In the ACA Final Rule, the Centers for Medicare & Medicaid Service (CMS) expanded the definition of the terms "States" and "United States" for purposes of the Medicaid Drug Rebate Program (MDRP) to encompass the U.S. territories, effective April 2017. 81 Fed. Reg. 5170, 520304 (Feb. 1, 2016). The effective date of that change was then postponed to April 2020. 81 Fed. Reg. 80003, 80004 (Nov. 15, 2016). Unless the effective date is again revised, as of April 1, 2020, manufacturers will be required to include transactions in the territories in their AMP and BP calculations, and will be responsible for the payment of Medicaid rebates on Medicaid utilization in the U.S. territories. CMS in the final rule also indicated that certain territories could request a section 1115 waiver if they do not wish to participate in the MDRP—which raises the concern that, if granted, such a waiver could mean that the territory's Medicaid program is not required to cover participating manufacturers' covered outpatient drugs, but that manufacturers may still be required to pay the Medicaid rebate.

A Section 1115 waiver would not change manufacturer price reporting obligations...

CMS has indicated that, if a territory does not wish to participate in the MDRP, it may request a waiver. Specifically, CMS stated that the Northern Mariana Islands and American Samoa may opt out under a waiver under section 1902(j) of the Social Security Act, while Puerto Rico, the Virgin Islands, and Guam "may use waiver authority under section 1115(a)(1) of the Act to waive section 1902(a)(54) of the Act, which requires state compliance with applicable requirements of section 1927 of the Act." 81 Fed. Reg. 5170, 5203-04 (Feb. 1, 2016). 

In doing so, CMS observed that "waivers under section 1115 of the Act are limited to requirements applicable to states or territories under section 1902(a) of the Act, and would not apply to the requirements placed on drug manufacturers that sell in the territories." 81 Fed. Reg. 80003, 80004 (Nov. 15, 2016) (emphasis added). Accordingly, CMS noted that "[t]hese manufacturers cannot be waived from the section 1927 of the Act requirements under which manufacturers must include sales that take place in the U.S. territories when determining [average manufacturer price (AMP)] and best price." Id. (emphasis added). CMS thus concluded that the definitional changes "require[] manufacturers to include eligible sales and associated discounts, rebates, and other financial transactions that take place in the U.S. territories in their calculations of AMP and best price once the revised definitions of States and United States become effective, regardless of whether the U.S. territories seek to waive participation in [the MDRP]." Id. (emphasis added). 

...But what about Medicaid rebate obligations?

While CMS has noted that a manufacturer's reporting obligations under the MDRP would persist notwithstanding a waiver under section 1115 of the Act, it has not expressly addressed whether a manufacturer's rebate obligations under the MDRP would also persist, particularly if the waiver were to relieve the territory of its reciprocal coverage obligations under the MDRP. On the one hand, CMS suggested that "the U.S. territories that receive a waiver" would not have the "benefit of receiving Medicaid rebates." Id. On the other hand, CMS clearly stated that a waiver under section 1115 of the Act cannot extend to manufacturer obligations under section 1927 of the Act. See id.

CMS recently confronted this "one-sided" waiver concern in the course of denying Massachusetts' request for a waiver under section 1115 of the Act of its coverage obligations under the MDRP. CMS explained that it would not grant a waiver under section 1115 of the Act to permit Massachusetts to establish a closed formulary unless the state fully forgoes the applicability of the MDRP within the state – including its entitlement to rebates. Letter from CMS to MassHealth 2 (Jun. 27, 2018). The state could then negotiate directly with manufacturers and have flexibility to establish a closed formulary. Id. CMS further explained that, in order for the agency to grant such a waiver, Massachusetts would have to show that federal costs would not exceed costs that would have been incurred otherwise. Id.

Will Puerto Rico seek a section 1115 waiver?

These considerations are particularly relevant with respect to Puerto Rico, the most economically significant of the territories, because Puerto Rico may request a waiver under section 1115 of the Act. Puerto Rico submitted comments in response to the 2016 interim final rule that postponed the effective date of territory inclusion, and in those comments it indicated that it had not yet determined if it would make such a request. If Puerto Rico were to do so, it could—inadvertently or otherwise—raise a concern similar to that raised by the Massachusetts waiver request.

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