September 14, 2010—The Centers for Medicare and Medicaid Services (CMS) proposed last week to withdraw its regulations and guidelines defining the average manufacturer price (AMP) of prescription drugs and advised pharmaceutical companies to temporarily determine those prices instead on language taken straight from the nation's new health care reform law. AMP is a key factor in the determination of 340B prices and Medicaid rebates and reimbursement.
In proposed rules published in the Sept. 3 Federal Register, CMS said it also plans to withdraw its definition of a "multiple source" or generic drug and its rule setting the federal upper Medicaid reimbursement limit on such drugs. All three were at the heart of a 2007 lawsuit filed by retail pharmacies against CMS challenging the legality of regulations issued that year that they said would seriously diminish their Medicaid reimbursement. A federal district judge barred CMS from implementing the AMP and generic drug rules with respect to retail pharmacies but allowed them to continue to be used to determine drug rebates to state Medicaid programs and 340B drug discounts to safety-net hospitals and other providers. The 340B ceiling price on a drug generally is its AMP minus its Medicaid unit rebate amount.
Driven Both by Lawsuit and ACA
CMS's proposed action is being viewed in part as a way of bringing that lawsuit to a close. The National Association of Chain Drug Stores and the National Community Pharmacists Association, which brought the suit against CMS, declared the move "a victory for patient care as it is delivered in America's pharmacies every day."
But the proposed withdrawal is also being required by language in this March's Affordable Care Act (ACA) that redefined AMP and the term "multiple source drug." The new definitions take effect on Oct. 1. According to an analysis of the ACA language by the law firm Reed Smith, the first price reports based on the new definitions are due to CMS by Nov. 30.
Congress redefined AMP as the average price paid to manufacturers by wholesalers for drugs distributed to retail community pharmacies and prices paid by such pharmacies that buy directly from manufacturers. In August, President Obama signed a bill creating an exception to excluded adjustments to sales of inhalable, infusible, instilled, implanted and injectable drugs not generally dispensed through a retail pharmacy.
The ACA included a definition of "retail community pharmacy" as well as a list of transactions excluded from the calculation of AMP. CMS said in its proposed rule that it "expects to develop" regulations implementing these changes but it did not say when. In the meantime, with the old rules withdrawn, it said "drug manufacturers would be advised to base their AMP calculations on the definitions set forth" in the ACA "instead of on the AMP and AMP-related definitions provided in existing regulations and guidance."
Experts generally agree that, apart from the so-called "five I" medicines, the changes Congress made will probably increase AMPs, which will tend to raise prices for 340B providers. The health care law, however, also significantly raised the minimum Medicaid rebate on most brand-name drugs – the other half of the 340B ceiling price equation – which will tend to reduce 340B providers' costs. The minimum rebate on generics was also raised, but not as much as for brand name pharmaceuticals.
Manufacturers Wary of Going it Alone
In any case, industry sources say manufacturers are wary of being required to figure out AMP numbers on their own for perhaps several months without the benefit of formal regulations or even less formal guidance.
For example, there is said to be considerable confusion about how to determine the AMP for "line extensions" of existing drugs – an issue addressed but not clearly defined by ACA and for which there still are no regulations. Manufacturers are also said to be concerned that calculating AMPs strictly on the basis of the language of ACA might yield new AMPs so high as to trigger additional Medicaid rebates that kick in when a product's AMP rises faster than the rate of inflation since the time the drug was introduced. A huge wave of price restatements could also occur if CMS's promised forthcoming AMP regulations diverge sharply from the definitions that companies will have to devise for themselves for the time being. Finally, manufacturers are said to be concerned about the prospect of widely divergent interpretations of AMP from company to company.
"If, as proposed, manufacturers must calculate AMP pursuant to a vague and confusing statute with no guidance from CMS, it will most certainly result in differing interpretations, assumptions and practices," says Donna Yesner, a partner with the McKenna Long and Aldridge law firm. "It is unfortunate that the proposed rule failed to answer fundamental questions such as how CMS expects manufacturers to determine whether a wholesaler, distributor or repackager distributes a drug to a retail community pharmacy, how manufacturers should implement the price adjustment exception for physician-administered drugs, and whether manufacturers can immediately submit a recalculated base date AMP that reflects the statutory provisions."
CMS, meanwhile, said it was not issuing a regulatory impact analysis for its proposed rule because it does not expect it "will have any economic effects." Nor did it analyze options for regulatory relief for nonprofit hospitals or other small businesses that will be affected or specifically for rural hospitals, the latter as required by the ACA, because in its opinion the rule will not have a "significant" impact on those entities.
CMS is accepting comments on the rule through Oct. 4.