Release of proposed AMP rule creates new issues for life-science industry

On Jan. 27, the Centers for Medicare and Medicaid Services (CMS)published the much-anticipated proposed Average Manufacturing Price (AMP) rulefor implementing the Medicaid prescription drug provisions of the PatientProtection and Affordable Care Act (PPACA). The new guidelines will have awide-reaching financial impact on the life-science industry by creating seriousadministrative and operational challenges that will have to be addressedrelatively quickly.

The proposed rule aims to lower costs for states andtaxpayers by aligning reimbursement rates to better reflect the actual pricethe pharmacy pays for the drug; increasing rebates paid by drug manufacturersthat participate in Medicaid; and providing rebates for drugs dispensed toindividuals enrolled in a Medicaid managed-care organization.

History of theMedicaid Rebate Act

In 1990, Congress passed the Medicaid Rebate Act in responseto increasing Medicaid expenditures for prescription drugs. The legislation'sgoal was to stop drug companies from overcharging Medicaid by giving taxpayers(who fund Medicaid) the best discounts that other purchasers negotiated.

The mechanism Congress designed to achieve this goalrequires drug companies that seek Medicaid payments for their prescriptiondrugs to pay a rebate to each state each quarter that is based on the differencebetween the price that the state paid and any lower price paid by otherpurchasers, other than health maintenance organizations (HMOs) or governmententities, known as the Best Price (BP), or a rebate based upon a 23.1 percentdiscount off the AMP, whichever provides the greatest rebates to the states.According to pharmaceutical pricing data, the overwhelming majority ofmanufacturer drug rebates are BP-based, not the flat 23.1-percent rebate.

The Best Price rule process

The rebates are based upon quarterly price reports the drugcompanies submit to CMS. Using these price reports and the states' prescriptiondrug-use data, CMS calculates the rebates owed by the drug companies to each state.Not surprisingly, the Office of the Inspector General (OIG) has recognizedthat, "manufacturers have a strong financial incentive to hide de-facto pricing concessions to otherpurchasers to avoid passing on the same discounts to the states" in the form ofhigher rebates based on a BP that would otherwise have included thesediscounts.

The process of determining BP involves scrutinizing allsupply chain and financial transactions for those that yield the lowest netprice. This includes direct sales, indirect sale chargebacks, wholesalerrebates, managed-care rebates and any other pertinent price concession.Transaction attributes, transaction type, entity class of trade, pricingarrangements, bundling, contingent-free goods and discounts are the foundation oftransaction selection logic, and form the basis for the OIG investigationscrutiny.

BP litigation

The landscape is littered with significant BP offenses andsubsequent large fines and sanctions applied to major pharmaceuticalmanufacturers by the OIG. The details for the offences include typicallyfraudulent price reporting based on omitting certain BP setting transactions.The offenses are recognized through "whistle-blowing" activities from internaland external sources and OIG increased investigative diligence. Representativeoffenses follow:

Federal investigators claim that, between 2000 and 2006, a major pharmaceutical manufacturer offered steep discounts to thousands of hospitals nationwide for a drug under a pricing arrangement known as the "Performance Agreement." The arrangement required that hospitals purchase the drugs together under a bundled arrangement in exchange for a steep discount. Investigators say that the manufacturer did this to access the lucrative retail outpatient market, intending that patients who used the intravenous version of the drug in the hospital would later purchase the oral form once they were discharged.

Under the performance agreement, hospitals that placed both products on their formularies and attained certain market share requirements were entitled to up to a 94-percent discount off the list price of the oral form, and up to 80 percent off the list price of the intravenous form. Although the manufacturer was required to pass along the benefit of the lowest prices to the state Medicaid programs, they didn't—and therefore avoided paying hundreds of millions of dollars to Medicaid in quarterly rebates, investigators allege. The company has now paid more than $2 billion dollars to settle fraudulent reporting cases involving drug efficacy and false AMP and BP reporting.

A top-10 pharmaceutical manufacturer paid $400 million in National Medicaid fraud settled in 2006. Even though the Medicaid Rebate Act requires BP reporting to include cash discounts, free goods contingent on other purchase requirements, volume discounts and any other rebates, BP reporting does not include discounts that are "merely nominal" in amount. The manufacturer thus devised a "nominal price" discount to market its products to hospitals, a discount the hospitals qualified for so long as they purchased set amounts. The company excluded these large discounts of more than 90 percent of AMP from its BP reporting, claiming that so long as the discount resulted in a price of less than 10 percent of AMP, as CMS defined the nominal price, the discount could be excluded from BP reporting. However, the legislative history of the Medicaid Rebate Act indicates that nominal price exclusion to BP reporting was intended to protect special purchasers, such as penny-a-pack birth control pills sold to Planned Parenthood. Congress was also clear that the overarching purpose of the Medicaid Rebate Act was to put Medicaid (the states and the taxpayers) on par with all other commercial purchasers, such as hospitals. The Deficit Reduction Act of 2005 further delineated the nominal price exclusion, and as of Jan. 1, 2007, only certain sales for less than 10 percent of AMP qualify.

A major pharmaceutical manufacturer paid $255 million under the False Claims Act. In August 2006, the manufacturer agreed to pay a total of $435 million to resolve criminal charges and civil liabilities in connection with illegal sales and marketing programs for its drugs for use in the treatment of brain tumors and metastases, and for use in treatment of superficial bladder cancer and hepatitis C. The settlement also involved claims involving best price violations for other drugs used in treating stomach ulcers.

What the proposed AMPrule means to you

With such aggressive goals from CMS, manufacturers shouldfocus on some of the major items included in the rule that will fundamentally changethe way they do business:

Would include U. S. territories in the AMP calculations.

Rebate agreements would include prescriptions paid by Medicaid managed care, as well as fee-for-service. This would require Medicaid managed-care plans to capture utilization data and provide it to the states, and would only exempt prescriptions dispensed by an HMO.

Over-the-counter drugs would need to be considered covered drugs if they have a National Drug Code (NDC).

Would prohibit the inclusion of sales to wholesalers in AMP, unless a manufacturer has documented evidence that the drugs sold to the wholesalers were distributed to retail community pharmacies.

Would include specialty pharmacies and home healthcare distributors within the definition of "retail community pharmacies."

Would require manufacturers to exclude from AMP rebates paid to insurers, but not the underlying sales to the pharmacies.

Would redefine BP to include discounts and rebates "associated" with the sale of a drug to a customer, rather than the price available to that customer.
Would require inclusion of direct sales of an AG-labeled drug to a manufacturer or distributor selling under its own NDC in the AMP of the brand.

CMS is allowing stakeholders to submit public comments for60 days from the publication date on the proposed rule. It is expected that CMSwill issue the final rule in October, although as we learned with the recentsituation concerning the Federal Sunshine Act guidelines, there is always a chanceof a delay.

In order to benefit from situations such as this,manufacturers should not only continue to place focus on preparing to complywith changing federal legislations, such as the proposed AMP rule, but alsoconsider how the process of compliance can best be leveraged to optimize theirbusiness. Because legislative and regulatory change entails reductions inreimbursement and margins, manufacturers will now need to leverage theircompliance infrastructure to maintain sales volume, profitability andcompetitive advantage. Doing so provides for the manufacturer additionalefficiencies in data-driven analytics to enable better real-time quantitativedecision-making.

Tony Chen is theassociate director of government pricing and Chester Schwartz is a seniorconsultant at Alliance Life Sciences Consulting Group Inc., a management andtechnology consultancy firm that works with many life-science clients todefine, deploy and support business applications.