On February 2, 2012, CMS issued proposed regulations that further refine and define how pharmaceutical manufacturers must calculate Medicaid drug rebates in the wake of health care reform (the Proposed Rule).  Specifically, the Proposed Rule changes the definition of “bona fide services fee,” which is a key component in determining a manufacturer’s Medicaid rebate liability.  While these regulations certainly will affect the operations of pharmaceutical manufacturers, they will also impact those who do business with them.  Comments on the Proposed Rule are due April 2, 2012. 

Generally, under the Medicaid Drug Rebate Program, pharmaceutical manufacturers calculate and report to CMS the Average Manufacturer’s Price (AMP) for their outpatient drugs.  They also calculate and report to CMS the “Best Price” they charged for those drugs, i.e., their lowest price to any commercial customer.  Depending on specific circumstances and the type of drugs involved, the Medicaid drug rebate that pharmaceutical manufacturers must pay to the 51 State Medicaid Programs is either the difference between the AMP and the Best Price for that specific drug and dosage, or is tied to a specific percentage off of the calculated AMP.   The Affordable Care Act (ACA) changed how AMP and Best Price must be calculated, and the Proposed Rule expands upon and implements those changes.  CMS estimates that the changes made to the Medicaid Drug Rebate Program by ACA and the Proposed Rule will result in a net savings of $17.7 billion for federal and state governments, over a four-year period.

The Proposed Rule is not CMS’s first attempt to define bona fide services fees for AMP and Best Price purposes.  In July 2007, CMS issued a Final Rule implementing the Medicaid pharmacy provisions of the Deficit Reduction Act of 2005 (the 2007 Final Rule), which provided guidance on how pharmaceutical manufacturers should calculate and report AMP and Best Price, including definitions for the types of bona fide service fees that were to be excluded.  However, in 2010, the ACA redefined AMP in a manner that conflicted with the 2007 Final Rule.  CMS therefore withdrew the provisions of the 2007 Final Rule relating to AMP in November 2010, which left manufacturers with nothing but the legislative definitions in the ACA and no substantive regulations to define AMP.  The Best Price provisions remained intact.

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