Medicaid Drug Rebate Program: CMS addresses authorized generics, drug category narrow exception in manufacturer releases 112 and 113

Hogan Lovells

The Centers for Medicare & Medicaid Services (CMS) recently issued two manufacturer releases. The first provides further information regarding the treatment of sales of authorized generic drugs in the Average Manufacturer Price calculation. The second highlights compliance issues related to drug category and other product attributes, including with respect to the narrow exception process, and calls for manufacturers to contact CMS with any corrections within 30 days of the issuance of this release.

The Centers for Medicare & Medicaid Services (CMS) recently issued two Medicaid Drug Rebate Program Notices (also called “manufacturer releases”), which we discuss below:

  • No. 112 (link): “Further Recommendations on Calculation of Average Manufacturer Price (AMP) of Brand Name Drug and Authorized Generic Drugs,” which addresses the scenario where the same manufacturer sells the brand drug and the authorized generic.

  • No. 113 (link): “Compliance with drug pricing and drug product information under the Medicaid Services Investment and Accountability Act of 2019,” which highlights compliance issues related to drug category and other product attributes and calls for manufacturers to contact CMS with any corrections within 30 days of the issuance of this release.

Release 112: CMS addresses authorized generic AMP treatment for a second time

To put this release into context, we first summarize recent developments regarding the AMP treatment of authorized generic drugs (AGs).

Background — The October 1, 2019 amendment to the Medicaid statute

The “Continuing Appropriations Act, 2020, and Health Extenders Act of 2019” (link), which became effective October 1, 2019, amended the Medicaid statute to no longer permit the inclusion of sales of AGs in the AMP of the related brand drug, by making the following changes:

§1396r–8. Payment for covered outpatient drugs

(k) Definitions

(1) Average manufacturer price

(C) Inclusion Exclusion of section 505(c) drugs

In the case of a manufacturer that approves, allows, or otherwise permits any drug of the manufacturer to be sold under a new drug application the manufacturer’s new drug application approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act [21 U.S.C. 355(c)], such term shall be inclusive exclusive of the average price paid for such drug by wholesalers for drugs distributed to retail community pharmacies.

(11) Wholesaler

The term "wholesaler" means a drug wholesaler that is engaged in wholesale distribution of prescription drugs to retail community pharmacies, including (but not limited to) manufacturers, repackers, distributors, own-label distributors, private-label distributors, jobbers, brokers, warehouses (including manufacturer's and distributor's warehouses, chain drug warehouses, and wholesale drug warehouses) independent wholesale drug traders, and retail community pharmacies that conduct wholesale distributions.

The Best Price (BP) definition was left unchanged, and continues to require inclusion of AG sales in the BP of the related brand drug, by stating that BP “shall be inclusive of the lowest price for such authorized drug available from the manufacturer during the rebate period to any manufacturer, wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States, [subject to other exclusions].” 42 U.S.C. § 1396r-8(c)(1)(C)(ii)(IV) (emphasis added).

CMS Release No. 111 — AMP and primary/secondary AG arrangements

CMS issued Release No. 111 (link) on October 17, 2019, to address so-called primary/secondary AG arrangements, which also are contemplated in Medicaid regulation (see 42 C.F.R. § 447.506):

  • The “primary manufacturer” of an AG is the manufacturer that holds the New Drug Application (NDA) of the AG (and the related brand drug).

  • The “secondary manufacturer” of an AG is the manufacturer that is authorized by the primary manufacturer to sell the AG (to the market), but does not hold the NDA.

In this type of arrangement, the primary (or brand) manufacturer typically sells the brand drug to the market, and sells the AG to the secondary manufacturer, which in turn sells the AG to the market.

Release No. 111 states that, following the statutory amendment, “a primary manufacturer that sells the authorized generic version of the brand drug to the secondary manufacturer cannot include the price of the transfer sale of the authorized generic to the secondary manufacturer in its calculation of AMP.”

When read together with the Medicaid statute and regulation (to the extent not superseded by the statutory amendment), this appears to call for the following approach:

  • The AMP for the brand drug reported by the primary manufacturer is to be based solely on AMP-eligible sales of the brand drug, excluding sales of the AG by the primary manufacturer to the secondary manufacturer.

  • The BP for the brand drug reported by the primary manufacturer is to be based on BP-eligible sales of the brand drug, including sales of the AG by the primary manufacturer to the secondary manufacturer.

CMS did not address the price reporting obligations of the secondary manufacturer in Release No. 111, but the Medicaid regulation provides that the secondary manufacturer “must provide a rebate based on its sales of authorized generics, and must calculate AMP and best price, consistent with the requirements specified in” the AMP and BP sections of the Medicaid regulation. In other words, the secondary manufacturer reports an AMP and BP for the AG which is based on “its sales” of the AG.

CMS Release No. 112 — AMP where the same manufacturer sells both the brand drug and the AG without involvement of a secondary manufacturer

Release No. 111 did not address how AMP should be reported for the brand drug under a second common type of AG arrangement, where the same (typically brand) manufacturer sells both the brand drug and the related AG to the market, without the involvement of a secondary manufacturer. Arguably, the Medicaid statute, as amended, is open to multiple readings in that regard.

AMP

CMS has now expressed its view in Release No. 112 that the amended statute requires “that the AMP calculation for such brand drug be determined excluding the average price of the authorized generic paid by wholesalers for drugs distributed to retail community pharmacies and manufacturers can no longer be considered wholesalers,” so that prices for the AG must be “excluded from the calculation of AMP for the brand drug,” with the result that “a separate AMP should be calculated for each drug product – that is, one AMP for the brand drug, and one AMP for the authorized generic product, and the AMP for the brand drug should exclude sales of the authorized generic product.”

The statutory change became effective on October 1, 2019, but Release No. 112 was not issued until May 18, 2020. This means affected manufacturers will have to determine whether to apply the approach set forth in Release No. 112 retrospectively, back to October 1, 2019, or prospectively only.

BP

In keeping with the BP provision in the Medicaid statute, which — as noted above — was not amended in October 2019, CMS states in Release No. 112 that “best price for both the brand product and the authorized generic would be the same, and be based on sales of both products.”

Muddying the waters: CMS discusses “affiliated companies”

In addition to “the situation when a manufacturer is the same for both the brand drug and authorized generic version,” which we have summarized above, Release No. 112 also discusses “the situation

when the drugs are being manufactured by different, but affiliated companies,” such as when “the manufacturer making the authorized generic might be a subsidiary of the brand name company, or the two might simply have a corporate or business relationship.” CMS does not further explain the scope of the affiliate relationship, or what it means to “simply” have a “corporate” or “business” relationship — but Release No. 112 seemingly calls for the same AMP and BP treatment as in the “same manufacturer” situation, namely the reporting of a single AMP and a single BP for each of the brand drug and the AG.

This raises a number of questions, including:

  • How is a primary/secondary arrangement (as described above) distinguishable from one where two entities are “affiliated” or have a “business” or “corporate” relationship, when it is unclear what constitutes such a relationship?

  • The AMP and BP approach in Release No. 112 potentially requires sharing of sales and other data across entities. On what basis, and under what authority, is CMS seeking to impose such information sharing requirements, which CMS has affirmatively declined to require in other contexts, such as with respect to the line extension alternative rebate formula?

  • CMS declares that it “plans to address the calculation of AMP for the brand drug and the authorized generic version in more detail through future rulemaking” and is “advising” manufacturers to adopt the approach set forth in Release No. 112, which itself is entitled “further recommendations” on AMP reporting. To what extent is the “advice” in Release No. 112 legally binding, particularly where it may conflict with a manufacturer’s obligations under other legal regimes?

CMS reiterates 2007 guidance refusing to review reasonable assumptions

In its conclusion, Release No. 112 repeats language from Release No. 78, dated June 2007 (link), stating that “we request that manufacturers not submit their [reasonable] assumptions to CMS” and noting that, “[s]hould a manufacturer disregard these instructions and submit such assumptions, they will not be reviewed and their receipt should not be considered as acquiescence by CMS to the submitted assumptions.” Manufacturers will have to determine whether these “instructions” are meant to merely discourage routine or periodic submissions of reasonable assumptions, rather than outreach to CMS as to specific questions or approaches — particularly when, ironically, Release No. 112 itself states that it was issued after “CMS received questions from the industry.”

Release 113: Guidance regarding the Medicaid Services Investment and Accountability Act of 2019

The Medicaid Services Investment and Accountability Act of 2019 (link), which became effective on April 18, 2019, amended the Medicaid statute in a number of ways, such as by:

  • Revising the definitions of Single Source Drug (S drug) and Innovator Multiple Source Drug (I drug). As revised, these definitions reference covered outpatient drugs marketed “under a new drug application” instead of, as before, drugs marketed “under an original new drug application.” In addition, the following qualification was added to the end of both definitions: “… unless the Secretary determines that a narrow exception applies (as described in section 447.502 of title 42, Code of Federal Regulations (or any successor regulation)).”

  • Imposing additional civil monetary penalties and other sanctions in connection with the “misclassification by the manufacturer of a covered outpatient drug” and “knowingly providing false … information related to drug pricing, drug product information, and data related to drug pricing or drug product information.”

  • Granting the Secretary of Health and Human Services authority to, among other things, “[c]orrect the misclassification, using drug product information provided by the manufacturer, on behalf of the manufacturer” if the manufacturer fails to timely correct the misclassification of the drug after notice from the Secretary.

The narrow exception process

The category assigned to a drug is significant because, among other things, an S or I drug is subject to a higher Medicaid rebate than a Noninnovator Multiple Source Drug (N drug). The categorization of S/I versus N hinged on the words “original NDA” in the pre-2019 statutory definitions of S and I drugs. But Congress did not define the phrase “original NDA,” and, when CMS adopted the current Medicaid regulation, which became effective on April 1, 2016, it considered an “original NDA” to essentially be any NDA, as distinguished from an abbreviated NDA (ANDA). But, in the 2016 regulation, CMS provided for a “narrow exception” process for “very limited circumstances where … certain drugs [approved under an NDA] might be more appropriately treated as if they were approved under an ANDA and classified as a noninnovator multiple source drug.” 81 Fed. Reg. 5170, 5191 (Feb. 1, 2016). CMS provided details regarding the narrow exception process in Release No. 98, which was issued on May 2, 2016 (link).

What about pre-April 1, 2016 periods?

The “original NDA” language had been included in the Medicaid statute since the inception of the Medicaid Drug Rebate Program, and CMS did not offer an interpretation of that phrase in regulation prior to 2016.

Nevertheless, Release No. 113 now states:

The [2016 regulation] did not, however, excuse manufacturers from their obligation to correctly report drugs approved under an NDA as either S or I drugs prior to the effective date of the 2016 final rule [i.e., April 1, 2016]. Notwithstanding CMS’s articulation of its interpretation of the statutory language and its admonition that the narrow exception policy is prospective only, several manufacturers have expressed disagreement with CMS’s interpretation prior to the final rule. Many of those manufacturers have misreported drugs marketed under an NDA as N drugs for periods prior to 2016 and have failed to correct the reporting. (Emphasis added.)

CMS’s strong stance may come as a surprise, particularly in light of the March 23, 2020 opinion in STI Pharma, LLC v. Azar et al., No. 1:2018cv01231 - Document 26 (D.D.C. 2020). The U.S. District Court for the District of Columbia held that a drug as to which CMS had granted a narrow exception request was appropriately categorized as an N drug for pre-2016 periods. The opinion is, of course, limited to the specific facts regarding the drug in question, including the basis on which CMS granted the narrow exception request for that particular drug, but its analysis — including of administrative law principles — is instructive.

Examples of “misclassification”

After reciting the penalty provisions newly added by the Act in 2019, Release No. 113 describes “some scenarios that may have led to an NDC being misclassified or misreported, in the past or currently,” including the following:

  • CMS grants a manufacturer’s request for a narrow exception: If CMS grants a request for a narrow exception, the NDC should be classified as an N drug beginning with second quarter 2016, that is, the effective date of the final rule. Prior to the second quarter of 2016, the NDC should be classified as either an S drug or I drug, as applicable. If the NDC is not already classified as either an S or I drug, as appropriate, for those prior periods, the manufacturer should … correct the misclassification.”

  • CMS denies a request for a narrow exception: If CMS denies a request for a narrow exception, the NDC should be classified as an S or I drug, as applicable, for the entire history of the NDC’s status as a covered outpatient drug in the MDRP. If it is not, the manufacturer should … correct the misclassification.”

More broadly, Release No. 113 states that, absent a pending or approved narrow exception request, “[a] misclassified NDC for purposes of this guidance is any NDC produced or marketed under an NDA or licensed under a [biologics license application (BLA)] that is currently or was previously reported … as an N drug.”

Examples of “misreporting”

In addition to focusing on NDA-approved drugs that CMS views are inappropriately reported as N drugs, CMS highlights issues with other product attributes:

  • Covered Outpatient Drug (COD) status field — CMS has validated this field by reference to FDA data since December 2018, but for prior periods, CMS has identified errors, such as assignment of “COD status ‘01’ which represents an [ANDA] along with an FDA application number reflecting an NDA approval, not an ANDA approval.”

  • Market Date field — CMS notes that this field is defined as “the earliest date the drug was first marketed under the application number by any labeler” (emphasis original). While acknowledging that a different Market Date definition applied for N drugs prior to February 2017, CMS is requiring manufacturers to revise the field if needed to comport with the current definition.

  • Baseline AMP — Because the Market Date is used to determine the Baseline AMP quarter (and therefore the baseline AMP figure), “accurate market date reporting is imperative in order to ensure that correct Baseline AMP values are established.”

CMS expects manufacturers to contact CMS to request corrections within 30 days of issuance of Release No. 113

CMS states that “manufacturers that have reported incorrect drug category information” and that either have not responded to related CMS inquiries or have not been contacted by CMS “should contact CMS within 30 days of the date of this guidance.”

CMS also states that the Act “grants CMS the authority to correct the misclassification of a drug if the manufacturer has received notice and failed to take steps to correct the classification” and threatens that “CMS can and will do so for all appropriate quarters.” This raises the question as to which quarters are the “appropriate quarters.”

Release No. 113 also provides that manufacturers “should” contact CMS to correct the other highlighted reporting issues, but does not refer to the 30 day deadline in those instances.

Bottom line

The Act may initially have been motivated by concern with misreporting of drug category information, but, as ultimately passed by Congress, is broader in scope, referring among other things to “incorrect drug product information.” Based on not only the substance but also the tone of Release No. 113, CMS appears to embrace the Act’s potentially broad reach and the related penalty and enforcement provisions. It may be advisable for manufacturers to review their prior communications with CMS regarding these topics, as well as the product attributes maintained in the product master (or a similar system) and on file with Medicaid.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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