Despite defeating attempts to increase the Medicaid drug rebate percentage to 18% for brands and 17% for generics and a move to make drugs dispensed through Medicaid managed care plans rebatable, the pharmaceutical industry will still feel the pinch of the Deficit Reduction Act of 2005 (DRA) signed into law by President Bush on February 8, 2006. The statute’s pricing transparency provision requires CMS to post the average manufacturer price (AMP) of drug products on its website beginning July 1 of this year and to update the data quarterly. The availability of this heretofore confidential pricing statistic promises to change the dynamics of the marketplace for brands with therapeutic alternatives or generic competition. It likely too will make it even more difficult for multiple source drugs to maintain price in an already competitive environment.

The DRA sections focused on ratcheting back Medicaid reimbursement to pharmacies to levels more commensurate with acquisition costs also retool the definitions of AMP and Best Price. Starting January 1, 2007, manufacturers will no longer be able to deduct “customary prompt payment discounts extended to wholesalers” when they calculate AMP. Neither will they be able to exclude nominal prices offered to commercial customers from Best Price. Moreover, 2007 will usher in a requirement to aggregate the pricing data for brands and their authorized generics when the brand’s AMP and Best Price are calculated even if the authorized generic is marketed under a different labeler code. These changes will be accompanied by new requirements to file reports with CMS quarterly about prompt pay discounts and nominal pricing.

While manufacturers are adjusting to these changes, the HHS Office of Inspector General (OIG) and the Centers for Medicare & Medicaid Services (CMS) will be working on a new regulation to clarify and further revise the definition of AMP. Although the DRA does not instruct CMS to address questions surrounding Best Price in the new rule, it seems likely the agency will do so. The OIG’s recommendations are due by June 1, 2006 and the new regulation is slated to issue by July 1, 2007. Based on the types of price reporting malfeasance addressed in recent pharmaceutical settlements and the issues raised by the OIG in prior audits of manufacturers’ AMP methodologies, the industry should expect the regulation to define when a number of activities not traditionally considered price concessions must be treated as such for AMP, Best Price and possibly even average sales price (ASP) purposes. The new rule also should clear up the long-standing ambiguities surrounding the handling of PBM rebates on retail pharmacy sales.

The DRA also makes submission of NDC numbers on claims for single source physician-administered drugs a condition of Medicaid payment beginning immediately. NDC numbers will become a condition of payment as of January 1, 2007 for the top 20 multiple source products by dollar volume identified by CMS annually. These changes are intended to facilitate state billing of Medicaid drug rebates on the products.

To curb Medicaid fraud, waste and abuse, the DRA takes a step that will seem unnecessary to a pharmaceutical industry already besieged by government investigations triggered by whistleblowers taking advantage of state and federal false claims acts. Nonetheless, the law contains an incentive designed to encourage the use of state false claims acts. States that have such laws as of January 1, 2007 will be allowed to keep 10% more when Medicaid recoveries under their laws are split with the federal government. Another DRA provision will require any manufacturer that pays at least $5 million in Medicaid rebates annually to upgrade compliance training and revise employee handbooks to educate their employees and contractors about false claims acts and the protections available to whistleblowers, again by January 1, 2007.

The DRA is available as a PDF from the GPOAccess Web site. The provisions discussed above are in Title VI, Subpart A, Chapters 1 and 3 in sections 6001-6003 (page 51) and 6032-6033 (page 70).

If you have questions about the impact of the DRA on pharmaceutical manufacturers or need assistance planning for implementation, please contact:

Larri Short
202-775-5786
short.larri@arentfox.com.