42 USC 1396r-8 - Payment for covered outpatient drugs

U.S Code last checked for updates: Nov 22, 2024

§ 1396r–8.

Payment for covered outpatient drugs

(a)

Requirement for rebate agreement

(1)

In general

(2)

Effective date

(3)

Authorizing payment for drugs not covered under rebate agreements

(4)

Effect on existing agreements

(5)

Limitation on prices of drugs purchased by covered entities

(A)

Agreement with Secretary

(B)

“Covered entity” defined

(C)

Establishment of alternative mechanism to ensure against duplicate discounts or rebates

If the Secretary does not establish a mechanism under section 256b(a)(5)(A) of this title within 12 months of November 4, 1992, the following requirements shall apply:

(i)

Entities

(ii)

State agency

(D)

Effect of subsequent amendments

(E)

Determination of compliance

(6)

Requirements relating to master agreements for drugs procured by Department of Veterans Affairs and certain other Federal agencies

(A)

In general

(B)

Effect of subsequent amendments

(C)

Determination of compliance

(7)

Requirement for submission of utilization data for certain physician administered drugs

(A)

Single source drugs

(B)

Multiple source drugs

(i)

Identification of most frequently physician administered multiple source drugs

(ii)

Requirement

(C)

Use of NDC codes

(D)

Hardship waiver

(b)

Terms of rebate agreement

(1)

Periodic rebates

(A)

In general

(B)

Offset against medical assistance

(C)

Special rule for increased minimum rebate percentage

(i)

In general

In addition to the amounts applied as a reduction under subparagraph (B), for rebate periods beginning on or after January 1, 2010, during a fiscal year, the Secretary shall reduce payments to a State under section 1396b(a) of this title in the manner specified in clause (ii), in an amount equal to the product of—

(I)

100 percent minus the Federal medical assistance percentage applicable to the rebate period for the State; and

(II)

the amounts received by the State under such subparagraph that are attributable (as estimated by the Secretary based on utilization and other data) to the increase in the minimum rebate percentage effected by the amendments made by subsections (a)(1), (b), and (d) of section 2501 of the Patient Protection and Affordable Care Act, taking into account the additional drugs included under the amendments made by subsection (c) of section 2501 of such Act.

The Secretary shall adjust such payment reduction for a calendar quarter to the extent the Secretary determines, based upon subsequent utilization and other data, that the reduction for such quarter was greater or less than the amount of payment reduction that should have been made.

(ii)

Manner of payment reduction

(2)

State provision of information

(A)

State responsibility

(B)

(3)

Manufacturer provision of price and drug product information

(A)

In general

Each manufacturer with an agreement in effect under this section shall report to the Secretary—

(i)

not later than 30 days after the last day of each rebate period under the agreement—

(I)

on the average manufacturer price (as defined in subsection (k)(1)) for covered outpatient drugs for the rebate period under the agreement (including for all such drugs that are sold under a new drug application approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act [21 U.S.C. 355(c)]); and

(II)

for single source drugs and innovator multiple source drugs (including all such drugs that are sold under a new drug application approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act), on the manufacturer’s best price (as defined in subsection (c)(1)(C)) for such drugs for the rebate period under the agreement;

(ii)

not later than 30 days after the date of entering into an agreement under this section on the average manufacturer price (as defined in subsection (k)(1)) as of October 1, 1990 for each of the manufacturer’s covered outpatient drugs (including for such drugs that are sold under a new drug application approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act);

(iii)

for calendar quarters beginning on or after January 1, 2004, in conjunction with reporting required under clause (i) and by National Drug Code (including package size)—

(I)

the manufacturer’s average sales price (as defined in section 1395w–3a(c) of this title) and the total number of units specified under section 1395w–3a(b)(2)(A) of this title;

(II)

if required to make payment under section 1395w–3a of this title, the manufacturer’s wholesale acquisition cost, as defined in subsection (c)(6) of such section; and

(III)

information on those sales that were made at a nominal price or otherwise described in section 1395w–3a(c)(2)(B) of this title;

for a drug or biological described in subparagraph (C), (D), (E), or (G) of section 1395u(o)(1) of this title or section 1395rr(b)(14)(B) of this title, and, for calendar quarters beginning on or after January 1, 2007 and only with respect to the information described in subclause (III), for covered outpatient drugs;

(iv)

not later than 30 days after the last day of each month of a rebate period under the agreement, on the manufacturer’s total number of units that are used to calculate the monthly average manufacturer price for each covered outpatient drug; and

(v)

not later than 30 days after the last day of each month of a rebate period under the agreement, such drug product information as the Secretary shall require for each of the manufacturer’s covered outpatient drugs.

Information reported under this subparagraph is subject to audit by the Inspector General of the Department of Health and Human Services. Beginning July 1, 2006, the Secretary shall provide on a monthly basis to States under subparagraph (D)(iv) the most recently reported average manufacturer prices for single source drugs and for multiple source drugs and shall, on at least a quarterly basis, update the information posted on the website under subparagraph (D)(v) (relating to the weighted average of the most recently reported monthly average manufacturer prices). For purposes of applying clause (iii), for calendar quarters beginning on or after January 1, 2022, a drug or biological described in the flush matter following such clause includes items, services, supplies, and products that are payable under part B of subchapter XVIII as a drug or biological.

(B)

Verification surveys of average manufacturer price and manufacturer’s average sales price

(C)

Penalties

(i)

Failure to provide timely information

(ii)

False information

(iii)

Misclassified drug product or misreported information

(I)

In general

Any manufacturer with an agreement under this section that knowingly (as defined in section 1003.110 of title 42, Code of Federal Regulations (or any successor regulation)) misclassifies a covered outpatient drug, such as by knowingly submitting incorrect drug product information, is subject to a civil money penalty for each covered outpatient drug that is misclassified in an amount not to exceed 2 times the amount of the difference between—

(aa)

the total amount of rebates that the manufacturer paid with respect to the drug to all States for all rebate periods during which the drug was misclassified; and

(bb)

the total amount of rebates that the manufacturer would have been required to pay, as determined by the Secretary using drug product information provided by the manufacturer, with respect to the drug to all States for all rebate periods during which the drug was misclassified if the drug had been correctly classified.

(II)

Other penalties and recovery of underpaid rebates

(iv)

Increasing oversight and enforcement

Each year the Secretary shall retain, in addition to any amount retained by the Secretary to recoup investigation and litigation costs related to the enforcement of the civil money penalties under this subparagraph and subsection (c)(4)(B)(ii)(III), an amount equal to 25 percent of the total amount of civil money penalties collected under this subparagraph and subsection (c)(4)(B)(ii)(III) for the year, and such retained amount shall be available to the Secretary, without further appropriation and until expended, for activities related to the oversight and enforcement of this section and agreements under this section, including—

(I)

improving drug data reporting systems;

(II)

evaluating and ensuring manufacturer compliance with rebate obligations; and

(III)

oversight and enforcement related to ensuring that manufacturers accurately and fully report drug information, including data related to drug classification.

(D)

Confidentiality of information

Notwithstanding any other provision of law, information disclosed by manufacturers or wholesalers under this paragraph or under an agreement with the Secretary of Veterans Affairs described in subsection (a)(6)(A) (other than the wholesale acquisition cost for purposes of carrying out section 1395w–3a of this title) is confidential and shall not be disclosed by the Secretary or the Secretary of Veterans Affairs or a State agency (or contractor therewith) in a form which discloses the identity of a specific manufacturer or wholesaler, prices charged for drugs by such manufacturer or wholesaler, except—

(i)

as the Secretary determines to be necessary to carry out this section, to carry out section 1395w–3a of this title (including the determination and implementation of the payment amount and the rebate), or to carry out section 1395w–3b of this title, section 1320f–1(f) of this title, including rebates under paragraph (4) of such section, or section 1395w–114b of this title,

(ii)

to permit the Comptroller General to review the information provided,

(iii)

to permit the Director of the Congressional Budget Office to review the information provided,

(iv)

to States to carry out this subchapter,

(v)

to the Secretary to disclose (through a website accessible to the public) the weighted average of the most recently reported monthly average manufacturer prices and the average retail survey price determined for each multiple source drug in accordance with subsection (f),

(vi)

in the case of categories of drug product or classification information that were not considered confidential by the Secretary on the day before April 18, 2019, and

(vii)

to permit the Executive Director of the Medicare Payment Advisory Commission and the Executive Director of the Medicaid and CHIP Payment and Access Commission to review the information provided.

The previous sentence shall also apply to information disclosed under section 1395w–102(d)(2) or 1395w–104(c)(2)(G) of this title and drug pricing data reported under the first sentence of section 1395w–141(i)(1) of this title. Any information disclosed to the Executive Director of the Medicare Payment Advisory Commission or the Executive Director of the Medicaid and CHIP Payment and Access Commission pursuant to this subparagraph shall not be disclosed by either such Executive Director in a form which discloses the identity of a specific manufacturer or wholesaler or prices charged for drugs by such manufacturer or wholesaler. Such information also shall not be disclosed by either such Executive Director to individual Commissioners of the Medicare Payment Advisory Commission or of the Medicaid and CHIP Payment and Access Commission in a form which discloses the identity of a specific manufacturer or wholesaler or prices charged for drugs by such manufacturer or wholesaler.

(4)

Length of agreement

(A)

In general

(B)

Termination

(i)

By the Secretary

(ii)

By a manufacturer

(iii)

Effectiveness of termination

(iv)

Notice to States

(v)

Application to terminations of other agreements

(C)

Delay before reentry

(c)

Determination of amount of rebate

(1)

Basic rebate for single source drugs and innovator multiple source drugs

(A)

In general

Except as provided in paragraph (2), the amount of the rebate specified in this subsection for a rebate period (as defined in subsection (k)(8)) with respect to each dosage form and strength of a single source drug or an innovator multiple source drug shall be equal to the product of—

(i)

the total number of units of each dosage form and strength paid for under the State plan in the rebate period (as reported by the State); and

(ii)

subject to subparagraph (B)(ii), the greater of—

(I)

the difference between the average manufacturer price and the best price (as defined in subparagraph (C)) for the dosage form and strength of the drug, or

(II)

the minimum rebate percentage (specified in subparagraph (B)(i)) of such average manufacturer price,

for the rebate period.

(B)

Range of rebates required

(i)

Minimum rebate percentage

For purposes of subparagraph (A)(ii)(II), the “minimum rebate percentage” for rebate periods beginning—

(I)

after December 31, 1990, and before October 1, 1992, is 12.5 percent;

(II)

after September 30, 1992, and before January 1, 1994, is 15.7 percent;

(III)

after December 31, 1993, and before January 1, 1995, is 15.4 percent;

(IV)

after December 31, 1994, and before January 1, 1996, is 15.2 percent;

(V)

after December 31, 1995, and before January 1, 2010 1

 So in original. Probably should be followed by a comma.

is 15.1 percent; and

(VI)

except as provided in clause (iii), after December 31, 2009,2

 So in original. Probably should be followed by “is”.

23.1 percent.

(ii)

Temporary limitation on maximum rebate amount

In no case shall the amount applied under subparagraph (A)(ii) for a rebate period beginning—

(I)

before January 1, 1992, exceed 25 percent of the average manufacturer price; or

(II)

after December 31, 1991, and before January 1, 1993, exceed 50 percent of the average manufacturer price.

(iii)

Minimum rebate percentage for certain drugs

(I)

In general

(II)

Drug described

For purposes of subclause (I), a single source drug or an innovator multiple source drug described in this subclause is any of the following drugs:

(aa)

A clotting factor for which a separate furnishing payment is made under section 1395u(o)(5) of this title and which is included on a list of such factors specified and updated regularly by the Secretary.

(bb)

A drug approved by the Food and Drug Administration exclusively for pediatric indications.

(C)

“Best price” defined

For purposes of this section—

(i)

In general

The term “best price” means, with respect to a single source drug or innovator multiple source drug of a manufacturer (including the lowest price available to any entity for any such drug of a manufacturer that is sold under a new drug application approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act [21 U.S.C. 355(c)]), the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States, excluding—

(I)

any prices charged on or after October 1, 1992, to the Indian Health Service, the Department of Veterans Affairs, a State home receiving funds under section 1741 of title 38, the Department of Defense, the Public Health Service, or a covered entity described in subsection (a)(5)(B) (including inpatient prices charged to hospitals described in section 256b(a)(4)(L) of this title);

(II)

any prices charged under the Federal Supply Schedule of the General Services Administration;

(III)

any prices used under a State pharmaceutical assistance program;

(IV)

any depot prices and single award contract prices, as defined by the Secretary, of any agency of the Federal Government;

(V)

the prices negotiated from drug manufacturers for covered discount card drugs under an endorsed discount card program under section 1395w–141 of this title; and

(VI)

subject to clause (ii)(V), any prices charged which are negotiated by a prescription drug plan under part D of subchapter XVIII, by an MA–PD plan under part C of such subchapter with respect to covered part D drugs or by a qualified retiree prescription drug plan (as defined in section 1395w–132(a)(2) of this title) with respect to such drugs on behalf of individuals entitled to benefits under part A or enrolled under part B of such subchapter, or any discounts provided by manufacturers under the Medicare coverage gap discount program under section 1395w–114a of this title or under the manufacturer discount program under section 1395w–114c of this title.

(ii)

Special rules

The term “best price”—

(I)

shall be inclusive of cash discounts, free goods that are contingent on any purchase requirement, volume discounts, and rebates (other than rebates under this section, section 1395w–3a(i) of this title, or section 1395w–114b of this title);

(II)

shall be determined without regard to special packaging, labeling, or identifiers on the dosage form or product or package;

(III)

shall not take into account prices that are merely nominal in amount 3

 So in original. Probably should be followed by a semicolon.

(IV)

in the case of a manufacturer that approves, allows, or otherwise permits any other drug of the manufacturer to be sold under a new drug application approved under section 505(c) of the Federal Food, Drug, and Cosmetic Act [21 U.S.C. 355(c)], shall be inclusive of the lowest price for such authorized drug available from the manufacturer during the rebate period to any manufacturer, wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States, excluding those prices described in subclauses (I) through (IV) of clause (i); and

(V)

in the case of a rebate period and a covered outpatient drug that is a selected drug (as referred to in section 1320f–1(c) of this title) during such rebate period, shall be inclusive of the maximum fair price (as defined in section 1320f(c)(3) of this title) for such drug with respect to such period.

(iii)

Application of auditing and recordkeeping requirements

(D)

Limitation on sales at a nominal price

(i)

In general

For purposes of subparagraph (C)(ii)(III) and subsection (b)(3)(A)(iii)(III), only sales by a manufacturer of covered outpatient drugs at nominal prices to the following shall be considered to be sales at a nominal price or merely nominal in amount:

(I)

A covered entity described in section 256b(a)(4) of this title.

(II)

An intermediate care facility for the mentally retarded.

(III)

A State-owned or operated nursing facility.

(IV)

An entity that—

(aa)

is described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Act or is State-owned or operated; and

(bb)

would be a covered entity described in section 256b(a)(4) 4

 See References in Text note below.

of this title insofar as the entity provides the same type of services to the same type of populations as a covered entity described in such section provides, but does not receive funding under a provision of law referred to in such section;

(V)

A public or nonprofit entity, or an entity based at an institution of higher learning whose primary purpose is to provide health care services to students of that institution, that provides a service or services described under section 300(a) of this title.

(VI)

Any other facility or entity that the Secretary determines is a safety net provider to which sales of such drugs at a nominal price would be appropriate based on the factors described in clause (ii).

(ii)

Factors

The factors described in this clause with respect to a facility or entity are the following:

(I)

The type of facility or entity.

(II)

The services provided by the facility or entity.

(III)

The patient population served by the facility or entity.

(IV)

The number of other facilities or entities eligible to purchase at nominal prices in the same service area.

(iii)

Nonapplication

(iv)

Rule of construction

(2)

Additional rebate for single source and innovator multiple source drugs

(A)

In general

The amount of the rebate specified in this subsection for a rebate period, with respect to each dosage form and strength of a single source drug or an innovator multiple source drug, shall be increased by an amount equal to the product of—

(i)

the total number of units of such dosage form and strength dispensed after December 31, 1990, for which payment was made under the State plan for the rebate period; and

(ii)

the amount (if any) by which—

(I)

the average manufacturer price for the dosage form and strength of the drug for the period, exceeds

(II)

the average manufacturer price for such dosage form and strength for the calendar quarter beginning July 1, 1990 (without regard to whether or not the drug has been sold or transferred to an entity, including a division or subsidiary of the manufacturer, after the first day of such quarter), increased by the percentage by which the consumer price index for all urban consumers (United States city average) for the month before the month in which the rebate period begins exceeds such index for September 1990.

(B)

Treatment of subsequently approved drugs

(C)

Treatment of new formulations

(i)

In general

(ii)

Amount 1

(iii)

Amount 2

For purposes of clause (i), the amount described in this clause with respect to a drug described in clause (i) and rebate period is the amount computed under paragraph (1) for such drug, increased by the product of—

(I)

the average manufacturer price for the rebate period of the line extension of a single source drug or an innovator multiple source drug that is an oral solid dosage form;

(II)

the highest additional rebate (calculated as a percentage of average manufacturer price) under this paragraph for the rebate period for any strength of the original single source drug or innovator multiple source drug; and

(III)

the total number of units of each dosage form and strength of the line extension product paid for under the State plan in the rebate period (as reported by the State).

In this subparagraph, the term “line extension” means, with respect to a drug, a new formulation of the drug, such as an extended release formulation, but does not include an abuse-deterrent formulation of the drug (as determined by the Secretary), regardless of whether such abuse-deterrent formulation is an extended release formulation.

(D)

Maximum rebate amount

(3)

Rebate for other drugs

(A)

In general

Except as provided in subparagraph (C), the amount of the rebate paid to a State for a rebate period with respect to each dosage form and strength of covered outpatient drugs (other than single source drugs and innovator multiple source drugs) shall be equal to the product of—

(i)

the applicable percentage (as described in subparagraph (B)) of the average manufacturer price for the dosage form and strength for the rebate period, and

(ii)

the total number of units of such dosage form and strength dispensed after December 31, 1990, for which payment was made under the State plan for the rebate period.

(B)

“Applicable percentage” defined

For purposes of subparagraph (A)(i), the “applicable percentage” for rebate periods beginning—

(i)

before January 1, 1994, is 10 percent,

(ii)

after December 31, 1993, and before January 1, 2010, is 11 percent; 5

 So in original. The semicolon probably should be a comma.

and

(iii)

after December 31, 2009, is 13 percent.

(C)

Additional rebate

(i)

In general

(ii)

Special rules for application of provision

In applying subparagraphs (A) and (D) of paragraph (2) under clause (i)—

(I)

the reference in subparagraph (A)(i) of such paragraph to “1990” shall be deemed a reference to “2014”;

(II)

subject to clause (iii), the reference in subparagraph (A)(ii) of such paragraph to “the calendar quarter beginning July 1, 1990” shall be deemed a reference to “the calendar quarter beginning July 1, 2014”; and

(III)

subject to clause (iii), the reference in subparagraph (A)(ii) of such paragraph to “September 1990” shall be deemed a reference to “September 2014”;

(IV)

the references in subparagraph (D) of such paragraph to “paragraph (1)(A)(ii)”, “this paragraph”, and “December 31, 2009” shall be deemed references to “subparagraph (A)”, “this subparagraph”, and “December 31, 2014”, respectively; and

(V)

any reference in such paragraph to a “single source drug or an innovator multiple source drug” shall be deemed to be a reference to a drug to which clause (i) applies.

(iii)

Special rule for certain noninnovator multiple source drugs

In applying paragraph (2)(A)(ii)(II) under clause (i) with respect to a covered outpatient drug that is first marketed as a drug other than a single source drug or an innovator multiple source drug after April 1, 2013, such paragraph shall be applied—

(I)

by substituting “the applicable quarter” for “the calendar quarter beginning July 1, 1990”; and

(II)

by substituting “the last month in such applicable quarter” for “September 1990”.

(iv)

Applicable quarter defined

(4)

Recovery of unpaid rebate amounts due to misclassification of covered outpatient drugs

(A)

In general

If the Secretary determines that a manufacturer with an agreement under this section paid a lower per-unit rebate amount to a State for a rebate period as a result of the misclassification by the manufacturer of a covered outpatient drug (without regard to whether the manufacturer knowingly made the misclassification or should have known that the misclassification would be made) than the per-unit rebate amount that the manufacturer would have paid to the State if the drug had been correctly classified, the manufacturer shall pay to the State an amount equal to the product of—

(i)

the difference between—

(I)

the per-unit rebate amount paid to the State for the period; and

(II)

the per-unit rebate amount that the manufacturer would have paid to the State for the period, as determined by the Secretary, if the drug had been correctly classified; and

(ii)

the total units of the drug paid for under the State plan in the period.

(B)

Authority to correct misclassifications

(i)

In general

(ii)

Enforcement

If, after receiving notice of a misclassification from the Secretary under clause (i), a manufacturer fails to correct the misclassification by such time as the Secretary shall require, until the manufacturer makes such correction, the Secretary may do any or all of the following:

(I)

Correct the misclassification, using drug product information provided by the manufacturer, on behalf of the manufacturer.

(II)

Suspend the misclassified drug and the drug’s status as a covered outpatient drug under the manufacturer’s national rebate agreement, and exclude the misclassified drug from Federal financial participation in accordance with section 1396b(i)(10)(E) of this title.

(III)

Impose a civil money penalty (which shall be in addition to any other recovery or penalty which may be available under this section or any other provision of law) for each rebate period during which the drug is misclassified not to exceed an amount equal to the product of—

(aa)

the total number of units of each dosage form and strength of such misclassified drug paid for under any State plan during such a rebate period; and

(bb)

23.1 percent of the average manufacturer price for the dosage form and strength of such misclassified drug.

(C)

Reporting and transparency

(i)

In general

(ii)

Public access

(D)

Other penalties and actions

(d)

Limitations on coverage of drugs

(1)

Permissible restrictions

(A)

A State may subject to prior authorization any covered outpatient drug. Any such prior authorization program shall comply with the requirements of paragraph (5).

(B)

A State may exclude or otherwise restrict coverage of a covered outpatient drug if—

(i)

the prescribed use is not for a medically accepted indication (as defined in subsection (k)(6));

(ii)

the drug is contained in the list referred to in paragraph (2);

(iii)

the drug is subject to such restrictions pursuant to an agreement between a manufacturer and a State authorized by the Secretary under subsection (a)(1) or in effect pursuant to subsection (a)(4); or

(iv)

the State has excluded coverage of the drug from its formulary established in accordance with paragraph (4).

(2)

List of drugs subject to restriction

The following drugs or classes of drugs, or their medical uses, may be excluded from coverage or otherwise restricted:

(A)

Agents when used for anorexia, weight loss, or weight gain.

(B)

Agents when used to promote fertility.

(C)

Agents when used for cosmetic purposes or hair growth.

(D)

Agents when used for the symptomatic relief of cough and colds.

(E)

Prescription vitamins and mineral products, except prenatal vitamins and fluoride preparations.

(F)

Nonprescription drugs, except, in the case of pregnant women when recommended in accordance with the Guideline referred to in section 1396d(bb)(2)(A) of this title, agents approved by the Food and Drug Administration under the over-the-counter monograph process for purposes of promoting, and when used to promote, tobacco cessation.

(G)

Covered outpatient drugs which the manufacturer seeks to require as a condition of sale that associated tests or monitoring services be purchased exclusively from the manufacturer or its designee.

(H)

Agents when used for the treatment of sexual or erectile dysfunction, unless such agents are used to treat a condition, other than sexual or erectile dysfunction, for which the agents have been approved by the Food and Drug Administration.

(3)

Update of drug listings

(4)

Requirements for formularies

A State may establish a formulary if the formulary meets the following requirements:

(A)

The formulary is developed by a committee consisting of physicians, pharmacists, and other appropriate individuals appointed by the Governor of the State (or, at the option of the State, the State’s drug use review board established under subsection (g)(3)).

(B)

Except as provided in subparagraph (C), the formulary includes the covered outpatient drugs of any manufacturer which has entered into and complies with an agreement under subsection (a) (other than any drug excluded from coverage or otherwise restricted under paragraph (2)).

(C)

A covered outpatient drug may be excluded with respect to the treatment of a specific disease or condition for an identified population (if any) only if, based on the drug’s labeling (or, in the case of a drug the prescribed use of which is not approved under the Federal Food, Drug, and Cosmetic Act [21 U.S.C. 301 et seq.] but is a medically accepted indication, based on information from the appropriate compendia described in subsection (k)(6)), the excluded drug does not have a significant, clinically meaningful therapeutic advantage in terms of safety, effectiveness, or clinical outcome of such treatment for such population over other drugs included in the formulary and there is a written explanation (available to the public) of the basis for the exclusion.

(D)

The State plan permits coverage of a drug excluded from the formulary (other than any drug excluded from coverage or otherwise restricted under paragraph (2)) pursuant to a prior authorization program that is consistent with paragraph (5).

(E)

The formulary meets such other requirements as the Secretary may impose in order to achieve program savings consistent with protecting the health of program beneficiaries.

A prior authorization program established by a State under paragraph (5) is not a formulary subject to the requirements of this paragraph.

(5)

Requirements of prior authorization programs

A State plan under this subchapter may require, as a condition of coverage or payment for a covered outpatient drug for which Federal financial participation is available in accordance with this section, with respect to drugs dispensed on or after July 1, 1991, the approval of the drug before its dispensing for any medically accepted indication (as defined in subsection (k)(6)) only if the system providing for such approval—

(A)

provides response by telephone or other telecommunication device within 24 hours of a request for prior authorization; and

(B)

except with respect to the drugs on the list referred to in paragraph (2), provides for the dispensing of at least 72-hour supply of a covered outpatient prescription drug in an emergency situation (as defined by the Secretary).

(6)

Other permissible restrictions

(7)

Non-excludable drugs

The following drugs or classes of drugs, or their medical uses, shall not be excluded from coverage:

(A)

Agents when used to promote smoking cessation, including agents approved by the Food and Drug Administration under the over-the-counter monograph process for purposes of promoting, and when used to promote, tobacco cessation.

(B)

Barbiturates.

(C)

Benzodiazepines.

(D)

Drugs and biological products described in subsection (ee)(1)(A) of section 1396d of this title that are furnished as medical assistance in accordance with subsection (a)(29) of such section and section 1396a(a)(10)(A) of this title.

(E)

Drugs and biological products to which section 1396d(a)(4)(F) of this title and subclause (XVIII) in the matter following subparagraph (G) of section 1396a(a)(10) of this title apply that are furnished as medical assistance in accordance with such section or clause, respectively, for the treatment or prevention, of COVID–19, as described in such subparagraph or subclause, respectively, and section 1396a(a)(10)(A) of this title.

(e)

Treatment of pharmacy reimbursement limits

(1)

In general

During the period beginning on January 1, 1991, and ending on December 31, 1994—

(A)

a State may not reduce the payment limits established by regulation under this subchapter or any limitation described in paragraph (3) with respect to the ingredient cost of a covered outpatient drug or the dispensing fee for such a drug below the limits in effect as of January 1, 1991, and

(B)

except as provided in paragraph (2), the Secretary may not modify by regulation the formula established under sections 447.331 through 447.334 of title 42, Code of Federal Regulations, in effect on November 5, 1990, to reduce the limits described in subparagraph (A).

(2)

Special rule

(3)

Effect on State maximum allowable cost limitations

[(4)

] 6

 See 1993 Amendment note below.

Establishment of upper payment limits

(5)

Use of amp in upper payment limits

(f)

Survey of retail prices; State payment and utilization rates; and performance rankings

(1)

Survey of retail prices

(A)

Use of vendor

The Secretary may contract services for—

(i)

with respect to a retail community pharmacy, the determination on a monthly basis of retail survey prices for covered outpatient drugs that represent a nationwide average of consumer purchase prices for such drugs, net of all discounts and rebates (to the extent any information with respect to such discounts and rebates is available); and

(ii)

the notification of the Secretary when a drug product that is therapeutically and pharmaceutically equivalent and bioequivalent becomes generally available.

(B)

Secretary response to notification of availability of multiple source products

(C)

Use of competitive bidding

In contracting for such services, the Secretary shall competitively bid for an outside vendor that has a demonstrated history in—

(i)

surveying and determining, on a representative nationwide basis, retail prices for ingredient costs of prescription drugs;

(ii)

working with retail community pharmacies, commercial payers, and States in obtaining and disseminating such price information; and

(iii)

collecting and reporting such price information on at least a monthly basis.

In contracting for such services, the Secretary may waive such provisions of the Federal Acquisition Regulation as are necessary for the efficient implementation of this subsection, other than provisions relating to confidentiality of information and such other provisions as the Secretary determines appropriate.

(D)

Additional provisions

A contract with a vendor under this paragraph shall include such terms and conditions as the Secretary shall specify, including the following:

(i)

The vendor must monitor the marketplace and report to the Secretary each time there is a new covered outpatient drug generally available.

(ii)

The vendor must update the Secretary no less often than monthly on the retail survey prices for covered outpatient drugs.

(iii)

The contract shall be effective for a term of 2 years.

(E)

Availability of information to States

(2)

Annual State report

Each State shall annually report to the Secretary information on—

(A)

the payment rates under the State plan under this subchapter for covered outpatient drugs;

(B)

the dispensing fees paid under such plan for such drugs; and

(C)

utilization rates for noninnovator multiple source drugs under such plan.

(3)

Annual State performance rankings

(A)

Comparative analysis

(B)

Availability of information

(4)

Appropriation

(g)

Drug use review

(1)

In general

(A)

In order to meet the requirement of section 1396a(a)(54) of this title, a State shall provide for a drug use review program described in paragraph (2) for covered outpatient drugs in order to assure that prescriptions (i) are appropriate, (ii) are medically necessary, and (iii) are not likely to result in adverse medical results. The program shall be designed to educate physicians and pharmacists to identify and reduce the frequency of patterns of fraud, abuse, gross overuse, excessive utilization, inappropriate or medically unnecessary care, or prescribing or billing practices that indicate abuse or excessive utilization, among physicians, pharmacists, and patients, or associated with specific drugs or groups of drugs, as well as potential and actual severe adverse reactions to drugs including education on therapeutic appropriateness, overutilization and underutilization, appropriate use of generic products, therapeutic duplication, drug-disease contraindications, drug-drug interactions, incorrect drug dosage or duration of drug treatment, drug-allergy interactions, and clinical abuse/misuse.

(B)

The program shall assess data on drug use against predetermined standards, consistent with the following:

(i)

compendia which shall consist of the following:

(I)

American Hospital Formulary Service Drug Information;

(II)

United States Pharmacopeia-Drug Information (or its successor publications); and

(III)

the DRUGDEX Information System; and

(ii)

the peer-reviewed medical literature.

(C)

The Secretary, under the procedures established in section 1396b of this title, shall pay to each State an amount equal to 75 per centum of so much of the sums expended by the State plan during calendar years 1991 through 1993 as the Secretary determines is attributable to the statewide adoption of a drug use review program which conforms to the requirements of this subsection.

(D)

States shall not be required to perform additional drug use reviews with respect to drugs dispensed to residents of nursing facilities which are in compliance with the drug regimen review procedures prescribed by the Secretary for such facilities in regulations implementing section 1396r of this title, currently at section 483.60 of title 42, Code of Federal Regulations.

(2)

Description of program

Each drug use review program shall meet the following requirements for covered outpatient drugs:

(A)

Prospective drug review

(i)

The State plan shall provide for a review of drug therapy before each prescription is filled or delivered to an individual receiving benefits under this subchapter, typically at the point-of-sale or point of distribution. The review shall include screening for potential drug therapy problems due to therapeutic duplication, drug-disease contraindications, drug-drug interactions (including serious interactions with nonprescription or over-the-counter drugs), incorrect drug dosage or duration of drug treatment, drug-allergy interactions, and clinical abuse/misuse. Each State shall use the compendia and literature referred to in paragraph (1)(B) as its source of standards for such review.

(ii)

As part of the State’s prospective drug use review program under this subparagraph applicable State law shall establish standards for counseling of individuals receiving benefits under this subchapter by pharmacists which includes at least the following:

(I)

The pharmacist must offer to discuss with each individual receiving benefits under this subchapter or caregiver of such individual (in person, whenever practicable, or through access to a telephone service which is toll-free for long-distance calls) who presents a prescription, matters which in the exercise of the pharmacist’s professional judgment (consistent with State law respecting the provision of such information), the pharmacist deems significant including the following:

(aa)

The name and description of the medication.

(bb)

The route, dosage form, dosage, route of administration, and duration of drug therapy.

(cc)

Special directions and precautions for preparation, administration and use by the patient.

(dd)

Common severe side or adverse effects or interactions and therapeutic contraindications that may be encountered, including their avoidance, and the action required if they occur.

(ee)

Techniques for self-monitoring drug therapy.

(ff)

Proper storage.

(gg)

Prescription refill information.

(hh)

Action to be taken in the event of a missed dose.

(II)

A reasonable effort must be made by the pharmacist to obtain, record, and maintain at least the following information regarding individuals receiving benefits under this subchapter:

(aa)

Name, address, telephone number, date of birth (or age) and gender.

(bb)

Individual history where significant, including disease state or states, known allergies and drug reactions, and a comprehensive list of medications and relevant devices.

(cc)

Pharmacist comments relevant to the individual’s drug therapy.

Nothing in this clause shall be construed as requiring a pharmacist to provide consultation when an individual receiving benefits under this subchapter or caregiver of such individual refuses such consultation, or to require verification of the offer to provide consultation or a refusal of such offer.

(B)

Retrospective drug use review

(C)

Application of standards

(D)

Educational program

(3)

State drug use review board

(A)

Establishment

(B)

Membership

The membership of the DUR Board shall include health care professionals who have recognized knowledge and expertise in one or more of the following:

(i)

The clinically appropriate prescribing of covered outpatient drugs.

(ii)

The clinically appropriate dispensing and monitoring of covered outpatient drugs.

(iii)

Drug use review, evaluation, and intervention.

(iv)

Medical quality assurance.

The membership of the DUR Board shall be made up at least ⅓ but no more than 51 percent licensed and actively practicing physicians and at least ⅓ * * * 8

 So in original.

licensed and actively practicing pharmacists.

(C)

Activities

The activities of the DUR Board shall include but not be limited to the following:

(i)

Retrospective DUR as defined in section ⁷ (2)(B).

(ii)

Application of standards as defined in section ⁷ (2)(C).

(iii)

Ongoing interventions for physicians and pharmacists, targeted toward therapy problems or individuals identified in the course of retrospective drug use reviews performed under this subsection. Intervention programs shall include, in appropriate instances, at least:

(I)

information dissemination sufficient to ensure the ready availability to physicians and pharmacists in the State of information concerning its duties, powers, and basis for its standards;

(II)

written, oral, or electronic reminders containing patient-specific or drug-specific (or both) information and suggested changes in prescribing or dispensing practices, communicated in a manner designed to ensure the privacy of patient-related information;

(III)

use of face-to-face discussions between health care professionals who are experts in rational drug therapy and selected prescribers and pharmacists who have been targeted for educational intervention, including discussion of optimal prescribing, dispensing, or pharmacy care practices, and follow-up face-to-face discussions; and

(IV)

intensified review or monitoring of selected prescribers or dispensers.

The Board shall re-evaluate interventions after an appropriate period of time to determine if the intervention improved the quality of drug therapy, to evaluate the success of the interventions and make modifications as necessary.

(D)

Annual report

(h)

Electronic claims management

(1)

In general

(2)

Encouragement

In order to carry out paragraph (1)—

(A)

for calendar quarters during fiscal years 1991 and 1992, expenditures under the State plan attributable to development of a system described in paragraph (1) shall receive Federal financial participation under section 1396b(a)(3)(A)(i) of this title (at a matching rate of 90 percent) if the State acquires, through applicable competitive procurement process in the State, the most cost-effective telecommunications network and automatic data processing services and equipment; and

(B)

the Secretary may permit, in the procurement described in subparagraph (A) in the application of part 433 of title 42, Code of Federal Regulations, and parts 95, 205, and 307 of title 45, Code of Federal Regulations, the substitution of the State’s request for proposal in competitive procurement for advance planning and implementation documents otherwise required.

(i)

Omitted

(j)

Exemption of organized health care settings

(1)

Covered outpatient drugs are not subject to the requirements of this section if such drugs are—

(A)

dispensed by health maintenance organizations, including Medicaid managed care organizations that contract under section 1396b(m) of this title; and

(B)

subject to discounts under section 256b of this title.

(2)

The State plan shall provide that a hospital (providing medical assistance under such plan) that dispenses covered outpatient drugs using drug formulary systems, and bills the plan no more than the hospital’s purchasing costs for covered outpatient drugs (as determined under the State plan) shall not be subject to the requirements of this section.

(3)

Nothing in this subsection shall be construed as providing that amounts for covered outpatient drugs paid by the institutions described in this subsection should not be taken into account for purposes of determining the best price as described in subsection (c).

(k)

Definitions

In this section—

(1)

Average manufacturer price

(A)

In general

Subject to subparagraph (B), the term “average manufacturer price” means, with respect to a covered outpatient drug of a manufacturer for a rebate period, the average price paid to the manufacturer for the drug in the United States by—

(i)

wholesalers for drugs distributed to retail community pharmacies; and

(ii)

retail community pharmacies that purchase drugs directly from the manufacturer.

(B)

Exclusion of customary prompt pay discounts and other payments

(i)

In general

The average manufacturer price for a covered outpatient drug shall exclude—

(I)

customary prompt pay discounts extended to wholesalers;

(II)

bona fide service fees paid by manufacturers to wholesalers or retail community pharmacies, including (but not limited to) distribution service fees, inventory management fees, product stocking allowances, and fees associated with administrative services agreements and patient care programs (such as medication compliance programs and patient education programs);

(III)

reimbursement by manufacturers for recalled, damaged, expired, or otherwise unsalable returned goods, including (but not limited to) reimbursement for the cost of the goods and any reimbursement of costs associated with return goods handling and processing, reverse logistics, and drug destruction;

(IV)

payments received from, and rebates or discounts provided to, pharmacy benefit managers, managed care organizations, health maintenance organizations, insurers, hospitals, clinics, mail order pharmacies, long term care providers, manufacturers, or any other entity that does not conduct business as a wholesaler or a retail community pharmacy, unless the drug is an inhalation, infusion, instilled, implanted, or injectable drug that is not generally dispensed through a retail community pharmacy ³

(V)

discounts provided by manufacturers under section 1395w–114a of this title or under section 1395w–114c of this title;

(VI)

any reduction in price paid during the rebate period to the manufacturer for a drug by reason of application of part E of subchapter XI;

(VII)

rebates paid by manufacturers under section 1395w–3a(i) of this title; and

(VIII)

rebates paid by manufacturers under section 1395w–114b of this title.

(ii)

Inclusion of other discounts and payments

(C)

Exclusion of section 505(c) drugs

(2)

Covered outpatient drug

Subject to the exceptions in paragraph (3), the term “covered outpatient drug” means—

(A)

of those drugs which are treated as prescribed drugs for purposes of section 1396d(a)(12) of this title, a drug which may be dispensed only upon prescription (except as provided in paragraph (4)), and—

(i)

which is approved for safety and effectiveness as a prescription drug under section 505 [21 U.S.C. 355] or 507 ⁴ of the Federal Food, Drug, and Cosmetic Act or which is approved under section 505(j) of such Act [21 U.S.C. 355(j)];

(ii)

(I)

which was commercially used or sold in the United States before October 10, 1962, or which is identical, similar, or related (within the meaning of section 310.6(b)(1) of title 21 of the Code of Federal Regulations) to such a drug, and (II) which has not been the subject of a final determination by the Secretary that it is a “new drug” (within the meaning of section 201(p) of the Federal Food, Drug, and Cosmetic Act [21 U.S.C. 321(p)]) or an action brought by the Secretary under section 301, 302(a), or 304(a) of such Act [21 U.S.C. 331, 332(a), 334(a)] to enforce section 502(f) or 505(a) of such Act [21 U.S.C. 352(f), 355(a)]; or

(iii)

(I)

which is described in section 107(c)(3) of the Drug Amendments of 1962 and for which the Secretary has determined there is a compelling justification for its medical need, or is identical, similar, or related (within the meaning of section 310.6(b)(1) of title 21 of the Code of Federal Regulations) to such a drug, and (II) for which the Secretary has not issued a notice of an opportunity for a hearing under section 505(e) of the Federal Food, Drug, and Cosmetic Act [21 U.S.C. 355(e)] on a proposed order of the Secretary to withdraw approval of an application for such drug under such section because the Secretary has determined that the drug is less than effective for some or all conditions of use prescribed, recommended, or suggested in its labeling; and

(B)

a biological product, other than a vaccine which—

(i)

may only be dispensed upon prescription,

(ii)

is licensed under section 262 of this title, and

(iii)

is produced at an establishment licensed under such section to produce such product; and

(C)

insulin certified under section 506 ³ of the Federal Food, Drug, and Cosmetic Act.

(3)

Limiting definition

The term “covered outpatient drug” does not include any drug, biological product, or insulin provided as part of, or as incident to and in the same setting as, any of the following (and for which payment may be made under this subchapter as part of payment for the following and not as direct reimbursement for the drug):

(A)

Inpatient hospital services.

(B)

Hospice services.

(C)

Dental services, except that drugs for which the State plan authorizes direct reimbursement to the dispensing dentist are covered outpatient drugs.

(D)

Physicians’ services.

(E)

Outpatient hospital services.

(F)

Nursing facility services and services provided by an intermediate care facility for the mentally retarded.

(G)

Other laboratory and x-ray services.

(H)

Renal dialysis.

Such term also does not include any such drug or product for which a National Drug Code number is not required by the Food and Drug Administration or a drug or biological 9

 So in original. Probably should be “biological product”.

used for a medical indication which is not a medically accepted indication. Any drug, biological product, or insulin excluded from the definition of such term as a result of this paragraph shall be treated as a covered outpatient drug for purposes of determining the best price (as defined in subsection (c)(1)(C)) for such drug, biological product, or insulin.

(4)

Nonprescription drugs

(5)

Manufacturer

The term “manufacturer” means any entity which is engaged in—

(A)

the production, preparation, propagation, compounding, conversion, or processing of prescription drug products, either directly or indirectly by extraction from substances of natural origin, or independently by means of chemical synthesis, or by a combination of extraction and chemical synthesis, or

(B)

in the packaging, repackaging, labeling, relabeling, or distribution of prescription drug products.

Such term does not include a wholesale distributor of drugs or a retail pharmacy licensed under State law.

(6)

Medically accepted indication

(7)

Multiple source drug; innovator multiple source drug; noninnovator multiple source drug; single source drug

(A)

Defined

(i)

Multiple source drug

The term “multiple source drug” means, with respect to a rebate period, a covered outpatient drug, including a drug product approved for marketing as a non-prescription drug that is regarded as a covered outpatient drug under paragraph (4), for which there ² at least 1 other drug product which—

(I)

is rated as therapeutically equivalent (under the Food and Drug Administration’s most recent publication of “Approved Drug Products with Therapeutic Equivalence Evaluations”),

(II)

except as provided in subparagraph (B), is pharmaceutically equivalent and bioequivalent, as defined in subparagraph (C) and as determined by the Food and Drug Administration, and

(III)

is sold or marketed in the United States during the period.

(ii)

Innovator multiple source drug

(iii)

Noninnovator multiple source drug

(iv)

Single source drug

(B)

Exception

(C)

Definitions

For purposes of this paragraph—

(i)

drug products are pharmaceutically equivalent if the products contain identical amounts of the same active drug ingredient in the same dosage form and meet compendial or other applicable standards of strength, quality, purity, and identity; and

(ii)

drugs are bioequivalent if they do not present a known or potential bioequivalence problem, or, if they do present such a problem, they are shown to meet an appropriate standard of bioequivalence.

(8)

Rebate period

(9)

State agency

(10)

Retail community pharmacy

(11)

Wholesaler

(Aug. 14, 1935, ch. 531, title XIX, § 1927, as added Pub. L. 101–508, title IV, § 4401(a)(3), Nov. 5, 1990, 104 Stat. 1388–143; amended Pub. L. 102–585, title VI, § 601(a)–(c), Nov. 4, 1992, 106 Stat. 4962–4964; Pub. L. 103–18, § 2(a), Apr. 12, 1993, 107 Stat. 54; Pub. L. 103–66, title XIII, § 13602(a), Aug. 10, 1993, 107 Stat. 613; Pub. L. 105–33, title IV, §§ 4701(b)(2)(A)(x), 4756, Aug. 5, 1997, 111 Stat. 493, 527; Pub. L. 106–113, div. B, § 1000(a)(6) [title VI, §§ 606(a), 608(u)], Nov. 29, 1999, 113 Stat. 1536, 1501A–396, 1501A–398; Pub. L. 108–173, title I, §§ 101(e)(4), (9), 103(e)(1), 105(b), title III, § 303(i)(4), title IX, § 900(e)(1)(K), (L), title X, § 1002, Dec. 8, 2003, 117 Stat. 2151, 2152, 2159, 2166, 2254, 2372, 2431; Pub. L. 109–91, title I, § 104(a), Oct. 20, 2005, 119 Stat. 2092; Pub. L. 109–171, title VI, §§ 6001(a)–(c)(2), (d)–(f)(2), 6002(a), 6003(a), (b), 6004(a), Feb. 8, 2006, 120 Stat. 54–61; Pub. L. 109–432, div. B, title IV, § 405(c)(2)(A)(ii), Dec. 20, 2006, 120 Stat. 3000; Pub. L. 111–8, div. F, title II, § 221(a), Mar. 11, 2009, 123 Stat. 783; Pub. L. 111–148, title II, §§ 2501(a), (b), (c)(2), (d)(1), (e), 2502(a), 2503(a)–(c), title III, § 3301(d)(2), title IV, § 4107(b), Mar. 23, 2010, 124 Stat. 306–310, 312, 468, 560; Pub. L. 111–152, title I, §§ 1101(c), 1206(a), Mar. 30, 2010, 124 Stat. 1039, 1056; Pub. L. 111–226, title II, § 202, Aug. 10, 2010, 124 Stat. 2394; Pub. L. 111–309, title II, § 204(b), Dec. 15, 2010, 124 Stat. 3290; Pub. L. 114–74, title VI, § 602(a), Nov. 2, 2015, 129 Stat. 596; Pub. L. 114–198, title VII, § 705(a), July 22, 2016, 130 Stat. 753; Pub. L. 115–123, div. E, title XII, § 53104(a), Feb. 9, 2018, 132 Stat. 302; Pub. L. 115–271, title I, § 1004(b)(1), Oct. 24, 2018, 132 Stat. 3912; Pub. L. 116–16, § 6(a)(1), (2)(B)–(c), Apr. 18, 2019, 133 Stat. 859, 861, 863; Pub. L. 116–59, div. B, title VI, § 1603(a), (b), Sept. 27, 2019, 133 Stat. 1108; Pub. L. 116–159, div. C, title VI, § 2601(b), Oct. 1, 2020, 134 Stat. 738; Pub. L. 116–260, div. CC, title I, § 112(b), title IV, § 401(c), Dec. 27, 2020, 134 Stat. 2947, 2997; Pub. L. 117–2, title IX, §§ 9811(a)(4)(B), 9816, Mar. 11, 2021, 135 Stat. 210, 216; Pub. L. 117–169, title I, §§ 11001(b)(1)(G)(ii), (2), (3), 11002(b), 11101(c)(2)–(4), 11102(b)(2)–(4), 11201(e)(8), Aug. 16, 2022, 136 Stat. 1853, 1854, 1862, 1870, 1876, 1877, 1892.)

cite as: 42 USC 1396r-8