Quick Summary:
- Finalizes a regulatory definition of a “line extension,” “new formulation” and “solid oral dosage form” which will become effective on January 1, 2022 for the purposes of the alternative rebate calculation under the Medicaid Drug Rebate Program (MDRP)
- A narrower definition of “new formulation” than in the proposed rule
- A broader definition of “oral solid dosage form” than in the proposed rule
- Codifies that if the initial brand name drug is an oral solid dosage form, a drug of a different dosage form may still be considered a line extension
- Inflationary rebate payments as part of the alternative unit rebate amount (URA) calculation for the MDRP are likely to increase as more drugs will qualify as line extensions after the effective date on January 1, 2022
*For simplicity, CMS and this article will use the term “initial brand name drug” in place of “initial single source drug or innovator multiple source drug”
Deeper Dive:
Back in June, CMS published a proposed rule covering a range of regulatory notices from definition changes to adjustments for the “best price” calculation in facilitating value-based contracting, as covered in our previous VHS blog. In the final rule, CMS refined definitions that impact the number of drugs qualifying as a “line extension” product. The new definitions released by CMS expand the number of drugs eligible to be considered a “line extension” product. Back in 2010, the ACA increased the statutorily defined minimum rebate for brand name drugs from 15.1% up to 23.1% of AMP while also mandating that line extension products are subject to the alternative unit rebate amount (URA). The alternative URA subjects’ line extension products to the inflationary rebate component applied to the initial brand name drug. For details on how the URA and alternative URA are calculated, including the inflationary component, see the CMS notice. Important to note, the alternative URA only applies when there is a corporate relationship between the manufacturer of the line extension drug and the manufacturer of the initial brand name listed drug.
In the proposed rule, CMS ambitiously broadened the definition of “new formulation” under which a drug would qualify as a line extension. The final rule narrowed the proposed definition, while still managing to expand the pool of candidate drugs labeled as a line extension.
CMS Definition Frenzy:
Oral Solid Dosage Form
CMS has now defined the term oral solid dosage form to be “an orally administered dosage form that is not a liquid or gas at the time the drug enters the oral cavity.” This definition could include a sublingual film or a drug that is orally inhaled, which is significantly broader than the FDA definition that includes only tablets, capsules, or similar forms. This interpretation increases the available drugs qualifying as a line extension.
Line Extension Determination
CMS made two changes to the previous definition:
1) Only the initial brand name drug must be an oral solid dosage form
2) CMS has expanded the definition of “new formulation”
New Formulation Determination:
In the proposed rule, CMS defined new formulation to mean “any change to the drug, provided that the new formulation contains at least one active ingredient in common with the initial brand name listed drug.” That definition left a myriad of changes that could qualify as a new formulation. The narrower final rule defines new formulation to mean “a change to the drug, including, but not limited to: an extended-release formulation or other change in release mechanism, a change in dosage form, strength, route of administration, or ingredients.”
Changes to drug qualifying as a new formulation:
- Extended-release formulations
- Dosage form, strength, route of administration, ingredients
Changes to drug not qualifying as a new formulation:
- Changes in pharmacodynamics, or pharmacokinetic properties
- Changes in indication accompanied by marketing as a separately identifiable drug (new NDC)
- Combination drugs, such as a drug that is a combination of two or more drugs or a drug that is a combination of a drug and a device.
Although CMS has decided not to include these changes under the definition of “new formulation”, they adamantly maintained CMS has the statutory authority to include them if they so wish, indicating potential future broadening would be within their scope. CMS offered candid responses to comments including on the more controversial proposed “new formulation” changes.
New Strength
In a significant change, a new strength produced or distributed at a later time than the initial strength(s), will be identified as a line extension and made subject to the line extension alternative URA calculation. Allowing a new strength to be considered a line extension drew much consternation while CMS stuck to their decision stating, “although it may be operationally confusing and difficult, but we do not believe that that it is illogical or impossible.”
Changes in Indication
Based on the comments, CMS decided not to include a new indication accompanied by marketing as a separately identifiable drug (for example, a different NDC) in the definition. Any future change to this definition could have implications for manufacturers altering formulations of drugs for the purpose of gaining orphan drug indications (assuming the corporate relationship part of the definition is met) or research spent pursuing new indications. The decision for a manufacturer to market a drug under a different NDC holds far more variables than the alternative URA in the MDRP, but any future change in this ruling would certainly be another factor to consider in that equation.
Drug Combinations
Although not explicitly stated, CMS danced around HIV combination drugs, which has high utilization in Medicaid populations, being the large drive for leaving them out of the definition. Important to note that if an initial brand name listed drug is a combination drug and then a manufacturer begins selling a new formulation of that combination drug, then the new drug satisfies the definition of a new formulation and must be identified as a line extension.
Insights:
The new definitions finalized by CMS, clear the path for an increase in the number of line extension drugs. Line extensions are an important factor in the life cycle projections of a new drug to market. Although the increase in inflationary rebates from new line extension products is unlikely to deter innovation in a broad sense, the modeling for life cycle return will now incorporate these changes. As CMS rolls out these new provisions through the Drug Data Reporting (DDR) for Medicaid system, manufacturers should seek operational communications with CMS staff to ensure compliance in reporting obligations. The final rule confirmed that the rebates would not be retroactive and the changes would not be implemented into practice until 2022. For their part, CMS estimates “these new final policies clarifying the definitions…could produce savings of $2.3 billion through the year 2025 in the form of additional manufacturer rebates to states.”
Impact to 340B:
The increase in Medicaid rebates will directly impact 340B prices. Given their inextricable link, the ruling here is likely to decrease 340B prices for the line extension products now exposed to the inflationary rebate and a higher alternative URA.
Impact to States:
The increase in rebates generated from the inflationary component of the alternative URA is given directly to CMS while the states only keep their fixed statutory rebate share. The finalized changes could breed trouble for states. To gain access to the preferred drug list (PDL) for state Medicaid programs, many manufacturers enter into supplemental rebate agreements. If a drug now becomes classified as a line extension, increasing inflationary rebate payments to CMS, manufacturers will be less likely to provide supplemental rebates to states.
Timeline:
CMS has issued the final rule; however, the rule does not take effect until January 1, 2022. Additionally, there are opportunities for legal rebuttal as well as delay of rulemaking with the new Administration. CMS maintained they have the authority to make these changes although legal challenges will center on the interpretation of Congressional intent and the diversion from FDA definitions even as CMS maintains that “the agencies may use the same terms differently for purposes within their own programs.”
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