Guidance to Pharma from CMS: How to Calculate the New Inflation-Based Additional Rebate for Generic Drugs

On April 15, 2016, the Center for Medicaid and CHIP Services, a part of the Centers for Medicare & Medicaid Services (CMS), issued a Program Notice to participating drug manufacturers (the Notice) which provides some guidance on how generic drug manufacturers are to calculate the new Additional Discount on generic drugs that will become part of the rebate due state Medicaid programs under the Medicaid Drug Rebate Program.

Pursuant to the Bipartisan Budget Act of 2015 (BBA), drug manufacturers are required to pay an Additional Discount to the state Medicaid programs when the Average Manufacturer Prices of their “covered outpatient drugs” other than single source or innovator multiple source drugs (meaning, non-innovator multiple source drugs (N drugs)) increase at a rate that exceeds the rate of inflation, based on the consumer price index for all urban consumers (CPI-U) during the month before the month in which the rebate period begins. Arent Fox LLP previously analyzed the provisions of the BBA most pertinent to drug manufacturers, which you can access here.

Starting with the calendar quarter beginning January 1, 2017, manufacturers must begin to calculate this Additional Discount for N drugs. The Notice clarifies that, “for N drugs marketed on or before April 1, 2013, the Base AMP is equal to the AMP for the third quarter of 2014 and the Base CPI-U is the CPI-U for September 2014. For N drugs marketed after April 1, 2013, the Base AMP is equal to the AMP for the fifth full calendar quarter after which the drug is marketed as a drug other than a single source or innovator multiple source drug and the Base CPI-U is equal to the CPI-U for the last month of the Base AMP quarter.” The Notice also provides an actual example of how the new rebate amounts should be calculated.

Finally, the Notice indicates that CMS will begin to include the Additional Discount in the Unit Rebate Amounts for N drugs in the Drug Data Reporting for Medicaid and Medicaid Drug Rebate systems starting with the first quarter of 2017.

Manufacturers should expect additional operational guidance from CMS on the calculation of Additional Discounts on N drugs in the months to come.