What Is A ‘Line Extension’? Medicaid Tries Again With Sweeping Definition

In the latest reminder of how badly industry lost the argument over the value of incremental improvements in formulations, US is proposing enhanced Medicaid rebates on virtually all new formulations of existing brands.

The 2010 Affordable Care Act was, if nothing else, a complex bill.

Any attempt to overhaul the US health care system, naturally, was going to take some doing. But there was also the unusual and somewhat chaotic legislative process towards enactment, which involved working through the unexpected loss of a Democratic super-majority in the Senate while the bill was still not in final form.

Amid that large and complex bill, there was one seemingly simple provision intended to curb what many legislators saw as an abuse by manufacturers: the ability to “re-set” the rebate amounts paid to the Medicaid program by launching a new formulation. Because Medicaid captures rebates tied to inflation, a well-timed and strategically priced line extension could launch at a lower (list) price than the original version, but cost more for Medicaid because it was “new” and therefore had no inflation penalty to pay.

The fix was seemingly straightforward. Any manufacturer who launched a new formulation would have to pay a rebate that at least matched the old formulation’s inflation penalty. The provision was a mere 300 words, most of which had to do with the math to calculate the “line extension” rebate.

Well, there are now a lot more than 300 words to read to figure out how to apply that concept in practice.

For one thing, the language on the calculation itself turned out to be muddled, and Congress had to go back and fix it in 2018. (Also see "Medicaid Rebates To Increase $3.95bn With Revision For Line Extensions" - Pink Sheet, 30 Mar, 2019.)

The End Of ‘Reasonable Assumptions’

But the statutory provision remains very terse when it comes to defining exactly which products have to pay the added rebate. The new formula applies to “a drug that is a line extension of a single source drug or an innovator multiple source drug that is an oral solid dosage form.” And a “line extension” is “a new formulation of the drug, such as an extended release formulation.” (That limited, non-definition was revised in 2016 by Congress to clarify that it did not want abuse-deterrent formulations to be penalized with the added rebate.)

Still, that leaves a lot of room for interpretation, and the Centers for Medicare & Medicaid Services has spent a lot of time trying to fill in some of the blanks.

The agency started in 2012 by trying to build a definition based on how the US Food & Drug Administration categorizes new drug approvals. So a Category 1 approval (new molecular entity) would not be a “line-extension,” but most other categories would be. (Also see "CMS Defines A “Line Extension” Drug, Formula For Calculating Rebates" - Pink Sheet, 6 Feb, 2012.)

That plan drew negative feedback based on several seemingly paradoxical implications. For example, on its face, manufacturers who launched new combinations of products that incorporated old, generic ingredients would have been responsible for calculating the inflation penalty on brands that they never marketed.

CMS decided to drop the definition in 2016, and instructed manufacturers to make “reasonable assumptions” about whether a given product is or is not subject to the line extension rebate. (Also see "Medicaid Add-On Rebates For Line Extensions Remain A Judgment Call" - Pink Sheet, 11 Feb, 2016.)

Well, now CMS is proposing to try again with a new definition. And it is a doozy. (Also see "Medicaid Inflation Rebates Would Apply To More Products Under Line Extension Proposal" - Pink Sheet, 18 Jun, 2020.)

Under the new policy, CMS is defining “new formulations” about as broadly as it can, incorporating several types of products that were explicitly exempt before. Those include new strengths, which CMS had previously said should not be considered “line extensions,” reflecting a sense that there are logical reasons to re-set pricing for higher or lower dosage strengths. CMS is now proposing to reverse that view.

Inhaled Power Now Considered A Solid Oral Dosage Form

But CMS is also proposing that the new rebate will apply to formulations that are not solid oral dosage forms – as long as the original brand is a solid oral dosage form. “Upon further evaluation of this statutory language, we believe that the statutory text can be reasonably construed to provide that only the initial single source drug or innovator multiple source drug must be an oral solid dosage form,” CMS says.

There’s more: CMS’ definition of what counts as a solid oral dosage form is surprisingly broad – and includes, for example, powders that are inhaled. The new definition stipulates that any drug that is administered orally and is not a liquid or a gas “at the time the drug enters the oral cavity” is considered an oral solid dosage form, and therefore any line extensions to that brand would be covered by the enhanced rebate.

CMS spends more than 4,000 words explaining its new interpretation of the statute in the proposed rule, and it is safe to assume there will be substantially more than that in the comments on the proposal.

But don’t let the technicalities drown out the broader message of the ACA provision in the first place – and in CMS’ approach to try to implement it as broadly as possible. The US government is saying loud and clear that it does not see value in incremental improvements in new formulations. That is an unfortunate reality for the pharmaceutical industry – and one that will require a lot more words to address.