HEALTH REFORM: Medicaid Drug Rebate Program ‘Reform’: Key Considerations and Implementation Tips for Pharmaceutical and Biotech Manufacturers

On March 23, 2010, President Obama signed H.R. 3590, the "Patient Protection and Affordable Care Act" ("PPACA"), into law. This legislation includes significant revisions to Section 1927 of the Social Security Act (42 U.S.C. § 1392r-8), which governs the Medicaid Drug Rebate Program ("MDRP"). Following the enactment of PPACA, H.R. 4872, the "Health Care and Education Reconciliation Act of 2010" was enacted into law on March 30, 2010, "reconciling" and revising portions of PPACA. The term "PPACA" used herein shall refer to PPACA as amended by H.R. 4872. We have set forth below some key considerations and implementation tips to assist pharmaceutical and biotech manufacturers in understanding the impact of this legislation with respect to the MDRP. In addition, we have outlined the significant changes to the MDRP in the sidebars, organized by their respective effective dates.

1. Assess the Preparedness of Your Government Pricing Function

  • PPACA makes significant changes to the definition of average manufacturer price ("AMP") and to the formulae and methodologies used to calculate MDRP rebates.
  • Among other things, AMP would be redefined to replace the concept of "distributed to the retail pharmacy class of trade" with the concept of "distributed to community retail pharmacies." This change likely will require revisions to policies, procedures, systems, and processes regarding, for example, coding of particular classes of trade as "eligible" or "ineligible" for purposes of the AMP calculation. It also may have unintended consequences on the calculation of AMP for certain products that are not traditionally sold to community retail pharmacies, including, for example, drugs and biologicals that are purchased by physicians for administration in their offices.
  • Certain of the MDRP changes under PPACA, such as the increases to the basic rebate percentages, the change to calculation of "additional" rebates for new formulations of existing drugs, and the extension of MDRP rebates to utilization by beneficiaries of Medicaid managed care plans, according to their terms, are effective for rebate periods beginning after December 31, 2009. As a practical matter, although the delayed passage of the law may leave these retroactive effective dates subject to legal challenge, CMS may attempt to enforce these effective dates and calculate 1Q10 unit rebate amounts ("URA") based on the higher "basic" rebate percentages and potentially higher "additional" rebates.

2. Determine the Potential Impact on Your Financial Liability

  • The extension of MDRP rebates to Medicaid Managed Care Organization ("MCO") utilization and increases to the MDRP rebate percentages represent relatively straightforward increases to manufacturers' MDRP liability that should be assessed for financial impact. (In addition, Medicaid enrollment will likely increase as a result of other provisions of PPACA.) But there also may be "hidden" increases that manufacturers should consider.
  • Various discounts to certain entities previously considered "retail pharmacy class of trade" (such as mail-order pharmacies and hospital outpatient pharmacies) will no longer be included in AMP calculations, potentially resulting in relatively higher AMPs, and, thus higher Medicaid rebates, to the extent these entities received greater discounts than "community retail pharmacies." There may be crossover from this impact into other programs, such as the 340B Program (to be addressed in a forthcoming client communication), as well as state programs that rely on AMP for rebate and/or reimbursement purposes.
  • The public disclosure of AMP, which was required by the DRA, continues to be enjoined in connection with ongoing litigation in National Ass'n of Chain Drug Stores v. Sebellius, Civ. Action No. 1:07cv02017 (RCL) (D.D.C.). However, it is possible that the litigation may be mooted in light of the redefinition of AMP under PPACA, thus permitting the disclosure of noninnovator drugs' AMPs, as outlined in the sidebars.
  • Assessing the impact of the provisions regarding new formulations may be challenging, as there are many open questions regarding the definitions and applicability of these provisions. In a March 10, 2010 report to CMS, the Office of Inspector General ("OIG") attempted to evaluate the impact of calculating additional rebates of different "versions" of drugs under the MDRP.1 The OIG stated that "new forms or strengths ?... of an active ingredient previously approved for marketing in the United States" were considered different "versions." The OIG also stated that it considered drugs "with variations of the same brand name (e.g., drug ABC and ABC XR, for which the 'XR' represented extended release) to be the same drug if they had the same active chemical ingredients." Although this interpretation is not binding on CMS, it may be helpful for manufacturers to consider as they assess the potential impact of this change.
  • In addition to the increased MDRP liability that may result from the change in the formula for calculating "additional" rebates for new formulations of existing products, "additional" rebates for all "S" and "I" drugs could increase unless CMS allows manufacturers to recalculate their "base date" AMPs used to calculate "additional" rebates under the AMP methodology, as revised by PPACA. In connection with changes previously made by the DRA and its implementing regulations, CMS permitted manufacturers to recalculate their "base date" AMPs under the revised AMP methodology, provided they had actual data from the "base date" quarter to use in those recalculations.

3. Review and Update Your Rebate and Discount Contracts

  • Several of the changes under PPACA have implications for manufacturers' rebate and discount contracting practices.
  • For example, it is relatively common for payors to include Medicaid MCO utilization in commercial rebate contracts. Therefore, manufacturers may be contractually liable to pay duplicate rebates on this utilization.
  • Also, the extension of MDRP rebates to Medicaid MCO utilization would not prohibit manufacturers from offering deeper discounts to Medicaid MCOs. However, whereas Medicaid rebates are exempt from manufacturers' Best Price calculations, these deeper discounts may not be.

4. Analyze Whether MDRP Changes Impact Research and Development ("R&D") Business Strategy

  • Provisions that may affect manufacturers' current and prospective R&D business strategies include: (1) the change in the MDRP "additional" rebate calculation that applies to new product formulations; and (2) a relatively lower minimum "basic" rebate percentage for drugs that are approved exclusively for pediatric use.
  • The new formulations provision is intended to limit the ability of manufacturers to charge premium pricing for new formulations of solid oral dosage form products, as such new formulations will potentially be penalized under the MDRP for essentially the difference between the new formulation's AMP and the "base date" AMP for the original formulation, if any. Operationalizing this provision may be challenging, especially in cases where the units and strengths of the formulations are not easily converted to like measures.
  • The relatively lower minimum "basic" rebate for innovator products approved exclusively for pediatric indications is intended to serve as an incentive for manufacturers to study and seek approval of products with exclusively pediatric indications. However, this provision may have the unintended consequence of acting as a disincentive to conduct further adult trials with respect to those products, once approved.2


  • Immediately: (1) begin assessing whether systems can apply the changed rebate percentages in connection with your validation of 1Q10 URA invoices record from the states; (2) ensure that such systems are capable of implementing the changes for 2010 for MDRP purposes, while retaining the 2009 URAs for purposes of calculating 340B Program drug discounts for 1Q10 and 2Q10; and (3) begin making system changes, as appropriate.
  • Begin analysis of the internal implementation of the new AMP definition now, rather than waiting until 3Q10 to do so. Although the AMP definitional changes do not become effective until October 1, 2010, many manufacturers likely learned from their experience implementing the changes to the MDRP made by the DRA and by its implementing regulations that the time it takes to modify policies, procedures, and systems and to train appropriate personnel may be substantial.
  • Ensure adequate documentation of the methodologies and processes used to calculate AMP (and to otherwise comply with obligations under the MDRP) in the intervals between the dates on which changes were and will be implemented over the course of this dynamic period. This is critical because manufacturers' AMP calculations and rebate payments are subject to government audit and enforcement under a variety of statutes, and manufacturers should be prepared to demonstrate their compliance with legal requirements at these various moments in time (and AMP has changed significantly over the last several years). Also, archive the methodologies and processes previously used.
  • Assess whether the internal government pricing group has sufficient resources to enable the group to implement these changes. This is particularly important as AMP is redefined and used more broadly by federal programs, and as additional utilization becomes subject to MDRP rebates.
  • When evaluating resources, consider not just the MDRP changes, but various other changes under PPACA, including without limitation the changes to the 340B Program, as well as the new Medicare Coverage Gap Discount Program that may impact this group's resources. We will analyze these changes separately in forthcoming client communications.
  • Begin reviewing the current customer base to ascertain the extent to which the MDRP changes will affect calculations and liability under the MDRP, as well as other commercial and state contracts.
  • Consider whether commercial contracting strategies involving community retail pharmacies and/or entities that were previously (but will no longer be) included in AMP need to be reassessed in terms of overall organizational financial impact.
  • Review whether any products might be considered "new formulations" or "line extensions" of other products for purposes of the additional rebate changes. Because the term "new formulation" is not defined in the legislation, it is possible that it could be construed broadly to include various NDC-9s that are related to an earlier-approved product.
  • Identify those affected products that are "oral solid dosage forms" for the purpose of ensuring that systems are capable of separate treatment of such products versus any non-affected products in the portfolio.
  • Review and comment, as appropriate, to any CMS guidance defining and/or interpreting the concept of "new formulation."
  • Even in the absence of specific statutory authority under PPACA to recalculate "base date" AMP, consider requesting that CMS authorize manufacturers to recalculate their "base date" AMPs using the revised AMP definition prior to October 1, 2010, the date on which the changes to AMP become effective.
  • If your product(s) are traditionally physician-administered drugs and/or other drugs that are not distributed through community retail pharmacies, consider seeking guidance from CMS regarding how to calculate AMP, as such products generally remain within the definition of "covered outpatient drug." Where such guidance is not available, consider, in conjunction with legal counsel, whether any "reasonable assumptions" may be appropriate and document any such assumptions appropriately.
  • If your product(s) is an "N" products (i.e. most generics), prepare for the possibly imminent public disclosure of weighted-average AMPs, and consider modeling the financial impact of discount and reimbursement strategies based on AMP.
  • Ensure that any financial modeling takes into account cross-program implications, as such programs also are revised by PPACA. For example, under the PPACA changes to the 340B Program, there are several "new" classes of covered entities created effective as of January 1, 2010. Even if such new entities are not functionally eligible for discounted pricing as of that date, due to possible Health Resources and Services Administration implementation issues, consider whether to attempt to identify chargebacks to such entities insofar as they may need to be excluded from AMP for beginning 1Q10, to the extent that manufacturers are required to proved these newly enrolled 340B covered entities with retroactive discounts on drugs purchased after January 1, 2010.
  • Review current commercial rebate and discount contracts to ascertain the extent to which Medicaid MCO utilization already is eligible for discounts under such agreements, and whether current carve-outs are adequate to address this issue. There is a potential for duplicate discounting in the event that the term of the commercial agreement extends beyond the effective date of this particular change, which, likely was March 23, 2010, the enactment date for PPACA.
  • Review state supplemental rebate contracts and state pharmaceutical assistance program contracts to determine the extent to which such contracts rely on the MDRP pricing formulae. To the extent that such contracts rely directly on cross-references to the federal MDRP calculation, the PPACA changes may impact such program discounts as well. To the extent that such contracts independently define terms such as "AMP" and "Best Price", or refer specifically to the old basic rebate percentages, manufacturers may need to perform separate rebate calculations for such program. The latter scenario could pose significant implementation challenges, as it could require manufacturers to maintain separate classification systems (e.g., one for the old "retail class of trade" and one for the new concept of "community retail pharmacies").
  • Review contractual termination and change of law provisions in all potentially relevant contracts, with an understanding that some of the changes to the MDRP program may materially impact the business under the agreement.
  • If your company is conducting or considering clinical trials on extended-release versions, evaluate the potential impact the MDRP changes may have on long-term product pricing and discounting strategies.
  • Consider the long-term pricing implications of the dosage form of the product that is launched as part of the overall product lifecycle planning, with the understanding that new formulations of solid oral dosage forms may be affected by pricing implications.
  • If your company is conducting or considering clinical trials for adult indications of pediatric products, evaluate the potential impact such indication(s) may have on MDRP liability.
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For more information about this issue of IMPLEMENTING
HEALTH AND INSURANCE REFORM, please contact the author
below or the member of the firm who normally
handles your legal matters.

Constance A. Wilkinson
Washington, DC
[email protected]

This client communication is not intended to encompass all of the significant items addressed in PPACA. There are a large number of key issues contained in this legislation that manufacturers should explore, including by way of example, the creation of a pathway for approving "biosimilar" biologicals, the Medicare Coverage Gap Discount Program, transparency provisions regarding payments to health care professionals, and excise taxes on pharmaceutical and medical device manufacturers. EBG will continue to develop client communications on these topics, which will be available at
1 U.S. Dep't of Health & Human Servs., Office of Inspector Gen., "Review of Additional Rebates for Brand-Name Drugs with Multiple Versions," A-06-09-00033 (Mar. 2010).
2 There also is a potentially incongruous interplay between this provision and the new formulation provision, to the extent that a pediatric version of a product might be deemed a "new formulation" and thus subject to an "additional" rebate calculation that uses the "base date" AMP of the original formulation, while also subject to the lower minimum "basic" rebate