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Are Your Reasonable Assumptions Ready for Their Close-Up? The OIG's 2017 Work Plan and Continuing Focus on Drug Pricing and Reimbursement

14 December 2016

Health Alert

The Department of Health and Human Services (HHS) Office of Inspector General (OIG) releases an annual Work Plan that details where it will focus its energies during the next year. The OIG released its Work Plan for fiscal year 2017 in early November and then, in a late-breaking development, the OIG added three new reviews specific to the Medicaid Drug Rebate Program (MDRP) through a December 6, 2016 letter to Senator Charles Grassley (R-Iowa). As in past years, the Work Plan continues to include a number of reviews relevant to the MDRP, the Medicare Average Sales Price (ASP) reporting requirement, and the 340B Drug Pricing Program. The OIG's letter to Senator Grassley makes clear that the OIG will be paying particular attention to manufacturer compliance with MDRP price reporting requirements. Reviews that may be of interest include:

Medicaid - MDRP Drug Categories, Reasonable Assumptions, and FDA Approval Status: In a letter to Senator Charles Grassley (R-Iowa) dated December 6, 2016, the OIG stated it will conduct three MDRP reviews not otherwise included in the Work Plan. These reviews will focus on CMS's oversight of the MDRP regarding the correct classification of drugs and the accuracy and validity of data reported under the MDRP. Specifically, the OIG stated that it will:

  • Examine the accuracy of CMS's Medicaid drug rebate classification data;
  • Review the Food and Drug Administration (FDA) approval status of drugs paid for by Medicaid; and
  • Review the reasonable assumptions upon which manufacturers rely when calculating drug prices for the MDRP and also interview CMS staff regarding the agency's oversight of manufacturer reasonable assumption submissions.

Medicaid - Treatment of Authorized Generics in AMP: The OIG will continue to closely monitor manufacturers' treatment of authorized generics (AG) in the related branded product Average Manufacturer Price (AMP) calculations. Under 42 C.F.R. § 447.506(b), sales of AGs by a primary manufacturer to a secondary manufacturer are included in the branded product AMP calculation only if the secondary manufacturer qualifies as a "wholesaler." The inclusion of AG sales to a secondary manufacturer typically lowers the branded drug's AMP and, consequently, the branded drug's rebate amount as well. The OIG will review manufacturer treatment of AG sales in AMP. The OIG issued a report in June 2014, prior to the publication of the Covered Outpatient Drug final rule, requesting that CMS clarify the conditions for including AG sales to secondary manufacturers in branded product AMP calculations. The final rule did address the treatment of AGs in AMP, and this will be the first time the OIG has formally looked at this issue since the final rule's publication earlier this year.

Medicaid - MCO Medicaid Drug Claims: The OIG will examine whether Medicaid managed care organizations (MCO) are paying for drugs that are not covered under the Medicaid Program. Well over half of all Medicaid beneficiaries receive their health care coverage through Medicaid MCOs, including the provision of covered outpatient drugs to enrollees. The OIG will review State arrangements with MCOs in an effort to determine whether these arrangements lead to reimbursement for drugs that are not covered by Medicaid.

Medicaid - Reimbursement Rates for Drugs Dispensed Through Specialty Pharmacies: The OIG will examine States that use the national average drug acquisition cost (NADAC) file, which is issued by CMS on at least a monthly basis, to set Medicaid pharmacy reimbursement amounts in order to determine how these states calculate reimbursement amounts for specialty drugs. The Work Plan notes that States using the NADAC may have difficulty determining the reimbursement amount for specialty drugs because the NADAC file does not include data for drugs sold through specialty pharmacies. The OIG will determine how state Medicaid agencies define specialty drugs and determine payment methodologies for specialty drugs, and it will analyze the differences in reimbursement amounts for these drugs between the States.

Medicare Part B - Drug Wastage Associated with Single-Use Vial Drugs: The OIG will investigate waste associated with single-use vials covered under Medicare Part B in order to identify policies to reduce such waste and lower drug costs. The OIG believes that savings could be realized if manufacturers marketed smaller single-use vials, at correspondingly lower prices. Beginning with utilization on January 1, 2017, the OIG will use the "JW" modifier, which is described in the Medicare Claims Processing Manual (Pub. 100-04, Ch. 17, § 40), to track the amount of waste in single-use vials that are reimbursed through Medicare Part B and identify cases in which a different size vial could significantly reduce waste. The OIG noted that the FDA does not currently control the size of single-use vials submitted for approval, indicating its potential intent to influence FDA regulations through this study. You may recall that the New York Times reported earlier this year that decreasing drug waste through marketing packages containing smaller quantities of drugs, including smaller vial sizes, could save an estimated US$3 billion per year.

Medicare Part B - Potential Inflation-Based Rebates: The OIG will conduct a study to determine the amount of Medicare savings that could be realized if manufacturers were required to provide inflation-based rebates to Medicare on Part B drugs. The study will examine between 50 and 100 Part B drugs and calculate the difference between the existing rebate policy and an inflation-based rebate methodology that is similar to the Medicaid inflation-based calculations for single source drugs, innovator multiple source drugs, and, starting in the first quarter of 2017, non-innovator drugs.

Medicare Part D - Rebates for Drugs Dispensed to 340B Pharmacies: The OIG will review the extent to which Part D plans do not receive rebates on drug utilization sourced through the 340B Drug Pricing Program. The 340B Program requires manufacturers to charge certain safety net providers no more than a statutorily defined (and deeply discounted) "ceiling price" when they sell drugs to those entities. Manufacturers that contract with Part D plans often carve out 340B units from the utilization eligible for rebate in order to avoid paying a second discount on these already-discounted units. The OIG will examine the potential savings that could be realized if manufacturers were obligated to pay rebates for 340B drugs dispensed through the Medicare Part D program.


It is important to review the 2017 Work Plan in detail to identify any additional issues that may be relevant to your organization. Please feel free to contact the Hogan Lovells GP team with any questions you may have.

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