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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) 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.
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:
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:
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.