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Proposed Medicaid Line Extension Definition Alters Rebate Calculation

Summary

The CMS proposes to define line extension under the MDRP to broadly include any product that has at least one ingredient in common with the original drug, even if it is a different dosage form. If finalized, this change would have significant implications on classification and rebate liability for a wide set of current and future products.

In June, the Centers for Medicare and Medicaid Services (CMS) released a proposed rule that covers multiple topics related to Medicaid drug policy and the Medicaid Drug Rebate Program (MDRP), including value-based purchasing (VBP) arrangements. While the VBP portion of the rule has received a lot of attention, the CMS’s proposed definitions of line extension and new formulation of a drug may have the most effect on Medicaid rebate liability.

Follow the Money

The Affordable Care Act (ACA) in 2010 altered the calculation used to determine Medicaid rebates due from manufacturers to states, increasing the base rebate from 15.1% of the average manufacturer price (AMP) to 23.1% of AMP, and adding a provision for line extension drugs that ties the inflation component of the rebate to the original product. Any increase in rebates from manufacturers due to these ACA provisions goes directly to the CMS instead of the traditional split between the state and CMS sharing based on the state’s federal matching percentage. This rebate offset is calculated by the CMS and collected quarterly.

As shown in the illustrative calculation in Figure 1, broadening the definition of the line extension can have significant negative financial implications for manufacturers. Conversely, the CMS could benefit based on the rebates offset methodology. In this hypothetical, a manufacturer brought a tablet to market in 2010, and then several years later followed with a new, non-oral dosage form at a much higher cost. With the inflation portion of the line extension tied to the price increases of the original drug, the additional rebate is several times the total cost of the original drug.

Figure 1. Illustrative Example of Rebate Impact of Line Extension Categorization vs. New Drug
Figure 1. Illustrative Example of Rebate Impact of Line Extension Categorization vs. New Drug

Background

In 2012, the CMS proposed in its Covered Outpatient Drug (COD) rule to define a line extension as “an oral solid dosage form that has been approved by the FDA as a change to the initial brand name listed drug in that it represents a new version of the previously approved listed drug.”  Under this proposed definition, both the original and new drugs were oral solid dosage forms, and the FDA approved the new drug based on a change to the original drug. The CMS declined to finalize this definition when it finalized the COD rule in 2016 and again when it published regulations from the Bipartisan Budget Act of 2018, implementing a technical correction to the line extension provision.

The proposed rule’s definitions of line extension and new formulation of a drug removes these 2 guardrails—broadening the definition of line extensions to include additional dosage forms and removing the role of the FDA in the definition. The CMS now proposes that a line extension is a new formulation of a drug, and a new formulation means “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.” The rule outlines a non-comprehensive list of changes that could be a new formulation, including several that were explicitly excluded in the 2012 proposed definition, such as new strengths of a drug.

Additionally, the CMS originally pointed to the FDA’s definition of oral solid dosage form, but in the new proposal it broadens this definition to include drugs that are not generally considered oral solids.  

What’s Next for Manufacturers?

The proposal leaves several key technical and operational questions unanswered. Given the potential scale of the impact of these proposed changes, manufacturers should contemplate the direct and indirect implications of this proposal across their inline and future portfolio strategies.

  • The CMS proposes to expand the definition of “oral solid dosage form” to include anything that is not a liquid or gas when it enters the oral cavity, which is significantly broader than the FDA definition that considers only tablets, capsules, or similar forms. The CMS specifies that the new definition includes a sublingual film or an orally inhaled powder. What are the potential implications of having 2 distinct definitions, one from the CMS and one from the FDA?
  • The line extension additional rebate was effective beginning in 2010, and the CMS is now proposing changes to the definition of a line extension, influencing which products could be categorized as a line extension. Under CMS’s proposal, would the line extension definition apply retroactively to 2010, potentially requiring manufacturers to pay extra rebates on historical sales?
  • Medicaid rebate liability directly impacts the prices paid by covered entities in the 340B drug discount program. Increased rebates due to line extension categorization in Medicaid translates to lower 340B prices. How will these new definitions and additional rebate liability influence product purchasing among 340B covered entities?
  • Are there other downstream effects to be considered if rebate liability is substantially altered for inline and future products that could be categorized as line extensions? For instance, could this change impact investment through new single-tablet regimen drugs or more convenient dosage forms?

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