United States: Proposed Medicaid Rebate Rule "Updates" Reflect Significant Program Changes

On May 26, 2023, the Centers for Medicare & Medicaid Services (CMS) published a proposed rule¹ to implement product misclassification and misreporting remedies contained in 2019 legislative amendments to the Medicaid rebate statute, as well as various "program administration and program integrity updates." Although the former proposals are relatively straightforward, the latter "updates" include significant changes to rebate program definitions and requirements that could materially affect manufacturer pricing practices and government pricing program liabilities. In some cases, such as CMS's proposal to use its authority to conduct price verification surveys to implement a state-driven form of negotiated pricing similar to the federal program authorized under the Inflation Reduction Act (IRA), the proposals reflect aggressive interpretations of the agency's statutory and regulatory authority. Further, the release includes a request for information (RFI) relating to a potential requirement for prescribers to include the diagnosis for which the drug is prescribed on Medicaid prescriptions, a potentially major change to long-standing prescribing practices. Finally, the proposed rule would incorporate changes to Medicaid managed care organizations' (MMCO) relationships with pharmacy benefit managers (PBMs) and other subcontractors, which are designed to enhance price transparency and discourage "spread pricing."

I. Background

The Medicaid rebate statute² requires manufacturers of "covered outpatient drugs" to enter into a rebate agreement with CMS as a condition to federal funding for those products under Medicaid and Medicare Part B. Under the rebate program, manufacturers must pay rebates to state Medicaid programs based on products' average manufacturer price (AMP) and best price (BP) data reported on a monthly and quarterly basis by manufacturers. The amount of the rebate payable generally includes two components: (i) a "basic" rebate and (ii) an "additional" rebate designed to penalize AMP increases that exceed the rate of inflation.³ CMS issued a final rule in 2016 addressing many Medicaid rebate program issues in considerable detail,⁴ and has subsequently amended those rules on several occasions. In 2019, Congress amended the Medicaid rebate statute to add compliance remedies and oversight authorities associated with manufacturers' reporting of product and pricing information under the rebate program.⁵

II. Overview of the proposed rule

While the title of the proposed rule suggests that it addresses simple statutory implementation issues, the substance of CMS's proposals are far from mundane. We have organized and addressed the proposed changes below according to the following categories: (i) proposals relating to the required scope of manufacturer participation; (ii) proposals defining included and excluded covered outpatient drugs; (iii) proposals relating to drug product information reporting and enforcement; (iv) proposals relating to AMP and BP calculation methods; (v) proposals relating to rebate calculation formulas; (vi) proposals relating to rebatable units (including the RFI relating to potentially requiring diagnosis codes as part of Medicaid prescriptions and pharmacy claims submissions); (vii) proposals addressing administration and oversight matters; (viii) proposals relating to the sufficiency of data to support state Medicaid programs' pharmacy payment rates; and (ix) proposed new requirements for Medicaid managed care organizations providing prescription drug coverage.

A. Scope of manufacturer participation

The rebate statute requires "manufacturers" to enter into rebate agreements with CMS covering all of their covered outpatient drugs and generally defines the term "manufacturer" broadly, consistent with the Federal Food, Drug, and Cosmetic Act.⁶ CMS regulations further define the term to include the "entity" that holds the National Drug Code (NDC) for a product.⁷

However, neither the statute nor the regulation has clearly defined how separate subsidiaries and affiliates are to be treated under the program. In 1995, CMS proposed a rule that defined "manufacturer" to include a parent, brother-sister, or subsidiary corporation that had at least 80 percent of the voting power across all classes of stock or at least 80 percent of the total value of shares in all classes of stock.⁸ However, CMS did not finalize that proposed rule.

In the recent proposed rule, CMS states that its current policy requires each "associated" labeler code of a manufacturer to have a rebate agreement, and that the agency treats each associated labeler code as part of a single manufacturer.⁹ However, manufacturers have challenged this policy (and CMS has in the past recognized the withdrawal of affiliates from the program), arguing that associated companies, parent companies, and brother-sister companies are distinct entities.¹⁰

The proposed rule seeks to preclude manufacturers from excluding drugs from the program by forming subsidiary corporations.¹¹ It would define "manufacturer" to mean "all associated entities of the manufacturer that sell prescription drugs, including but not limited to owned, acquired, affiliates, brother or sister corporations, operating subsidiaries, franchises, business segments, part of holding companies, divisions, or entities under common corporate ownership or control."¹² Each entity would be required to maintain a rebate agreement, and "each associated labeler code of a manufacturer [would be] considered to be part of the single manufacturer."¹³ The proposed regulation does not otherwise specify, however, what level of "association" will be deemed to trigger this rule, such as the level of ownership that would be deemed to result in two corporations being deemed "brother and sister" (when they are not both 100 percent owned by a common parent). But the economic impact analysis estimated that 24 related-party manufacturers may be affected.¹⁴

B. Covered outpatient drugs

1. Narrowing the "limiting definition"

The rebate statute applies to "covered outpatient drugs," which includes most FDA-approved drugs, biologics, and insulin.¹⁵ However, the statute also contains a "limiting definition" which excludes drugs "provided as part of, or as incident to and in the same setting as" various other health care services "and for which payment may be made ... as part of payment for the [services] and not as direct reimbursement for the drug."¹⁶ CMS has historically interpreted these provisions to require manufacturers to report pricing data with respect to all of their products, but to permit manufacturers to dispute rebate claims when the drug payment is bundled into the payment for other services.

The proposed rule would narrow the exception by specifying that a drug is considered to be subject to "direct reimbursement" if the payment includes any payment for a drug and the drug is separately identified, even if the payment for the drug is not specifically "unbundled" from the payment for the health care service.¹⁷

2. Exclusion of vaccines

Vaccines have been excluded from the definition of a covered outpatient drug under the rebate statute since its enactment, yet there is no current regulatory definition of a "vaccine."¹⁸ CMS asserts that a definition is now needed because of advances in immunology-based drug development (e.g., in oncology). Specifically, in CMS's view, "it is likely Congress understood the term 'vaccine' to refer to preventative vaccines only," meaning "therapeutic vaccines" would not be considered vaccines under the statute.¹⁹ Thus, the proposed rule defines a vaccine as "a product that is administered prophylactically to induce active, antigen-specific immunity for the prevention of one or more specific infectious diseases and is included in a current or previous FDA published list of vaccines licensed for use in the United States."²⁰ This proposal is especially important for those developing therapeutic vaccines, such as immune-oncology products, because they would be considered covered outpatient drugs and not included within the vaccine exclusion.²¹

3. Noninnovator multiple source drug definition

The amount of the rebate payable for most drugs under the rebate program depends on whether a product is considered to be a single source drug or an innovator multiple source drug (S/I drug) on the one hand, or a noninnovator multiple source drug (N drug) on the other. In general, N drugs are generic products approved for marketing under abbreviated new drug applications (ANDAs). Some older products, however, predate the 1962 ANDA regulatory scheme, and CMS proposes to clarify the N drug definition to specify that an N drug does not include a drug approved prior to 1962 that is not marketed under a new drug application (NDA).²²

C. Drug product information reporting and enforcement

Under the rebate program, manufacturers must report various information relating to their products in addition to pricing data, and MSIAA enacted new provisions relating to product information reporting and enforcement. The proposed rule implements these drug product reporting and related enforcement standards.

First, CMS defines drug product information to include most of the product "demographic" information currently reported under the program, including items such as the NDC number, product category (S/I drug v. N drug), approval date, market date, 5-I indicator (to identify "nonretail" infused, injected, implanted, instilled, or inhaled provider-administered products), base period AMP, and other information required to perform rebate calculations. In situations where the manufacturer or CMS determines that corrections to drug price information are necessary, the manufacturer must contact CMS to coordinate the change and must certify the revised information.²³

Second, existing CMS regulations generally require manufacturers to submit revisions to previous AMP or BP data to CMS within 12 calendar quarters, except that manufacturers may submit revised data for earlier periods in cases involving an "internal investigation."²⁴ The proposed rule would define an "internal investigation" in a way intended to limit this exception. For example, where the "investigation" pertains to a prior manufacturer's reported price information relating to the product, the new manufacturer may only submit revised information in the case of "fraud, abuse or a violation of law or regulation" by the prior manufacturer, rather than simply the application of a different calculation methodology or assumptions following a product acquisition.²⁵

Third, turning to MSIAA's amendments, CMS proposes regulations to implement the program enforcement authorities associated with a manufacturer's misclassification of a drug as either an S/I drug or an N drug. While the proposed rule generally focuses on misclassifications relating to product status, it also defines misclassifications to include (i) the submission of any erroneous drug pricing information as broadly defined above or (ii) the payment of erroneous rebate amounts, even if all data submissions are correct. Under the proposed rule, if CMS identifies a misclassification, it will notify the manufacturer of the misclassification and provide a calculation of associated past due rebates, and the manufacturer will have 30 days to correct and certify the information. Manufacturers would have 60 days from the date of the initial CMS notice to pay any rebate underpayments to the states. If the manufacturer fails to do so, CMS may make corrections itself, suspend or exclude the misclassified drug from the program, impose a civil money penalty of up to 23.1 percent of the product AMP for each associated drug unit, or, ultimately, terminate the manufacturer from the program. Finally, CMS will publish an annual report to Congress related to misclassified drugs.²⁶

D. AMP and BP calculation methods

1. "Stacking" and BP calculations

The rebate statute generally defines BP as "the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States."²⁷ This language has been interpreted to refer to the single lowest price to a single entity within the distribution and payment chain for a drug, in contrast to the aggregate/average calculation methods applicable to AMP.

In a recent False Claims Act case,²⁸ the Fourth Circuit affirmed a district court decision holding that neither the rebate statute nor the 2016 final rule clearly required that manufacturers must instead aggregate, or "stack," discounts to multiple entities throughout the distribution and payment chain, to determine a drug's BP, and that a manufacturer's position that no such "stacking" was required was "objectively reasonable."

In the proposed rule, CMS proposes to "prospectively clarify" the regulations to provide that manufacturers must combine, or "stack," discounts offered to different and unrelated entities within the distribution chain when determining BP.²⁹ CMS focuses upon the "lowest realized price at which the manufacturer made that drug unit available" to BP-eligible entities, so that stacking is required when "a manufacturer provides a discount to a wholesaler, then a rebate to the provider who dispensed the drug unit, and then another rebate to the insurer who covered that drug unit...."³⁰ CMS does not address, however, the difficulty (if not impossibility) of determining the cumulative discounts that were provided on a given "drug unit" to different BP-eligible entities within the supply chain; in effect, the proposed rule may require that the greatest level of discounts to BP-eligible entities at each stage of the supply chain always be combined, in something of a worst-case scenario, unless the manufacturer can demonstrate there was no drug unit to which all of those discounts applied. Notably, the Office of Management and Budget's (OMB's) regulatory impact statement indicated that "we cannot determine cost estimates for this item."³¹

2. Rescission of drug coupon "accumulator" rule for AMP and BP calculations

Many manufacturers have historically offered coupons, savings cards, or other forms of cost-sharing assistance to commercially insured patients, and CMS's 2016 final rule broadly exempted these forms of support from AMP and BP calculations where their value was passed through to the patient.³² In 2020, however, CMS amended its rule to require that such amounts be taken into account in pricing calculations where such amounts are "captured" by pharmacy benefit manager (PBM) or other payor "accumulator" programs, and not passed on to patients.³³ In May 2022, a federal district court struck down the accumulator rule as being outside of CMS's authority,³⁴ and CMS has now formally proposed to withdraw the 2020 rule.³⁵

E. Rebate calculation formulas

1. Market date definition for additional inflation rebates

Under the rebate program, manufacturers must pay an "additional rebate" to the extent that their product's AMP increases faster than the rate of inflation relative to a base period. The base period, in turn, is generally defined by reference to the initial "market date" of the drug.³⁶ The proposed rule adds clarity by defining "market date" as "the date on which the covered outpatient drug was first sold by any manufacturer," and rejecting a definition of when a drug is first advertised or available for sale.³⁷ This would allow manufacturers to utilize actual data to determine base date AMP, instead of relying on reasonable assumptions.³⁸ Further, CMS proposes that a drug is "sold" when it is "transferred (including in transit) to a purchasing entity," but acknowledges that experienced manufacturers are interpreting the term differently.³⁹ CMS has expressly requested comments to define the term "sold."⁴⁰ Finally, the provision also clarifies that a second or other subsequent manufacturer or licensee does not receive a new market date, but rather adopts the original market date – the date the drug was first sold by any manufacturer.

2. Rebates applicable to "other drugs"

In a few cases, a drug may not meet the technical definition of an S/I drug or an N drug, and CMS has proposed a technical clarification that such drugs will be subject to rebates as if they were N drugs.⁴¹

3. Removal of Medicaid rebate cap

Due to the effect of the additional rebate, it is possible that the total amount of rebates payable for a drug can exceed the gross sales revenue for the product. In 2010, Congress established a maximum rebate cap equal to 100 percent of the AMP. However, in 2021, Congress removed the maximum rebate cap, effective January 1, 2024.⁴² The proposed rule would amend the regulation to reflect this change.⁴³

F. Rebatable units

1. Physician-administered drugs

Since 2005, the rebate statute has required states to collect utilization data with respect to physician-administered drugs identified by CMS, so that rebate claims could be submitted for these drugs after "crosswalking" the Healthcare Common Procedure Coding System billing codes used for physician-administered drugs to the NDC codes used in the drug rebate program.⁴⁴ Consistent with the statutory terms, CMS currently requires states to submit utilization data for all single-source physician-administered drugs, and for the top 20 highest dollar-volume multiple-source physician-administered drugs specified annually by CMS.⁴⁵ Under the proposed rule, CMS would require states to submit utilization data, and collect rebates for, all physician-administered, covered outpatient drugs, including those reimbursed under managed care arrangements.⁴⁶

2. RFI solicitation of comments to require inclusion of diagnosis codes on Medicaid claims

With certain exceptions, the Medicaid statute requires states to cover products utilized for "medically accepted indications," which is further defined to include FDA-approved indications as well as indications listed in specified third-party compendia.⁴⁷ Yet, without a requirement to include a diagnosis code on Medicaid prescriptions and claims, it is generally impractical for states to determine if a product is being used for this purpose and therefore if it is eligible for coverage and subject to a rebate. Typically, the indication for which the drug is prescribed can only be obtained by requiring prior authorization for the drug and requiring the prescriber to provide that information to obtain coverage.

Although CMS is not proposing specific changes in this regard, CMS is considering the potential impact of requiring a diagnosis to be included on a prescription in order for a state to receive federal matching funds for the prescription. The agency is requesting information on this question with particular areas of interest including the requirement's burden, associated privacy concerns, and operational considerations.⁴⁸ Given that prescribers have generally not been required to include diagnosis codes on prescriptions, such a change could have various significant impacts. Among other things, it might create additional exposure for prescribers and Medicaid managed care organizations under the False Claims Act, to the extent a diagnosis is determined to be "false" or a payor fails to appropriately apply the relevant criteria for establishing the drug was used for a medically accepted indication.

G. Administration and oversight

1. Time limits on audits of state utilization data

Under the rebate program, states must invoice manufacturers based on prior quarter product utilization within 60 days of the end of each calendar quarter, and manufacturers may audit or dispute that utilization information.⁴⁹ However, the statute does not place any specific time limit on audits or disputes. CMS proposes to require that formal or informal manufacturer utilization disputes, hearing requests, or audits be initiated within 12 calendar quarters of the last day of the quarter from the date of the state invoice.⁵⁰

2. Price verification survey process

CMS also proposes standards with respect to price verification surveys of manufacturers and wholesalers, for purposes of evaluating manufacturer price reports and Medicaid payment amounts, and to make certain nonproprietary information publicly available.⁵¹

The rebate statute authorizes price certification surveys for products subject to rebate agreements in order to verify AMP, BP, wholesale acquisition cost (WAC) and Medicare average sales price (ASP) data. CMS notes that these data could also provide information to enable states to set more efficient payment rates for products or to seek supplemental rebates, particularly with respect to physician-administered drugs or other drugs, such as gene therapies. These "non-retail" drugs are generally not subject to existing surveys and represent an increasing proportion of Medicaid spending.

Significantly, however, CMS seems to suggest that the data to be collected may go well beyond simple transaction prices to "verify" AMP or ASP. For example, the preamble references non-price data such as manufacturer production methods and cost input data, patient outcome data, and information relating to consignment distribution models. CMS states that making this information available "would allow States to access this information and understand the derivation of a COD's price so that States may establish and negotiate payment for Medicaid CODs...."⁵² In effect, CMS seeks to use its price verification authority to construct and facilitate a separate "negotiated pricing" mechanism for states, independent of that authorized at the federal level under the IRA.

Turning to the specifics of the surveys, to identify drugs (other than drugs subject to the IRA-negotiated pricing scheme) subject to price verification surveys, CMS would initially (i) identify drugs with the highest Medicaid spending per claim or the highest total Medicaid spending net of rebates, the highest one-year price increase, or the highest launch price; (ii) select the highest per claim and total spending drugs with expenditures greater than 0.5 percent of Medicaid drug spending, the top 1 percent of drugs with the highest median one-year WAC increases, and those new drugs with launch prices over $500,000 if those products are estimated to be within the top 5 percent of Medicaid drugs; and (iii) publish the list of drugs selected for price verification surveys each April. Next, CMS would "refine" the list by considering the exclusion of products for which manufacturers (i) were "willing" to negotiate CMS-approved supplemental rebates with at least 25 states which, when combined with federal rebates, would exceed the ratio of rebates to expenditures in fee-for-service Medicaid programs (currently 38 to 72 percent) or (ii) had otherwise worked with states to control expenditures through measures such as value-based purchasing arrangements. In addition, CMS also solicits comments regarding whether it should conduct surveys for drugs within this cohort that were approved under accelerated FDA pathways.⁵³

For drugs subject to surveys, CMS proposes to collect information on (i) prices, charges, distribution, and utilization; (ii) clinical information; (iii) costs of production, research, and marketing; and (iv) "other information" that may be unique to enable states to understand product pricing. CMS intends to post non-proprietary information on a public website.⁵⁴ In sum, CMS has proposed using its authority to "verify" prices to instead establish a process requiring manufacturers to offer minimum discounts or face the potential public disclosure of their business information.

H. State Medicaid programs' pharmacy payment rates

Current CMS regulations require that state pharmacy payment rates, including both ingredient costs and pharmacy dispensing fees, must be consistent with "actual acquisition costs" (AAC), and that states must submit "findings" in support of AAC compliance in connection with their Medicaid state plan.⁵⁵ Under the proposed rule, CMS would clarify that such "findings" may not be supported by simple "market surveys" of what other payors reimburse for drugs or dispensing fees. Instead, rates and dispensing fees must be based on "cost data"; in particular, states "must substantiate how their reimbursement to pharmacy providers reasonably reflects the actual cost of the ingredients used to dispense the drug, and the actual costs of dispensing the drug, consistent with the regulatory definitions of AAC and professional dispensing fee."⁵⁶

I. Medicaid managed care requirements

1. Unique BIN/PCN identification cards

Health plans, including Medicaid managed care organizations (MMCOs), typically issue enrollee identification cards with unique codes known as BIN/PCN codes, which are used to identify the patient's insurance plan. In some cases, however, MMCOs do not reflect unique, Medicaid-specific BIN/PCN codes on the cards. The proposed rule would require MMCOs to use Medicaid-specific codes and group numbers on identification cards, beginning no later than the state's next rating period for the MMCO contract following the final rule effective date. CMS suggested that the use of such codes could facilitate better identification of Medicaid claims, which in turn can help states avoid invoicing for duplicate Medicaid rebates for drugs purchased under the section 340B drug discount program where the state also requires MMCOs to implement a mechanism, such as claims modifiers, to identify claims for 340B-discounted drugs.⁵⁷

2. Drug cost transparency in MMCO contracts and spread pricing

Potentially more significantly, the proposed rule would require MMCOs to structure their agreements with subcontractors, including PBMs, to provide greater transparency and differentiation of drug costs and other expenses.⁵⁸ CMS intends this change to tease out service fees paid by MMCOs to plans through "spread pricing" mechanisms.⁵⁹ In particular, CMS seeks to limit the paid health care costs used by states to calculate MMCO medical loss ratios (MLRs) by excluding the amount of any "spread" (which CMS regards as "paid for administrative services furnished by the PBM"), and in turn for such MLRs to yield more actuarially sound capitation rates.⁶⁰ In short, CMS is indirectly discouraging spread pricing by requiring MMCO subcontractors such as PBMs to report their drug claims and other costs (including spread pricing differentials) as separate line items.⁶¹

III. Discussion and potential areas for comments

Although partially styled as "Administration and Program Integrity Updates," the proposed rule reflects significant regulatory changes to long-standing rebate program approaches and includes elements that may present operational challenges for manufacturers, providers, wholesalers, and payors. CMS's proposals, particularly taken together, could create material manufacturer liabilities under the Medicaid and 340B drug pricing programs and affect pricing strategy more broadly. Moreover, at least several of the proposals reflect extremely broad agency interpretations of both statutory terms and regulatory authority that are sure to raise questions under the Administrative Procedure Act.

CMS is accepting comments on the proposed rule until July 25, 2023. In addition to some of the more specific items described in the preceding section (e.g., vaccines, N drugs), manufacturers, distributors, providers, and payors should carefully consider the proposals' implications, including but not limited to the following:

• What is a "manufacturer"? Although CMS styles its interpretation of the term "manufacturer" to include "associated" entities as a clarification of existing policy, its prior deviations from that approach and its 1995 proposals suggest that it may actually reflect a change in agency interpretation that disregards corporate forms. Either way, even if its proposals are sustainable and may affect relatively few entities, manufacturers may wish to seek clearer guidance with respect to the "associated" manufacturer standard as it relates to joint ventures and other investment interests.
• Drug pricing information corrections and audit limits – a one-way door? CMS's limitation of the "internal investigation" exception for pricing resubmissions and its proposed manufacturer audit time limits effectively seek to create a statute of limitations with respect to manufacturers' ability to recoup rebate overpayments, where such limitations do not exist with respect to state claims for rebate underpayments due to miscalculations or data errors.
• Erroneous rebate payments as "product misclassification" errors. While MSIAA clearly authorizes additional enforcement remedies for manufacturers' product misclassifications, manufacturers should consider the scope of information that CMS proposes to fall within "misclassifications," including erroneous rebate payments when the submitted product information is in fact correct.
• Limiting definition – a rule swallowing an exception? Even if CMS's historical interpretation of the limiting definition as a limit on rebate liability rather than product participation and reporting is arguably restrictive, its purpose in that context is still consistent with the clear meaning of the statute: to carve out drugs reimbursed under bundled payment structures from the rebate program. CMS's proposal may effectively negate even that restriction and render the limiting definition meaningless, however, and subject substantially more "covered outpatient drugs" (including clearly inpatient drugs) to rebates, inasmuch as many bundled service reimbursement claims may reflect an itemization of the items and services furnished to the patient as part of the encounter.
• CMS's "stacking" proposal – lemonade from lemons? From our perspective, while there may indeed be circumstances where multiple discounts benefitting a single entity should be "stacked," CMS's proposal is inconsistent with the statute, which references a "price" "to" "any" of a list of entities (ending with the disjunctive "or"). Indeed, while the lower court decisions in Allergan Sales found that the whistleblower had asserted a "plausible" alternative construction under a Chevron-like analysis, it is equally clear that both of those decisions also concluded that the better statutory interpretation was against a stacking requirement.⁶² It is also consistent with historical guidance and practice, and the agency's suggestion that its 2016 final rule reflected an intent to require stacking without regard to whether discounts benefit a single entity is questionable, inasmuch as the examples cited in that preamble contemplated discounts benefitting a single entity at the retail level. Finally, of course, CMS's stacking proposal could potentially create significant additional rebate liabilities (which the OMB could not even estimate) and could raise massive operational challenges for manufacturers seeking to "track" discounts to multiple entities associated with a single product unit sale.
• Rebates for all multiple-source, physician-administered drugs. Manufacturers of multiple-source, physician-administered drugs should consider whether the statute authorizes mandatory rebates for drugs outside the "top 20" list created by CMS.⁶³
• Price verification surveys – a Trojan horse? While the IRA's price negotiation program included numerous, specific limitations on the number and types of drugs subject to price negotiations, specific standards with respect to information collection, durational limits, and the like, CMS has sought to establish a state-driven price negotiation program without any of these limits. More important, the agency seeks to do so with little to no statutory authority and is instead relying on "price" verification survey authority to collect information that is decidedly unrelated to "verifying" submitted pricing data for uses that extend beyond "verification" to "negotiation" of additional rebate amounts. In short, the proposed rule represents a clear attempted end-run around the statutory limits on price negotiation authority that Congress enacted in the IRA. Aside from these issues of authority, the proposal raises substantial questions relating to the maintenance of confidential manufacturer information (and who determines what information is confidential) and other operational matters.
• Diagnosis codes – solicitation of comments. While CMS has not made any specific proposals with respect to the use of diagnosis codes, the proposed rule's preamble suggests a desire to enable states to identify and deny payment for drug claims that do not involve "medically accepted indications."⁶⁴ While prescription drug claims formats do include fields for diagnosis codes, and e-prescribing and electronic health record system interfaces could be adapted to capture such information, the implementation of a requirement to include them on pharmacy claims would, at a minimum, require significant implementation work on the part of physicians and pharmacies, and could risk disruptions in Medicaid patient treatment. Moreover, the requirement would effectively breathe life into a statutory coverage requirement that has largely been ignored in practice, potentially creating new False Claims Act exposure for manufacturers, prescribers, pharmacies, and MMCOs with respect to all Medicaid prescriptions – ranging from inexpensive generics to high-cost therapies.
• Managed care matters. While the proposal to require unique Medicaid BIN/PCN identifiers is largely operational, its ultimate utility may lie in the identification of potentially duplicate rebate claims under either Medicaid or negotiated agreements. Similarly, the requirement for PBMs to differentiate payments for claims and other services (including via spread pricing) will require MMCOs to modify existing agreements, and may provide greater transparency that could affect ongoing PBM pricing structures and MLR calculations. Finally, MMCOs should consider the broader implications of CMS's fee-for-service proposals under the rebate program. To the extent that such programs may entail significant increases in manufacturer statutory rebate liabilities, it may indirectly affect manufacturers' willingness to provide discounts or rebates under negotiated MMCO relationships for that same utilization.

Footnotes

1. 88 Fed. Reg. 34238 (proposed May 26, 2023).

2. 42 U. S. C. § 1396r-8.

3. Id. § 1396r-8(c).

4. See 42 C. F. R. §§ 447. 500 et seq. ; 81 Fed. Reg. 5170 (Feb. 1, 2016).

5. Medicaid Services Investment and Accountability Act of 2019 (MSIAA), Pub. L. No. 116-16, 133 Stat. 852.

6. 42 U. S. C. § 1396r-8(k)(5).

7. 42 C. F. R. § 447. 502.

8. 60 Fed. Reg. 48,442, 48,447 (proposed Sept. 19, 1995).

9. 88 Fed. Reg. at 34,255.

10. Id.

11. Id. at 34,256.

12. Id.

13. Id.

14. Id. at 34,284.

15. 42 U. S. C. § 1396r-8(k)(2).

16. Id. § 1396r-8(k)(3).

17. 88 Fed. Reg. at 34,252.

18. Id. at 34,258.

19. Id. at 34,258-59.

20. Id. at 34,259.

21. Id.

22. Id. at 34,257.

23. Id. at 34,252.

24. 42 C. F. R. § 447. 510.

25. 88 Fed. Reg. at 34,253.

26. Id. at 34261.

27. 42 U. S. C. § 1396r-8(c)(1)(C)(i).

28. United States ex rel. Sheldon v. Allergan Sales LLC, 499 F. Supp. 3d 184 (D. Md. 2021), aff'd en banc, 49 F. 4th 873 (4th Cir. 2022), petition for cert. filed, No. 22-593 (Dec. 22, 2022).

29. 88 Fed. Reg. at 34,260.

30. Id.

31. Id. at 34,286.

32. 42 C. F. R. § 447. 505.

33. 85 Fed. Reg. 87,000 (Dec. 20, 2022). Under an accumulator program, a PBM or plan adopts a benefit design under which manufacturer patient support amounts do not count toward a patient's insurance deductible or other out-of-pocket cost-sharing responsibilities. The effect of such programs is that patients' initial therapy costs are borne by manufacturers, and payors' obligation to provide insurance coverage for a product is effectively deferred.

34. PhRMA v. Becerra, No. 1-21-cv-1395, 2022 U. S. Dist. LEXIS 88736 (D. D. C. May 17, 2022).

35. 88 Fed. Reg. at 34,260.

36. 42 U. S. C. § 1396r-8(c)(2), (3)(C).

37. 88 Fed. Reg. at 34,260.

38. Id.

39. Id. at 34,257.

40. Id.

41. Id. at 34,265.

42. 42 U. S. C. § 1396r-8(c)(2)(D).

43. 88 Fed. Reg. at 34,265.

44. 42 U. S. C. § 1396r-8(a)(7).

45. 42 C. F. R. § 447. 520.

46. 88 Fed. Reg. at 34,275.

47. 42 U. S. C. § 1396r-8(k)(6).

48. 88 Fed. Reg. at 34,247.

49. 42 U. S. C. § 1396r-8(b)(2).

50. Id. at 34,256. In support of this proposal, CMS invokes its general authority to promulgate rules for the efficient administration of the Medicaid program.

51. Id. at 34,268. The proposed rule disavows an intent to use the data for product coverage, clinical, or cost effectiveness determinations.

52. Id.

53. Id. at 34,271.

54. Id. at 34,273.

55. 42 C. F. R. § 447. 518.

56. 88 Fed. Reg. at 34,273-74.

57. See id. at 34,248. Notably, the preamble states that the rule would "allow for" a state or MMCO to use 340B claims modifiers, but does not propose any requirements to do so.

58. Id. at 34,249-52.

59. Spread pricing refers to situations where a PBM pays a pharmacy for drug costs at one rate (e. g. , WAC +2%), but charges a plan a different, higher rate for the drugs (e. g. , WAC +3%) covered by the plan, and the PBM retains the difference.

60. 88 Fed. Reg. at 34,250. Although federal law does not prohibit "spread pricing," a 2019 CMS informational bulletin suggested that spread pricing should not be included in MLR calculations.

61. CMS's regulatory impact analysis cited a Congressional Budget Office analysis estimating that the elimination of Medicaid spread pricing could save as much as $929 million over 10 years. Id. at 34,282.

62. The Allergan appeal may well be remanded in light of the Supreme Court's recent decision in United States ex rel. Schutte v. Super Valu Inc. , No. 21 1326 (U. S. June 1, 2023), which addressed the "objective reasonableness" defense under the False Claims Act. If so, the lower courts may need to confront the statutory interpretation issue more directly given the Supreme Court's separate grant of certiorari in Loper Bright Enterprises v. Raimondo, No. 22-451, petition for cert. granted (May 2, 2023), to address whether Chevron deference should be overruled.

63. 42 U. S. C. § 1396r-8(a)(7)(B).

64. Notably, the Medicaid statute requires coverage and payment for drugs prescribed for "medically accepted indications," but does not prohibit payment for drugs prescribed for conditions that do not meet that statutory definition.

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