September 2024 Medicaid Rebate Final Rule: Key Issues For Manufacturers

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On Thursday, September 26, 2024, the Centers for Medicare and Medicaid Services (CMS) published in the Federal Register the Medicaid Drug Rebate Program (MDRP)...
United States Food, Drugs, Healthcare, Life Sciences

On Thursday, September 26, 2024, the Centers for Medicare and Medicaid Services (CMS) published in the Federal Register the Medicaid Drug Rebate Program (MDRP) final rule titled "Medicaid Program; Misclassification of Drugs, Program Administration and Program Integrity Updates Under the Medicaid Drug Rebate Program" (CMS-2434-F) (the Final Rule).1 The Final Rule's provisions will generally take effect on November 19, 2024, with the exception of two provisions in the standard Medicaid managed care contract requirement section, which will take effect for the first rating period for contracts with Medicaid managed care plans beginning on or after November 19, 2025.2

This Advisory provides a summary of several key provisions in the Final Rule, including those addressing drug classification and penalties for misclassification, the definition of a "covered outpatient drug" (COD), the definition of an "internal investigation," the definition of the "market date," a new 12-quarter deadline for manufacturer audits or disputes of invoiced rebate units, revisions to the regulatory patient support program exclusions, and a revision to Medicaid managed care standard contract requirements. In addition, this Advisory identifies proposals listed in the May 26, 2023 proposed rule (the Proposed Rule)3 that were not finalized, including those addressing the definition of a "manufacturer," surveys of manufacturer and wholesaler pricing information, stacking, and the definition of a "vaccine."

I. Drug Classification; Oversight and Enforcement of Manufacturer's Drug Product Data Reporting Requirements — Proposals Related to the Calculation of Medicaid Drug Rebates and Requirements for Manufacturers (89 Fed. Reg. at 79021, 79024, 79038-40, 79049-55)

In the Final Rule, CMS largely finalizes its proposals implementing the changes to the Medicaid statute introduced by the Medicaid Services Investment and Accountability Act of 2019 (MSIAA). According to CMS, the MSIAA amendments provided "new authorities to the agency to identify and correct a manufacturer's misclassification of a drug, as well as impose other penalties on manufacturers that fail to correct their misclassifications."4 To this end, the Final Rule "include[s] a new process to identify, notify and correct a manufacturer's drug category classifications"5 and adds regulations governing penalties for misclassifications and failure to report pricing and product information in a timely manner.

a. Definition of "Drug Product Information" (89 Fed. Reg. at 79021, 79038-40)

CMS largely finalizes its proposed definition of "drug product information" at § 447.502 to include:

National Drug Code (NDC), drug name, units per package size (UPPS), drug category ("S", "I", "N"), unit type (for example, TAB, CAP, ML, EA), drug type (prescription, over-the-counter), base date AMP, therapeutic equivalent code (TEC), line extension indicator, 5i indicator, 5i route of administration (if applicable), FDA approval date, FDA application number or OTC monograph citation (if applicable), market date, and COD status.

Citing concerns raised by commenters, CMS removed from the end of the proposed definition the catch-all phrase: "any other information deemed necessary by the Agency to perform accurate Unit Rebate Amount calculations."6 CMS states that drug product information "generally does not change once established and is tied to the drug throughout the history of that drug in the MDP system."7

CMS repeats its view from the Proposed Rule that "[t]he only situation in which a drug that is produced or marketed under an NDA may be reported as a noninnovator drug is if a narrow exception was granted by CMS,"8 adding that the MSIAA's drug classification amendments "confirm[ed] CMS's pre 2016 interpretation."9 Additionally, as discussed below, CMS also finalizes its definition of "misclassification" to include "drug product information," making such information subject to the correction process and enforcement penalties described below.

b. Medicaid Drug Rebates and Penalties (89 Fed. Reg. at 79021, 79049-55)

CMS finalizes its proposals to add new requirements to address the process by which the agency would identify and correct "misclassifications" of drug pricing and product information, including new penalties added to the Medicaid statute by the MSIAA. In response to general comments that misclassification penalties should apply prospectively only from the effective date of the MSIAA in April 2019, CMS states that "there is no provision in the statute which would exempt manufacturers from their responsibility of correcting their misclassification from before 2019"10 and indicates that misclassifications would be addressed through this process for reporting periods across "the entire amount of time that the COD is reported" under the MDRP.11 CMS also states that if a manufacturer does not take corrective action for pre-2019 reporting periods, the penalties contained in the Final Rule "will apply."12

1. Definition of "Misclassification" (89 Fed. Reg. at 79021, 79050-51)

CMS finalizes its proposal at § 447.509(d)(1) that a misclassification occurs when a manufacturer:

(i) Reported and certified to the agency its drug category or drug product information related to a covered outpatient drug that is not supported by the statute and applicable regulations; or,

(ii) Reported and certified to the agency its drug category or drug product information that is supported by the statute and applicable regulations, but pays rebates to States at a level other than that associated with that classification.

In particular, CMS asserts its authority to include "drug product information" within the definition of misclassification,13 which subjects such information to CMS' new process to "correct" reported drug product information, including the penalties described below.

2. Manufacturer Notification by the Agency of Drug Misclassification (89 Fed. Reg. at 79051)

CMS finalizes its proposal at § 447.509(d)(2) that if the agency makes a determination that a misclassification has occurred, the agency will send a written and electronic notice to the manufacturer. The manufacturer will have 30 calendar days from the date of the notice to (i) submit the corrected drug product information as well as any additional drug product and pricing information necessary to calculate its rebate obligations to the states and (ii) upon notification by CMS that the manufacturer's information was updated in the system, certify the applicable price and drug product data. In response to commenter concerns that the 30-day period would not afford sufficient time, CMS maintains its belief that 30 days is "sufficient in most circumstances" but would entertain information extension requests in "extenuating circumstances."14

In response to comments requesting CMS incorporate a dispute resolution process or other "collaborative" process to resolve potential misclassifications, CMS states that the "misclassification process that was established in MSIAA does not provide for a specific dispute resolution process for misclassified drugs" and that "CMS is implementing what the Congress set forth, which did not propose a dispute resolution process."15 However, CMS indicates the agency will take the dispute resolution suggestion into consideration for future rulemaking.16

3. Manufacturer Payment of Unpaid Rebates Due to Misclassification (89 Fed. Reg. at 79021, 79051-52)

CMS finalizes its proposal at § 447.509(d)(3) that, in the event of a misclassification, a manufacturer must pay to each state an amount equal to the sum of the difference between: (i) the Unit Rebate Amount (URA) paid by the manufacturer for the COD to the state for each period during which the drug was misclassified and (ii) the URA that the manufacturer would have paid to the state for the COD for each period if the drug had been correctly classified by the manufacturer, multiplied by the total units of the drug paid. CMS finalizes that this amount must be paid within 60 calendar days of the date the notice is sent by the agency to the manufacturer indicating that the drug is misclassified.17 Further, CMS clarifies that manufacturers must accomplish these payments "separate from the normal quarterly rebate cycle."18

4. Agency Authority to Correct Misclassifications and Additional Penalties for Drug Misclassification (89 Fed. Reg. at 79021, 79052-54)

CMS largely finalizes its proposal at § 447.509(d)(4) regarding CMS corrective action and penalties against manufacturers related to misclassifications. Specifically, if a manufacturer fails to (i) correct a misclassification and certify applicable pricing and drug product information within 30 calendar days after the agency notifies the manufacturer of the misclassification, and/or (ii) pay the rebates that are due to the states as a result of the misclassification within 60 calendar days of such notification, the agency may do any or all of the following:

  • Correct the misclassification of the drug in the system, using any pricing and drug product information that may have been provided by the manufacturer, on behalf of the manufacturer.19 CMS expanded its proposal to clarify that the manufacturer must certify any changes made by CMS, and if it does not do so within 30 days, then CMS may "take other authorized actions against the manufacturer."20 CMS asserts the agency "may certify changes on behalf of the manufacturer and would do so in this specific situation,"21 although this language is not codified in the regulatory text.
  • Suspend the misclassified drug, and the drug's status as a COD under the manufacturer's rebate agreement from the MDRP, and exclude the misclassified drug from Federal Financial Participation (FFP) in accordance with section 1903(i)(10)(E) of the Social Security Act (SSA).22 CMS provides clarifications as to the suspension penalty in its discussion of the new provisions related to the failure to report drug pricing or product information, summarized below.
  • Impose a Civil Monetary Penalty (CMP) for each rebate period during which the drug is misclassified, not to exceed an amount equal to the product of (i) the total number of units paid and (ii) 23.1 percent of the AMP for the unit.23

CMS finalizes that the agency could take these steps in addition to other actions or penalties available under the Medicaid statute, including referral to the Department of Health and Human Services Office of Inspector General (HHS OIG) and termination from the MDRP.24 Specifically, CMS states that termination could occur when a manufacturer fails to correct a misclassification or has one or more drugs suspended from the MDRP.[[N: 89 Fed. Reg. at 79053; see id. 79084 (codified at 42 C.F.R. § 447.510(h)). The Final Rule codifies that "[c]ontinued suspension of the rebate agreement could result in termination for cause" for the late reporting of drug pricing and drug product information; however, similar language is not codified in the misclassification provisions.]]

5. Transparency of Manufacturers' Drug Misclassifications (89 Fed. Reg. at 79054)

CMS finalizes its proposal at § 447.509(d)(5) that the agency would make available on a public website an annual report as required under the MSIAA on the drug(s) that were identified as misclassified during the previous year. This report would include a description of any steps taken by the agency with respect to the manufacturer to reclassify the drugs, ensure the payment by the manufacturer of unpaid rebate amounts resulting from the misclassifications, and disclose the use of the expenditures from the fund created in section 1927(b)(3)(C)(iv) of the SSA. In response to commenters' concerns, CMS states that "[t]he report will only include items that were used in making the determination that the drug was misclassified, which will not include any proprietary or confidential pricing information."25

c. Suspension for Late Reporting of Drug Pricing and Drug Product Information (89 Fed. Reg. at 79021, 79054-79055)

CMS finalizes its proposal at § 447.510(h) that if a manufacturer fails to provide required drug pricing or drug product information, the agency will provide written notice to the manufacturer, including a deadline by which such information must be reported. If the manufacturer does not report the information within 90 calendar days after that deadline, the manufacturer's rebate agreement will be suspended for all CODs furnished after the end of the 90-calendar-day period.26 CMS would notify the states 30 calendar days before the effective date of the manufacturer's suspension.27 Further, the rebate agreement will remain suspended until such information is reported in full and certified, but not for a period of less than 30 calendar days.28 Continued suspension of the rebate agreement could result in termination for cause.29

CMS states that "regarding coverage and payment for 340B-eligible products during the period of the suspension," manufacturers must still offer drugs through the 340B Program pursuant to § 42 U.S.C. 256b, and 340B covered entities may dispense those medications.30 FFP would not be available for drugs dispensed to Medicaid patients, but states could opt to cover those claims through state-only funds.31 Additionally, the Final Rule provides that reimbursement for drugs under Medicare Part B would remain available; however, FFP would not be available for Part B crossover claims for dual eligibles.32

II. Modification of the Definition of COD to Clarify When a Payment for the Drug is Considered Direct Reimbursement (89 Fed. Reg. at 79022, 79033-38)

Only a COD is subject to rebates under the MDRP. Under the "limiting definition" in SSA § 1927(k)(3), a COD does not include a drug "provided as part of, or as incident to and in the same setting as" certain specified services, including inpatient hospital services, "and for which payment may be made under [Medicaid] as part of payment for [hospital inpatient and other specified services] and not as direct reimbursement for the drug."33

In the Final Rule, CMS states that over the years, it has received questions about when a payment is considered a "direct reimbursement" for a drug and whether identifying a drug separately on a claim for payment can amount to "direct reimbursement" for the drug. In the Proposed Rule, CMS stated that "[i]f a drug and its cost can be separately identified on a claim for payment, it can be considered subject to direct reimbursement."34 Accordingly, CMS proposed revising the regulatory definition of COD to provide that "direct reimbursement" for a drug may include both separate reimbursement for the drug "or reimbursement for a drug plus the service, in one inclusive payment if the drug and the itemized cost of the drug are separately identified on the claim."35 CMS states in the Final Rule that the proposed changes to the definition of a COD were "not intended to be a departure from current practice or in conflict with the current regulation or statute," but were "intended to address the fact that States are now using newer reimbursement methodologies where it is not entirely clear whether drugs reimbursed through that new methodology are CODs."36

In the Final Rule, CMS "agree[s] [with commenters] that the proposed regulatory definition may not have clearly identified those situations that will qualify as direct reimbursement."37 The Final Rule amends the COD definition at 42 C.F.R. § 447.502, in part, to add a new paragraph (4), which states:

(4) Direct reimbursement for a drug may include both:

(i) Reimbursement for a drug alone, or
(ii) Reimbursement for a drug plus the service, in a single inclusive payment if:

(A) The drug, charge for the drug, and number of units of the drug are separately identified on the claim, and
(B) The inclusive payment includes an amount directly attributable to the drug, and
(C) The amount paid that is attributable to the drug is based on a reimbursement methodology that is included in the applicable section of the State plan.38

CMS explains that under the revised definition, "[A] drug that is reimbursed as part of a bundled payment under a [Diagnosis-Related Group (DRG)] or similar bundled payment methodology is not subject to rebates. However, if that drug is carved out of the bundled payment and reimbursed directly, then the drug is subject to rebates when applicable."39

The Final Rule states that "[i]f a State plan does not address a distinct reimbursement methodology for a drug included in a bundled payment, then a SPA [State Plan Amendment] would need to be submitted and approved that includes such methodology in the appropriate section of the State plan."40 CMS explains that to seek a rebate on a COD that is part of a bundled service, "[T]he number of units administered to the patient must be identified on the invoice for the inclusive payment and reflected in a payment methodology in the State plan."41 The Final Rule does not explain what it means for the number of units to be "reflected in a payment methodology in the State plan."42

CMS "intend[s] to provide additional guidance to States with respect to how the interpretation of direct reimbursement may be operationalized so that States can invoice for rebates for these CODs."43 In addition, CMS notes that "States will need to determine how they instruct their providers and managed care plans to identify for rebate billing purposes those inclusive payment claims where direct reimbursement is being made for a COD."44 CMS states that "[t]his claim information will allow the State to provide utilization information to the manufacturer in order for the manufacturer to verify that utilization. Collection of the data and how it may be presented to manufacturers may vary by State or manufacturer."45

Footnotes

1. Medicaid Program; Misclassification of Drugs, Program Administration and Program Integrity Updates Under the Medicaid Drug Rebate Program, (Sept. 26, 2024).

2. 89 Fed. Reg. at 79025.

3. 88 Fed. Reg. 34238 (May 26, 2023).

4. 89 Fed. Reg. at 79049. Of note, according to CMS, the MSIAA "also amended the Act to clarify that the reporting of false drug product information and data related to false drug product information would also be subject to possible civil monetary penalties (CMPs) by the HHS Office of the Inspector General (OIG), and to provide specific new authority to the Secretary to issue CMPs related to knowing misclassifications by drug manufacturers of drug product or misreported information." CMS indicates that these new OIG authorities were not a subject of this rulemaking. See Id.

5. 89 Fed. Reg. at 79049.

6. 89 Fed. Reg. at 79039-79040.

7. 89 Fed. Reg. at 79038.

8. Id. We note that the Final Rule does not discuss CMS' Manufacturer Release No. 120, which describes an exception to this standard allowing drugs for which CMS granted narrow exception request to remain reported as noninnovator for reporting periods prior to the 2016 Final Rule

9. 89 Fed. Reg. at 79021.

10. 89 Fed. Reg. at 79050.

11. 89 Fed. Reg. at 79052.

12. 89 Fed. Reg. at 79053.

13. 89 Fed. Reg. at 79050.

14. 89 Fed. Reg. at 79051.

15. Id.

16. Id. Later in the rulemaking, CMS states that the new misclassification process does allow for "collaboration" because it permits "manufacturers to work with CMS to ensure the information in the system is accurate." 89 Fed. Reg. at 79053.

17. 89 Fed. Reg. at 79051.

18. 89 Fed. Reg. at 79052.

19. 89 Fed. Reg. at 79052, 79054.

20. 89 Fed. Reg. at 79053.

21. Id.

22. 89 Fed. Reg. at 79052-79054, 79083.

23. 89 Fed. Reg. at 79052.

24. 89 Fed. Reg. at 79052-79053.

25. 89 Fed. Reg. at 79054.

26. 89 Fed. Reg. at 79054-79055.

27. Id.

28. Id.

29. Id.

30. 89 Fed. Reg. at 79050.

31. Id.

32. 89 Fed. Reg. at 79055.

33. Social Security Act (SSA) § 1927(k)(3) (emphasis added).

34. 88 Fed. Reg. at 34252.

35. 88 Fed. Reg. at 34291 (proposed 42 C.F.R. § 447.502).

36. 89 Fed. Reg. at 79033-79034.

37. 89 Fed. Reg. at 79034.

38. 89 Fed. Reg. at 79082 (emphasis added).

39. 89 Fed. Reg. at 79036-79037 (emphasis added).

40. 89 Fed. Reg. at 79035.

41. 89 Fed. Reg. at 79036.

42. Id.

43. 89 Fed. Reg. at 79035.

44. 89 Fed. Reg. at 79036.

45. Id.

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