Medicaid Rebate Extension To Territories Operationally, Legally Questionable, Manufacturers Say

Manufacturers strongly oppose a CMS proposal that would extend the manufacturer drug rebate program to include drugs sold to Medicaid enrollees in Puerto Rico, Virgin Islands, Guam, Northern Mariana Islands and American Samoa.

CMS’ proposal to include U.S. territories in the Medicaid drug rebate program would cause operational problems for manufacturers and represents a significant reversal of longstanding policy, manufacturers are telling CMS in comments submitted in response to the agency’s recent proposed rule on covered outpatient drugs.

The Medicaid rule, published in the Feb. 2 Federal Register, for the most part was dedicated to implementing elements of the Affordable Care Act pertaining to Medicaid drugs, such as new methods of calculating Average Manufacturer Price (AMP) and calculating rebates (Also see "Calculating AMP: Medicaid Proposed Rule Provides Answers, Some Detailed, Some Vague, To Manufacturers’ Questions" - Pink Sheet, 6 Feb, 2012.).

However, CMS also used it as an opportunity to propose some changes and clarifications that were not included in the law, such as the proposal to expand the rebate program, which has applied only to the 50 states and D.C. since the inception of the program in a 1990 law, to include the U.S. territories of Puerto Rico, the Virgin Islands, Guam, Northern Mariana Islands and American Samoa.

The Biotechnology Industry Organization, in its written comments submitted April 2, identified the expansion of the rebate program to the territories as one of the two proposals from the rule that it “strongly opposes.” The other is CMS’ proposal not to allow “presumed inclusion” for sales to wholesalers when calculating AMP; manufacturers have been expected to strongly object to that proposal (Also see "Manufacturers See AMP Rule’s “Presumed Inclusion” Proposal As Certainly Challenging" - Pink Sheet, 26 Mar, 2012.).

BIO called including the territories a “radical expansion of the program” for which CMS “offers no substantive basis.” It asked that CMS substantively demonstrate the need for the expansion beyond a generalized belief that it will benefit the territories. Manufacturers already offer voluntary rebates to the territories, it added.

Another manufacturer trade association, the Generic Pharmaceutical Association, in its April 2 comments, also said it strongly opposes the proposal, which it said is “a material expansion that is without a specific statutory directive. Congress gave significant consideration to the rebate program during the health care reform debate but at no point signaled that CMS should expand the program to the territories.”

BIO likewise noted the statutory and regulatory history of the program. It argued that “it is not clear that CMS has the legal authority” to extend the program. It noted that CMS has consistently applied the program to the states and D.C. in previous Medicaid rules and that, while Congress has passed legislation amending the Medicaid program seven times since the original CMS rule establishing the extent of the program, it “has never taken action to change this course.” Such “inaction on the part of Congress can be viewed as a de facto endorsing of the longstanding CMS position that the program does not apply to the territories.”

Operational Issues

Both organizations argue against the expansion based on the operational impact on manufacturers.

GPhA said the “significant operational and financial burden” would include requiring alterations to existing systems and collection of data not currently captured. In addition, the group said the change would disrupt current contracts and pricing structures. The resulting increased operation costs for generic firms “likely will impact health care costs for consumers and public and private payers.”

BIO noted that the revision would require that prices to AMP-eligible and best price-eligible entities in the territories be included in a manufacturer’s calculations of AMP and BP. “This is a prohibitively complicated process for those manufacturers who sell into the territories through related but distinct corporate entities, possibly under different labeler codes. These foreign entities do not participate in the program and are not signatories to any rebate agreements,” BIO wrote. Manufacturers are not able to incorporate sales and discount data from those distinct corporate entities into their own data, it said.

“Those of our members with this corporate set-up have uniformly and vehemently emphasized the barriers that exist to sharing this type of information,” BIO said.

It would be likely, for example, for island territories in the Pacific Ocean, such as Guam, to receive drug shipments from a company incorporated in Japan or another Asian country rather than from a U.S.-incorporated affiliate that supplies the states.

Should CMS go ahead with the proposed expansion, BIO urges that manufacturers be responsible only for providing the rebates, and not for including prices in the territories in their price calculations. It notes that prices may be subject to regulation in territories, such as Puerto Rico, which can set maximum prices for drugs. Such regulation can distort AMP and Best Price. The inclusion of territories’ prices in AMP would also have a spillover effect on Medicare Part B drugs, BIO added, since CMS has said it intends to move forward with a policy of substituting AMP for Average Sales Price (ASP) for purposes of Part B drug reimbursement if ASP exceeds AMP by 5% in a certain period. Since ASP does not include prices in territories, including those prices in AMP could trigger a substitution because of the difference in methodology.

While CMS’ proposal would grant the territories up to a year to implement the rebate program, the manufacturer groups argued that manufacturers would also need a significant amount of time and asked that, if CMS goes forward with the proposal, it should also state that manufacturers have an additional year to comply. GPhA and BIO both said manufacturers will need that much time to update systems and contracting arrangements before extending rebates to the territories.

Another attempt by CMS to clarify the existing rebate program also drew protest from both GPhA and BIO: CMS’ proposal to define the meaning of an “original NDA” for the purpose of determining which products pay the 23.1% minimum rebate for brand drugs and which the 13% minimum rebate for generics (Also see "Generic Drug Firms Want CMS To Change Proposed Definition Of “Original NDA”" - Pink Sheet, 26 Mar, 2012.).