LTCPA | Medicaid Generic Drug Reimbursement

Medicaid Generic Drug Reimbursement

States have substantial discretion in setting reimbursement rates for drugs covered under Medicaid. However, reimbursement for multiple source drugs (drugs with generic versions) is subject to Federal Upper Limits (FULs) set by the Centers for Medicare and Medicaid Services (CMS). States may further restrict reimbursement for multiple source drugs by setting lower Maximum Allowable Cost (MAC) limits. The manner in which FULs are established has changed several times in recent years.

Historically, FULs were based on Average Wholesale Prices published in commercial drug pricing compendia. CMS was required to:

Establish an FUL when there were three or more therapeutically equivalent drugs
Set the FUL at 150% of the lowest AWP of those therapeutically equivalent drugs

That FUL would then apply to all of those therapeutically equivalent drugs, regardless of the version that was actually dispensed. However, concerns about AWP – including that it was not defined by any statute or regulation and therefore was not established uniformly for all drugs and that it was not necessarily based on actual sale prices – led Congress to consider alternatives to AWP.

The Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005 (DRA) enacted in February 2006 made changes to the methodology pharmaceutical manufacturers use to calculate Average Manufacturer Price (AMP) for each of their outpatient drugs. CMS subsequently uses these AMP values to calculate the rebates that manufacturers are required to pay the states on prescriptions of their drugs dispensed to Medicaid beneficiaries under the “Medicaid Drug Rebate Program” (MDRP).

The DRA also changed the process for establishing FULs. CMS was required to:

Establish an FUL when there were two or more therapeutically equivalent drugs
Set the FUL at 250% of the lowest AMP of those therapeutically equivalent drugs

The DRA, therefore, reduced the number of therapeutically equivalent drugs that trigger CMS’s obligation to establish an FUL from three to two and substituted AMP for AWP as the price used to set FULs. The DRA also required CMS to make manufacturers’ AMPs available both to state Medicaid programs (via direct reports) and to the public (via a website).

CMS’s Implementation of the DRA: The AMP Final Rule

In July 2007, CMS issued a Final Rule that promulgated regulations regarding, among other things, the methodology pharmaceutical manufacturers should use to calculate AMP and the process CMS would use to establish FULs, in accordance with the changes made by the DRA.

At the time, “AMP” was defined by statute as “the average price paid to the manufacturer for the drug in the United States by wholesalers for drugs distributed to the retail pharmacy class of trade.” In the Final Rule, CMS defined “retail pharmacy class of trade” as “any independent pharmacy, chain pharmacy, mail order pharmacy, or other outlet that purchases drugs from a manufacturer, wholesaler, distributor, or other licensed entity and subsequently sells or provides the drugs to the general public.” CMS’s applied its broad definition of “retail pharmacy class of trade” to include mail-order pharmacies owned by pharmacy benefit managers and hospital outpatient pharmacies, which are able to secure prices, discounts, and rebates not available to community pharmacies.

This led to concerns that AMP-based FULs would be below community pharmacies’ acquisition costs for generic drugs. Reports from the GAO and the OIG indicated that pharmacies would be reimbursed less than the purchase price for a significant number of medications and, in some cases, would be reimbursed less than half of the purchase price.

The Final Rule was to be effective October 2007.

Pharmacy Trade Association Litigation

In November 2007, the National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA) filed a complaint in U.S. District Court against CMS seeking to enjoin implementation of the AMP Final Rule, on the ground that CMS’s definition of “retail pharmacy class of trade” conflicted with the statute. In December 2007, the Court granted the plaintiffs’ motion for a preliminary injunction, which prohibited CMS from setting AMP-based FULs and from making AMPs available to state Medicaid programs or the public.

The Patient Protection and Affordable Care Act of 2010

The Patient Protection and Affordable Care Act (ACA) enacted in March 2010 significantly revised the definition of AMP and changed yet again the process for establishing FULs. Specifically, the ACA:

Re-defined AMP as the average price paid to a manufacturer for a drug sold to “retail community pharmacies,” rather than the “retail pharmacy class of trade”
Defined “retail community pharmacies” to include only independent pharmacies, supermarket pharmacies, chain pharmacies, and mass merchandiser pharmacies, thereby excluding prices to mail-order pharmacies and hospital outpatient pharmacies from AMP calculations
Required CMS to establish an FUL when there are three or more therapeutically equivalent drugs and to set the FUL no less than 175% of the weighted average AMP of those therapeutically equivalent drugs
Limited information made available to the public (via a website) to the weighted average AMPs for multiple source drugs

These changes became effective October 1, 2010. However, CMS continued to be enjoined from setting AMP-based FULs and from making AMPs available to state Medicaid programs or the public, in connection with the pharmacy trade associations’ litigation.

Regulatory Withdrawal of AMP- and FUL-Related Regulations

In November 2010, CMS issued a Final Rule rescinding those regulations promulgated by the AMP Final Rule that conflicted with the changes made by the ACA. Accordingly, in December 2010, NACDS/NCPA issued a statement announcing the withdrawal of their lawsuit.

Now that the injunction has been lifted, CMS is able (and required) to:

Set AMP-based FULs in accordance with the process established by the ACA
Make AMPs for all outpatient drugs available to state Medicaid programs
Make weighted average AMPs for multiple source drugs available to the public (via a website)

FUL Draft Files Published

In September, October and November 2011, CMS released three files containing FUL drug prices in comparison to the weighted monthly AMP and an FUL Methodology & Data Elements Guide. CMS has indicated that it is developing regulations to address ambiguities in the AMP calculation methodology that resulted from the ACA changes.

Although CMS has issued the three FUL files and FUL Methodology for comment, these are neither a proposed rule nor a formal rule-making activity. CMS has not yet issued formal regulations on the post-ACA AMPs, which could fundamentally change the aggregated AMP results published in the files.

In a letter to CMS, LTCPA has asked for delay in establishing any FULs under the revised methodology until CMS finalizes and implements regulations that provide pharmaceutical manufacturers with detailed and unambiguous guidance for calculating AMP.

Proposed AMP Rule Released

In February 2012, CMS released the Proposed Rule to implement the ACA's statutory provisions on AMP. In addition to defining AMP, the new rule proposes changes to CMS’ Best Price regulations, and adds new provisions on the calculation of Medicaid rebates and Medicaid drug reimbursement amounts.