Pricing and Rebate Exercise Overview in Healthcare Sector

Andrew Ruskin
Partner
K&L Gates
Andrew.Ruskin@klgates.com
Christopher H. Scott
Partner
Latham & Watkins LLP
Chris.Schott@lw.com
Joe Metro
Partner
Reed Smith LLP
JMetro@ReedSmith.com
LAB - Learn, Apply, and Benchmark:
Pricing and Rebate Exercise Under
Medicaid, Medicare, and 340B
A
g
e
n
d
a
Four
 
hypothetical
 
drug
 
scenarios:
(1) RCP AMP, BP, and the 340B Ceiling Price
(2) 5i AMP and the Not Generally Dispensed Ratio
(3) URA for Line Extensions
(4) Medicare Part B
Questions
These
 
presentation
 
materials
 
are
 
provided
 
for
 
informational
 
purposes
 
only
 
and
 
do
 
not
 
constitute
 
legal
 
advice
 
or
 
the
 
views
 
or 
positions 
Latham & Watkins LLP,
K&L Gates LLP 
or 
Reed Smith 
LLP. 
These presentation 
materials 
are 
intended, 
but 
not 
 
promised 
or 
guaranteed to 
be 
current, 
complete, 
or 
up-to-date 
and should
in 
no 
way 
be 
taken 
as 
an 
indication 
of 
future 
 
results. 
Transmission 
of 
the 
information 
is 
not intended 
to 
create, and 
the 
receipt 
does 
not 
constitute, an
attorney-client 
 
relationship between 
sender 
and 
receiver. 
The 
presentation 
materials are 
offered only 
for 
general 
informational 
and 
 
educational
 
purposes.
 
They
are
 
not
 
offered
 
as
 
and
 
do
 
not
 
constitute
 
legal
 
advice
 
or
 
legal
 
opinions.
 
You
 
should
 
not
 
act
 
or
 
rely 
 
on
 
any
 
information
 
contained
 
in
 
these
 
presentation
 
materials
without
 
first
 
seeking
 
the
 
advice
 
of
 
an
 
attorney.
2
Scenario
 
(1):
RCP 
AMP, 5i AMP,
 
and
 
the
 
340B
 
Ceiling
 
Price
3
S
c
e
n
a
r
i
o
 
(
1
)
:
 
A
s
s
u
m
p
t
i
o
n
s
Drug:
S o
r
 
I
 
drug
BP
 
must
 
be
 
reported
One
 
bottle
 
of
 
100
 
capsules
Medicaid calculations ordinarily occur at the unit (here capsule) level
For
 
simplicity,
 
this
 
example
 
calculates
 
at
 
the
 
bottle
 
level
Prices:
WAC
 
at
 
launch:
 
$
8,000
 
per
 
bottle
WAC 
currently:
 
$
9,400
 
per
 
bottle
AMP:
The 
drug 
is 
subject 
to 
the 
"traditional" 
or 
"Retail 
Community 
Pharmacy"
 
(RCP) 
 
AMP
 
formula
because
 
it
 
is
 
not
 
a
 
5i
 
drug
 
by
 
route
 
of
 
administration
4
B
a
c
k
g
r
o
u
n
d
:
 
R
C
P
 
A
M
P
,
 
B
e
s
t
 
P
r
i
c
e
,
 
a
n
d
 
t
h
e
B
a
s
i
c
 
R
e
b
a
t
e
RCP
 
AMP 
is 
the 
average 
price 
paid 
to 
the 
manufacturer 
for 
its 
drug in 
 
the  
United 
States 
by:
 
(i) 
wholesalers 
for 
drugs 
distributed 
to
 
RCPs; 
 
and
 
(ii)
 
RCPs
 
that
 
purchase
 
drugs
 
directly
 
from
 the
manufacturer
Best
 
Price,
 
generally,
 
is
 
the
 
lowest
 
price
 
to
 
any
 
wholesaler,
 
retailer, 
 
provider,
 
HMO,
 
or
 
nonprofit
Note:  AMP and BP ultimately reported, and rebates calculated, on per unit, rather than per bottle,
basis
Basic
 
rebate
 
amount
 
equals:
Minimum
 
Rebate%
 
calculation:
AMP
 
x
 
M
i
n
i
mum
 
Rebat
e
%
Greater
of
B
P
 
Calcu
l
atio
n
:
AMP-BP
5
S
c
e
n
a
r
i
o
 
(
1
)
:
 
A
M
P
Assume 
the
 following
 
discounts
Current
 
WAC=
 
$9,400 
per
 
bottle
Two
 
customers:
 
Distributor 
and
 
Plan
Distributor
:
   
1. 
Purchase
 
Discount
 
=
 
2%,
 
or
 
$188
 
per
 
bottle
    2. Prompt Pay Discount (PPD) = 2%, or $188 per bottle
Plan:
1.
Purchase 
discount=
 
5%,
 
or
 
$470
 
per
 
bottle
2.
Performance
 
rebate=
 
20%,
 
or
 
$
1,880
AMP=
 
Eligible
 
dollars
 
divided
 
by
 
eligible
 
units
The
 
Plan
 
is 
ineligible
 
for
 
RCP
 
AMP,
 
so 
only
 
Distributor
 
dollars
 
and discounts
 
are
 
relevant
With respect to Distributor dollars, only purchase discounts are relevant since CPPD are AMP-exempt
Assume 
Distributor 
purchased 
10 
units 
and 
earned 
the 
purchase
 discount 
on
 
all 
units, 
so 
that 
the 
 
Distributor
 
paid
$92,120
 
for
 
10
 
units (not taking into account prompt pay discounts)
Per Bottle AMP
 
=
 
$92,12
0
/
 
1
0
 
=
 
$9,212
6
S
c
e
n
a
r
i
o
 
(
1
)
:
 
B
e
s
t
 
P
r
i
c
e
,
 
B
a
s
i
c
 
R
e
b
a
t
e
Per Bottle BP=
 
WAC
 
minus
 
all
 
discounts
 
provided
 to
 
same
 
customer
 
on
 
the
 
same
 
unit
Unlike
 
for
 
RCP
 
AMP,
 
the
 
Plan
 
is
 
eligible
 
for
 
BP, and Distributor CPPD discounts affect BP
Distributor:
  
 
$9,400
-
$188-$188 
=
 
$9,024
Plan:
 
$9,400-$470-$1,880
 
 
=
 
$7,050
 
 
The Plan sets the BP
Per Bottle Basic
 
Rebate=
 
Greater
 
of
23.1% 
of
 
AMP:$
 
9,212
 
x
 
23.1%
  =
 
$2,127
AMP
 
minus
 
BP:$
 
9,212-$7,050
 =
 
$2,162
 
  
BP is relevant for the Basic Rebate
R
ole
 
of
 
BP:
 
If
 
BP
 
is
 
more
 
than
 
23.1%
 
lower
 
than
 
AMP,
 
it
 
impacts
 
the
 
basic
 
rebate; 
 
otherwise,
 
it
 
has
 
no
 impact
7
B
a
c
k
g
r
o
u
n
d
:
 
A
d
d
i
t
i
o
n
a
l
 
R
e
b
a
t
e
An "additional rebate" is added when the drug's quarterly AMP exceeds "base date AMP," as
increased by the applicable consumer price index factor (CPI-U)
 In other words, rebate obligations for drugs increase if the product's AMP increases faster than
the rate of inflation
Often called the "inflation penalty“
Formula for calculating the Additional Rebate:
8
S
c
e
n
a
r
i
o
 
(
1
)
:
 
A
d
d
i
t
i
o
n
a
l
 
R
e
b
a
t
e
Base AMP
WAC at launch = $8,000 per bottle
Examp
l
e (a): 
Base AMP= $8,000 because launch terms limited to customary prompt pay to
wholesalers and no other discounts were given in base AMP quarter
Example (b): 
Base AMP= $7,500 because launch incentive on-invoice discount of $500 was given
in base AMP quarter
Base AMP adjusted for inflation
Assume rate of inflation since launch is 12%
Example (a): 
$8,000 + 12% = $8,960
Example (b): 
$7,500 + 12% = $8,400
Inflation penalty calculation for reporting (current) quarter
Current AMP= $9,212
Example (a): 
Additional rebate= ($9,212 - $8,960) = 
$252 
      
The higher base AMP results in a
lower rebate
Example (b): 
Additional rebate= ($9,212 - $8,400) = 
$812 
      
The lower base AMP results in a
higher rebate
9
S
c
e
n
a
r
i
o
 
(
1
)
:
 
T
o
t
a
l
 
R
e
b
a
t
e
 
(
U
R
A
)
 
C
a
l
c
u
l
a
t
i
o
n
Unit
 
Rebate
 Amount
 
=
 
Base
 
Rebate+
 
Additional
 
Rebate
Currently
 subject to 100% of AMP cap through 4Q2023
Current
 
AMP
 
=
 
$9,212
 
per
 
bottle
Base
 
Rebate=
 
Greater
 
of
23.1%
 
of
 
AMP:$
 
9,212
 
x
 
23.1%
 
=
 
$2,127
AM
P
 
minu
s
 
BP:
 
$
 
9,212
 
-
 
$7,05
0
 
 
 
=
 
$2,162
Inflation
 
Penalty
 
Rebate=
Example
 
(a):
 
Additional
 
rebate=
 
($9,212
 
-
 
$8,960)=
 
$252
Example
 
(b):
 
Additional
 
rebate=
 
($9,212
 
-
 
$8,400)=
 
$812
URA=
Example
 
(a):
 
$2,162
 
+
 
$252=
 
$2,414
Example
 
(b)
:
 
$2,16
2
 
+
 
$81
2
 
=
 
$2,974
Implications
 
for
 reporting
 
quarter:
Performance rebate made "AMP minus BP" greater than "23.1% of AMP" due to the BP impact, thereby 
increasing the base
rebate by $35 ($2,162, as compared to $2,127)
Discount in base AMP quarter increased the additional rebate by $560 ($2,974, as compared to $2,414) ... And 
this effect
will recur each rebate quarter for the life of the drug
But note:  Recent CPI increases may “erode” previous Additional Rebate effects and mitigate cap elimination
10
10
S
c
e
n
a
r
i
o
 
(
1
)
:
 
T
h
e
 
3
4
0
B
 
C
e
i
l
i
n
g
 
P
r
i
c
e
AMP
 
and
 
URA
 
figures
 
(from
 
prior
 
slides):
AMP:
 
$9,212
URA
Exampl
e
 
(a):
 
$2,162
 
+
 
$25
2
 
=
 
$2,414
Exampl
e
 
(
b)
:
 
$2,162 
+
 
$81
2
 
=
 
$2,974
340B
 
Ceiling
 
Price:
 
AMP
 
minus
 
URA
Example
 
(a):
 
$9,212
 
-
 
$2,414
 
=
 
$6,798
Example
 
(b):
 
$9,212
 
-
 
$2,974
 
=
 
$6,238
 
A higher URA results in a lower 340B ceiling price
The significance of a higher URA/lower 340B ceiling price depends on the sales mix of the drug
11
11
P
o
l
l
i
n
g
 
Q
u
e
s
t
i
o
n
 
#
1
Which price represents 
the
 
lowest
 
price
 
to
 
any
 
wholesaler,
 
retailer, 
provider,
 
HMO,
 
or
 
nonprofit?
A.
RCP AMP
B.
BP
C.
The Additional Rebate
D.
The 340B Ceiling Price
12
12
Scenario
 
(
2
):
5i
 
AMP
 
and
 
the
 
Not
 
Generally
 
Dispensed
 
Ratio
13
13
B
a
c
k
g
r
o
u
n
d
:
 
5
i
 
A
M
P
Separate
 
AMP 
calculation
 
for
 
injectable,
 
infused,
 
implanted,
 
inhaled, 
 
or
 
instilled
 
(“5i")
 
drugs
 
"not
generally
 
dispensed"
 
through
 
RCPs
Not
 
generally
 
dispensed"
 
means
 
dispensed 
>70%
 
of
 
the
 
time
 
to
 
non­ 
 
RCPs
 
(directly
 
or
 
through
wholesalers)
5i 
AMP 
includes 
those 
sales 
(and 
associated discounts,
 
rebates, 
 
payments,
 
or 
other
 
financial
transactions)
 
included
 
in
 
RCP
 
AMP
 
and 
 
those 
to:
physicians;
 
PBMs;
 
HMOs;
 
MCOs;
 
insurers;
 
hospitals;
 
clinics
 
and
 outpatient 
 
facilities; 
mail 
order
pharmacies;
 
long-term care 
providers;
 
hospices; 
and 
 
"manufacturers, 
or
 
any 
other entity 
that
does 
not 
conduct 
business as 
a 
 
wholesaler
 
or
 
[RCP]"
14
14
S
c
e
n
a
r
i
o
 
(
2
)
:
 
A
s
s
u
m
p
t
i
o
n
s
Drug: Prescribing Information states
 
-----------DOSAGE AND ADMINISTRATION---------
 
Instill one drop into the affected eye(s) twice a day.
Market profile: In each month
Roughly 65 to 75% of units are sold to Retail Community Pharmacies (RCPs), directly or through
wholesalers (WS)
Roughly 25 to 35% of units are sold to classes of trade that are not RCPs or WS
Is the drug a 5i drug?
Y
es, because due to its route of administration, it is one of the "inhalation, infusion, instilled, implanted,
or injectable" (5i) drugs
Once established, this determination remains in place
Is the drug subject to the 5i AMP formula?
Only if it is "not generally dispensed" to the retail channel, which must be determined every month
15
15
B
a
c
k
g
r
o
u
n
d
:
 
T
h
e
 
N
o
t
 
G
e
n
e
r
a
l
l
y
 
D
i
s
p
e
n
s
e
d
 
 
R
a
t
i
o
The
 
regulations
 
merely
 
state:
"A 
manufacturer 
must 
determine 
if 
the 
5i 
drug 
is 
not 
generally 
dispensed 
 
through 
a 
[RCP] 
based
on 
the 
percentage 
of 
sales 
to 
entities 
other 
than 
 
[RCPs].
 
[]
 
A
 
5i
 
drug
 
is
 
not
 
generally
 
dispensed
through
 
a
 
[RCP]
 
if
 
70
 
percent
 
or 
 
more 
of 
the 
sales (based 
on 
units 
at 
the 
NDC-9 
level) 
of 
the 
5i
drug, 
were 
to 
 
entities
 
other
 
than
 
[RCP]
 
or
 
wholesalers
 
for
 
drugs
 
distributed
 
to
 
[RCPs]."
What
 
is
 
the
 evaluation
 
period?
"Over
 
a
 
period
 
of
 
time,
 
such
 
as
 
a
 
12-month
 
period"
How
 
frequently
 
does
 
the
 
evaluation
 
need
 
to
 
be
 
done?
Monthly
 (with
 
quarter
s
 
base
d
 
o
n
 
weighted
 
months)
16
16
S
c
e
n
a
r
i
o
 
(
2
)
:
 
T
h
e
 
N
G
D
 
R
a
t
i
o
([Direct Sales Units to RCPs] + ([Direct Sales Units to Wholesalers] 
- 
[Indirect Ineligible Sales Units through
Wholesalers]))
All COT Sales Units
The drug is NGD if less than 30% of total units are to the retail channel
The NGD ratio indicates the percentage of units sold to the retail channel (RCP and WS)
All sales units are determined at the NDC-9 level
Hypothetical month: April
([2,500
]
 
+ 
[
35
,
000
]
 
[
12,000]) 
= 
25% Result: 
The drug is NGD, and the 
5
i AMP formula applies in April
 
102,000
Hypothetical month: May
([
13,250] 
+ 
[
42
,
000
]
 - 
(8,500
]
) 
= 
32% 
Result: 
The drug is not NGD, and the RCP AMP formula applies in May
 
113,000
Impact: Because 5i AMP includes many more COTs, it also captures more discounts, and therefore might be lower
than RCP AMP
Quarterly AMP for Q2: Will be based on the AMP figures for April, May, and June, regardless of which AMP formula
applied in each month
 What are monthly AMP figures used for?
17
17
Scenario
 
(
3
):
URA for Line Extensions
18
18
S
c
e
n
a
r
i
o
 
(
3
)
:
 
 
F
a
c
t
 
P
a
t
t
e
r
n
Our client is Acme and is asking whether
Drug H is a line extension and how to
calculate the URA
Acme and Galore are unrelated entities
Original drug criteria include:
1.
Same active ingredient
2.
Oral solid dosage form
3.
Earlier in time
4.
Active in MDRP
5.
Same manufacturer/corporate relationship
19
19
S
c
e
n
a
r
i
o
 
(
3
)
:
 
 
P
o
t
e
n
t
i
a
l
 
O
r
i
g
i
n
a
l
 
D
r
u
g
s
The potential original drugs are C, F, G
Would change from quarter to quarter only if the facts change, e.g., Acme purchases Drug E
from Galore or merges with Galore, or Acme brings Drug D back to market
Which one is the original drug for the reporting quarter?
20
20
S
c
e
n
a
r
i
o
 
(
3
)
:
 
 
I
d
e
n
t
i
f
y
 
t
h
e
 
S
p
e
c
i
f
i
c
O
r
i
g
i
n
a
l
 
D
r
u
g
Figures are for the reporting quarter
Percentage calculation:  [Additional Rebate] / [AMP]
Drug C has the highest additional rebate as a percentage of AMP and is the
specific 
original drug for the quarter
Would change from quarter to quarter based on AMP and additional rebate
fluctuations
21
21
B
a
c
k
g
r
o
u
n
d
:
 
 
U
R
A
 
f
o
r
 
L
i
n
e
 
E
x
t
e
n
s
i
o
n
s
Basic Rebate of the Line
Extension
Greater of
+
x
Line extension regulation became effective Jan. 2022
If a drug is a “new formulation” of an existing drug and other facts exist, the new formulation is a
“line extension”
A line extension is subject to an alternative rebate formula that applies the inflation penalty from
the applicable original drug to the line extension
Basic Rebate of the Line
Extension
+
Additional Rebate of the Line Extension
AMP of the
Line Extension
Greatest Additional Rebate for
Any Strength of the Applicable
Original Drug, as % of that
drug’s AMP
Ordinary Course URA Formula
22
22
Alternative URA Formula
S
c
e
n
a
r
i
o
 
(
3
)
:
 
 
O
r
d
i
n
a
r
y
 
C
o
u
r
s
e
 
U
R
A
f
o
r
 
L
i
n
e
 
E
x
t
e
n
s
i
o
n
Drug H (the line extension):
Baseline AMP = 100
Current AMP = 300
Baseline CPI-U (month before baseline quarter) = 170
Current CPI-U (month before current quarter) = 200
BP = 250
Basic Rebate:
AMP * 23.1% = 69.30
AMP – BP = 50.00
Additional Rebate:
AMP – [Baseline AMP * Current CPI-U / Baseline CPI-U] = 182.35
23
23
S
c
e
n
a
r
i
o
 
(
3
)
:
 
 
P
u
t
t
i
n
g
 
i
t
 
A
l
l
 
T
o
g
e
t
h
e
r
Basic Rebate of the Line
Extension = 
69.30
Greater of
+
x
Figures were taken from the preamble of a 2019 CMS regulation:
https://www.govinfo.gov/content/pkg/FR-2019-04-01/pdf/2019-06274.pdf
Implications:
Launching the line extension at a lower price than the original drug(s) may still trigger the alternative URA
Older drugs still on the market?
Return on investment in innovation?
Basic Rebate of the Line
Extension = 
69.30
+
Additional Rebate of the Line Extension = 
182.35
AMP of the
Line Extension
= 
300
Greatest Additional Rebate for
Any Strength of the Applicable
Original Drug, as % of that
drug’s AMP = 
0.7143
Ordinary Course URA Formula
24
24
= 
251.65
= 
283.59
Alternative URA Formula
Scenario
 
(
4
):
Medicare Part B
25
25
B
a
c
k
g
r
o
u
n
d
:
 
 
A
S
P
 
C
a
l
c
u
l
a
t
i
o
n
ASP 
defined 
as 
manufacturer's sales to 
all purchasers
 
(excluding 
sales 
 
exempt from 
Medicaid
 
Drug
Rebate 
Program's
 
Best 
Price 
calculations 
 
and
 
sales
 
at
 
a
 
"nominal
 
price")
 
divided
 
by
 
the
 
total
number
 
of
 
units 
sold
"Unit"
 
defined
 
as
 
product
 
represented
 
by
 
11-digit
 
NDC
"Nominal
 price"
 
defined
 
via
 
regulation
 
by
 
reference
 
to
 
Medicaid 
Drug
 
Rebate
 
Program's 
definition
By 
statute, 
following 
price 
concessions 
must
 
be 
included 
in 
ASP
 
(
i.e.
, 
ASP
 
is
 
reduced
 
by):
Prompt
 
pay
 
discounts
Cash
 
discounts
Volume
 
discounts
Chargebacks
Rebates
 
(other
 
than
 
Medicaid
 
rebates}
Free
 
goods
 
contingent
 
on
 
a
 
purchase
 
requirement
26
26
S
c
e
n
a
r
i
o
 
(
4
)
:
 
M
a
n
u
f
a
c
t
u
r
e
r
-
R
e
p
o
r
t
e
d
 
A
S
P
Assume the following discounts
Drug has a single NDC-11, which refers to a single vial
Current WAC= $9,400 per vial (for simplicity, assumes ASP reporting/reimbursement is at the vial level)
Two customers: 
Distributor 
and 
Hospital System
Distributor:
 
         1.   
Prompt Pay Discount (PPD) = 2%, or $188 per vial
          2.   Purchase Discount = 2%, or $188 per vial, for a net price of $9,024
 
Hospital System:
1.
Purchase discount=  5%, or $470 per vial
2.
Performance rebate = 20%, or $1,880
o
Assuming the rebate was achieved, the per vial price is $7,050
o
Note: 
For simplicity, assumes no smoothing of lagged price concessions
ASP= Eligible dollars divided by eligible units
ASP captures "sales to all purchasers" (subject to certain exclusions), and so both the Distributor and Hospital
System dollars and discounts are relevant (note the similarity with 5i AMP), and Distributor
 PPD is relevant
Assume Distributor purchased 10 vials and earned the PPD on all vials, so that the Distributor paid $9,0240 for
10 vials
Assume Hospital System purchased 10 vials and earned the purchase discount and performance rebate on all
vials, so that the Hospital System paid $70,500 for 10 vials
Per vial ASP= ($90,240 
+ 
$70,500)
/ 
(1
0 
+ 
10) 
= 
$8,037
27
27
S
c
e
n
a
r
i
o
 
(
4
)
:
 
A
S
P
-
B
a
s
e
d
 
R
e
i
m
b
u
r
s
e
m
e
n
t
 
R
a
t
e
Reimbursement is at the HCPCS code level, and is currently set at ASP + 6%
Sequestration reduces the reimbursement by 2%
The HCPCS-code reimbursement is based on the volume-weighted ASP figures reported for all the NDC-11s in the
code
Single source drugs
The HCPCS code includes the NDC-11s of the drug, typically all reported by the same single manufacturer
 Inserting the ASP and unit figures for the hypothetical single NDC-11 drug into the formula generates a volume-
weighted ASP equal to the reported ASP, resulting in the following reimbursement amount
$8,037 + 6% = $8,131 + $388.22 = 
$8,519.22
Note that this is less than the acquisition cost paid by the Distributor (which was $9,024)
Multiple source drugs
The HCPCS code includes the NDC-11s of all related drugs
This means that an individual manufacturer cannot predict the Part B reimbursement amount for the code, as it is
based on a volume-weighted ASP figure reflecting the ASP and unit figures reported by all manufacturers with NDC-
11s in the HCPCS code
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The Part B reimbursement rate is based on the ASP figures reported two quarters prior
The two-quarter lag has implications for drug pricing strategies
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Which of the following is true regarding ASP?
A.
It is calculated at the NDC-9
B.
It is utilized to calculate rebate amounts for Medicare Part B
C.
Reimbursement is currently set at ASP + 6%
D.
It does not include price concessions
30
30
Please submit your questions in the Session Chat box on the right or reach out to the presenters separately.
Andrew Ruskin
Partner
K&L Gates
Andrew.Ruskin@klgates.com
Christopher H. Scott
Partner
Latham & Watkins LLP
Chris.Schott@lw.com
Joe Metro
Partner
Reed Smith LLP
JMetro@ReedSmith.com
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Delve into a comprehensive analysis of pricing strategies and rebate structures under Medicaid, Medicare, and 340B programs within the healthcare sector. Explore hypothetical drug scenarios, RCP AMP calculations, best price determinations, and basic rebate methodologies. Gain insights into legal perspectives from top industry partners.

  • Pricing
  • Rebate
  • Healthcare
  • Medicaid
  • Medicare

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  1. LAB - Learn, Apply, and Benchmark: Pricing and Rebate Exercise Under Medicaid, Medicare, and 340B Christopher H. Scott Partner Latham & Watkins LLP Chris.Schott@lw.com Joe Metro Partner Reed Smith LLP JMetro@ReedSmith.com Andrew Ruskin Partner K&L Gates Andrew.Ruskin@klgates.com

  2. Agenda Four hypothetical drug scenarios: (1) RCP AMP, BP, and the 340B Ceiling Price (2) 5i AMP and the Not Generally Dispensed Ratio (3) URA for Line Extensions (4) Medicare Part B Questions These presentation materials areprovidedforinformationalpurposesonly anddonot constitute legaladvice ortheviewsor positions Latham & Watkins LLP, K&L Gates LLP or Reed Smith LLP. These presentation materials are intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results. Transmission of the information is not intended to create, and the receipt does not constitute, an attorney-client relationship between sender and receiver. The presentation materials are offered only for general informational and educational purposes. They arenot offeredasanddonotconstitutelegaladvice orlegalopinions. Youshould not actorrely onanyinformationcontainedinthesepresentation materials withoutfirstseekingtheadvice of anattorney. 2

  3. Scenario (1): RCP AMP, 5i AMP, and the 340B Ceiling Price 3

  4. Scenario (1): Assumptions Drug: S or I drug BP must be reported One bottle of 100 capsules Medicaid calculations ordinarily occur at the unit (here capsule) level For simplicity, this example calculates at the bottle level Prices: WAC at launch: $8,000 per bottle WAC currently: $9,400 per bottle AMP: The drug is subject to the "traditional" or "Retail Community Pharmacy" (RCP) AMP formula because it is not a 5i drug by route of administration 4

  5. Background: RCP AMP, Best Price, and the Basic Rebate RCPAMP is the average price paid to the manufacturer for its drug in the United States by: (i) wholesalers for drugs distributed to RCPs; and (ii) RCPs that purchase drugs directly from the manufacturer Best Price, generally, is the lowest price to any wholesaler, retailer, provider, HMO, or nonprofit Note: AMP and BP ultimately reported, and rebates calculated, on per unit, rather than per bottle, basis Basic rebate amount equals: BP Calculation: AMP-BP Greater of Minimum Rebate% calculation: AMPxMinimumRebate% 5

  6. Scenario (1): AMP Assume the following discounts Current WAC= $9,400 per bottle Two customers: Distributor and Plan Distributor: 1. Purchase Discount = 2%, or $188 per bottle 2. Prompt Pay Discount (PPD) = 2%, or $188 per bottle Plan: 1.Purchase discount= 5%, or $470 per bottle 2.Performance rebate= 20%, or $1,880 AMP= Eligible dollars divided by eligible units The Plan is ineligible for RCP AMP, so only Distributor dollars and discounts are relevant With respect to Distributor dollars, only purchase discounts are relevant since CPPD are AMP-exempt Assume Distributor purchased 10 units and earned the purchase discount on all units, so that the Distributor paid $92,120 for 10 units (not taking into account prompt pay discounts) Per Bottle AMP = $92,120/ 10 = $9,212 6

  7. Scenario (1): Best Price, Basic Rebate Per Bottle BP= WAC minus all discounts provided to same customer on the same unit Unlike for RCP AMP, the Plan is eligible for BP, and Distributor CPPD discounts affect BP Distributor: $9,400-$188-$188 = $9,024 Plan: $9,400-$470-$1,880 = $7,050 Per Bottle Basic Rebate= Greater of 23.1% of AMP:$ 9,212 x 23.1% = $2,127 AMP minus BP:$ 9,212-$7,050 = $2,162 Role of BP: If BP is more than 23.1% lower than AMP, it impacts the basic rebate; otherwise, it has no impact The Plan sets the BP BP is relevant for the Basic Rebate 7

  8. Background: Additional Rebate An "additional rebate" is added when the drug's quarterly AMP exceeds "base date AMP," as increased by the applicable consumer price index factor (CPI-U) In other words, rebate obligations for drugs increase if the product's AMP increases faster than the rate of inflation Often called the "inflation penalty Formula for calculating the Additional Rebate: 8

  9. Scenario (1): Additional Rebate Base AMP WAC at launch = $8,000 per bottle Example (a): Base AMP= $8,000 because launch terms limited to customary prompt pay to wholesalers and no other discounts were given in base AMP quarter Example (b): Base AMP= $7,500 because launch incentive on-invoice discount of $500 was given in base AMP quarter Base AMP adjusted for inflation Assume rate of inflation since launch is 12% Example (a): $8,000 + 12% = $8,960 Example (b): $7,500 + 12% = $8,400 Inflation penalty calculation for reporting (current) quarter Current AMP= $9,212 Example (a): Additional rebate= ($9,212 - $8,960) = $252 lower rebate Example (b): Additional rebate= ($9,212 - $8,400) = $812 higher rebate The higher base AMP results in a The lower base AMP results in a 9

  10. Scenario (1): Total Rebate (URA) Calculation Unit Rebate Amount = Base Rebate+ Additional Rebate Currently subject to 100% of AMP cap through 4Q2023 Current AMP = $9,212 per bottle Base Rebate= Greater of 23.1% of AMP:$ 9,212 x 23.1% AMP minus BP: $ 9,212 - $7,050 Inflation Penalty Rebate= Example (a): Additional rebate= ($9,212 - $8,960)= $252 = $2,127 = $2,162 Example (b):Additional rebate= ($9,212 - $8,400)= $812 URA= Example (a): $2,162 + $252= $2,414 Example (b): $2,162 + $812 = $2,974 Implications for reporting quarter: Performance rebate made "AMP minus BP" greater than "23.1% of AMP" due to the BP impact, thereby increasing the base rebate by $35 ($2,162, as compared to $2,127) Discount in base AMP quarter increased the additional rebate by $560 ($2,974, as compared to $2,414) ... And this effect will recur each rebate quarter for the life of the drug But note: Recent CPI increases may erode previous Additional Rebate effects and mitigate cap elimination 10

  11. Scenario (1): The 340B Ceiling Price AMP and URA figures (from prior slides): AMP: $9,212 URA Example (a): $2,162 + $252 = $2,414 Example(b): $2,162 + $812 = $2,974 340B Ceiling Price: AMP minus URA Example (a): $9,212 - $2,414 = $6,798 Example (b): $9,212 - $2,974 = $6,238 A higher URA results in a lower 340B ceiling price The significance of a higher URA/lower 340B ceiling price depends on the sales mix of the drug 11

  12. Polling Question #1 Which price represents the lowest price to any wholesaler, retailer, provider, HMO, or nonprofit? A. RCP AMP B. BP C. The Additional Rebate D. The 340B Ceiling Price 12

  13. Scenario (2): 5i AMP and the Not Generally Dispensed Ratio 13

  14. Background: 5i AMP Separate AMP calculation for injectable, infused, implanted, inhaled, or instilled ( 5i") drugs "not generally dispensed" through RCPs Not generally dispensed" means dispensed >70% of the time to non RCPs (directly or through wholesalers) 5i AMP includes those sales (and associated discounts, rebates, payments, or other financial transactions) included in RCP AMP and those to: physicians; PBMs; HMOs; MCOs; insurers; hospitals; clinics and outpatient facilities; mail order pharmacies; long-term care providers; hospices; and "manufacturers, or any other entity that does not conduct business as a wholesaler or [RCP]" 14

  15. Scenario (2): Assumptions Drug: Prescribing Information states -----------DOSAGE AND ADMINISTRATION--------- Market profile: In each month Roughly 65 to 75% of units are sold to Retail Community Pharmacies (RCPs), directly or through wholesalers (WS) Roughly 25 to 35% of units are sold to classes of trade that are not RCPs or WS Is the drug a 5i drug? Yes, because due to its route of administration, it is one of the "inhalation, infusion, instilled, implanted, or injectable" (5i) drugs Once established, this determination remains in place Is the drug subject to the 5i AMP formula? Only if it is "not generally dispensed" to the retail channel, which must be determined every month Instill one drop into the affected eye(s) twice a day. 15

  16. Background: The Not Generally Dispensed Ratio The regulations merely state: "A manufacturer must determine if the 5i drug is not generally dispensed through a [RCP] based on the percentage of sales to entities other than [RCPs]. [] A 5i drug is not generally dispensed through a [RCP] if 70 percent or more of the sales (based on units at the NDC-9 level) of the 5i drug, were to entities other than [RCP] or wholesalers for drugs distributed to [RCPs]." What is the evaluation period? "Over a period of time, such as a 12-month period" How frequently does the evaluation need to be done? Monthly (with quarters based on weighted months) 16

  17. Scenario (2): The NGD Ratio ([Direct Sales Units to RCPs] + ([Direct Sales Units to Wholesalers] - [Indirect Ineligible Sales Units through Wholesalers])) All COT Sales Units The drug is NGD if less than 30% of total units are to the retail channel The NGD ratio indicates the percentage of units sold to the retail channel (RCP and WS) All sales units are determined at the NDC-9 level Hypothetical month: April ([2,500] + [35,000] [12,000]) = 25% Result: The drug is NGD, and the 5i AMP formula applies in April Hypothetical month: May 102,000 ([13,250] + [42,000] - (8,500]) = 32% Result: The drug is not NGD, and the RCP AMP formula applies in May Impact: Because 5i AMP includes many more COTs, it also captures more discounts, and therefore might be lower than RCP AMP Quarterly AMP for Q2: Will be based on the AMP figures for April, May, and June, regardless of which AMP formula applied in each month What are monthly AMP figures used for? 113,000 17

  18. Scenario (3): URA for Line Extensions 18

  19. Scenario (3): Fact Pattern Drug Active Ingredient Dosage Form and Strength Date Manufacturer Reported in MDRP A Alpha 10 ml Vial 2010 Acme Yes B Alphasulphate 20 mg Tablet 2011 Acme Yes C Alpha 30 mg IR Tablet 2012 Acme Yes D Alpha 30 mg Capsule 2013 Acme No E Alpha 10 mg Capsule 2014 Galore Yes F Alpha 30 mg ER Tablet 2015 Acme Yes G Alpha 35 mg ER Tablet 2016 Acme Yes H Alpha Our client is Acme and is asking whether Drug H is a line extension and how to calculate the URA Acme and Galore are unrelated entities Original drug criteria include: 40 mg ER Tablet 2017 Acme Yes 1. 2. 3. 4. 5. Same active ingredient Oral solid dosage form Earlier in time Active in MDRP Same manufacturer/corporate relationship 19

  20. Scenario (3): Potential Original Drugs Drug Active Ingredient Dosage Form and Strength Date Manufacturer Reported in MDRP A Alpha 10 ml Vial 2010 Acme Yes B Alphasulphate 20 mg Tablet 2011 Acme Yes C Alpha 30 mg IR Tablet 2012 Acme Yes D Alpha 30 mg Capsule 2013 Acme No E Alpha 10 mg Capsule 2014 Galore Yes F Alpha 30 mg ER Tablet 2015 Acme Yes G Alpha 35 mg ER Tablet 2016 Acme Yes H Alpha The potential original drugs are C, F, G Would change from quarter to quarter only if the facts change, e.g., Acme purchases Drug E from Galore or merges with Galore, or Acme brings Drug D back to market Which one is the original drug for the reporting quarter? 40 mg ER Tablet 2017 Acme Yes 20

  21. Scenario (3): Identify the Specific Original Drug Drug Additional Rebate AMP Additional Rebate as Percentage of AMP C 200 280 0.7143 F 125 275 0.4545 G 110 270 0.4074 Figures are for the reporting quarter Percentage calculation: [Additional Rebate] / [AMP] Drug C has the highest additional rebate as a percentage of AMP and is the specific original drug for the quarter Would change from quarter to quarter based on AMP and additional rebate fluctuations 21

  22. Background: URA for Line Extensions Ordinary Course URA Formula Basic Rebate of the Line Extension + Additional Rebate of the Line Extension Greater of Alternative URA Formula Greatest Additional Rebate for Any Strength of the Applicable Original Drug, as % of that drug s AMP Basic Rebate of the Line Extension AMP of the Line Extension x + Line extension regulation became effective Jan. 2022 If a drug is a new formulation of an existing drug and other facts exist, the new formulation is a line extension A line extension is subject to an alternative rebate formula that applies the inflation penalty from the applicable original drug to the line extension 22

  23. Scenario (3): Ordinary Course URA for Line Extension Drug H (the line extension): Baseline AMP = 100 Current AMP = 300 Baseline CPI-U (month before baseline quarter) = 170 Current CPI-U (month before current quarter) = 200 BP = 250 Basic Rebate: AMP * 23.1% = 69.30 AMP BP = 50.00 Additional Rebate: AMP [Baseline AMP * Current CPI-U / Baseline CPI-U] = 182.35 23

  24. Scenario (3): Putting it All Together Ordinary Course URA Formula Basic Rebate of the Line Extension = 69.30 + = 251.65 Additional Rebate of the Line Extension = 182.35 Greater of Alternative URA Formula Greatest Additional Rebate for Any Strength of the Applicable Original Drug, as % of that drug s AMP = 0.7143 AMP of the Line Extension = 300 Basic Rebate of the Line Extension = 69.30 x + = 283.59 Figures were taken from the preamble of a 2019 CMS regulation: https://www.govinfo.gov/content/pkg/FR-2019-04-01/pdf/2019-06274.pdf Implications: Launching the line extension at a lower price than the original drug(s) may still trigger the alternative URA Older drugs still on the market? Return on investment in innovation? 24

  25. Scenario (4): Medicare Part B 25

  26. Background: ASP Calculation ASP defined as manufacturer's sales to all purchasers (excluding sales exempt from Medicaid Drug Rebate Program's Best Price calculations and sales at a "nominal price") divided by the total number of units sold "Unit" defined as product represented by 11-digit NDC "Nominal price" defined via regulation by reference to Medicaid Drug Rebate Program's definition By statute, following price concessions must be included in ASP (i.e., ASP is reduced by): Prompt pay discounts Cash discounts Volume discounts Chargebacks Rebates (other than Medicaid rebates} Free goods contingent on a purchase requirement 26

  27. Scenario (4): Manufacturer-Reported ASP Assume the following discounts Drug has a single NDC-11, which refers to a single vial Current WAC= $9,400 per vial (for simplicity, assumes ASP reporting/reimbursement is at the vial level) Two customers: Distributor and Hospital System Distributor: 1. Prompt Pay Discount (PPD) = 2%, or $188 per vial 2. Purchase Discount = 2%, or $188 per vial, for a net price of $9,024 Hospital System: 1. Purchase discount= 5%, or $470 per vial 2. Performance rebate = 20%, or $1,880 o Assuming the rebate was achieved, the per vial price is $7,050 o Note: For simplicity, assumes no smoothing of lagged price concessions ASP= Eligible dollars divided by eligible units ASP captures "sales to all purchasers" (subject to certain exclusions), and so both the Distributor and Hospital System dollars and discounts are relevant (note the similarity with 5i AMP), and Distributor PPD is relevant Assume Distributor purchased 10 vials and earned the PPD on all vials, so that the Distributor paid $9,0240 for 10 vials Assume Hospital System purchased 10 vials and earned the purchase discount and performance rebate on all vials, so that the Hospital System paid $70,500 for 10 vials Per vial ASP= ($90,240 + $70,500)/ (10 + 10) = $8,037 27

  28. Scenario (4): ASP-Based Reimbursement Rate Reimbursement is at the HCPCS code level, and is currently set at ASP + 6% Sequestration reduces the reimbursement by 2% The HCPCS-code reimbursement is based on the volume-weighted ASP figures reported for all the NDC-11s in the code Single source drugs The HCPCS code includes the NDC-11s of the drug, typically all reported by the same single manufacturer Inserting the ASP and unit figures for the hypothetical single NDC-11 drug into the formula generates a volume- weighted ASP equal to the reported ASP, resulting in the following reimbursement amount $8,037 + 6% = $8,131 + $388.22 = $8,519.22 Note that this is less than the acquisition cost paid by the Distributor (which was $9,024) Multiple source drugs The HCPCS code includes the NDC-11s of all related drugs This means that an individual manufacturer cannot predict the Part B reimbursement amount for the code, as it is based on a volume-weighted ASP figure reflecting the ASP and unit figures reported by all manufacturers with NDC- 11s in the HCPCS code 28

  29. Scenario (4): The Two-Quarter Lag The Part B reimbursement rate is based on the ASP figures reported two quarters prior The two-quarter lag has implications for drug pricing strategies 29

  30. Polling Question #2 Which of the following is true regarding ASP? A. It is calculated at the NDC-9 B. It is utilized to calculate rebate amounts for Medicare Part B C. Reimbursement is currently set at ASP + 6% D. It does not include price concessions 30

  31. Please submit your questions in the Session Chat box on the right or reach out to the presenters separately. Christopher H. Scott Partner Latham & Watkins LLP Chris.Schott@lw.com Joe Metro Partner Reed Smith LLP JMetro@ReedSmith.com Andrew Ruskin Partner K&L Gates Andrew.Ruskin@klgates.com

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