A Biden administration final rule aimed at driving down the cost of prescription drugs in Medicaid may face legal challenges despite having dropped several contentious provisions from the proposed version, lawyers say.

The rule from the Centers for Medicare and Medicaid Services (RIN: 0938-AU28) seeks to strengthen oversight and transparency around how drug companies negotiate prices with Medicaid. The CMS clarified several statutory ambiguities that the it says have allowed drug companies to pay lower rebates to states and ultimate increase the cost of prescription drugs.

The agency had expressed concerns that manufacturers were misclassifying their drugs in the Medicaid Drug Rebate Program, leading to lower rebates to state Medicaid programs and higher drug prices overall.

Under the rebate program, drug manufacturers agree to provide state Medicaid programs with the lowest price they can possibly offer for a drug. In exchange, Medicaid agrees to cover most of the manufacturers’ drugs, and drug companies get access to the program’s large pool of beneficiaries. Certain low-income hospitals, health centers, and specialized clinics are also entitled to Medicaid’s reduced prices.

The final rule takes aim at clarifying the meaning of various definitions pertinent to payment negotiations between states and manufacturers under the rebate program, including terms like “covered outpatient drug,” “market date,” and “noninnovator multiple source (N) drug.”

The agency had also proposed reinterpreting terms like “best price,” “manufacturer,” and “vaccine,” but stopped short of finalizing these revisions.

The final rule also provides the CMS with more authority to take corrective action when misclassification of drugs by pharmaceutical companies is discovered.

It makes clear CMS’s “zero-tolerance approach” to any type of misreporting and raises the stakes for any errors in drug pricing or product reporting, said Margaux Hall, a senior partner at Ropes and Gray.

‘Inconsistent With the Statute’

William Sarraille, a health-care attorney and regulatory consultant, predicted the agency’s move to redefine established terms will spur litigation from drug companies.

He pointed to what he called the CMS’s attempt to gut the “limiting definition” of covered outpatient drugs as one example of a provision that would likely get shot down in court.

“That ‘limiting definition’ says that manufacturers don’t have to pay Medicaid rebates on outpatient drugs that are ‘bundled’ for payment purposes with other items or services,” said Sarraille.

“So, for instance, if an outpatient drug is used in an ambulatory surgery and the surgery is paid by the payor on an all-inclusive, bundled basis, combining the charge for the surgical room, the supplies used, and the drug, the manufacturer doesn’t owe a Medicaid rebate for the drug,” he said.

“I think this provision is clearly inconsistent with the statute, and that CMS will lose. But it’s willing to throw the dice to try to generate more Medicaid rebates,” Sarraille said.

Drug Surveys Scrapped

Notably absent in the final version of the CMS rule were provisions that would have required manufacturers of the most expensive drugs in the drug rebate program to complete surveys detailing proprietary information such as production expenses, research costs, and international pricing to verify drug costs.

Manufacturers that failed to comply with the information requests within 90 days would have been imposed fines of up to $100,000.

The agency had previously claimed the surveys were “critical to ensure that pricing information associated with these products is accurate so that State Medicaid programs receive the full rebate amounts to which they are entitled.” It didn’t share its reasoning behind the decision to not finalize the policy.

The proposed survey requirement had spurred warnings of legal challenges.

“CMS did say that the agency received many comments on some of the more controversial proposals, and perhaps those comments persuaded the agency that it needed to further consider the lawfulness and policy consequences of various proposals,” Hall said.

Sarraille said that it’s likely the agency understood that it risked acting in a manner that was “ultra vires,” or “beyond the powers” afforded to it by Congress.

“CMS is trying to give the state Medicaid agencies a means to press for IRA-like price concessions,” he said, referencing the 2022 Inflation Reduction Act’s creation of the Medicare Drug Price Negotiation Program.

“But neither the Medicaid Act nor the IRA gave CMS that authority. CMS cannot do what Congress never gave it the power to do,” said Sarraille.

Financial Impact

The rule still contains some “sea-changes” for industry to contend with, said Hall. Some drugmakers may feel pain points if the final rule goes into effect, she predicted.

For instance, “if companies had drugs that are subject to bundled payment, under this rule, for the first time, they may be assessed Medicaid rebates,” Hall said.

Manufacturers will also face new time constraints for challenging Medicaid rebate assessments.

Drugmakers will have a 12-quarter period to initiate disputes, request hearings, or conduct audits for state-invoiced units on both current and fully paid rebates under the new policy.

This timeframe begins on the last day of the quarter in which the state invoice was postmarked, according to an analysis of the rule by Sidley Austin LLP.

In the past, “there used to be no such time limit,” she said.

Hall said she expects companies will scrutinize the rule to determine whether its provisions are consistent with statute. “If not, they will consider tools to respond, including perhaps litigation,” she said.