Health and Insurance Watch



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On January 21, 2016 the Centers for Medicare and Medicaid Services (“CMS”) notified a final rule expected to be published on February 1, 2016 in the Federal Register (“CMS final rule”). The CMS final rule implements a number of provisions of the Affordable Care Act of 2010 that relate to Medicaid reimbursement for covered outpatient drugs (“CODs”), Medicaid coverage and the Medicaid drug rebate (“MDR”) program. In a dramatic change in policy that is expected to significantly impact both drug manufacturers providing CODs to Medicaid beneficiaries on the Island, as well as Puerto Rico’s Mi Salud program through which such beneficiaries receive Medicaid covered health care services, CMS decided to include Puerto Rico and other territories in the MDR program effective April 1, 2017.


Overview of the Medicaid Drug Rebate Program prior to the changes introduced by the CMS final rule.


State Medicaid programs reimburse pharmacies for the prescription drugs that they dispense to Medicaid beneficiaries instead of buying drugs directly from manufacturers. The reimbursements to pharmacies include an estimated acquisition cost (EAC) plus a reasonable dispensing fee. 1


Pursuant to section 1927 of the Social Security Act, the Medicaid Drug Rebate (MDR) program became effective on January 1, 1991.2 Its purpose is to reduce State and Federal expenditures for prescriptions drugs and it is administered by CMS.


The MDR program requires manufactures to enter into a rebate agreement with the Secretary of Health and Human Services and pay quarterly rebates to States Medicaid Agencies in order for their drugs to be eligible for Federal Medicaid funding.3 However, “the Secretary may authorize a State to enter directly into agreements with a manufacturer.” 42 USC 1396r–8. Any separate or supplemental state rebate agreement must achieve drug rebates that are at least equal to the MDR program rebates.4 On the other hand, the Social Security Act “does not preclude States from negotiating prices, including manufacturer discounts and rebates for non-Medicaid drug purchases.” 5


Under the MDR program the amount of rebate due for each unit of a drug (unit rebate amount or URA) is defined by statute. Until recently, the basic (or minimum) rebate had been between 23.1% (brand name drugs) and 13% (generic drugs) of the Average Manufacturer Price (AMP) paid to the manufacturer for the drug in the United States per unit or the difference between the AMP and the best price per unit, whichever of the two is greater.6 Id. Moreover, the MDR program contemplates that in the event that the AMP for a drug has risen faster than inflation, the manufacturer must also pay an additional rebate. On the other hand, MDR program caps the total rebate for brand name drugs at 100% of AMP of each drug.7 Nevertheless, Medicaid reimbursements vary across States since each state determines what constitutes the estimated acquisition cost and dispensing fee for drugs.


Inclusion of Puerto Rico and the territories in the collection of rebates under the MDR Program


Prior to the adoption of the CMS final rule, CMS’ Medicaid rebate regulations and the standard rebate agreement that governs drug manufacturers’ participation in the program did not include Puerto Rico in the definition of the term “State”.8 As a result, the MDR program did not apply in Puerto Rico. ASES, the Puerto Rico government agency running the Medicaid Mi Salud program, had up to know collected rebates by directly entering into rebate agreements with drug manufacturers which were outside the scope of the MDR program.9


However, the CMS final rule amends the definitions of the terms “State” and of the term “United States” in the CMS regulations to specifically include the territories within the scope of such definition. By doing so, CMS effectively expanded the reach of the MDR program to the territories. The CMS final rule establishes that the term “territories” includes the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands and American Samoa. In approving the amendment, CMS noted that it understood it had the requisite authority to include the territories in the MDR program and, further, that the corresponding amendment in the regulations assured that the regulatory definition of the term “State” was consistent with the parallel definition found in Section 1101(a)(1) of the Social Security Act.


Although the amendments to the definitions of “State” and “United States” in the CMS final rule are effective as of April 1, 2016, which is the date in which the CMS final rule is to be effective, neither of the definitions will include the territories until one (1) year after the final rule´s effective date; i.e., April 1, 2107. The purpose behind the one-year postponement in the inclusion of the territories within the new definition, was to give drug manufacturers and the territories additional time to implement the requirements of the MDR program in such territories, including adopting system changes, developing mechanisms and processes which will be necessary to comply with the new MDR requirements. Therefore, the new requirements found in the CMS final rule regarding the determination of AMP, best price, MDRs and requirements for manufacturers will not apply in Puerto Rico and the other territories until April 1, 2017.


It should be pointed out that in adopting the final rule CMS did recognize that the territories may choose to be excluded from participation in the MDR program if they request a waive and satisfy the legal standards to qualify for such a waiver. The start-up costs to the territories of implementing the requirements of the MDR program, and to be in a position to collect rebates from drug manufacturers under the same are expected to be considerable. By some estimates, start-up costs may run anywhere between $500,000 to $900,000. Additionally the expected minimum annual operating costs for the MDR program in the territories is expected to be around $500,000. Consequently, CMS expects each territory to determine whether such start-up and operating costs will outweigh anticipated benefits from collecting rebates, and to decide whether or not they will be requesting a waiver from the MDR program during the additional year they have been afforded to implement the same.


Finally, from the standpoint of the drug manufacturers participating in the MDR program, the financial impact of the new program requirements and their eventual implementation in all or a majority of the territories is expected to be considerable. This holds particularly true in territories such as Puerto Rico where almost one-half of the population qualifies for Medicaid and receives health care benefits through the government’s Mi Salud program.




1. Estimated acquisition cost (EAC) is “the agency’s best estimate of the price generally and currently paid by providers for a drug marketed or sold by a particular manufacturer or labeler in the package size of drug most frequently purchased by providers.” 42 CFR 447.502.


2. Section 4401 of the Omnibus Budget Reconciliation Act of 1990, P.L. 101-503 added section 1927 to the Social Security Act.


3. The Affordable Care Act revised the “rebate calculation and increased the minimum rebate percentage manufactures are required to pay for brand-name and generic drugs”. DOJ, Office of the Inspector General, States’ Collection of Rebates for Drugs Paid through Medicaid Managed Care Organizations, Sept. 2012. The increased rebate percentages must be remitted to the Federal Government.


4. See, CMS State Medicaid Directors Letter (SMDL) #02-014 of September 18, 2002 clarifying authorization of States to enter directly into separate or supplemental drug rebate agreements with manufacturers, available at: http:// Prior authorization programs are used to negotiate drug discounts for the Medicaid Programs. They must be submitted for CMS review under the State plan process.


5. Id., at 3.


6 Best price was defined as the lowest price available from the manufacturer to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity or governmental entity in the United States with certain exceptions. 42 USC 1396r-8(c)(1)(C).


7. 42 USC 1396r-8 (c)(2)(D) (“MAXIMUM REBATE AMOUNT.—In no case shall the sum of the amounts applied under paragraph (1)(A)(ii) [basic rebate] and this paragraph [additional rebate] with respect to each dosage form and strength of a single source drug or an innovator multiple source drug for a rebate period beginning after December 31, 2009, exceed 100 percent of the average manufacturer price of the drug.”)


8. “"States" means the 50 states and the District of Columbia.” 42 CFR 447.502.


9. It should be noted that eligible beneficiaries of the GHIP covered by ASES are not limited to Medicaid beneficiaries. Pursuant to the ASES enabling law, the GHIP also covers members of the Puerto Rico Police, as well as their spouses and children; public employees and their direct dependents (subject to an economic contribution); the pensioners of the Central Government of the Commonwealth of Puerto Rico; employees of small and medium sized business (subject to an economic contribution from the employer and employee); veterans, their spouses and children, certified by the Federal Medical Assistance Program; other individuals and members of association, cooperative, professional associations, or colleges of persons authorized to practice their professions by the Government of Puerto Rico, among others (subject to a premium payment system).



©2016 Fiddler, González & Rodríguez, P.S.C. This Watch has been prepared by Fiddler, González & Rodríguez, P.S.C. for informational purposes only and does not constitute legal advice. This information does not create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. Fiddler, González & Rodríguez, P.S.C. and its members assume no responsibility to inform you of additional changes in law or any other legal issues related to the matters advised in this publication.


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