Affordable Care Act 340B Program: Full Text & Detailed Explanation

PAYMENT FOR COVERED OUTPATIENT DRUGS

This section, 1927 of the Social Security Act, outlines the regulations for Medicaid drug rebates and explicitly incorporates the 340B Drug Pricing Program. Understanding this text is crucial for healthcare providers, pharmacies, and manufacturers participating in these federal programs. This detailed explanation breaks down the complex legal language to clarify how the Affordable Care Act’s goals of accessible and affordable healthcare are intertwined with drug pricing and rebates, particularly through the 340B program.

(a) Requirement for Rebate Agreement.

(1) In general.

To ensure Medicaid and Medicare Part B payments are available for a manufacturer’s covered outpatient drugs, the manufacturer must have a rebate agreement in place with the Secretary of Health and Human Services. This agreement is on behalf of all states, although the Secretary can allow states to directly make agreements. Crucially, manufacturers must also comply with paragraph (5) regarding drugs purchased by “covered entities” as defined under the 340B program, starting from the month after the Veterans Health Care Act of 1992 was enacted. They must also meet the requirements of paragraph (6), which relates to agreements with the Department of Veterans Affairs and other federal agencies.

Agreements predating April 1, 1991, are considered effective from January 1, 1991, for retroactive payment calculations. For agreements entered into after March 1, 1991, the effective date is either the agreement date itself or a later date chosen by the state, up to the first day of the calendar quarter that begins more than 60 days after the agreement.

(2) Effective date.

The rebate agreement requirement became effective for drugs dispensed under Medicaid on or after January 1, 1991.

(3) Authorizing payment for drugs not covered under rebate agreements.

There are exceptions. Paragraph (1) and section 1903(i)(10)(A) do not apply to single-source or innovator multiple-source drugs if:

• (A)
  • (i) The state determines the drug is essential for beneficiary health under the state’s medical assistance plan.
  • (ii) The FDA has given the drug a 1-A rating, indicating therapeutic equivalence.
  • (iii)
    • (I) The physician obtains prior authorization before dispensing, as per subsection (d).
    • (II) The Secretary reviews and approves the state’s essentiality determination.
• (B) The Secretary determines there were extenuating circumstances in the first calendar quarter of 1991.

This section provides a safety valve for states to ensure access to medically necessary drugs even if a manufacturer lacks a rebate agreement, under specific conditions and with oversight.

(4) Effect on existing agreements.

Rebate agreements between a state and a manufacturer already in place when this section was enacted are considered compliant if they meet two conditions for their initial period:

• The state agrees to report all rebates paid to the Secretary.
• The agreement provides for a minimum aggregate rebate of 10% of the state’s total Medicaid spending on the manufacturer’s drugs.

For renewal periods after the initial term, existing agreements are compliant if:

• The state proves to the Secretary that the rebates are at least as large as those required under this section.
• The state agrees to continue reporting rebates to the Secretary.

This grandfather clause ensured that pre-existing state-manufacturer agreements could continue without immediate disruption, provided they met certain minimum rebate levels and reporting requirements.

(5) Limitation on prices of drugs purchased by covered entities.

This paragraph is where the Affordable Care Act 340b Program Text directly intersects with Medicaid rebates, establishing a critical link between the two.

• (A) Agreement with secretary. A manufacturer meets the requirements of this paragraph by entering into an agreement with the Secretary that adheres to section 340B of the Public Health Service Act for covered outpatient drugs purchased by “covered entities” from the month following the enactment of this paragraph (after the Veterans Health Care Act of 1992).

• (B) Covered entity defined. “Covered entity” is explicitly defined as per section 340B(a)(4) of the Public Health Service Act. This refers to specific healthcare organizations like federally qualified health centers, disproportionate share hospitals, and other entities serving vulnerable populations.

• (C) Establishment of alternative mechanism to ensure against duplicate discounts or rebates. If the Secretary doesn’t establish a mechanism within 12 months of the enactment of this section to prevent duplicate discounts or rebates as per section 340B(a)(5)(A) of the Public Health Service Act, the following interim measures apply:

  • (i) Entities. Covered entities must inform the state Medicaid agency when seeking reimbursement for a covered outpatient drug unit subject to a 340B agreement.
  • (ii) State agency. State agencies must provide a way for covered entities to indicate on reimbursement claims forms that a drug unit is subject to a 340B agreement and must not submit rebate claims to manufacturers for these drugs under subsection (b).

  This section addresses the crucial issue of preventing “duplicate discounts.” Drugs purchased at 340B discounted prices should not also be subject to Medicaid rebates. The interim mechanism ensures clear identification of 340B drugs in the Medicaid claims process.

• (D) Effect of subsequent amendments. When determining compliance with 340B requirements, the Secretary must not consider any amendments to section 340B enacted after the Veterans Health Care Act of 1992. This freezes the 340B requirements to the version in effect at that time for the purpose of this paragraph, providing regulatory stability.

• (E) Determination of compliance. A manufacturer is deemed compliant if they demonstrate to the Secretary that they would comply with the 340B provisions as they existed immediately after the enactment of this paragraph and would have entered a 340B agreement at that time, but for subsequent legislative changes to section 340B. This clause addresses situations where manufacturers might have been willing to comply with the original 340B intent but were hindered by later legislative changes.

(6) Requirements relating to master agreements for drugs procured by department of veterans affairs and certain other federal agencies.

This paragraph extends similar requirements to master agreements with the Department of Veterans Affairs and other federal agencies:

• (A) In general. Manufacturers must comply with section 8126 of title 38, United States Code, including entering into a master agreement with the Secretary of Veterans Affairs.

• (B) Effect of subsequent amendments. Similar to paragraph (5)(D), amendments to section 8126 after the Veterans Health Care Act of 1992 are not considered when determining compliance.

• (C) Determination of compliance. Analogous to paragraph (5)(E), manufacturers are deemed compliant if they would have complied with section 8126 as it existed after the enactment of this paragraph but for later legislative changes.

This paragraph ensures consistent pricing and agreements across different federal healthcare systems, mirroring the 340B requirements and maintaining a stable regulatory landscape based on the law as it was shortly after the Veterans Health Care Act of 1992.

(7) Requirement for submission of data for certain physician administered drugs.

This section mandates data submission for certain physician-administered drugs to ensure proper rebate collection.

• (A) Single source drugs. For single-source physician-administered drugs covered under Medicaid from January 1, 2006, states must collect and submit utilization data and coding (like J-codes and NDC numbers) as specified by the Secretary to identify the manufacturer for rebate purposes.

• (B) Multiple source drugs.

  • (i) Identification of most frequently physician administered multiple source drugs. By January 1, 2007, the Secretary must publish a list of 20 physician-administered multiple-source drugs with the highest dollar volume under Medicaid, updating the list annually.
  • (ii) Requirement. From January 1, 2008, for drugs on this list, states must submit utilization data and coding to identify manufacturers for rebate collection, similar to single-source drugs in (A).

• (C) Use of NDC codes. Data submission under (A) and (B)(ii) must use National Drug Code (NDC) numbers from January 1, 2007, unless the Secretary specifies an alternative coding system.

• (D) Hardship waiver. The Secretary can delay the application of (A) or (B)(ii) for states needing more time to implement the required reporting system, preventing undue hardship.

This section enhances the ability to secure rebates for physician-administered drugs, particularly high-volume ones, by requiring standardized data collection and reporting, ensuring accurate manufacturer identification and rebate calculations.

(b) Terms of Rebate Agreement.

(1) Periodic rebates.

• (A) In general. Rebate agreements require manufacturers to provide quarterly rebates to each state Medicaid plan for covered outpatient drugs dispensed after December 31, 1990, for which Medicaid payment was made. Rebates must be paid within 30 days of receiving utilization information from the state. This includes drugs dispensed to individuals in Medicaid managed care organizations if the organization covers such drugs.

• (B) Offset against medical assistance. Rebate amounts received by a state under this section are considered a reduction in Medicaid expenditure in that quarter, impacting federal matching funds under section 1903(a)(1).

• (C) Special rule for other drugs.

  • (i) In general. For rebate periods starting January 1, 2010, the Secretary will reduce payments to states under section 1903(a). This reduction equals the federal share of Medicaid spending multiplied by the rebate amounts attributable to the increased minimum rebate percentages from the Affordable Care Act (Patient Protection and Affordable Care Act, specifically section 2501), and considering additional drugs included due to ACA amendments.
  • (ii) Manner of payment reduction. This payment reduction is treated as an overpayment to the state, disallowed against the state’s regular quarterly Medicaid draw under section 1903(d)(2). This disallowance is not subject to reconsideration under section 1116(d).

  This complex section adjusts federal payments to states to account for the increased rebate percentages mandated by the Affordable Care Act, ensuring the federal government shares in the savings generated by these higher rebates. The mechanism of payment reduction as an overpayment ensures direct fiscal impact.

(2) State provision of information.

• (A) State responsibility. State Medicaid agencies must report to each manufacturer within 60 days after each rebate period, using a standard format set by the Secretary. This report includes the total units of each dosage form, strength, and package size of each covered outpatient drug dispensed for which Medicaid paid during the period, including data from Medicaid managed care organizations. States must also promptly send a copy of this report to the Secretary.

• (B) Audits. Manufacturers can audit the state-provided information. Rebate adjustments are made if audits reveal utilization discrepancies. This ensures accuracy and accountability in the rebate process, allowing manufacturers to verify state-reported data.

(3) Manufacturer provision of price and drug product information.

This section details extensive reporting requirements for manufacturers to ensure accurate rebate calculations and program oversight.

• (A) In general. Manufacturers with rebate agreements must report to the Secretary:

  • (i) Monthly, within 30 days of the month’s end:
    • (I) Average Manufacturer Price (AMP), including customary prompt pay discounts to wholesalers, for covered outpatient drugs.
    • (II) Best Price for single-source and innovator multiple-source drugs.
  • (ii) Within 30 days of entering an agreement: AMP as of October 1, 1990, for each covered outpatient drug.
  • (iii) Quarterly, starting January 1, 2004, along with monthly reporting, by NDC code:
    • (I) Average Sales Price (ASP) and total units under section 1847A.
    • (II) Wholesale Acquisition Cost (WAC), if required under section 1847A.
    • (III) Information on sales at nominal prices or as described in section 1847A(c)(2)(B) for specific drug categories.
  • (iv) Monthly, within 30 days, total units used to calculate monthly AMP for each covered outpatient drug.
  • (v) Monthly, within 30 days, drug product information as required by the Secretary for each covered outpatient drug.

  The Inspector General of HHS can audit this reported information. The Secretary must provide states with monthly updates of AMP for single and multiple source drugs and quarterly website updates of weighted average AMPs.

• (B) Verification surveys of average manufacturer price. The Secretary can survey wholesalers and direct sellers to verify reported AMPs. Refusal to provide information or knowingly providing false information can result in a civil monetary penalty up to $100,000, subject to section 1128A penalties (excluding penalty amounts and additional assessments).

• (C) Penalties.

  • (i) Failure to provide timely information. Manufacturers failing to provide timely information face increased penalties of $10,000 per day of delay. Failure to report within 90 days of the deadline results in agreement suspension until reported (minimum 30 days).
  • (ii) False information. Knowingly providing false information, including drug pricing and product data, incurs a civil monetary penalty up to $100,000 per false item, in addition to other legal penalties, and is subject to section 1128A penalties (excluding subsections (a), (b), (f)(3), and (f)(4)).
  • (iii) Misclassified drug product or misreported information.
    • (I) In general. Knowingly misclassifying a covered outpatient drug, such as by submitting incorrect drug product information, results in a civil monetary penalty up to twice the difference between rebates paid on the misclassified drug and rebates that should have been paid if correctly classified.
    • (II) Other penalties and recovery of underpaid rebates. These civil penalties are additional to other legal penalties and recovery of underpaid rebates.
  • (iv) Increasing oversight and enforcement. Annually, the Secretary retains 25% of civil money penalties collected under this subparagraph and subsection (c)(4)(B)(ii)(III) for oversight and enforcement activities, including improving drug data reporting, compliance evaluation, and ensuring accurate drug information reporting.

• (D) Confidentiality of information. Information disclosed by manufacturers or wholesalers is confidential and cannot be disclosed in a way that reveals specific manufacturer or wholesaler identities or drug prices, except:

  • (i) As necessary to carry out this section.
  • (ii) For review by the Comptroller General.
  • (iii) For review by the Director of the Congressional Budget Office.
  • (iv) To states for carrying out Medicaid.
  • (v) For public website disclosure of weighted average monthly AMPs and average retail survey prices for multiple-source drugs.
  • (vi) For drug product or classification information not considered confidential before the enactment of this clause.

  This confidentiality extends to information disclosed under Medicare Part D sections 1860D-2(d)(2), 1860D-4(c)(2)(E), and drug pricing data under section 1860D-31(i)(1).

This extensive section emphasizes transparency and accountability through rigorous reporting requirements, verification mechanisms, and significant penalties for non-compliance or misrepresentation. Confidentiality provisions balance transparency with protection of proprietary information.

(4) Length of agreement.

• (A) In general. Rebate agreements are initially effective for at least one year and automatically renew for at least one-year periods unless terminated.

• (B) Termination.

  • (i) By the secretary. The Secretary can terminate an agreement for violations or other good cause, effective no earlier than 60 days after notice. Manufacturers are entitled to a hearing, but this doesn’t delay termination.
  • (ii) By a manufacturer. Manufacturers can terminate agreements for any reason, effective the calendar quarter beginning at least 60 days after notice to the Secretary.
  • (iii) Effectiveness of termination. Termination does not affect rebates due before the effective date.
  • (iv) Notice to states. The Secretary must notify states of terminations at least 30 days before the effective date.
  • (v) Application to terminations of other agreements. These termination provisions also apply to 340B agreements and master agreements under 38 U.S.C. 8126.

• (C) Delay before reentry. After termination, a new agreement with the same or successor manufacturer cannot be entered into until one calendar quarter has passed, unless the Secretary finds good cause for earlier reinstatement.

This section outlines the terms and conditions for the duration and termination of rebate agreements, ensuring a balance between stability and the ability to end agreements for cause or at the manufacturer’s discretion, while also protecting rebate obligations already incurred.

(c) Determination of Amount of Rebate.

(1) Basic rebate for single source drugs and innovator multiple source drugs.

• (A) In general. Except as in paragraph (2), the basic rebate for single-source and innovator multiple-source drugs is calculated per dosage form and strength per rebate period. It is the product of:

  • (i) Total units paid by the state plan in the rebate period.
  • (ii) The greater of:
    • (I) The difference between AMP and Best Price.
    • (II) The Minimum Rebate Percentage of the AMP (specified in (B)(i)).

• (B) Range of rebates required.

  • (i) Minimum rebate percentage. The “Minimum Rebate Percentage” varies by period:
    • 12.5% (Dec 31, 1990 – Oct 1, 1992)
    • 15.7% (Sep 30, 1992 – Jan 1, 1994)
    • 15.4% (Dec 31, 1993 – Jan 1, 1995)
    • 15.2% (Dec 31, 1994 – Jan 1, 1996)
    • 15.1% (Dec 31, 1995 – Jan 1, 2010)
    • 23.1% (after Dec 31, 2009), except as in (iii).
  • (ii) Temporary limitation on maximum rebate amount. The rebate amount under (A)(ii) cannot exceed:
    • 25% of AMP (before Jan 1, 1992)
    • 50% of AMP (Dec 31, 1991 – Jan 1, 1993)
  • (iii) Minimum rebate percentage for certain drugs.
    • (I) In general. For specific drugs in (II), the minimum rebate percentage after December 31, 2009, is 17.1%.
    • (II) Drug described. These drugs are:
      • (aa) Clotting factors with separate furnishing payments under section 1842(o)(5), listed by the Secretary.
      • (bb) Drugs FDA-approved exclusively for pediatric indications.

• (C) Best price defined.

  • (i) In general. “Best Price” is the lowest price available from the manufacturer during the rebate period to any US wholesaler, retailer, provider, HMO, non-profit, or government entity, excluding prices charged to:
    • (I) Indian Health Service, VA, State homes for veterans, DoD, Public Health Service, 340B covered entities (including inpatient prices to 340B hospitals).
    • (II) Federal Supply Schedule of the GSA.
    • (III) State Pharmaceutical Assistance Programs.
    • (IV) Federal government depot and single award contract prices.
    • (V) Prices for covered discount card drugs under endorsed discount card programs under section 1860D-31.
    • (VI) Prices negotiated by Medicare Part D plans, MA-PD plans, qualified retiree prescription drug plans, or discounts under the Medicare coverage gap discount program.
  • (ii) Special rules. “Best Price”:
    • (I) Includes cash discounts, free goods contingent on purchase, volume discounts, and rebates (other than Medicaid rebates).
    • (II) Ignores special packaging, labeling, or identifiers.
    • (III) Excludes nominal prices.
    • (IV) For manufacturers allowing other drugs to be sold under their NDA, “Best Price” includes the lowest price for any such authorized drug, excluding prices in (i)(I)-(IV).
  • (iii) Application of auditing and recordkeeping requirements. For 340B hospitals, inpatient drug purchases are subject to 340B auditing and recordkeeping requirements.

• (D) Limitation on sales at a nominal price.

  • (i) In general. Only sales at nominal prices to specific entities are considered “nominal prices” for (C)(ii)(III) and (b)(3)(A)(iii)(III):
    • (I) 340B covered entities.
    • (II) Intermediate care facilities for the mentally retarded.
    • (III) State-owned/operated nursing facilities.
    • (IV) 501(c)(3) tax-exempt or state-owned/operated entities that would be 340B covered entities but lack qualifying funding.
    • (V) Public/non-profit entities or higher education institution entities providing services under section 1001(a) of the Public Health Service Act to students.
    • (VI) Other safety net providers determined by the Secretary based on factors in (ii).
  • (ii) Factors. Factors for (i)(VI) safety net provider designation:
    • (I) Type of facility/entity.
    • (II) Services provided.
    • (III) Patient population served.
    • (IV) Number of other nominal price-eligible entities in the service area.
  • (iii) Nonapplication. Clause (i) does not apply to nominal price sales under master agreements under 38 U.S.C. 8126.
  • (iv) Rule of Construction. This subparagraph does not alter existing prohibitions on services for entities in (i)(IV), like section 300a-6 of this title.

This section meticulously defines the basic rebate calculation for brand-name and innovator drugs, using a formula based on AMP and Best Price. The definition of Best Price is complex, with numerous exclusions and special rules, designed to ensure that Medicaid receives a significant discount while considering various market factors and other federal programs like 340B. The nominal price limitations are designed to prevent abuse while allowing for legitimate discounted sales to safety net providers.

(2) Additional rebate for single source and innovator multiple source drugs.

• (A) In general. The rebate for single-source and innovator multiple-source drugs is increased by an “inflationary” rebate. This additional rebate equals the product of:

  • (i) Total units dispensed after December 31, 1900, paid by the state plan in the rebate period.
  • (ii) The amount (if any) by which:
    • (I) The AMP for the rebate period exceeds
    • (II) The AMP for the quarter starting July 1, 1990, adjusted for CPI-U inflation from September 1990 to the month before the rebate period begins.

• (B) Treatment of subsequently approved drugs. For drugs FDA-approved after October 1, 1990, the base AMP in (A)(ii)(II) is the AMP for the first full calendar quarter after marketing, and the CPI-U adjustment starts from the month prior to that first full quarter.

• (C) Treatment of new formulations.

  • (i) In general. For “line extensions” of oral solid dosage form single-source or innovator multiple-source drugs, the rebate is the greater of the amount in (ii) or (iii).
  • (ii) Amount 1. The standard rebate (paragraph (1)) plus the inflationary rebate (subparagraph (A) and (B)).
  • (iii) Amount 2. The standard rebate (paragraph (1)) plus the product of:
    • (I) The AMP of the line extension.
    • (II) The highest additional rebate percentage for any strength of the original drug.
    • (III) Total units of the line extension paid by the state plan.

  “Line extension” means a new formulation (e.g., extended release) but excludes abuse-deterrent formulations, even if extended release.

• (D) Maximum rebate amount. The total rebate (basic + additional) for single-source and innovator multiple-source drugs after December 31, 2009, cannot exceed 100% of the AMP.

This section introduces an “inflationary” rebate to account for price increases over time, using a 1990 baseline and CPI-U adjustment. It also addresses “line extensions” to prevent manufacturers from circumventing rebate obligations by slightly reformulating existing drugs, ensuring that rebates are appropriately increased for these new formulations. A cap of 100% of AMP is placed on the total rebate.

(3) Rebate for other drugs.

• (A) In general. Except as in (C), rebates for covered outpatient drugs that are not single-source or innovator multiple-source drugs (i.e., generics) are calculated as the product of:

  • (i) The “applicable percentage” of the AMP (defined in (B)).
  • (ii) Total units dispensed after December 31, 1990, paid by the state plan.

• (B) Applicable percentage defined. The “Applicable Percentage” for generic drugs varies by period:

  • 10% (before Jan 1, 1994)
  • 11% (Dec 31, 1993 – Jan 1, 2010)
  • 13% (after Dec 31, 2009).

• (C) Additional rebate.

  • (i) In general. Rebates for generic drugs are increased similarly to the inflationary rebates for brand-name drugs under paragraph (2)(A) and (D), except as in (ii).
  • (ii) Special rules for application of provision. Applying paragraph (2)(A) and (D) to generics:
    • (I) “1990” in (2)(A)(i) becomes “2014”.
    • (II) “July 1, 1990” in (2)(A)(ii) becomes “July 1, 2014”, subject to (iii).
    • (III) “September 1990” in (2)(A)(ii) becomes “September 2014”, subject to (iii).
    • (IV) References in (2)(D) are adjusted to refer to subparagraph (A), “this subparagraph,” and “December 31, 2014.”
    • (V) “Single source or innovator multiple source drug” in (2) is read as referring to drugs covered by this clause.
  • (iii) Special rule for certain noninnovator multiple source drugs. For generics first marketed after April 1, 2013, the base quarter in (2)(A)(ii)(II) is “the applicable quarter,” and the base month is “the last month in such applicable quarter.”
  • (iv) Applicable quarter defined. “Applicable quarter” for drugs in (iii) is the fifth full calendar quarter after the drug is first marketed as a generic.

This section sets the rebate rates for generic drugs at a lower “applicable percentage” of AMP than brand-name drugs. However, it also introduces an “additional rebate” mechanism for generics, similar to the inflationary rebate for brand-name drugs, but using a 2014 baseline instead of 1990. This reflects a later starting point for inflationary adjustments for generic drugs.

(4) Recovery of unpaid rebate amounts due to misclassification of covered outpatient drugs.

• (A) In general. If a manufacturer’s misclassification of a covered outpatient drug (regardless of intent) leads to a lower per-unit rebate, the manufacturer must pay the state the difference between the rebate paid and the rebate that should have been paid if correctly classified, multiplied by the total units paid.

• (B) Authority to correct misclassifications.

  • (i) In general. The Secretary must notify manufacturers of drug misclassifications (regardless of intent) and require timely correction.
  • (ii) Enforcement. If a manufacturer fails to correct misclassification after notice, the Secretary can:
    • (I) Correct the misclassification using manufacturer-provided drug product information.
    • (II) Suspend the misclassified drug and its covered outpatient drug status, excluding it from federal financial participation under section 1903(i)(10)(E).
    • (III) Impose a civil money penalty for each misclassified rebate period, up to the product of the total units of the misclassified drug paid by any state plan and 23.1% of the AMP.

• (C) Reporting and transparency.

  • (i) In general. The Secretary must submit an annual report to Congress on misclassified drugs, reclassification steps, actions to recover unpaid rebates, and expenditures from the fund created in subsection (b)(3)(C)(iv).
  • (ii) Public access. The Secretary must make the report information publicly available in a timely manner.

• (D) Other penalties and actions. Actions and penalties under this clause are additional to other remedies, including terminating the rebate agreement and pursuing other civil money penalties or legal actions.

This section provides strong enforcement mechanisms to address drug misclassification, ensuring that manufacturers are held accountable for accurate classification and pay the correct rebate amounts. It includes penalties, correction authority for the Secretary, and transparency measures through public reporting.

(d) Limitations on Coverage of Drugs.

(1) Permissible restrictions.

• (A) States can subject any covered outpatient drug to prior authorization, complying with paragraph (5).

• (B) States can exclude or restrict coverage if:

  • (i) The prescribed use is not for a medically accepted indication (defined in (k)(6)).
  • (ii) The drug is on the list in paragraph (2).
  • (iii) Restricted by a state-manufacturer agreement authorized by the Secretary under subsection (a)(1) or in effect under (a)(4).
  • (iv) The state excluded the drug from its formulary established under paragraph (4).

This section grants states significant flexibility in managing drug coverage through prior authorization and formulary exclusions, while also outlining specific limitations on this flexibility.

(2) List of drugs subject to restriction.

The following drug categories or uses can be restricted or excluded from coverage:

• (A) Agents for anorexia, weight loss, or weight gain.
• (B) Agents to promote fertility.
• (C) Agents for cosmetic purposes or hair growth.
• (D) Agents for symptomatic relief of cough and colds.
• (E) Agents to promote smoking cessation.
• (F) Prescription vitamins and mineral products, except prenatal vitamins and fluoride preparations.
• (G) Nonprescription drugs, except for pregnant women when recommended per section 1905(bb)(2)(A) guidelines for tobacco cessation (FDA-approved OTC monograph drugs).
• (H) Covered outpatient drugs where the manufacturer requires exclusive purchase of associated tests or monitoring services.
• (I) Barbiturates.
• (J) Benzodiazepines.
• (K) Agents for sexual or erectile dysfunction, unless used to treat a non-sexual/erectile dysfunction condition for which FDA-approved.

This is a specific list of drug categories that states are permitted to restrict or exclude from Medicaid coverage, reflecting policy choices to limit coverage for certain types of drugs or uses. It’s important to note that some of these categories (like smoking cessation agents, barbiturates, and benzodiazepines) are later listed as non-excludable under paragraph (7).

(3) Update of drug listings.

The Secretary must periodically update the list in paragraph (2) based on data from state surveillance and utilization review programs, identifying drugs or uses subject to clinical abuse or inappropriate use. This allows the list of excludable drugs to be dynamic and responsive to changing patterns of drug use and abuse.

(4) Requirements for formularies.

States can establish drug formularies if they meet specific requirements:

• (A) The formulary must be developed by a committee of physicians, pharmacists, and other experts appointed by the Governor or the state’s Drug Use Review (DUR) board.
• (B) The formulary must include covered outpatient drugs from manufacturers with rebate agreements (excluding drugs restricted under paragraph (2)), except as in (C).
• (C) A drug can be excluded for a specific disease, condition, or identified population if, based on labeling or compendia (for off-label medically accepted uses), the excluded drug lacks a significant clinical therapeutic advantage in safety, effectiveness, or clinical outcome over formulary drugs, with a public written explanation for exclusion.
• (D) The state plan must cover drugs excluded from the formulary (except those restricted under paragraph (2)) through a prior authorization program consistent with paragraph (5).
• (E) The formulary must meet other requirements set by the Secretary to achieve program savings while protecting beneficiary health.

Prior authorization programs under paragraph (5) are not considered formularies subject to this paragraph’s requirements. This section establishes detailed rules for state formularies, balancing cost control with patient access and clinical considerations. The requirement for a formulary committee and the criteria for exclusion ensure clinical input and transparency.

(5) Requirements of prior authorization programs.

State prior authorization programs must meet specific criteria:

• (A) Response by phone or telecommunication within 24 hours of a prior authorization request.
• (B) Except for drugs in paragraph (2), dispensing of at least a 72-hour supply of a covered outpatient prescription drug in an emergency situation (defined by the Secretary).

These requirements ensure timely access to necessary medications even with prior authorization, especially in emergency situations, while allowing states to manage drug utilization.

(6) Other permissible restrictions.

States can impose limitations on quantities per prescription or number of refills within a therapeutic class to discourage waste and address fraud or abuse. This allows states to implement reasonable utilization controls.

(7) Non-excludable drugs.

The following drug categories or uses cannot be excluded from coverage:

• (A) Agents to promote smoking cessation, including FDA-approved OTC monograph drugs for tobacco cessation.
• (B) Barbiturates.
• (C) Benzodiazepines.

This paragraph creates exceptions to paragraph (2), specifically requiring coverage for smoking cessation agents, barbiturates, and benzodiazepines, despite their inclusion in the potentially excludable list in paragraph (2). This reflects specific policy decisions to ensure access to these drug categories.

(e) Treatment of Pharmacy Reimbursement Limits.

(1) In general.

From January 1, 1991, to December 31, 1994:

• (A) States cannot reduce payment limits for ingredient costs or dispensing fees below the limits in effect on January 1, 1991.
• (B) Except as in (2), the Secretary cannot modify regulations under 42 CFR 447.331-447.334 (in effect on November 5, 1990) to reduce these limits.

(2) Special rule. Paragraph (1)(A) does not apply to states not complying with regulations in (1)(B) until they come into compliance.

(3) Effect on state maximum allowable cost limitations. This section does not supersede state maximum allowable cost (MAC) limitations in effect before January 1, 1991, or after December 31, 1994. Rebates are made regardless of MAC limitations.

(4) Establishment of upper payment Limits. Subject to paragraph (5), the Secretary must establish a Federal Upper Limit (FUL) for each multiple-source drug with three or more FDA-rated therapeutically and pharmaceutically equivalent products, using only such formulations for FUL determination.

(5) Use of AMP in upper payment limits. FULs must be no less than 175% of the weighted average of the most recent monthly AMPs for pharmaceutically and therapeutically equivalent multiple-source drugs available to retail community pharmacies nationwide. The Secretary must use an AMP smoothing process similar to that in section 1847A.

This section addresses pharmacy reimbursement, setting temporary floors on payment limits and establishing Federal Upper Limits (FULs) for generic drugs to control costs. The FUL methodology is tied to AMP and aims to ensure reasonable pharmacy reimbursement while promoting generic drug utilization.

(f) Survey of Retail Prices; State Payment and Utilization Rates and Performance Rankings.

(1) Survey of retail prices.

• (A) Use of vendor. The Secretary can contract for services to:

  • (i) Determine monthly retail survey prices for covered outpatient drugs, representing a national average of consumer purchase prices net of discounts and rebates (if information available).
  • (ii) Notify the Secretary when therapeutically and pharmaceutically equivalent and bioequivalent drug products become generally available.

• (B) Secretary response to notification of availability of multiple source products. Within 7 days of notification under (A)(ii), the Secretary must determine if the product is now described in subsection (e)(4) (eligible for FUL).

• (C) Use of competitive bidding. The Secretary must competitively bid for a vendor with demonstrated history in:

  • (i) Surveying and determining representative nationwide retail ingredient prices for prescription drugs.
  • (ii) Working with retail pharmacies, commercial payers, and states to obtain and disseminate price information.
  • (iii) Collecting and reporting price information at least monthly.

  The Secretary can waive Federal Acquisition Regulation provisions (except confidentiality and other appropriate provisions) for efficient implementation.

• (D) Additional provisions. Vendor contracts must include terms requiring:

  • (i) Monitoring the marketplace and reporting new covered outpatient drugs becoming generally available.
  • (ii) Monthly updates on retail survey prices.
  • (iii) 2-year contract term.

• (E) Availability of information to states. Monthly retail survey price information, including for single-source drugs, must be provided to states. The Secretary must provide state Medicaid agencies access to retail survey prices.

(2) Annual state report.

States must annually report to the Secretary information on:

• (A) Payment rates for covered outpatient drugs.
• (B) Dispensing fees.
• (C) Utilization rates for non-innovator multiple source drugs.

(3) Annual state performance rankings.

• (A) Comparative analysis. The Secretary must annually compare national retail sales price data (from paragraph (1)) for the 50 most prescribed drugs with Medicaid prices for each state for those drugs.
• (B) Availability of information. The Secretary must submit full information on annual rankings to Congress and states.

(4) Appropriation. $5,000,000 is appropriated annually from FY 2006-2010 for this subsection.

This section mandates retail price surveys to establish benchmarks, requires states to report payment and utilization data, and directs the Secretary to conduct annual state performance rankings based on price comparisons. This promotes price transparency and allows for comparative analysis of state Medicaid drug spending relative to national retail prices.

(g) Drug Use Review.

(1) In general.

• (A) To meet section 1902(a)(54) requirements, states must have a Drug Use Review (DUR) program for covered outpatient drugs to ensure prescriptions are appropriate, medically necessary, and unlikely to cause adverse medical results. The program must educate physicians and pharmacists to reduce fraud, abuse, gross overuse, excessive utilization, inappropriate or medically unnecessary care, or prescribing/billing practices indicating abuse or excessive utilization, as well as address potential and actual severe adverse drug reactions, therapeutic appropriateness, over/underutilization, generic use, therapeutic duplication, drug-disease contraindications, drug-drug/drug-allergy interactions, incorrect dosage/duration, and clinical abuse/misuse.

• (B) The program must assess drug use data against predetermined standards from:

  • (i) Compendia:
    • (I) American Hospital Formulary Service Drug Information.
    • (II) United States Pharmacopeia-Drug Information.
    • (III) DRUGDEX Information System.
  • (ii) Peer-reviewed medical literature.

• (C) For calendar years 1991-1993, the Secretary will pay states 75% of DUR program adoption expenditures.

• (D) States are not required to perform additional DUR for nursing facility residents compliant with Secretary-prescribed drug regimen review procedures under section 1919 regulations (42 CFR 483.60).

(2) Description of program.

DUR programs must include:

• (A) Prospective drug review.

  • (i) Review of drug therapy before each prescription is filled or delivered, typically at point-of-sale, screening for potential problems: therapeutic duplication, drug-disease contraindications, drug-drug interactions (including OTC), incorrect dosage/duration, drug-allergy interactions, and clinical abuse/misuse. Standards are from paragraph (1)(B) compendia and literature.
  • (ii) State law must establish pharmacist counseling standards for Medicaid beneficiaries, including offering to discuss (in person or via toll-free phone) significant matters: medication name/description, route/dosage/duration, special directions/precautions, common severe side effects/interactions/contraindications and actions, self-monitoring techniques, storage, refill information, missed dose action.
    Pharmacists must make reasonable efforts to obtain, record, and maintain patient information: name, address, phone, DOB/age, gender, significant history (disease states, allergies, drug reactions, medication list), pharmacist comments. Consultation is not required if refused, and verification of offer/refusal is not required.

• (B) Retrospective drug use review. Ongoing periodic examination of claims data and records to identify patterns of fraud, abuse, gross overuse, excessive utilization, inappropriate or medically unnecessary care, or prescribing/billing practices indicating abuse or excessive utilization among providers and beneficiaries, or associated with specific drugs/drug groups, using mechanized claims processing and information retrieval systems.

• (C) Application of standards. Ongoing assessment of drug use data against explicit predetermined standards (using paragraph (1)(B) compendia and literature), monitoring for therapeutic appropriateness, over/underutilization, generic use, therapeutic duplication, drug-disease contraindications, drug-drug interactions, incorrect dosage/duration, and clinical abuse/misuse, and implementing remedial strategies to improve care quality and conserve funds.

• (D) Educational program. Through the State DUR Board (paragraph (3)), either directly or via contracts, using DUR Board data on common problems, provide active and ongoing educational outreach to practitioners on common drug therapy problems to improve prescribing/dispensing practices.

(3) State drug use review board.

• (A) Establishment. Each state must establish a DUR Board directly or via contract.

• (B) Membership. DUR Board membership must include healthcare professionals with expertise in: clinically appropriate prescribing, dispensing/monitoring, DUR, evaluation/intervention, and medical quality assurance. At least 1/3 but no more than 51% must be licensed, actively practicing physicians, and at least 1/3 licensed, actively practicing pharmacists.

• (C) Activities. DUR Board activities include:

  • (i) Retrospective DUR as in (2)(B).
  • (ii) Application of standards as in (2)(C).
  • (iii) Ongoing interventions for physicians and pharmacists targeted at therapy problems or individuals identified in retrospective DUR. Interventions must include (as appropriate): information dissemination, written/oral/electronic reminders with patient/drug-specific information and suggested practice changes (ensuring privacy), face-to-face discussions with experts and targeted prescribers/pharmacists (including follow-up), and intensified review/monitoring of selected prescribers/dispensers. The Board must re-evaluate interventions to assess impact on care quality and success, and modify as needed.

• (D) Annual report. Each State must require the DUR Board to prepare an annual report. States must submit an annual report to the Secretary describing Board activities, prospective/retrospective DUR programs, interventions, impact on care quality, and cost savings. The Secretary uses these reports to evaluate state DUR program effectiveness.

This section mandates comprehensive Drug Use Review programs in each state Medicaid system, encompassing prospective and retrospective review, educational outreach, and a State DUR Board. These programs are designed to improve medication use, reduce inappropriate utilization, and enhance patient safety and outcomes, while also containing costs.

(h) Electronic Claims Management.

(1) In general. The Secretary must encourage states to establish point-of-sale electronic claims management systems for covered outpatient drugs for real-time eligibility verification, claims data capture, adjudication, and assisting pharmacists in payment applications, consistent with chapter 35 of title 44, U.S. Code.

(2) Encouragement.

• (A) For FY 1991-1992, state plan expenditures for developing these systems receive 90% federal matching funds under section 1903(a)(3)(A)(i) if the state uses cost-effective competitive procurement for telecommunications and ADP services/equipment.
• (B) The Secretary can allow states to substitute their competitive procurement Request for Proposal for otherwise required advance planning and implementation documents in applying 42 CFR part 433, and 45 CFR parts 95, 205, and 307.

This section promotes the adoption of electronic claims management systems to improve efficiency, reduce fraud and abuse, and streamline pharmacy claims processing within Medicaid drug programs, offering enhanced federal matching funds as an incentive.

(i) Annual Report.

(1) In general. By May 1 each year, the Secretary must transmit a report to the Senate Finance Committee, House Energy and Commerce Committee, and Senate and House Committees on Aging on the operation of this section in the preceding fiscal year.

(2) Details. Each report must include information on:

• (A) Ingredient costs paid for single-source, multiple-source, and nonprescription covered outpatient drugs.
• (B) Total value of rebates received and number of manufacturers providing rebates.
• (C) Comparison of rebate sizes to rebates offered to other purchasers.
• (D) Effect of inflation on required rebates.
• (E) Trends in Medicaid prices for covered outpatient drugs.
• (F) Federal and state administrative costs of compliance.

This section mandates annual reporting to Congress on the Medicaid drug rebate program’s operation, providing oversight and transparency regarding program costs, rebates, pricing trends, and administrative aspects.

(j) Exemption of Organized Health Care Settings.

(1) Covered outpatient drugs are exempt from this section if:

• (A) Dispensed by HMOs, including Medicaid managed care organizations under section 1903(m), and subject to 340B discounts.
• (B) Subject to 340B discounts.

(2) State plans must provide that hospitals dispensing drugs using formulary systems and billing no more than purchasing costs are exempt.

(3) This subsection does not mean drug amounts paid by these institutions should not be considered for Best Price calculations under subsection (c).

This section provides exemptions for drugs dispensed in organized healthcare settings like HMOs and hospitals meeting certain criteria, especially when 340B discounts are involved. However, these discounted prices must still be factored into Best Price calculations, preventing double discounting.

(k) Definitions.

(1) Average manufacturer price.

• (A) In general. Subject to (B), “Average Manufacturer Price” (AMP) is the average price paid to the manufacturer in the US by:

  • (i) Wholesalers for drugs to retail community pharmacies.
  • (ii) Retail community pharmacies buying directly from the manufacturer.

• (B) Exclusion of customary prompt pay discounts and other payments.

  • (i) In general. AMP excludes:
    • (I) Customary prompt pay discounts to wholesalers.
    • (II) Bona fide service fees to wholesalers or retail community pharmacies (distribution, inventory management, stocking allowances, admin services, patient care programs).
    • (III) Reimbursements for recalled, damaged, expired, or unsalable returned goods (cost of goods, return handling, reverse logistics, drug destruction).
    • (IV) Payments/rebates/discounts to pharmacy benefit managers, MCOs, HMOs, insurers, hospitals, clinics, mail order pharmacies, LTC providers, manufacturers, or any non-wholesaler/retail community pharmacy entity.
    • (V) Discounts under section 1860D–14A (Medicare coverage gap discount program).
  • (ii) Inclusion of other discounts and payments. AMP includes any other discounts, rebates, payments, or financial transactions received by, paid by, or passed through to retail community pharmacies.

• (C) Exclusion of 505(c) drugs. For manufacturers allowing any drug to be sold under their NDA, AMP excludes the average price paid for such drugs by wholesalers distributing to retail community pharmacies.

(2) Covered outpatient drug. Subject to (3) exceptions, “covered outpatient drug” means:

• (A) Drugs treated as prescribed drugs for section 1905(a)(12), dispensable only by prescription (except as in (4)), and:
  • (i) FDA-approved prescription drugs (section 505 or 507 of FD&C Act) or approved under section 505(j) (generics).
  • (ii) Drugs commercially used/sold in US before 1962 Drug Amendments or identical/similar/related (21 CFR 310.6(b)(1)) to such drugs, not finally determined by the Secretary to be a “new drug” or subject to enforcement action under FD&C Act sections 301, 302(a), or 304(a) for section 502(f) or 505(a) violations.
  • (iii) Drugs in section 107(c)(3) of 1962 Drug Amendments with compelling medical need justification by the Secretary, or identical/similar/related (21 CFR 310.6(b)(1)) to such drugs, and not subject to a hearing notice under section 505(e) of FD&C Act for proposed withdrawal of approval due to being less than effective.
• (B) Biological products (non-vaccine):
  • (i) Dispensable only by prescription.
  • (ii) Licensed under section 351 of Public Health Service Act.
  • (iii) Produced at a licensed establishment.
• (C) Insulin certified under section 506 of FD&C Act.

(3) Limiting definition. “Covered outpatient drug” excludes drugs/biologics/insulin provided as part of or incident to:

• (A) Inpatient hospital services.
• (B) Hospice services.
• (C) Dental services (except drugs directly reimbursed to dispensing dentists).
• (D) Physicians’ services.
• (E) Outpatient hospital services.
• (F) Nursing facility and intermediate care facility for mentally retarded services.
• (G) Other lab and x-ray services.
• (H) Renal dialysis.

Also excludes drugs without required NDC number or used for non-medically accepted indications. Excluded drugs are still “covered outpatient drugs” for Best Price determination.

(4) Nonprescription drugs. If a state Medicaid plan covers prescribed drugs (section 1905(a)(12)) and allows coverage for OTC drugs when physician-prescribed, such OTC drugs are “covered outpatient drugs.”

(5) Manufacturer. “Manufacturer” means entities engaged in:

• (A) Production, preparation, propagation, compounding, conversion, or processing of prescription drug products directly/indirectly.
• (B) Packaging, repackaging, labeling, relabeling, or distribution of prescription drug products.

Excludes wholesale distributors and state-licensed retail pharmacies.

(6) Medically accepted indication. “Medically accepted indication” means:

• FDA-approved use.
• Use supported by citations in compendia in subsection (g)(1)(B)(i).

(7) Multiple source drug; innovator multiple source drug; noninnovator multiple source drug; single source drug.

• (A) Defined.

  • (i) Multiple source drug. Covered outpatient drug (including OTC drugs covered under paragraph (4)) with at least one other drug product that:
    • (I) Therapeutically equivalent (FDA “Orange Book”).
    • (II) Pharmaceutically equivalent and bioequivalent (except as in (B)) as FDA-determined and defined in (C).
    • (III) Sold/marketed in US during the period.
  • (ii) Innovator multiple source drug. Multiple source drug marketed under an NDA, unless Secretary determines a narrow exception applies (42 CFR 447.502).
  • (iii) Noninnovator multiple source drug. Multiple source drug not an innovator multiple source drug (generic).
  • (iv) Single source drug. Covered outpatient drug (including OTC drugs covered under paragraph (4)) produced/distributed under an NDA, including cross-licensed products, unless Secretary determines a narrow exception applies (42 CFR 447.502). Also includes covered outpatient biological products licensed/produced/distributed under an approved biologics license application.

• (B) Exception. (A)(i)(II) (pharmaceutical and bioequivalence for multiple source drugs) does not apply if FDA regulation changes therapeutic equivalence rating requirements.

• (C) Definitions. For this paragraph:

  • (i) Pharmaceutically equivalent. Identical amounts of same active ingredient, same dosage form, meeting compendial standards.
  • (ii) Bioequivalent. No known/potential bioequivalence problem, or meets appropriate bioequivalence standard if problem exists.

(8) Rebate period. Calendar quarter or other period set by the Secretary for rebate payments.

(9) State agency. Agency designated under section 1902(a)(5) to administer the state Medicaid plan.

(10) Retail community pharmacy. Independent, chain, supermarket, or mass merchandiser pharmacy licensed by the state, dispensing to the general public at retail prices. Excludes mail-order, nursing home, LTC, hospital, clinic, charitable/non-profit, government pharmacies, and PBMs.

(11) Wholesaler. Drug wholesaler engaged in wholesale distribution to retail community pharmacies, including repackers, distributors, own-label/private-label distributors, jobbers, brokers, warehouses, independent wholesale drug traders, and retail community pharmacies conducting wholesale distributions.

This extensive definitions section clarifies key terms used throughout section 1927, crucial for proper interpretation and implementation of the Medicaid drug rebate program and its interaction with the 340B program. Definitions like AMP, Best Price, Covered Outpatient Drug, and Single/Multiple Source Drug are foundational to understanding the program’s mechanics. The definition of “Retail Community Pharmacy” is particularly important in delineating which pharmacies are included in AMP calculations and program participation. The explicit inclusion and cross-reference to the 340B program within these definitions highlights the interconnectedness of these federal healthcare initiatives in ensuring affordable drug access, especially for vulnerable populations served by 340B covered entities and the broader Medicaid program.