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Release of proposed AMP rule creates new issues for life-science industry
June 2012
by Tony Chen and Chester Schwartz  |  Email the author

On Jan. 27, the Centers for Medicare and Medicaid Services (CMS) published the much-anticipated proposed Average Manufacturing Price (AMP) rule for implementing the Medicaid prescription drug provisions of the Patient Protection and Affordable Care Act (PPACA). The new guidelines will have a wide-reaching financial impact on the life-science industry by creating serious administrative and operational challenges that will have to be addressed relatively quickly.
The proposed rule aims to lower costs for states and taxpayers by aligning reimbursement rates to better reflect the actual price the pharmacy pays for the drug; increasing rebates paid by drug manufacturers that participate in Medicaid; and providing rebates for drugs dispensed to individuals enrolled in a Medicaid managed-care organization.  
History of the Medicaid Rebate Act
In 1990, Congress passed the Medicaid Rebate Act in response to increasing Medicaid expenditures for prescription drugs. The legislation's goal 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 goal requires drug companies that seek Medicaid payments for their prescription drugs to pay a rebate to each state each quarter that is based on the difference between the price that the state paid and any lower price paid by other purchasers, other than health maintenance organizations (HMOs) or government entities, known as the Best Price (BP), or a rebate based upon a 23.1 percent discount off the AMP, whichever provides the greatest rebates to the states. According to pharmaceutical pricing data, the overwhelming majority of manufacturer 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 drug companies submit to CMS. Using these price reports and the states' prescription drug-use data, CMS calculates the rebates owed by the drug companies to each state. Not surprisingly, the Office of the Inspector General (OIG) has recognized that, "manufacturers have a strong financial incentive to hide de-facto pricing concessions to other purchasers to avoid passing on the same discounts to the states" in the form of higher rebates based on a BP that would otherwise have included these discounts.  
The process of determining BP involves scrutinizing all supply chain and financial transactions for those that yield the lowest net price. This includes direct sales, indirect sale chargebacks, wholesaler rebates, managed-care rebates and any other pertinent price concession. Transaction attributes, transaction type, entity class of trade, pricing arrangements, bundling, contingent-free goods and discounts are the foundation of transaction selection logic, and form the basis for the OIG investigation scrutiny.
BP litigation  
The landscape is littered with significant BP offenses and subsequent large fines and sanctions applied to major pharmaceutical manufacturers by the OIG. The details for the offences include typically fraudulent price reporting based on omitting certain BP setting transactions. The offenses are recognized through "whistle-blowing" activities from internal and external sources and OIG increased investigative diligence. Representative offenses 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 AMP rule means to you  
With such aggressive goals from CMS, manufacturers should focus on some of the major items included in the rule that will fundamentally change the 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 for 60 days from the publication date on the proposed rule. It is expected that CMS will issue the final rule in October, although as we learned with the recent situation concerning the Federal Sunshine Act guidelines, there is always a chance of a delay.
In order to benefit from situations such as this, manufacturers should not only continue to place focus on preparing to comply with changing federal legislations, such as the proposed AMP rule, but also consider how the process of compliance can best be leveraged to optimize their business. Because legislative and regulatory change entails reductions in reimbursement and margins, manufacturers will now need to leverage their compliance infrastructure to maintain sales volume, profitability and competitive advantage. Doing so provides for the manufacturer additional efficiencies in data-driven analytics to enable better real-time quantitative decision-making.
Tony Chen is the associate director of government pricing and Chester Schwartz is a senior consultant at Alliance Life Sciences Consulting Group Inc., a management and technology consultancy firm that works with many life-science clients to define, deploy and support business applications.



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