On Thursday, January 21, the Centers for Medicare & Medicaid Services (CMS or “the Agency”) published its long-awaited final rule with comment period implementing the Medicaid pricing and reimbursement provisions of the Patient Protection and Affordable Care Act (“ACA”). A display copy of the final rule (“ACA Final Rule” or “Rule”), published in the Federal Register on February 1, can be found here. The ACA Final Rule has an effective date of Friday, April 1, 2016 (which CMS believes will provide “adequate time for implementation”), and applies prospectively from that date.

According to a CMS press release, the ACA Final Rule “clarifies many of the changes made to the Medicaid Drug Rebate Program by the Affordable Care Act and provides drug manufacturers with the regulatory guidance necessary to ensure proper calculation and reporting of drug product and pricing information.” The Agency estimates that over the next five years (2016-2020), the ACA Final Rule will save state and federal governments approximately $2.7 billion, and cost drug manufacturers and states approximately $431 million. Although many of the provisions of the extensive rule related to how drug manufacturers will calculate certain drug pricing benchmarks like Average Manufacturer Price (AMP) and related pricing metrics, there are numerous provisions that will impact pharmacies, including

  • States will now pay pharmacies based upon the Actual Acquisition Cost (AAC), instead of Estimated Acquisition Cost (EAC); 
  • CMS will replace the term “dispensing fee” with “professional dispensing fee” to recognize a pharmacist’s professional services and costs; and
  • FUL levels will be recalculated, but will be subject to a “floor” at the NADAC-type calculations for the same drugs.

A summary of the three most significant provisions for pharmacy are set out below. However, in general, pharmacies should expect changes in how many individual drugs will be priced (depending on whether the numerous definitional changes in manufacturer drug price calculations result in higher or lower AMPs – a unique calculation for each product) and reimbursed. In general, we expect reimbursement to come closer to actual cost, and dispensing fees to rise to fill in the gap. How the payments realign, however, and what the realignment means for the long term success of independent pharmacies in particular, will only be known in the future. 

Additional ancillary provisions addressing bona fide service fees, territorial application, and other issues, are outlined below. Based upon all the changes, however, we can predict that pharmacies will experience increased reporting requirements for manufacturers to track their needed calculations. Beyond the specific drug pricing changes, however, the more important drivers will be the changes in state reimbursement. 

Pharmacy Reimbursement

The ACA Final Rule addressed provisions of the regulation regarding Actual Acquisition Cost (AAC), professional dispensing fees, pharmacy profit margin and other matters having to do with how states set pharmacy reimbursement. 

AAC: Notably, CMS replaced the term Estimated Acquisition Cost (EAC) with AAC, now requiring states to pay pharmacies based upon the AAC of the drug. CMS opined that while “EAC may have been predictable, we do not believe it was an accurate standard for determining pharmacy reimbursement rates.” States will have until April 2017 to modify their plans, if needed. The AAC requirements apply only to Medicaid fee-for-service; Medicaid-managed care organizations are not required to adopt the AAC pharmacy reimbursement methodology. The AAC can be calculated in several different ways by states, including by reference to national surveys, use of WAC prices, or via state surveys. 

Although commenters urged CMS to require different terminology than “actual” (because by definition the state prices would lag by a year or more, and often may not reflect rebates or discounts), CMS declined the request. Similarly, CMS allowed the states to determine their own methodology, without mandating any different methodologies for long-term care, mail order, community, chain or other pharmacy types. Still, it is likely that some states will separately consider each of the different types of pharmacies in setting acquisition costs. 

Professional Dispensing Fees: CMS replaced the term “dispensing fee” with “professional dispensing fee.” In so doing, CMS noted that this change was “designed to reinforce our position that the dispensing fee should reflect the pharmacist’s professional services and costs to dispense the drug product to a Medicaid beneficiary.” Like the AAC methodology above, the “professional dispensing fee” applies only to Medicaid fee-for-service; Medicaid managed care organizations are not required to make this change. 

The rule defines “professional dispensing fee” as a measurement of the cost which: 

  1. s incurred at the point of sale or service and pays for costs in excess of the ingredient cost of a covered outpatient drug each time a covered outpatient drug is dispensed;
  2. includes only pharmacy costs associated with ensuring that possession of the appropriate covered outpatient drug is transferred to a Medicaid beneficiary. Pharmacy costs include, but are not limited to, reasonable costs associated with a pharmacist's time in checking the computer for information about an individual's coverage, performing drug utilization review and preferred drug list review activities, measurement or mixing of the covered outpatient drug, filling the container, beneficiary counseling, physically providing the completed prescription to the Medicaid beneficiary, delivery, special packaging, and overhead associated with maintaining the facility and equipment necessary to operate the pharmacy; and
  3. Does not include administrative costs incurred by the State in the operation of the covered outpatient drug benefit including systems costs for interfacing with pharmacies.

The rule also directed states to use a “transparent, comprehensive, and well-designed tool that addresses a pharmacy provider’s cost to dispense the drug product to a Medicaid beneficiary.” Importantly, however, CMS does not require states to consider a reasonable rate of return or any profit by the pharmacy. Nor, again, does the Final Rule require CMS to evaluate different pharmacy classes and their associated costs (for example, the delivery and packaging costs that long term care pharmacies incur) in setting dispensing fees, and states will have the flexibility of creating one or more classes of dispensing costs in their state plans.

Federal Upper Limits

CMS has also changed the metrics by which it will set Federal Upper Limit (FUL) payments for certain drugs. In response to comments that the 175 percent of the weighted average of monthly AMPs may provide a FUL reimbursement that is too low, CMS agreed to provide an exception when that amount is less than the average pharmacy acquisition cost (e.g., NADAC) for those drugs. In those circumstances, CMS will utilize a higher multiplier such that the FUL reimbursement will equal the average acquisition cost. As a result, the NADAC is the effective floor for the new FULs. 

CMS has indicated it will begin publishing the “Final” FULs in March to be effective in April 2016, even though states have until April 2017 to implement the new outpatient drug rule with state plan amendments. States that need to amend their Medicaid State Plans (“SPAs”) to accommodate the FUL provisions of the ACA Final Rule may have one year from the effective date of this Final Rule (that is, until April 1, 2017) to submit a compliant SPA. This will almost certainly result in confusion between federal and state procedures, and pharmacies should prepare for this confusion in the coming months. In addition, CMS will not include so-called 5i (inhalation, infusion, instilled, implanted and injectable) drugs that are not generally dispensed by retail community pharmacies in the FUL calculations, nor will it apply the FUL to 5i drugs that are not generally dispensed to such pharmacies. The FUL calculations will include authorized generic products when: (a) determining if three therapeutically and pharmaceutically equivalent (A-rated) products are on the market and (b) calculating the FUL. Similarly, the FULs will not apply to FDA B-rated products. Furthermore, product groups that do not have the same unit type reported are not subject to FUL application, and the AMP of a terminated NDC will not be used to calculate a FUL, beginning on the first day of the month after the termination date reported to CMS.

During the comment period, interested parties advised CMS that based upon prior FULs, it appeared that products and product groups fell in and out of the reports; some product groups has significant price swings month-to-month; and CMS sometimes placed drugs in the incorrect product groups. CMS responded by noting that there will be fluctuation in any upper limit calculation, that it is committed to improving its data integrity, and that by defaulting to NADAC-like amounts when the FUL calculation falls below NADAC will reduce the harm of occasional price variability. CMS also rejected commenter requests that it apply a smoothing methodology to avoid price swings. The first test of CMS’s ability to properly manage the FUL calculations will be known when CMS finalizes and publishes the next update in April 2016 after this ACA Final Rule is effective.

State Plan Requirements

States must consider both ingredient cost reimbursement and professional dispensing fee reimbursement when proposing changes to either of these components of Medicaid COD reimbursement. States may propose tiered dispensing fees based on pharmacy type (e.g., chain, non-chain, or 340B, non-340B).  CMS urged the States to use reliable and accurate data to establish an AAC model of reimbursement to ensure that Medicaid providers are adequately reimbursed. CMS specifically noted that an AMP-based reimbursement regimes for single source products could constitute an appropriate methodology, so long as the State ensured that pharmacies are reimbursed at a price that reflects AAC, and take into account wholesales markup. States that wish to consider AMP-based reimbursement must also consider the AMP confidentiality provisions of the Medicaid statute.

States may also provide coverage of investigational drugs in Medicaid, but will only receive federal matching payments for these drugs when coverage is established in the state plan. This coverage could include payment for drugs in the middle of clinical trials approval dispensed for purposes of “expanded access” (also known as “compassionate use”), provided the state plans sought to include them.

MAC Pricing

Unfortunately, the Final Rule did not directly address so-called “Maximum Allowable Cost” or MAC issues. CMS does not address MAC pricing in the Rule, even though encouraged to do so by commenters. The Preamble states: “One commenter stated that CMS should require states to demonstrate that both their brand name drug reimbursement, as well as the maximum allowable cost (MAC) lists for generics are justified based on state based data and not permit states to make reductions in these MAC lists without justification to CMS. The commenter added that states should be required to demonstrate that their MAC methodology is based on community pharmacies costs of purchasing prescription drugs and also include a process by which such values are changed in a timely manner so that they are more transparent to the pharmacy. Response: Provisions addressing the use of maximum allowable cost (MAC) lists are not addressed in this final rule. Along with a SPA submission, states must also provide public notice of that change in accordance with § 447.205 prior to proposing any changes; therefore, the public notice process shall address any transparency concerns. States are not limited in regard to conducting retail pharmacy surveys and CMS is not finalizing any such requirement in this final rule. We further emphasize that states must establish rates that ensure beneficiary access in accordance with the requirements of section 1902(a)(30) of the Act. We also note that to the extent that pharmacies have concerns regarding the adequacy of the payment rates, they should present these concerns to the state.” 

Other Changes

In addition to the reimbursement changes, there are several other changes that are worth noting for those pharmacies that receive manufacturer service fees, the drugs dispensed to children under the age of 17, territorial application, and data submission requirements for Medicare Managed Care Organizations.

Average Manufacturer Price and Best Price

Bona fide service fees (“BFSFs”): CMS recognized that its three proposed definitions were inconsistent, and streamlined them to adopt and refer to the definition in §447.502 throughout. In addition, CMS clarified in the ACA Final Rule that BFSF analysis must be conducted on fees to entities other than wholesalers and RCPs, but not on fees paid to entities that are not AMP or Best Price eligible, as appropriate. One of the open questions regarding BFSFs since the passage of the ACA is whether the four service fees listed at 1927(k)(1)(B)(i)(II) are either (a) BFSFs without any further analysis, or (b) potential BFSFs that must be subjected to the four part regulatory test. While many suspected the latter due to the language in the proposed rule, the ACA Final Rule still leaves open the possibility that the former may be the guiding measure. (a) may be the correct answer.

However the issue will be resolved, the determination of fair market value must be articulated by the manufacturer and made contemporaneously with the payment of the fee. Manufacturers may rely on “any” documentation to establish FMV, “provided that it makes clear the methodologies or factors the manufacturer used” in making the FMV determination. This would appear to include, if sufficient, documentation demonstrating rigorous negotiation with the service provider. CMS refused to establish a safe harbor for the calculation of fair market value, saying it lacked the authority to do so.

Other Rebate Issues

Children Utilization: The ACA Final Rule reaffirms that only drugs indicated for use in children up to 16 years of age (that is, until their 17th  birthday) qualify for the smaller 17.1 percent minimum Medicaid rebate percentage. CMS rejected numerous attempts to redefine pediatric at ages above 16. How a manufacturer may establish the pediatric-only indication, however, was expanded beyond “as specified in the Indications and Usage section of the FDA approved labeling” to also include through “an explanation elsewhere in the labeling that makes clear that the drug is approved for use only in the pediatric age group, or a subset of this group.” Further, CMS made clear that one dosage form and strength of a product (generally, one NDC-9) could qualify for the 17.1 percent minimum rebate percentage because of its particular label and usage, while other NDC-9s within the product family may not.

Territorial Reach: The Agency finalized its redefinitions of “State” and “United States” to include the five territories – Puerto Rico, U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana Islands – effective April 1, 2017. The extra year was given to address not insubstantial implementation concerns raised by both territories and manufacturers – according to CMS, there is nothing that can’t be fixed with 12 months’ lead time. The territories may exercise their waiver authority and choose not to participate in the MDRP. Manufacturers will be obliged to pay rebates on Medicaid utilization in the participating territories beginning 2Q 2017, and to simultaneously include sales and price concession data in their AMP and Best Price calculations. Inclusion/exclusion rules for particular purchasers in the territories are addressed above.

Application to Medicaid Managed Care Organizations: Faced with comments and complaints about the proposed MCO reporting requirements, the Agency will not finalize its 30-day data submission requirements, but may offer guidance in the future. Instead, the final rule addresses MCO data in the state reporting requirements regulation at §447.511. Id. While not providing specific penalties for failure to do so, CMS reminded states that they are required to ensure that the mechanism used to avoid duplicate discounting or rebates on 340B drugs applies to Medicaid MCO utilization; it is the states’ responsibility to instruct their MCOs to exclude 340B units from its utilization data. Finally, CMS called on states to include MCO utilization based on the date dispensed (date of service) rather than the claim paid date (the date for fee-for-service inclusion), because MCO utilization is susceptible to considerable lag.

Given the complexity of this ruling, we highly encourage you to participate in NCPA’s Member Forum on this topic. NCPA will host a Members Forum at 2 p.m. ET, Feb. 24 with a CMS official who will review the final rule and discuss what it means for independent community pharmacy. Click here for more information.