Administration Releases Two Healthcare Reform Implementation Guidances Affecting Drug Manufacturers

By Alan M. Kirschenbaum –

The Obama Administration took two steps on Friday to advance the implementation of health care reform, both of which are of interest to drug manufacturers.  First, CMS issued a draft agreement and final guidance on the Part D coverage gap drug discount program.  Second, the IRS issued a guidance on the Qualifying Therapeutic Discovery Project Tax Credit.  Both the discount and tax credit are mandated by the Patient Protection and Affordable Care Act ("PPACA"), which was enacted on March 23, 2010.

The Final Coverage Gap Discount Guidance and Draft Agreement

A CMS memorandum issued on Friday finalizes a draft guidance on how the Part D coverage gap discount program will be implemented.  We described the draft when it was released for comment on April 30.  The final guidance is accompanied by a preamble providing CMS’ responses to comments on the draft.  The most noteworthy change in the final guidance is that CMS has reversed its decision to provide a grace period during CY 2011 during which a manufacturer’s drugs would be covered under Part D even if the manufacturer did not sign a coverage gap agreement.  In the draft, CMS had proposed that, since Part D plans had already established their formularies for 2011, “extenuating circumstances” warranted postponing until 2012 the bar on coverage for manufacturers lacking an agreement.  However, CMS has now decided that it will not apply the “extenuating circumstances” authority in the statute, and the agency expects all manufacturers to sign an agreement by 2011 (see § 50.2 of the guidance).

There are a number of other noteworthy changes and clarifications in the final guidance and its preamble: 

• Relationship with other Part D rebates:  Many drug manufacturers are considering whether to reduce their existing rebate offers to Part D sponsors for 2011 in light of the new coverage gap discount.  The Guidance (§ 30.2) and preamble clarify that the coverage gap discount is not intended to replace drug rebates currently paid to Part D plans.  CMS expects that manufacturers will continue to provide separate rebates on Part D drugs, including in the coverage gap.

• No manufacturer access to discount estimates:  Drug manufacturers are having difficulty estimating their anticipated liability for coverage gap discounts because they do not have access to Part D plan estimates of coverage gap drug expenses or expected coverage gap discounts.  CMS declined a request to give manufacturers access to such estimates contained in Part D sponsor bids, explaining that bid information is proprietary and, in any event, is not specific enough to assist a particular manufacturer in estimating liability.

• Payment deadline not extended:  CMS has so far declined to extend the deadline for payment of coverage gap discounts beyond the 15 day period proposed in the draft.  Indeed, the deadline in the draft agreement has been reduced to 14 days after receipt of an invoice (draft agreement § II(b)).  However, CMS will consider further requests to extend this period when it receives comments on the draft agreement (see below). 

• Direct payment to Part D sponsors retained:  CMS rejected requests to establish a system for manufacturers to send discount payments to CMS or its contractor to distribute to Part D sponsors, rather than sending payments directly to numerous sponsors.  CMS optimistically explains that the direct payment process will not be overly burdensome because CMS’ contractor will help facilitate timely electronic payments to Part D sponsors.

• No withholding of disputed amounts:  CMS also declined to permit manufacturers to withhold disputed amounts when paying an invoice, as is permitted under the Medicaid Drug Rebate and TRICARE retail refund programs.  Presumably, CMS considers withholding of disputed amounts to be too much of a hardship on Part D sponsors.

• Retroactive changes to discount:  Reversing its position in the draft, CMS has decided that retroactive changes will be made to the drug discount where retroactive changes have been made to a beneficiary’s claim or eligibility determination (Guidance § 70.4)

• Authorized generics:  The preamble clarifies that an authorized generic approved under an NDA is subject to the coverage gap discount, even if Part D plans include it in the generic tier of the formulary with a generic copay.

The Draft Agreement and Public Meeting:  Along with the final guidance, CMS released a notice setting forth a draft model coverage gap discount agreement and announcing a public meeting to discuss it.  Among other provisions, the draft agreement contains dispute resolution procedures, a 10-year recordkeeping requirement, authority for HHS to audit manufacturer records, and authority for manufacturers to audit the data used by CMS’s contractor to determine manufacturer discounts.  It also contains a requirement for manufacturers to maintain up-to-date registration and listing with the FDA, which means that a failure to do so will no longer be merely a misbranding violation under the Federal Food, Drug, and Cosmetic Act, but could also expose the manufacturer to termination of the Part D coverage gap discount agreement for breach. 

The public meeting will be held on June 1, 2010, and registration is open until then.  CMS is also soliciting comments on the draft agreement, which are due by close of business on June 21, 2010.

Therapeutic Discovery Tax Credit

Also on Friday, the IRS issued a notice and fact sheet explaining how it will administer the Therapeutic Discovery Project Credit authorized by section 9023 of PPACA.  Under this program, firms with 250 employees or fewer will be eligible to apply for a tax credit (or alternatively, a grant) equal to 50 percent of the direct and necessary costs incurred during 2009 and 2010 for a qualifying therapeutic discovery project.  To receive the credit/grant, a project must be “qualified” by HHS and “certified” by the IRS.  First, HHS must qualify the project based on whether it shows reasonable potential to either (1) result in new therapies to treat an unmet medical need or prevent, detect, or treat a chronic or acute disease or condition; (2) reduce long-term health costs; or (3) significantly advance the goal of curing cancer within 30 years.  Next, the IRS will certify qualified projects that have the greatest potential (a) to create and sustain high quality, high-paying jobs in the U.S., and (b) to advance U.S. competitiveness in the life, biological, and medical sciences.

No company may receive more than $5 million in tax credits or grants for 2009 and 2010 combined, and the total amount of credits/grants that may be allocated among certified projects may not exceed $1 billion for the two-year period.  Applications must be submitted during a narrow window that begins on the day the application form is released on www.irs.gov, which will be no later than June 21, 2010, and ends on July 21, 2010.  An appendix to the IRS notice describes the project information that must accompany the application form.