Reed Smith In-depth

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.”
Doctor holding electronic device with prescription symbol

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.