February 17, 2012—The Centers for Medicare and Medicaid Services’ (CMS) long-awaited proposed rule to implement health care reform’s changes to the Medicaid drug rebate program would continue policies put in place late last year that have likely resulted in higher 340B prices for most covered outpatient drugs but lower 340B prices for the smaller class of so-called “5i” inhalation, infusion, instilled, implanted or injectable medications.
It is unclear, though, how drug manufacturers will respond to language in the proposal regarding 340B discounts on orphan drugs to rural and free-standing cancer hospitals that became eligible for 340B under the Affordable Care Act (ACA) in 2010.[ms-protect-content id=”2799″] 340B providers say they believe the rule allows manufacturers to provide such discounts without fear of increasing their Medicaid rebate liability to states.
In addition, CMS’s proposal might dissuade drug companies from voluntarily offering discounts on inpatient drugs to 340B rural and cancer hospitals and to children’s hospitals that have been eligible for the program since late 2009. Also, it is difficult to say from the proposed rule what CMS’s position is on 340B “shared savings” arrangements between covered entities and state Medicaid programs.
CMS is accepting comments on its proposal through April 2.
AMP for Most Drugs
The proposed rule would implement and clarify ACA’s new definition of average manufacturer price (AMP). For the 340B program, the lower AMP is, the lower the 340B ceiling price and the larger the 340B discount to covered entities.
CMS’s proposal would define AMP narrowly to include only sales made to true retail pharmacies, resulting in higher 340B prices for most drugs. Prior to ACA, the government based AMP on average sales for drugs distributed to the “retail pharmacy class of trade.” In ACA, however, Congress redefined AMP to align with retail prices, and AMP is now based on sales for drugs distributed to “retail community pharmacies.” Retail community pharmacies are defined to include a narrower class of drugs than retail pharmacy class of trade.
For example, CMS proposes that the definition of retail community pharmacy should exclude those that dispense drugs in non-retail settings, including hospitals, outpatient facilities and clinics. Similar to previous AMP definitions, the proposal would exclude sales to federal programs from AMP. This would continue to leave out from AMP all sales to 340B covered entities, including voluntary inpatient sales at the 340B price.
Although the proposed rule would generally narrow the definition of AMP, CMS also proposes to include in the definition of retail community pharmacy those entities that conduct business as if they were wholesalers or retail community pharmacies, such as specialty and home infusion pharmacies as well as home healthcare providers. CMS notes that these entities dispense drugs to some portions of the public at retail prices. Furthermore, CMS suggests that some drugs dispensed by these entities, including some oral drugs that require Risk Evaluation and Mitigation Strategy (REMS), are not dispensed by retail community pharmacies. Thus, if sales of drugs by these pharmacies were not included in AMP, there would be no AMPs for these drugs and therefore no Medicaid rebates or 340B prices.
Alternative 5i AMP
Congress created a separate AMP for inhalation, infusion, instilled, implanted, or injectable drugs (“5i drugs”) that are “not generally dispensed through a retail pharmacy.” Unlike the standard AMP definition, the alternative 5i AMP includes discounts on sales to non-retail pharmacies. Thus, the AMP for a 5i drug would be lower under the 5i calculation than it would be under the standard AMP calculation, and 340B prices would be lower as a result.
CMS’s proposed rule would clarify the alternative 5i AMP. Of interest to 340B stakeholders is how CMS would define which drugs will be impacted by the 5i AMP. CMS proposes a very limiting definition so that if more than 10 percent of a manufacturer’s sales for a drug are to retail pharmacies, then the drug would not be included in the more favorable 5i AMP. CMS expressed concern that its proposal could be too limiting and asked for comments on whether it should consider a broader standard.
Orphan Drugs
The proposed rule also addresses orphan drug sales to rural and cancer hospitals in the 340B program and their treatment under the Medicaid best price exclusion. Although ACA expanded 340B to allow rural and cancer hospitals to access 340B discounts, the so-called “orphan drug exclusion” prevents these hospitals from accessing the discount on certain orphan drugs. The Health Resources and Services Administration HRSA issued a proposed rule last May that called for orphan drugs to be excluded from 340B only when used for the rare disease or condition for which the drugs received their orphan designation. There are indications that HRSA could publish its final regulation by May.
As the 340B community awaits a final rule from HRSA, some manufacturers have expressed concern over offering 340B discounts on orphan drugs during this interim period for fear of lowering their best price and increasing their Medicaid rebate liability. However, the proposed rule says manufacturers can exclude from best price those prices charged to covered entities under the 340B program.
340B providers believe that manufacturers may exclude from best price sales of orphan drugs to covered entities for which they charged a 340B price. Nevertheless, manufacturers may continue to refuse to give discounts on any orphan drugs to rural and cancer hospitals pending release of the final orphan drug rule, arguing that until the rule is finalized, a potential reading of the law is that no orphan drugs are “covered outpatient drugs” and therefore none is subject to 340B discounts. Under this reading, offering 340B discounts on orphan drugs to rural and cancer hospitals would be voluntary and may not be excluded from best price.
Voluntary Inpatient Discounts
CMS’s proposed rule also addresses the exclusion from best price of voluntary inpatient discounts to 340B covered entities. The Medicaid statute provides that manufacturers do not have to report “any” sales to 340B covered entities, including discounts on inpatient sales, as part of their best price. Although CMS does not explicitly address whether inpatient discounts to the newly eligible hospitals and children’s hospitals may be excluded from best price, CMS proposes that manufacturers may exclude prices to 340B covered entities only when charged under the 340B program or when offered on inpatient drugs to disproportionate share hospitals, in the latter case as required by the Medicaid statute.
Not excluded under the proposed rule would be prices charged for outpatient drugs that are purchased outside the 340B program, such as when a hospital carves out its Medicaid population from the 340B program.
Medicaid Pharmacy Reimbursement
CMS’s position on 340B “shared savings” arrangements between covered entities and state Medicaid programs is not entirely clear. Under such arrangements, which most 340B covered entity groups have advocated vigorously, states require covered entities to pass some of their 340B savings on to the state while still reimbursing 340B pharmacies for 340B-purchased drugs provided to Medicaid patients at levels that cover pharmacy costs. Without such arrangements, 340B providers argue, covered entities have an incentive to carve their 340B drugs out of Medicaid, depriving themselves and state Medicaid agencies of the benefits of 340B pricing.
CMS proposes that states base Medicaid reimbursement for retail pharmacy-dispensed drugs on actual acquisition cost (AAC)—a new standard that would replace “estimated acquisition cost” as the basis for determining the ingredient cost portion of Medicaid reimbursement for all retail drugs.
CMS proposes that states describe in writing their 340B reimbursement methodologies for retail drugs. In developing the proposed rule, CMS evaluated 340B reimbursement policy options but ultimately concluded that states should develop their own polices and share them with CMS. These plans, however, should meet the new AAC reimbursement framework. The proposed rule cited the Department of Health and Human Services Office of Inspector General’s (OIG) June 2011 report on Medicaid reimbursement and 340B, which noted that many states already have written policies requiring 340B covered entities to bill for their 340B drugs at AAC. CMS recognized that such a 340B reimbursement methodology would meet the new AAC based reimbursement policy it proposes, but also asks for comments on other 340B reimbursement models that could meet the AAC standard.
The rule proposes to move all retail prescription reimbursement to AAC, whether 340B or not. Reimbursement can be based on a participating entity’s cost, or a state can base reimbursement off of average AACs across all entities. The proposal would not require states to reimburse 340B entities based on what they bill at AAC. In other words, states could create 340B fee schedules based on AAC.
CMS does not propose to dictate to states the professional dispensing fees they should provide to 340B pharmacies, but it notes that states should determine whether “unique circumstances” may call for a professional dispensing fee for 340B pharmacies that differs from the fee for non-340B pharmacies.
340B providers say it is hard to tell from that latter language whether CMS endorses the shared savings concept or intends to require states to justify decisions to provide 340B pharmacies with an enhanced dispensing fee. They say they plan to ask CMS to clarify its position on 340B shared savings when they submit comments on the proposed rule.[/ms-protect-content]