The Centers for Medicare and Medicaid Services plans to clarify the types of drug line extensions that will be subject to inflation-based add-on rebates in Medicaid after considering further comments from stakeholders.

The agency deferred a final decision on a definition of line extensions in its recent final rule implementing changes to the Medicare drug rebate program under the Affordable Care Act. Pharmaceutical manufacturers had objected to the agency’s proposed definition on the basis that it inappropriately expanded the categories of products subject to the additional rebate.

The long-awaited final regulation, known as the AMP rule because it addresses the calculation of average manufacturer price (AMP) as the basis of Medicaid rebates, was published in the Feb. 1 Federal Register. It was released two years after the proposed version was issued in February 2012.

“We are requesting additional comments on the definition of line extension drug and the identification of new formulations as we may consider addressing these in future rule making,” CMS says in the rule.

“Therefore, at this time, manufacturers are to rely on the statutory definition of line extension… and where appropriate, are permitted to use reasonable assumptions in their determination of whether their drug qualifies as a line extension drug.” Comments on the definition are due April 1, 2016.

The ACA modified the unit rebate amount for a line extension of a single source or an innovator multiple source oral solid dosage drug. The change went into effect in 2010, along with ACA-mandated increases in the base Medicaid rebate for brand and generic drugs and expansion of manufacturer rebate obligations to include Medicaid managed care organizations.

Making Price Inflation Rebate Stick

The line extension requirement is designed to prevent manufacturers from using such products to evade the inflationary adjustment portion of the rebate. Manufacturers pay an additional rebate to adjust for any price increase on their brands that exceeds the rate of inflation, which is often the biggest component of a rebate for mature brands.

The inflation-based rebate is added to the basic rebate for brands – which is 23.1% of the average manufacturer price or the difference between AMP and the best price given for a drug. Prior to the ACA, line extensions could be introduced at higher prices that would skirt the inflationary adjustment.

The ACA defines a line extension as a new formulation of a drug, such as an extended-release version but does not provide any further specificity. Because CMS never provided a more detailed definition of line extensions either, manufacturers have had to rely on their own discretion to determine which products qualify. They will have to continue to do so until CMS provides further guidance.

“Manufacturers have tried in good faith to give meaning to the undefined term ‘line extension’ in light of the ‘such as extended release formulations’ [statutory language] since the effective date” of the law, Sidley Austin law firm partner Bill Sarraille told "The Pink Sheet."

“They have paid rebates consistent with the positions they have taken. Most have recorded their positions in reasonable assumptions, with some having written to CMS directly on the issue,” Sarraille said.

In its proposed version of the AMP rule, CMS had suggested that a line extension be defined as a single source or innovator multiple source drug that is an oral solid dosage form approved by FDA as a change to the initial brand in that it represents a new version of the drug, such as a new ester, new salt or other non-covalent derivative; a new formulation of a previously-approved drug; a new combination of two or more drugs; or a new indication of an already marketed drug ([A#00120206005]).

Although the final rule incorporates some improvements relative to the proposed reg, it can still cause some manufacturers to face significantly higher rebates.

The proposed definition would include abuse-deterrent formulations and single source or innovator multiple source drugs that receive three-year pediatric exclusivity or seven year orphan exclusivity.

Stakeholder comments on the proposal took issue with the definition, arguing that inclusion of abuse-deterrent formulations is at odds with national policies to address the nation’s drug abuse crisis and that including drugs that have earned market exclusivity could discourage innovation.

Although CMS stops short to finalizing a definition of a line extension, it is finalizing the rebate calculation for line extension drugs and also the clarification that a manufacturer of a line extension is subject to the add-on rebate if the company is also the manufacturer of the initial brand drug or has a corporate relationship with the manufacturer of the initial brand.

The final rule addresses a number of other issues of concern to pharmaceutical manufacturers (see box). Most provisions of the rule will be effective April 1, 2016, except that manufacturers will have until April 1, 2017 to report eligible drug sales in the US Territories – Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands and American Samoa – in their AMP calculations and best price determinations.

From manufacturers’ perspective, although the final rule incorporates some improvements relative to the proposal, it can still cause some manufacturers to face significantly higher rebates, depending on product mix and the manufacturers' prior positions, Sarraille commented.

Authorized Generics Need A Close Look

For example, he noted that manufacturers are taking a close look at: when authorized generics should be included in AMP calculations, the "not generally" dispensed through retail pharmacies test that CMS settled on, and the agency’s suggested treatment of some oral drugs dispensed through specialty pharmacies.

In the final rule, CMS indicates that when an authorized generic is transferred by the original manufacturer to a secondary entity, its transfer price should only be included in the primary manufacturer’s AMP for the branded product when the second manufacturer is acting as a wholesaler that distributes the product to a retail community pharmacy.

In the final rule, CMS estimates Medicaid has saved $17.7bn from 2010 through 2014 (including $13.7bn to the federal government and $4bn to the states), mainly as a result of the ACA-mandated increased rebate percentages on branded drugs, the treatment of new formulations, and from the collection of rebates through Medicaid managed care organizations.

Changes In Drug Rebate Provisions Of Final AMP Rule
Proposal	Final Rule
Line extensions defined as a “single source or innovator multiple source drug that is in an oral solid dosage form that has been approved by the FDA as a change to the initial brand name listed drug in that it represents a new version of the previously approved listed drug, such as a new ester, a new salt, or other non-covalent derivative; a new formulation of a previously approved drug; a new combination of two or more drugs; or a new indication for an already marketed drug.	Definition not finalized; CMS seeks additional public comment by April 1, 2016.
Manufacturers should use “build up” method when determining AMP, including sales only when there is adequate, verifiable documentation showing the drug was actually distributed to a retail community pharmacy Also see "Manufacturers See AMP Rule’s “Presumed Inclusion” Proposal As Certainly Challenging" - Pink Sheet, 26 March, 2012..	Manufacturers may continue to make reasonable assumptions and presume, in the absence of adequate documentation to the contrary, that prices are for drugs distributed to retail community pharmacies.
Included in AMP are sales to entities conducting business as retail community pharmacies, including specialty pharmacies, home infusion pharmacies and home healthcare providers Also see "Manufacturers Seek CMS Definition Of “Specialty Pharmacy”" - Pink Sheet, 16 April, 2012..	Specialty pharmacies, home infusion pharmacies and home healthcare providers are considered retail community pharmacies as long as they don’t dispense drugs to patients primarily through the mail. Also excluded: nursing home pharmacies, long-term care facility pharmacies, hospital pharmacies, clinics, charitable or not-for-profit pharmacies, government pharmacies or pharmacy benefit managers.
So-called ‘5i’ drugs (those injected, infused, inhaled, implanted or instilled) not traditionally dispensed through a retail community pharmacy are subjected to a different AMP calculation by law. CMS proposed manufacturers use the FDA Structured Product Labeling Routes of Administration guide to identify 5i drugs Also see "AMP Rule Answers Questions On Collecting Pricing Data For “5i” Specialty Drugs Raised By Manufacturers" - Pink Sheet, 1 February, 2012..	Manufacturers are not required to use FDA Routes of Administration guide.
To be considered “not traditionally dispensed through a retail community pharmacy,” at least 90% of a 5i drug’s sales must be to non-retail community pharmacies.	To be considered “not traditionally dispensed through a retail community pharmacy, at least 70% of a 5i drug’s sales must be to non-retail community pharmacies.
For purposes of calculating rebates, single source and innovator multiple source drugs are defined as those equivalent to the “original NDA.”	Clarifies that “original NDA” means an NDA other than an ANDA approved by FDA. Acknowledges certain drugs (such as those approved under section 505(b)(2) or approved under an NDA prior to enactment of the Hatch-Waxman Amendments in 1984, might be more appropriately treated as if they were approved under an ANDA. CMS will issue guidance regarding the “limited” circumstances that might allow a narrow exception. for some drugs marketed under an NDA to be treated as a non-innovator multiple source drug.

Medicaid Add-On Rebates For Line Extensions Remain A Judgment Call

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