.510 Requirements for 

manufacturers. 

(a) Quarterly reports. A manufacturer 

must report product and pricing 

information for covered outpatient 

drugs to CMS not later than 30 days 

after the end of the rebate period. The 

quarterly pricing report must include: 

(1) AMP, calculated in accordance 

with § 447.504 of this subpart; 

(2) Best price, calculated in 

accordance with § 447.505 of this 

subpart; 

(3) Customary prompt pay discounts, 

which shall be reported as an aggregate 

dollar amount which includes discounts 

paid to all purchasers in the rebate 

period; and 

(4) Prices that fall within the nominal 

price exclusion, which shall be reported 

as an aggregate dollar amount and shall 

include all sales to the entities listed in 

§ 447.508(a) of this subpart for the 

rebate period. 

(b) Timeframe for reporting revised 

AMP, best price, customary prompt pay 

discounts, or nominal prices. A 

manufacturer must report to CMS 

revisions to AMP, best price, customary 

prompt pay discounts, or nominal 

prices for a period not to exceed 12 

quarters from the quarter in which the 

data were due. 

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

manufacturer must report base date 

AMP to CMS for the first full calendar 

quarter following [publication date of 

the final rule]. 

(2) Any manufacturer’s recalculation 

of the base date AMP must only reflect 

the revisions to AMP as provided for in 

§ 447.504(e) of this subpart. 

(d) Monthly AMP. (1) Monthly AMP 

means the AMP that is calculated on a 

monthly basis. A manufacturer must 

submit a monthly AMP to CMS not later 

than 30 days after the last day of each 

prior month. 

(2) Calculation of monthly AMP. In 

calculating monthly AMP, a 

manufacturer may estimate the impact 

of its end-of-quarter discounts and 

allocate these discounts in the monthly 

AMPs reported to CMS throughout the 

rebate period. The monthly AMP should 

be calculated based on the methodology 

in § 447.504 of this subpart, except the 

period covered will be one month. 

Further, monthly AMP should be 

calculated based on the best data 

available to the manufacturer at the time 

of submission. 

(3) Prohibition against reporting 

revised monthly AMP. In calculating 

monthly AMP, a manufacturer should 

not report a revised monthly AMP later 

than 30 days after each month, except 

in exceptional circumstances authorized 

by the Secretary. 

(e) Certification of pricing reports. 

Each report submitted under paragraphs 

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

certified by one of the following: 

(1) The manufacturer’s Chief 

Executive Officer (CEO); 

(2) The manufacturer’s Chief 

Financial Officer (CFO); or 

(3) An individual who has delegated 

authority to sign for, and who reports 

directly to, the manufacturer’s CEO or 

CFO. 

(f) Recordkeeping requirements. (1) A 

manufacturer must retain records 

(written or electronic) for 10 years from 

the date the manufacturer reports data 

to CMS for that rebate period. The 

records must include these data and any 

other materials from which the 

calculations of the AMP, the best price, 

customary prompt pay discounts, and 

nominal prices are derived, including a 

record of any assumptions made in the 

calculations. The 10-year time frame 

applies to a manufacturer’s quarterly 

and monthly submissions of pricing 

data, as well as any revised quarterly 

pricing data subsequently submitted to 

CMS. 


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(2) A manufacturer must retain 

records beyond the 10-year period if 

both of the following circumstances 

exist: 

(i) The records are the subject of an 

audit or of a government investigation 

related to pricing data that are used in 

AMP, best price, customary prompt pay 

discounts, or nominal prices of which 

the manufacturer is aware. 

(ii) The audit findings or investigation 

related to the AMP, best price, 

customary prompt pay discounts, or 

nominal price have not been resolved. 

(g) Data reporting format. All product 

and pricing data, whether submitted on 

a quarterly or monthly basis, must be 

submitted to CMS in an electronic 

format. 

§ 447.512 Drugs: Aggregate upper limits of 

payment. 

(a) Multiple source drugs. Except for 

brand name drugs that are certified in 

accordance with paragraph (c) of this 

section, the agency payment for 

multiple source drugs must not exceed, 

in the aggregate, the amount that would 

result from the application of the 

specific limits established in accordance 

with § 447.514 of this subpart. If a 

specific limit has not been established 

under § 447.514 of this subpart, then the 

rule for ‘‘other drugs’’ set forth in 

paragraph (b) applies. 

(b) Other drugs. The agency payments 

for brand name drugs certified in 

accordance with paragraph (c) of this 

section and drugs other than multiple 

source drugs for which a specific limit 

has been established under § 447.514 of 

this subpart must not exceed, in the 

aggregate, payment levels that the 

agency has determined by applying the 

lower of the—

(1) Estimated acquisition costs plus 

reasonable dispensing fees established 

by the agency; or 

(2) Providers’ usual and customary 

charges to the general public. 

(c) Certification of brand name drugs. 

(1) The upper limit for payment for 

multiple source drugs for which a 

specific limit has been established 

under § 447.514 of this subpart does not 

apply if a physician certifies in his or 

her own handwriting that a specific 

brand is medically necessary for a 

particular recipient. 

(2) The agency must decide what 

certification form and procedure are 

used. 

(3) A checkoff box on a form is not 

acceptable but a notation like ‘‘brand 

necessary’’ is allowable. 

(4) The agency may allow providers to 

keep the certification forms if the forms 

will be available for inspection by the 

agency or HHS. 

§ 447.514 Upper limits for multiple source 

drugs. 

(a) Establishment and issuance of a 

listing. 

(1) CMS will establish and issue 

listings that identify and set upper 

limits for multiple source drugs that 

meet the following requirements: 

(i) The FDA has rated two or more 

drug products as therapeutically and 

pharmaceutically equivalent in their 

most current edition of ‘‘Approved Drug 

Products with Therapeutic Equivalence 

Evaluations’’ (including supplements or 

in successor publications), regardless of 

whether all such formulations are rated 

as such and only such formulations 

shall be used when determining any 

such upper limit. 

(ii) At least two suppliers list the 

drug, which has met the criteria in 

paragraph (a)(1)(i) of this section, based 

on all listings contained in current 

editions (or updates) of published 

compendia of cost information for drugs 

available for sale nationally. 

(2) CMS publishes the list of multiple 

source drugs for which upper limits 

have been established and any revisions 

to the list in Medicaid program 

issuances. 

(b) Specific upper limits. The agency’s 

payments for multiple source drugs 

identified and listed periodically by 

CMS in Medicaid program issuances 

must not exceed, in the aggregate, 

payment levels determined by applying 

for each drug entity a reasonable 

dispensing fee established by the State 

agency plus an amount established by 

CMS that is equal to 250 percent of the 

average manufacturer price (as 

computed without regard to customary 

prompt pay discounts extended to 

wholesalers) for the least costly 

therapeutic equivalent. 

(c) Ensuring a drug is for sale 

nationally. To assure that a drug is for 

sale nationally, CMS will consider the 

following additional criteria: 

(1) The AMP of a terminated NDC will 

not be used to set the Federal upper 

limit (FUL) beginning with the first day 

of the month after the actual termination 

date reported by the manufacturer to 

CMS. 

(2) Except as set forth in paragraph 

(c)(3) of this section, in establishing the 

FUL, the AMP of the lowest priced 

therapeutically and pharmaceutically 

equivalent drug that is not less than 30 

percent of the next highest AMP will be 

used to establish the FUL. 

(3) When the FUL group includes 

only the innovator single source drug 

and the first new generic or authorized 

generic drug enters the market, the 

criteria in paragraph (c)(2) of this 

section will not apply. 

§ 447.516 Upper limits for drugs furnished 

as part of services. 

The upper limits for payment for 

prescribed drugs in this subpart also 

apply to payment for drugs provided as 

part of skilled nursing facility services 

and intermediate care facility services 

and under prepaid capitation 

arrangements. 

§ 447.518 State plan requirements, 

findings and assurances. 

(a) State plan. The State plan must 

describe comprehensively the agency’s 

payment methodology for prescription 

drugs. 

(b) Findings and assurances. Upon 

proposing significant State plan changes 

in payments for prescription drugs, and 

at least annually for multiple source 

drugs and triennially for all other drugs, 

the agency must make the following 

findings and assurances: 

(1) Findings. The agency must make 

the following separate and distinct 

findings: 

(i) In the aggregate, its Medicaid 

expenditures for multiple source drugs, 

identified and listed in accordance with 

§ 447.514(a) of this subpart, are in 

accordance with the upper limits 

specified in § 447.514(b) of this subpart; 

and 

(ii) In the aggregate, its Medicaid 

expenditures for all other drugs are in 

accordance with § 447.512 of this 

subpart. 

(2) Assurances. The agency must 

make assurances satisfactory to CMS 

that the requirements set forth in 

§§ 447.512 and 447.514 of this subpart 

concerning upper limits and in 

paragraph (b)(1) of this section 

concerning agency findings are met. 

(c) Recordkeeping. The agency must 

maintain and make available to CMS, 

upon request, data, mathematical or 

statistical computations, comparisons, 

and any other pertinent records to 

support its findings and assurances. 

§ 447.520 FFP: Conditions relating to 

physician-administered drugs. 

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

has not required the submission of 

claims using codes that identify the 

drugs sufficiently for the State to bill a 

manufacturer for rebates. 

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

require providers to submit claims for 

single source, physician-administered 

drugs using Healthcare Common 

Procedure Coding System codes or NDC 

numbers in order to secure rebates. 

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

require providers to submit claims for 

the 20 multiple source physicianadministered drugs identified by the 


hsrobinson on PROD1PC76 with PROPOSALS3
77200 Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Proposed Rules 

Secretary as having the highest dollar 

value under in the Medicaid program 

using NDC numbers in order to secure 

rebates. 

(b) As of January 1, 2007, a State must 

require providers to submit claims for 

physician-administered single source 

drugs and the 20 multiple source drugs 

identified by the Secretary using NDC 

numbers. 

(c) A State that requires additional 

time to comply with the requirements of 

this section may apply to the Secretary 

for an extension. 

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program) 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program.) 

Dated: August 10, 2006. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: October 16, 2006. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 06–9792 Filed 12–15–06; 4:51 pm] 

BILLING CODE 4120–01–P 


hsrobinson on PROD1PC76 with PROPOSALS3