We reported yesterday that the Centers for Medicare & Medicaid Services (CMS) Final Average Manufacturer Price (AMP) Rule (the “Final Rule”) was released and will be published in the Federal Register next week.  If you are still reading, despite the fact that we included “Technical Highlights” in today’s title, we will assume a certain level of familiarity with the Medicaid Drug Rebate Program in our discussion below.  However, although the issues addressed in the Final Rule are technical, the business implications are very real, and the Final Rule is significant to all manufacturers with marketed drug products participating in the Medicaid Drug Rebate Program (or who hope to participate someday).

Those of you who have been anxiously awaiting a final AMP rule for years now will be pleased to learn that some long-standing questions raised by CMS’s controversial 2012 proposed AMP rule have been answered (and, of course, some new questions have been raised).  Some highlights of the Final Rule, in no particular order:

• “Presumed inclusion” in AMP is okay. CMS was persuaded that this approach to AMP calculation is appropriate and backed down from its 2012 proposal that manufacturers “build up” AMP based on actual sales.
• Sales “to” 340B covered entities are out of AMP and Best Price (BP) (manufacturers do not need to be their brother’s keeper and confirm that 340B purchases were proper under the program as a condition to excluding, as was proposed). CMS also specifically clarifies in the preamble that 340B subceiling prices may be BP-excluded.
• U.S. territories are in the calculations, beginning in 2017. Historically, “States” and “United States” have been defined to include the 50 states and the District of Columbia.  CMS has finalized its proposal to extend these definition to include Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands, and American Samoa. This change will require manufacturers to pay rebates on utilization of their covered outpatient drugs dispensed to Medicaid beneficiaries in the territories.  In addition, manufacturers would have to include sales to AMP- and BP-eligible entities located in the territories in those respective calculations.  This change may have significant systems as well as pricing policy implications that manufacturers should consider carefully.  Among other things, manufacturers with Medicare Part B drugs should note that there is potential spillover impact on the Average Sales Price calculations.
• Manufacturers will be permitted to restate base date AMP to conform to ACA changes (but this will be a very limited availability).
• The “line extension” language has deleted the proposed references to FDA chemical types (this has possible implications for fixed dose combination products etc.). Note that CMS specifically requests additional comments “on the definition of line extension drug and the identification of new formulations” and indicated possible future rule making on this issue. CMS further states that “at this time, manufacturers are to rely on the statutory definition of line extension at section 1927(c)(2)(C) of the Act, and where appropriate, are permitted to use reasonable assumptions in their determination of whether their drug qualifies as a line extension drug.”
• Whether a “5i” drug is generally distributed through retail community pharmacies (RCPs) will not be a 90/10 calculation (as initially proposed) but rather 70/30. This may make more drugs eligible for the 5i AMP calculation.  In addition, unlike under the 2012 proposal, manufacturers will not be required to make the 5i status determination separately each reporting period.  Rather, CMS has left some flexibility to “use a smoothing process that could address the concerns raised about the possibility that the AMP will shift between AMP and AMP for 5i drugs not generally dispensed through retail community pharmacies” and indicated manufacturers may also make reasonable assumptions.
• Specialty, home health and home infusion pharmacies are included in AMP “but only to the extent that they meet the definition of retail community pharmacy at section 1927(k)(10) of the Act, which specifically excludes entities that dispense medications primarily through the mail. It is not our intention that pharmacies that dispense medications primarily through the mail would meet the statutory definition” of RCP. But then CMS further states it does: “not believe that a retail community pharmacy must have a ‘brick and mortar’ store front. Nowhere in section 1927 of the Act does it specify that a pharmacy must maintain such a store front to be considered [an RCP]”.
• CMS states in the preamble that “with the presumed inclusion approach manufacturers may make certain reasonable assumptions when calculating AMP, even when such assumptions are based upon a small percentage of sales of such drugs to wholesalers that distribute to retail community pharmacies or sales directly to retail community pharmacies.”  However, the Final Rule does not address how to calculate AMP for drugs that are not “5i” but have no AMP-eligible sales.
• The list of exclusions from the 5i AMP calculation has been significantly expanded (among other things, the rule is clear that AMP cannot be reduced by 340B/FSS prices etc.).
• The AMP smoothing methodology has been included in the regulations and clarifies (as has been previously indicated by CMS) that it includes current month. Also, in the Final Rule preamble, CMS acknowledges that smoothing ineligible sales (so-called “factoring”) may be reasonable, and indicates it may permit, but not require such smoothing (similar to its previous position with respect to ASP).
• BP is clarified to not be reduced by “returns”.
• CMS significantly revised language regarding patient coupons/vouchers/free goods etc. that may be excluded from AMP and BP.
• Sales to patients are clearly excluded from AMP and BP.
• Whether a drug has a pediatric indication (that may qualify it for the lower pediatric rebate) may be indicated “in an explanation elsewhere in the labeling that makes it clear that the drug is for use only in a pediatric age group, or a subset of this group” – the pediatric designation need not just be in the “Indications and Use” section of the label, as initially proposed by CMS in 2012.
• Certain civil monetary penalty provisions are deleted (e.g., those that could have been read to impose automatic penalties for failure to timely report). This does not mean penalties are not available through the proper channels, just that they are not automatic.
• CMS includes some revisions to state reimbursement/actual acquisition cost provisions (particularly with respect to Medicaid reimbursement to 340B covered entities).

There is a significant amount of interpretive preamble attached to the regulations, and the above is not an all-inclusive list of regulatory changes or issues.   We hope to provide additional insight in future posts and/or client alerts.  Moreover, while we have highlighted some key issues, this is not a comprehensive discussion of the legal ramifications of and/or how to implement any of these provisions.  Drug and biologic manufacturers should review the Final Rule in detail.  Particular attention should be paid to, among other things, possible impact on:

• Drug pricing and discount strategies;
• Government pricing methodologies and “reasonable assumptions” (ensuring proper document version control and archival of methodologies is critical as the Final Rule is implemented in your organization);
• Medicaid reimbursement;
• Patient programs; and
• Overall compliance program and policies and procedures.

Due thought should also be given to submitting additional comments to CMS (particularly with respect to the line extension issues).  Practical considerations such as system updates and personnel and resource allocation are also important at this time for manufacturers.

In addition, other industry stakeholders such as health care providers, pharmacies, home health entities, pharmacy benefit managers, and health plans should familiarize themselves with the key provisions in the Final Rule insofar as they may impact their dealings with affected manufacturers.

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