Fact sheet

Misclassification of Drugs, Program Administration and Program Integrity Updates Under the Medicaid Drug Rebate Program Notice for Proposed Rulemaking (CMS-2434-P)

The Centers for Medicare & Medicaid Services’ (CMS’) proposed rule seeks to advance policies to promote efficient operation of the Medicaid Drug Rebate Program (MDRP). This includes proposed policies to implement new statutory authorities included in the Medicaid Services Investment and Accountability Act of 2019 (MSIAA) to address situations in which manufacturers incorrectly report or misclassify their drugs in the MDRP. The proposed rule also seeks to enhance the MDRP integrity and improve program administration by proposing new policies that would assure greater consistency and accuracy of drug information reporting, strengthened data collection, and efficient operation of the MDRP.

Identifying and Correcting Misclassified Drug Information

Manufacturers that participate in the MDRP must report certain drug-related product and pricing information on a one-time, monthly, and/or quarterly basis to CMS. This information is used, in turn, to operate the program. It includes the classification of a manufacturer’s drug as a brand-name or generic drug. This classification helps to determine the rebates that manufacturers pay to the states for their drugs. Brand-name drugs pay a higher rate of rebates than generic drugs.

Until the enactment of MSIAA, CMS only had the authority to impose penalties on manufacturers that failed to provide timely price information or provided false price information. Other than termination from the program, no specific authority existed for CMS to take any direct actions against manufacturers that reported false drug product information or misclassified drugs.

In this notice of proposed rulemaking (NPRM), CMS would implement new statutory authorities to address issues related to incorrect reporting by drug manufacturers of drug product information in the Medicaid Drug Program (MDP) system, as well as the misclassification of drugs. Specifically, the proposed regulation would:

  • Define the situations in which CMS would consider a drug misclassified for the purposes of the MDRP, as well as other situations in which a manufacturer is paying rebates to states that are different from the rebates that are supported by the drug data being reported to MDP.
  • Develop a process and timeline that CMS would use to notify the manufacturer that the agency has determined that a misclassification of a covered outpatient drug (COD) has occurred, and the process for correcting the misclassification.
  • Codify a manufacturer’s obligation to pay unpaid rebate amounts to states due to the misclassification of CODs.
  • Describe the range of actions that CMS may take against a manufacturer that does not correct the misclassification after being notified, which include the agency correcting the misclassification, suspension of the drug and/or its manufacturer from the MDRP, exclusion of the misclassified drug from Medicaid payment, and imposition of civil monetary penalties (CMPs).

Enhancing Medicaid Drug Rebate Program Definitions and Operations

One of CMS’ goals for this NPRM is to enhance MDRP operations and increase the efficiency and economy of overall operations and resources to facilitate the needs of states and Medicaid beneficiaries. Therefore, the proposed rule includes several proposals that would ensure that states are able to obtain the required rebates so that they can most effectively operate their pharmacy programs and enhance access to necessary prescription medications.

These proposed provisions include providing authority to:

  • Allow CMS to suspend the National Drug Rebate Agreement of a labeler for no fewer than 30 days for late reporting of a drug product and price information required under the statute and the agreement.
  • Define “manufacturer” for the purposes of satisfying the statutory requirement that all labelers of a manufacturer have a rebate agreement in effect with the Secretary of Health and Human Services (HHS) in order for any of that manufacturer’s CODs to be eligible for federal financial participation (FFP).
  • Define “vaccine” for the specific purposes of the MDRP, so that manufacturers understand which products are considered vaccines under the MDRP and are excluded from the definition of COD, and not subject to rebates.
  • Revise the determination of Medicaid “best price” to specify for manufacturers that cumulative discounts, rebates, or other arrangements must be “stacked” (aggregated) to generate a final price realized by the manufacturer for a particular unit of a COD, including discounts, rebates or other arrangements provided to different best price eligible entities.
  • Define “market date” of a drug for purposes of establishing the base date average manufacturer price (AMP) quarter, which is used to calculate the inflation rebates that manufacturers owe on their CODs.
  • Limit the period for manufacturers to initiate disputes concerning state utilization unit rebate data to 12 quarters from the last day of the quarter from the date of the state invoice.
  • Specify that both ingredient cost reimbursement and professional dispensing fee reimbursement under Medicaid fee for service must be based on pharmacy-established cost data, and that market-based research (such as third-party payments accepted by pharmacies) will not qualify as supporting data.
  • Require states to collect national drug code (NDC) information on all physician-administered drugs, and specify that states should be invoicing for rebates for all physician-administered drugs in order to receive FFP and secure manufacturer rebates.
  • Define “direct reimbursement” to a provider to specify the situations in which a state can bill a manufacturer for a rebate for a COD when the drug is reimbursed as part of a single payment.
  • Specify the conditions under which CMS will allow an “internal investigation” of pricing data to allow the manufacturer to make changes to already-reported pricing data outside the 12-quarter window.
  • Specify that for the purposes of manufacturer drug rebates, the drug category “N” represents all “other drugs,” regardless of whether they satisfy the definition of a generic drug.

Enhancing States’ Abilities to Manage Medicaid Drug Spending

With the introduction of new expensive drug treatments like high-cost gene and cell therapies, CMS seeks to provide additional tools to states to enhance their ability to manage their drug spending. States have found it increasingly difficult to understand whether a price being charged by a manufacturer for a drug is consistent with the statutory requirement that Medicaid payments made for a service, including drugs, be efficient and that taxpayer funds be protected.

Therefore, CMS is proposing to use the authority in section 1927(b)(3)(B) of the Social Security Act, which authorizes the Secretary of HHS to survey manufacturers and wholesalers for information about the prices or charges for CODs reported to CMS under section 1927(b)(3)(A) of the Act (AMP, best price, average sales price (ASP), wholesale acquisition cost (WAC)).

Specifically, consistent with the above authority, CMS is proposing to survey manufacturers for a small number of drugs that participate in the Medicaid Drug Rebate Program (MDRP) in certain situations to verify price (or prices) of drugs based on the following three-step process:

  • Step 1: Each year, CMS would use a variety of objective measures (e.g., drugs with highest launch prices or top 5% in price) to develop an initial list of high-priced drugs.

CMS estimates that approximately 200 NDCs will result from this step.

  • Step 2: From the list in Step 1, CMS would exclude drugs for which manufacturers have (1) participated in any CMS drug pricing program or initiative under which manufacturers would negotiate a COD’s price directly with CMS; or (2) negotiated significant supplemental rebates with at least 50% of states.
  • Step 3: If, after application of the criteria above, more than 10 covered outpatient drugs remain on the survey list, CMS would further refine the list of drugs to be surveyed by consulting with states and/or determining highest Medicaid drug spend.

    CMS estimates that the final list will result in approximately 3-10 NDCs that would be subject to the survey.

We propose to post to our website the letter sent to the manufacturer indicating the name of the COD to be surveyed and the request for completion of the drug price verification survey. The survey would collect information regarding pricing, charges, production and distribution/ utilization for the COD, drug product and clinical information, costs of production, research, and marketing, as well as other information determined by the Secretary of HHS. CMS proposes to post non-proprietary information in order to receive feedback from stakeholders regarding the price of the drug as part of the verification process. CMS also proposes that a manufacturer that fails to provide specific information or declines to provide the information requested in the verification survey within 90 calendar days of CMS’ request would be referred to the Office of the Inspector General for possible imposition of civil monetary penalties.

CMS believes this process would help assure that Medicaid payments for prescription drugs are consistent with economy, efficiency, and quality of care by helping states negotiate supplemental and/or value-based rebates for these drugs. The proposed survey process is not intended to limit or deny access to any of the selected drugs, assess clinical or cost-effectiveness of selected drugs, or supplant findings from U.S. Food and Drug Administration’s (FDA’s) drug approval process. Rather, the survey process is intended for verification purposes only.

Enhancing Pharmacy Benefit Operations in Medicaid Managed Care

Over 75% of Medicaid beneficiaries receive their health care services from Medicaid-managed care plans. Therefore, it is important to ensure that pharmacy benefits in these plans are operated efficiently and provide quality services to Medicaid beneficiaries.

Because it can be difficult to determine from a Medicaid managed care beneficiary’s insurance card if they are covered under Medicaid managed care or one of the managed care plan’s non-Medicaid lines of business, CMS is proposing that the Medicaid managed care beneficiary’s card include Medicaid-specific information to help ensure the appropriate scope of benefits are delivered and avoid duplicate discounts under the 340B Drug Discount Program.

CMS is also proposing changes to address transparency in pharmacy benefit manager (PBM) pricing. When a PBM contracts with a Medicaid managed care plan to administer the plan’s drug benefit and the PBM retains the difference between what is paid by the managed care plan and what the PBM pays a provider for the cost and dispensing of the drug, this action is called “spread pricing.” CMS is proposing that managed care plans structure contracts with PBMs to be transparent about spread pricing. We propose to require PBMs report the cost of the covered outpatient drug and dispensing separately from any other fees charged to the plan by the PBM.

As a result, any payments for costs over and above the cost of the drug and dispensing fee would be separately identified by the managed care plan and not be used to inflate the Medical Loss Ratio (MLR) inappropriately. The MLR reflects how much of the capitation payments paid by the state to the plan go toward covering the cost of the enrollees’ medical care. Accurate MLRs would result in more accurate managed care capitation rates.

Other Proposals Related to Legislative Changes to Medicaid Drug Rebate Cap, Court Ordered Changes, and Third-Party Liability

Removal of AMP Cap: The American Rescue Plan Act of 2021 removes the limit (i.e., “cap”) on Medicaid drug rebates (currently capped at 100% of AMP) beginning January 1, 2024. CMS proposes in this rule to insert a sunset date (December 31, 2023) on the maximum rebate amount for brand and generic drugs.

Conforming Regulation to Court-directed Decision on PBM Accumulator Programs: CMS proposes to rescind revisions made by the December 31, 2020, final rule (“Medicaid Program; Establishing Minimum Standards in Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based Purchasing (VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug Rebate and Third Party Liability (TPL) Requirements”) to the Determination of Best Price and Determination of AMP sections consistent with a court order issued by the United States District Court for the District of Columbia, which vacated and set aside the “Accumulator Adjustment Rule” of 2020.

Diagnosis on a Medicaid Prescription: CMS is soliciting comments relating to the issues, benefits, and challenges of requiring a diagnosis be included on Medicaid prescriptions. We

are particularly interested in understanding the burden of such a proposal, and seeking comments on how to negate any foreseeable impact on beneficiaries and providers, as well as steps that would be needed by states to implement a Medicaid requirement successfully for diagnosis on prescriptions as a condition of FFP.

Modification of Third-Party Liability Rules: CMS proposes to modify third-party liability rules to correct an omission in the regulation text due to changes authorized under Bipartisan Budget Act (BBA) of 2018. Under the proposal, CMS regulations would conform to the statutory exception to standard coordination of benefits cost avoidance and allow States to “pay and chase” for certain types of care. The proposed regulations would also specify the timeframe allowed prior to Medicaid paying claims for certain types of care.

There will be a 60-day comment period on this NPRM; comments on the notice of proposed rulemaking must be submitted to the Federal Register no later than July 25, 2023. For more information on how to submit comments or to review the rule in its entirety, visit the Federal Register.