CMS wants to include a broader array of pharmacy benefit manager price concessions in calculating Medicaid average manufacturer prices for reimbursing outpatient prescription drugs.

The move, if implemented, could force manufacturers to look more closely at how PBM discounts are allocated. The requirement could prove challenging, since CMS is unsure whether tracking such discounts is even "operationally feasible" for manufacturers, despite its view that the discounts should be taken into account in AMPs.

In proposed regulations published Dec. 22, 2006, in the Federal Register, CMS outlines its thinking on PBMs and how their role in the pharmaceutical industry has evolved since Medicaid's drug rebate program was enacted in 1990.

The rules would implement provisions of the 2005 Deficit Reduction Act, which revise Medicaid upper payment limits for multiple source drugs to be based on average manufacturer prices.

The rules also contain some clarifications of the Medicaid drug "best price" formulas.

Much of the rules centers on what types of price concessions and buyers are part of the retail pharmacy market, since AMPs are intended to reflect purchases of outpatient drugs by Medicaid recipients.

Comments are due Feb. 20. Congress directed that CMS publish a final AMP rule by July 1, 2007.

The federal upper payment limits are aimed at restraining spending for drugs dispensed in the retail setting, and traditionally have drawn upon prices manufacturers charge to wholesalers for drugs in the retail channel.

Based on these principles, CMS has previously confined its inclusion of PBM price concessions to situations where the PBM acts as a wholesaler. However, the agency believes that there may be other types of "indirect" price concessions made to PBMs that in effect reduce the net price at retail - and thus should be taken into account for AMPs.

CMS buttresses its position by citing two reports that highlighted uncertainty about how PBM price concessions should be treated for Medicaid calculations.

A February 2005 Government Accountability Office ¹ analysis, "Medicaid Drug Rebate Program - Inadequate Oversight Raises Concerns About Rebates Paid to States," recommended that CMS provide clearer guidance on manufacturer price determination methods, including the treatment of PBM negotiated concessions.

More recently, the HHS Office of the Inspector General noted that manufacturers variously include all, none or some PBM rebates and fees in AMP calculations. OIG's report, "Determining Average Manufacturer Prices for Prescription Drugs under the Deficit Reduction Act of 2005," similarly urged clearer guidance from CMS (² Also see "Too Much Leeway? OIG Gives CMS Broad Advice For Medicaid Pricing Reg" - Pink Sheet, 5 June, 2006., p. 23).

Noting that PBMs have taken on a "significant role in drug distribution" over the past decade and a half, CMS remarks in its preamble to the proposed rules that "a major factor contributing to the determination of AMP is the treatment of PBMs."

The agency says that "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, and 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 the pharmacies."

Excluding all PBM price concessions could simplify price calculations but "could result in an artificial inflation of AMP." Thus, CMS proposes 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."

Acknowledging the challenge presented by that goal, CMS invites "comments on whether this proposal is operationally feasible."

CMS also looks to its understanding of congressional intent for AMP. "We recognized 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," the agency says, but adds that "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."

In addition to the operational difficulty of tracking PBM price concessions, the agency specifically asks for comments on how to define and "how best to measure" the price concessions that should be included in AMP, and how such price concessions should be reported to CMS.

The proposed rules would implement provisions of the Deficit Reduction Act that sets federal upper payment limits for multiple source drugs at 250 percent of the lowest average manufacturer price for drugs in a group. About 600 drugs are subject to the limits, accounting for an estimated 8.3 percent of Medicaid outpatient drug spending.

In the deficit act, Congress required that CMS begin publicly disclosing AMPs by July 1, 2006, even though the agency had until July 1, 2007 to issue rules updating the AMP reporting requirements.

CMS has withheld AMPs from disclosure, saying the information could be misleading if published before CMS sets final policies on calculating AMPs.

Late Spring Posting Of AMPs Now Planned

CMS says now that it expects to begin making AMPs "available to the states and public in late spring."

Manufacturers will have to report AMPs monthly for purposes of setting payment limits for states, and CMS plans to post those to an agency Web site on a monthly basis.

As before, manufacturers will have to report quarterly AMPs that are used to calculate drug rebate amounts that manufacturers pay to states.

All of the changes in the proposed rules would save about $8.4 billion in state and federal spending over five years, a figure in line with projections made during congressional debate.

A decision to include in AMPs the sales to PBMs, or other groups such as mail-order pharmacies or nursing facilities, could have a mixed impact on stakeholders.

Excluding more organizations reduces the number of transactions manufacturers must track and simplifies their calculations.

In addition, a narrower definition of what types of sales are part of the definition of a retail class of trade may tend to raise AMPs by excluding some discounted prices, which in turn tends to raise the upper limits on payments to pharmacies.

However, higher AMPs also tend to increase drug rebate liabilities for manufacturers, CMS points out. For innovator drugs, rebates to state Medicaid programs are based on 15 percent of AMP or the difference between the AMP and the "best price" to private payers, whichever is larger.

Again, "based in part on the OIG and GAO reports," CMS defines the retail pharmacy class of trade to mean "that sector of the drug marketplace ... which dispenses drugs to the general public and which includes all price concessions related to such goods and services."

Thus, it proposed to exclude sales to nursing home pharmacies from AMP calculations, because these pharmacies do not dispense prescriptions to the general public.

Mail-Order Sales Included In AMP

However, the agency proposes to include sales to mail-order pharmacies, an approach that has been opposed by pharmacy and drug store groups on the basis that mail-order discounts often are not available to retail pharmacies and do not reflect dispensing costs (³ Also see "Medicaid Reform Bill Is A Draw For Pharma; Pharmacy Continues Its Fight" - Pink Sheet, 2 January, 2006., p. 25).

"We considered limiting mail-order prices to only those prices that are offered to all pharmacies under similar terms and conditions," the agency says. "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 [of AMP]."

Even if only some mail-order prices were to be included in AMP, "retail pharmacies may not be able to meet the terms and conditions ... to be eligible for some manufacturer price concessions," CMS adds.

Sales through the Medicare Part D program and state pharmaceutical assistance programs also are subject to AMP, CMS clarifies. Medicare drug plans and SPAPs are insurers for drugs sold at retail and "these sales are included in AMP to the extent the sales are to an entity included in the retail pharmacy class of trade."

As under current Medicaid policy, sales to government programs that directly purchase and provide prescription drugs (rather than serving as third-party insurers like Part D plans) are excluded from AMPs. These include sales to the Department of Veterans Affairs, military depot drug prices, and the Indian Health Service. These purchasers act more like health care providers than like a part of the retail class trade.

As specified in the deficit act, the proposed rules would direct that prompt pay discounts be excluded from AMP, a change that has the effect of raising AMPs.

The deficit act did not define customary prompt pay discounts, however. CMS proposes 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."

Prompt Pay Discounts Placed At 2%

In trying to gauge the impact of the change, CMS notes that manufacturers have reported "informally" that "customary prompt pay discounts are generally about 2 percent," but CMS has not found independent confirmation of that figure, nor does it know what proportion of sales qualify for the discount.

Nonetheless, to give a rough measure of the provision's impact, CMS says it uses this "limited information" to estimate that removing the discounts from AMP "would cost manufacturers up to $160 million (2 percent of $8 billion in repayment payments annually)."

In a Dec. 15, 2006, bulletin to drug manufacturers discussing the proposed rules, CMS notes that they are to begin excluding prompt pay discounts from AMPs beginning in January, even though the agency "expects to address how to make this calculation in the final regulation" due by July.

In "the interim, we suggest that drug manufacturers make reasonable assumptions consistent with the statutory provisions."

Congress' treatment of prompt pay discounts is an exception to the Medicaid program's general policy that most sorts of incentive arrangement, service fees or promotional fees are generally treated as price concessions - which lower AMP - when paid to an entity covered by AMP.

Noting the increasing use of "service fees" provided by drug manufacturers, for example, CMS proposes that these fees must be treated as price concessions unless shown to be "bona fide."

"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," CMS notes. "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 be included in AMP."

Criteria for bona fide service fees include that they "represent fair market value" for an "itemized service actually performed on behalf of the manufacturer," and that "the manufacturer would otherwise perform (or contract for) in the absence of a service arrangement" and that are "not passed on to a client or customer."

The Medicare program adopted a similar standard for its Part B reimbursement of physician-administered drugs, addressing concerns that service fees are disguised discounts.

In the Medicaid proposal, CMS does not include a definition of fair market value for bona fide fees, but instead specifically requests public comment on the issue.

Though the Deficit Reduction Act did not specifically address the best price portion of the Medicaid drug reimbursement program, CMS in the new rules includes certain "clarifications" to reflect Medicaid policy and its "understanding of congressional intent."

CMS proposes to include many PBM price concessions in "best prices," based on the same reasoning used to propose their inclusion in AMPs.

However, best price excludes prices negotiated by Part D drug plans, CMS clarifies, citing specific language in the Medicare Modernization Act on this point.

Prompt pay discounts are another area of difference between AMPs and best price formulas.

While DRA specifically revises AMP to exclude prompt pay discounts, CMS "can find no evidence in the legislative history that Congress intended" to exclude such discounts from best prices. Thus they continue to be included in best price calculations.

- Denise Peterson

Medicaid AMPs May Include More PBM Discounts, If CMS Can Figure Out How

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