Continuing Appropriations Act Changes Treatment of Authorized Generics in Medicaid Rebate Average Manufacturer Price

Buried in a recently enacted continuing appropriations act for FY 2020 is a provision amending the Medicaid Drug Rebate statute as it relates to authorized generics. See Continuing Appropriations Act, 2020, and Health Extenders Act of 2019, § 1603.  Under CMS regulations, NDA holders (“primary manufacturers,” in CMS parlance) who permit other manufacturers (“secondary manufacturers”) to market authorized generics under the same NDA are to include in the average manufacturer price (AMP) of the brand version the transfer price of the authorized generic from the primary to the secondary manufacturer, if the secondary manufacturer is “acting as a wholesaler for drugs distributed to retail community pharmacies.”  42 C.F.R. § 447.506(b).  These prices, which tend to be steeply discounted, tend to reduce the AMP of the brand version, which, in turn, reduces the brand’s Medicaid rebate liability.

Prompted by an April 2019 report of the Office of the Inspector General of the Department of Health and Human Services, which concluded that this practice was depriving Medicaid of hundreds of millions of dollars in rebates, Congress has now amended the statute to specifically exclude from the brand AMP all authorized generic transfer sales from an NDA holder to a “wholesaler”.  The statutory definition of “wholesaler” has been changed to complete the exclusion.  Heretofore, the definition included, among other things, a manufacturer engaged in wholesale distribution to retail community pharmacies, which permitted authorized generic sales to certain secondary manufacturers to be included in the brand’s AMP.  The reference to “manufacturer” has now been deleted, so that a secondary manufacturer may no longer be considered a “wholesaler” even if it sells to retail community pharmacies.  The latter change – i.e., the deletion of the term “manufacturer” from the definition of a “wholesaler”, could have an impact on transactions affecting not only authorized generics, but also drugs sold by a manufacturer to a repackager or relabeler.

This law was signed by Donald Trump on September 27 and became effective on October 1, 2019.  CMS has yet to issue any guidance regarding its implementation.  Holders of NDAs for authorized generics will have to evaluate their monthly and quarterly AMP methodologies to ensure consistency with the new amendment.