Misclassification of Drugs, Program Administration, and Program Integrity

The Centers for Medicare & Medicaid Services (CMS) is providing an update on the work related to the Misclassification of Drugs, Program Administration, and Program Integrity Updates under a Medicaid Drug Rebate Program Proposed Rule (CMS-2434-P).

The Proposed Rule aims to address issues in which drug manufacturers incorrectly report or misclassify their drugs under the Medicaid Drug Rebate Program (MDRP). This initiative stems from new statutory authorities included in the Medicaid Services Investment and Accountability Act of 2019 (MSIAA). The rule seeks to improve the accuracy and consistency of drug information reporting, enhance the integrity of the MDRP, and streamline program administration through the introduction of new policies.

One significant aspect of the Proposed Rule is revisions to the regulations for determining the best price for drugs. Specifically, CMS proposed changes to § 447.505(d)(3) to clarify that manufacturers must adjust the best price for a drug for a rebate period if cumulative discounts, rebates, or other arrangements affect the prices available to best price-eligible entities. This adjustment process, referred to as “stacking,” ensures that all discounts and rebates are accounted for in determining the final price realized by the manufacturer for a drug.

How does stacking work?  Let’s take an example:

Imagine a pharmaceutical company sells a medication with a list price of $100 per unit. During a rebate period, the company offers several discounts and rebates to various entities, which need to be “stacked” to determine the final price. These can include the following:

1. Volume Discount: The company provides a 10-percent discount to bulk purchasers who buy large quantities of the medication. For a large hospital chain purchasing 1,000 units, this results in a $10 discount per unit, reducing the price to $90 per unit.

2. Prompt Payment Discount: The company offers an additional 5-percent discount for purchasers who pay their invoices within 30 days. The hospital chain takes advantage of this discount, further reducing the price by $4.50 (5 percent of $90), making the price $85.50 per unit.

3. Rebate Program: The company has a rebate agreement with Medicaid, which provides a $15 rebate per unit. After applying the volume and prompt payment discounts, the price is reduced to $85.50 per unit, and the $15 rebate is then applied, bringing the final price down to $70.50 per unit.

4. Loyalty Program Discount: Additionally, the company offers a 2-percent discount for loyal customers who have been purchasing from them for over a year. This discount applies to the $70.50 per unit price, resulting in an additional $1.41 discount, making the final price $69.09 per unit.

By stacking these discounts, the final price realized by the manufacturer for each unit of medication sold to the hospital chain is $69.09, significantly lower than the initial list price of $100. This approach is crucial for regulatory compliance, particularly in programs like the Medicaid Drug Rebate Program, where accurate reporting of drug prices is essential for rebate calculations and overall program integrity.

CMS received a range of comments on the proposed revisions to § 447.505(d)(3), with both support and opposition expressed. While CMS is still finalizing other parts of the Proposed Rule, they have decided not to finalize the proposal regarding stacking at this time. Instead, CMS plans to collect additional information from manufacturers on the best price stacking methodologies to better understand and inform future rulemaking.

The primary purpose of the Proposed Rule is to enhance the accuracy, consistency, and integrity of the Medicaid Drug Rebate Program by addressing drug misclassification issues and improving the overall administration of the program.