Zero Medicaid Rebate For Specialty Rx? Reform Law Puts CMS In Conundrum

A quirk of the health care reform law puts CMS in the position of having to figure how, or even if, it will be able to authorize the collection of Medicaid rebates on drugs not distributed via a retail pharmacy - including many cancer drugs, imaging contrast agents, and other specialty biopharma products.

The Patient Protection and Affordable Care Act changed the definition of average manufacturer price to include only prices on drugs distributed through retail pharmacies. Retail pharmacies had fought for the change, since the previous definition of AMP resulted in retail pharmacies receiving lower reimbursement for products in many cases. The previous definition included prices on drugs distributed through a variety of other distribution channels, such as mail-order and institutional pharmacies, which often were lower than the prices available to retail pharmacies.

AMP also is used to calculate the rebate manufacturers owe on drugs used in Medicaid, which increased to a minimum of 23.1 percent of AMP under the new law. Since retail prices will be used under the new definition, many drug AMPs will increase, resulting in higher rebate levels.

However, one unintended consequence of the new law is that since there will be no way to calculate AMP for drugs not distributed through retail pharmacies, it could be argued that those drugs are exempt from Medicaid rebates.

Bill Sarraille, a partner in the Washington, D.C., office of the law firm Sidley Austin, said in an interview, "I believe that under the plain language of the statute, because it basically now says that AMP is based on prices to the retail pharmacy, and because the rebate calculation is 23.1 percent of AMP or the difference between AMP and best price, that if you have no AMP prices, then you can have no rebates, and that that is the correct legal interpretation from a plain language perspective. A reviewing court is not supposed to defer to an agency where there is a plain language meaning inherent in the statutory language. And I would say that there is only one interpretation, and that is that if AMP is zero, there is no rebate.

"This is something that some manufacturers have begun to focus on," he continued, "and I think that they have concluded that that is the legally correct answer. I think what they're trying to determine now is if it's the politically possible answer."

One option would be for Congress to pass legislation fixing the language in a way that ensures all drugs are subject to Medicaid rebates. However, CMS does have options for providing an alternate pricing measure absent legislation.

Under prior guidance, CMS has said that when an AMP is unavailable for a certain period, the prior AMP can be carried forward.

"I think that an issue for CMS would be whether that carry-forward rule can really apply where the statutory definition of AMP is changing, and so where you'd be carrying forward literally a different metric calculated in a different fashion. But they may try to say that that's the right answer," Sarraille said.

CMS also might be able to fall back on the pricing metric used for the Federal Supply Schedule, referred to as "non-FAMP" - non-federal average manufacturer price. Non-FAMP is based on prices through wholesalers to certain customers, but there is something called the "90/10 rule," which says that if not even a small percentage of a product's transactions goes through those channels, then all transactions to all customers can be used to calculate price.

"So maybe they'll try and do something like that. But, again, looking at the statute it's unclear how they would argue that they would have authority to do that," Sarraille said.

In response to an inquiry on the matter, CMS said, "We are currently reviewing the revised definition of average manufacturer price in the Affordable Care Act. We are working on further guidance regarding this definition and expect to issue such guidance in the near future."

Manufacturers could begin litigation to press the issue, but a more likely route would be to inform CMS in writing of their interpretation "and state that until the issue is resolved that they're not going to pay the Medicaid rebates on these products or reserving the right to submit a recalculation that would allow them to recoup the money at some later date," Sarraille said.

-Scott Steinke ([email protected])