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Impact of the Final AMP Rule on Trade and ChannelSpecialty Product Distribution and Channel Optimization
October 27, 2016
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(“KPMG International”), a Swiss entity. All rights reserved. NDPPS 613419
Agenda
Selected Final Rule Topics
2
3
Class of Trade Considerations
4
5
Final Rule Overview
1
Questions
Bona Fide Service Fees
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(“KPMG International”), a Swiss entity. All rights reserved. NDPPS 613419
Fit in Overall TimelineFinal Rule Overview
1.0 Harmless Annoyance
— Poorly Understood
— Data Limitations
— Questionable Methodologies
— Manual Processes
— Limited Controls
— Insufficient Documentation
2.0 Important Burden
— Compliant Methodologies
— More Robust Data
— Key Functions Automated
— Compliance Oriented Controls
— Poorly Understood Beyond GP
3.0 Core Strategic Function
— Understood, Purposeful & Responsive
— Integrated Operationally &
Systematically
— Efficient
— Source of Insight
— Forward-Looking
GP’s strategic importance is increasing with its larger F/S impact, expanded use in provider reimbursement, and greater
transparency. Enormous opportunities exist to enhance its value proposition with more responsive methodologies, data
analytics-driven insights, enhanced integration, and embedded forward-looking strategic approaches.
Perf
orm
an
ce
Historical Recent Evolving
En
vir
on
men
t
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CMS 5 Year Financial Projections
— Final rule projects $2.7B savings primarily related to the FULs.
— $432M in operating costs for states & manufacturers
Status— “Establishes the long term framework” for MDRP
— Not Finalized: Line extension drug identification.
— More Guidance Forthcoming: Limited exceptions to NDA=S/I,
territories, restatements, value based arrangements, etc.
The final rule impacts the following three distinct areas of the Medicaid drug reimbursement system:
Manufacturer Government Pharmacy1) Manufacturer Calculation
of AMP & BP
2) Government Calculation of
Rebate Amount Owed by
Manufacturer
3) Government
Payment to
Pharmacy for
Product Dispensed
Mar
‘10
Affordable
Care
Act (“ACA”)
Au
g ‘10
5i Statutory
Changes
No
v ‘10
DRA Final Rule
AMP Provisions
Withdrawn
Feb
‘12
Proposed
Rule
Published
Au
g ‘15
Final Rule
To OMB
Feb
‘16
Final Rule
Published
Ap
r ‘1
6
Generally
Effective
4/1*
May ‘16
First AMP
Due 5/30
Ju
l ’1
6
First BP Due
7/30
Ap
r 2017
Territories
Effective
Ba
sic
Fa
cts
“Medicaid: Covered Outpatient Drugs; Final Rule”
425 commentators to proposed rule
185 pages in FR version (proposed rule was 50) Effe
ctive
Da
tes Generally prospective but:
Certain statutory provisions effective 10/1/10
Some provisions indicated as “clarifying”
* CMS recently indicated no enforcement of 5i AMP
calculation provisions prior to the 3rd quarter calculations
IntroductionFinal Rule Overview
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Area
Select
Provision Select Considerations
Calc
ula
tions
Original NDA
• Generally NDA = S/I drug
• “Limited exception” application before
4/1/17
AG AMP
Calculation
• Sales to secondary excluded?
• Depends significantly on definitions.
Territories• Separate entity considerations
• Potential BP impact
Definitions• Wholesaler and Manufacturer
• RCP and Specialty
Returns • Limited to cost
Bundles• Non-contingent discounts
• Historical bundle assumptions
Rebate
Am
ount
Line
Extension
Drugs
• New version & of what drug
• Oral solid dosage determination
• Corporate relationships
MMCO on
Service Date
• Difference can be significant
• Evaluation process w/ tool
Pharm
acy
Paym
ent
FULs• New floor at NADAC
• Changes recalculation dynamic
AAC• State methods have varied to-date
• 340B impact may be significant
Final Rule Themes
• Product type distinctions based on nuances of
regulatory approval, label information, FDA
classifications, etc.
• Reasonable assumptions made and documented
• General lack of clarity and completeness
• Revisiting earlier decisions
• Implementation timeframe may not be sufficient
• Determining whether any changes will be applied
retroactively
• Base AMP restatement strategy and execution
• Tracking 5 to 7 + methodologies over past 10 years
Common Manufacturer Issues
• GP calculation methodologies, systems, processes
• Coordination between GP and other groups
(regulatory, trade, etc.)
• Government rebate processes
• Accruals and reserves determinations
• Contracting strategies (PR, supplementals, etc.)
Business Impact Areas
General Operational ConsiderationsFinal Rule Overview
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Why do we
care?Smoothing &
Factoring
Treatment of
Prompt Pay
Inclusion of
Authorized
Generic
Sales
What are the
issues?
Distributors Chain Warehouses
3PLs
What are the
underlying
assumptions?
Conducting wholesale
distributionDistribution to RCP
Secondary
Manufacturers
Wholesaler Definition - Issue SummarySelected Final Rule Topics
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Regulatory Definitions
“Wholesaler means a drug wholesaler that is engaged in wholesale distribution
of prescription drugs to retail community pharmacies, including but not limited
to manufacturers, repackers, distributors, own-label distributors, private-label
distributors, jobbers, brokers, warehouses (including manufacturer’s and
distributor’s warehouses, chain drug warehouses, and wholesale drug
warehouses), independent wholesale drug traders, and retail community
pharmacies that conduct wholesale distributions.”
Wholesaler
Manufacturer means any entity that holds the NDC for a covered outpatient
drug or biological product and meets the following criteria …
(2) Is engaged in the packaging, repackaging, labeling, relabeling, or
distribution of covered outpatient drug products and is not a wholesale
distributor of drugs or a retail pharmacy licensed under State law.
(4) For drugs subject to private labeling arrangements, the term
‘‘manufacturer’’ will also include the entity under whose own label or trade
name the product will be distributed.”
Manufacturer
Wholesaler Definition - AnalysisSelected Final Rule Topics
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Preamble Guidance
“Response: The statutory definition of wholesaler includes warehouses and
makes specific reference to chain drug warehouses that are engaged in
wholesale distribution of prescription drugs to retail community pharmacies.
Therefore, given the statutory definition and express inclusion of chain drug
warehouses, we see no reason to alter the definition in this final rule.”
Chain Drug
Warehouse
Response: We do not believe it is necessary to further add that drug
wholesalers must take title to, or possession of, the drugs to meet the definition
of wholesaler … What is not clear from the comment is whether these 3PL
entities pay a price for the drug, or are paid a service fee to provide packaging
services to the manufacturer. In the event there is a price paid for the drug by
the 3PL, this price should be included to the extent that the 3PL entity meets
the definition of wholesaler …
3PLs
Wholesaler Definition – Analysis (continued)Selected Final Rule Topics
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Chain Warehouse Impact On AMP
AMP Eligible
Units Dollars
2,000 $ 2,500
Chains Warehouse Classified as Wholesaler
AMP
$1.250000
Chains Warehouse Classified as Retail
2,000 $ 2,490 $1.245000
Net Sales to Chains
$ 10
Prompt Pay @ 2%
Units Dollars AMP
$ 500
AMP Eligible
AMP variance at the third decimal - $ 0.005
How much of a difference can prompt pay make?Selected Final Rule Topics
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RCP Exclusions:
• Pharmacies that dispense prescription
medications to patients primarily through the
• Nursing home pharmacies
• Long-term care facility pharmacies
• Hospital pharmacies
• Clinics
• Charitable or not-for-profit pharmacies
• Government pharmacies
• Pharmacy benefit managers
Retail Community Pharmacy (RCP) definition:
1.An independent pharmacy, a chain
pharmacy, a supermarket pharmacy, or a
mass merchandiser pharmacy;
2.Licensed as a pharmacy by the state;
3.Dispenses medications to the general
public; and
4.Dispenses medications at retail prices.
CMS Guidance:
• There is no percentage threshold established by CMS
for pharmacies to be considered “primarily dispensing
through the mail.”
• Surveys to determine the overall percentage of mail
order, retail, or non-retail purchases are not required.
• If an RCP: (1) does not offer prescriptions primarily
through the mail; and (2) has a home delivery service
as an additional service to send prescriptions directly
to the patient’s home, such sales would be included in
AMP.
• CMS does not believe that a RCP must have a ‘‘brick
and mortar’’ store front.
RCP Definition, Exclusions & CMS GuidanceSelected Final Rule Topics
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What constitutes “primarily through the mail” requires a manufacturer reasonable assumption.
It may be challenging to apply the “primarily through the mail” reasonable assumption to entity
business models:
• Customer surveys:
• May take time to develop and gather results.
• Customers may not respond to surveys unless contractually obligated.
• Web based research and phone calls:
• Time consuming depending on number of entities.
• Phone calls are difficult to document but may be required if customer website is
ambiguous or non-existent.
• Third party customer classifications:
• Is data already available to your organization?
• Does the data contain a customer category for mail order?
• How reliable is the data?
• Mail versus retail rebate data identifiers
• Not all customers receive rebates.
• Requires systems or considerable time to analyze data.
RCP Definition - Primarily Through The MailSelected Final Rule Topics
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Whether home infusion and home health entities constitute RCPs requires manufacturer reasonable
assumptions.
Applying the reasonable assumption may be challenging:
• Do you have a home infusion and/or home health COT? Or are these entities assigned
various COTs (e.g. hospital, clinic)?
• Is home delivery an “additional service”?
• Is an affiliation with an entity required (e.g. patient of hospital)?
• Is the entity a government entity (e.g. state county)?
• Third party customer classifications:
• Is data already available to your organization?
• Does the data contain a customer category for residential?
• How reliable is the data?
RCP Definition - Home Health & Home InfusionSelected Final Rule Topics
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(“KPMG International”), a Swiss entity. All rights reserved. NDPPS 613419
RCP Definition - SpecialtySelected Final Rule Topics
2) Consider whether such entities could reasonably meet the RCP definition
There is no single accepted definition for MDRP or otherwise. Considerations might include some of
the following and/or others as determined with your broader management team:
Specialty Pharmacy:
• Focuses on specialty drugs
• Equipped for efficient management of special handling, storage
or distribution requirements
• Enhanced data sharing & communications with both patients and
providers to improve patient care and disease management;
particularly related to complex conditions that may be chronic
and/or rare.
• Enhanced patient assistance in locating resources to provide
financial assistance
Specialty Drug
• Generally not available through regular retail pharmacies
• High cost
• No generally accepted alternative (no therapeutically equivalent
& other treatment options undesirable)
• Requires close interaction with patient (education, monitoring,
etc.)
• Biotech/5i
• Special storage or handling
1) Consider how your organization defines “specialty pharmacy” and whether that is evolving following
recent attention paid to these arrangements
3) Determine if any oral SP drugs will consistently lack AMP-eligible sales (e.g. exclusive direct distribution
products) and, if so, develop reasonable assumption necessary to create a calculation
2a) Must be ALL of the following:
• Licensed by State (presumably yes)• Independent, chain, supermarket or mass merchandiser (probably yes)• Dispense to general public (depends on definition of general public and specific facts but
may frequently fail this test)• Retail prices (depends on definition of retail prices and specific facts and may be fruitful –
but also potentially circular)
2b) Also, may not dispense primarily through the mail
• Could vary across the industry • Consider periodic surveys if
you’ve made it this far
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Bundled Sales – Simple Mathematical ExampleSelected Final Rule Topics
Product WAC Contract
Price
Discount Discount
Allocation %
Allocated
Discount
Reallocated
Net Price
REF A B C=A-B D=A/SUM(A) E=D*SUM(C) F=A-E
A $10 $8 $2 40% $6 $4
B $15 $2 $13 60% $9 $6
Total $25 $10 $15 100% $15 $10
Raw data used as input
Discounts are reallocated
Reallocated data are used in CMS
calculations (AMP, BP, ASP)1
Example reallocation (“unbundling”) of bundled discounts:
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Bundled sale means any arrangement regardless of physical
packaging under which
I. The rebate, discount, or other price concession is
conditioned upon:
A. The purchase of:
1. The same drug
2. Drugs of different types (that is, at the nine-digit
National Drug Code (NDC) level)
3. Or another product
B. Or some other performance requirement (for
example, the achievement of market share, inclusion
or tier placement on a formulary),
II. Or where the resulting discounts or other price
concessions are greater than those which would have
been available had the bundled drugs been purchased
separately or outside the bundled arrangement.
(1) The discounts in a bundled sale, including but not limited to
those discounts resulting from a contingent arrangement, are
allocated proportionally to the total dollar value of the units of
all drugs sold under the bundled arrangement.
(2) For bundled sales where multiple drugs are discounted, the
aggregate value of all the discounts in the bundled
arrangement must be proportionally allocated across all the
drugs in the bundle.
Bundled sale means any arrangement regardless of physical
packaging under which
I. The rebate, discount, or other price concession is
conditioned upon:
A. the purchase of the
1. same drug,
2. drugs of different types (that is, at the nine-digit
national drug code (NDC) level)
3. Or another product
B. Or some other performance requirement (for
example, the achievement of market share,
inclusion or tier placement on a formulary),
II. Or where the resulting discounts or other price
concessions are greater than those which would have
been available had the bundled drugs been purchased
separately or outside the bundled arrangement.
(1) The discounts in a bundled sale, including those discounts
resulting from a contingent arrangement, are allocated
proportionally to the total dollar value of the units of all drugs
or products sold under the bundled arrangement.
(2) For bundled sales where multiple drugs are discounted, the
aggregate value of all the discounts in the bundled
arrangement must be proportionally allocated across all the
drugs or products in the bundle.
DRA Final Rule (PPACA Proposed Rule) Final Rule (Changes from DRA)
Bundled Sales – What actually changed?Selected Final Rule Topics
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• “We did not intend to revise the policy expressed in the 2007 AMP final
rule but rather to reiterate that when a bundled sale exists…
• …We believe that not finalizing the proposed phrase “but not limited to”
in the definition of bundled sale in this final rule will address the
commenter’s concerns with any potential adverse impact on the
contractual relationships between wholesalers and manufacturers since
the final bundled sale definition reiterates that all discounts in the
bundled arrangement must be allocated proportionally to the total dollar
value of the units of all drugs or products sold under the bundled
arrangement.”
Clarification on bundle parameters
Bundled Sales – Preamble GuidanceSelected Final Rule Topics
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https://www.justice.gov/opa/pr/wyeth-and-pfizer-agree-pay-7846-million-resolve-lawsuit-alleging-wyeth-underpaid-drug-rebates
• The Department of Justice announced on April 27th, 2016 that
pharmaceutical companies Wyeth and Pfizer Inc. have agreed to pay
$784.6 million…
• According to the government’s complaint, Wyeth sold Protonix Oral and
Protonix IV through a bundled sales arrangement in which a hospital could
earn deep discounts on both drugs. Through this bundled arrangement,
Wyeth sought to induce hospitals to buy and use Protonix Oral, which
hospitals otherwise would have had little incentive to use, because other
pre-existing oral PPI drugs were priced competitively and were considered
to be as safe and effective.
• The government alleged that Wyeth hid from Medicaid the bundled
discounts Wyeth gave to hospitals on Protonix Oral and Protonix IV.
In the News
Bundled Sales - Why does it matter?Selected Final Rule Topics
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AMP Calculations
Monthly Smoothing Base AMP Quarterly AMP
NGD Determination
ThresholdData
SourceRatio Basis
Time Period
New Products
Identification
Clear definitionAlignment with
RegulatoryNon-5i / Non-RCP
Drugs
5i Product Identification, NGD & AMP Calculation - Issue SummarySelected Final Rule Topics
Allow manufacturers to calculate a price reflective of the
marketplace for products that are not generally distributed to
RCPs
What is the
intent of 5i
AMP
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“A manufacturer must identify to CMS each covered outpatient drug that qualifies as a 5i
drug.”
Regulation
Preamble
• “we have decided not to finalize the definition of 5i drug that was proposed in the
definition section of the proposed rule… Instead, we will use the acronym of “5i drug”
to refer to inhalation, infusion, instilled, implanted, or injectable drugs. “A
manufacturer must identify to CMS each covered outpatient drug that qualifies as a 5i
drug.”
• Manufacturers “may make such determinations, using resources such as the
manufacturer’s prescribing information, drug package insert, or the FDA SPL Routes
of Administration; however, we will not mandate the use of any specific resource”.
• “manufacturers will have the flexibility to determine whether their drug is a 5i drug
based on reasonable assumptions.”
• “…a written or electronic record outlining these assumptions must be maintained by
the drug manufacturer”
5i Product IdentificationSelected Final Rule Topics
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A manufacturer must determine if the 5i drug is not generally dispensed through a retail community pharmacy based on the percentage of sales to entities other than retail community pharmacies.• A 5i drug is not generally dispensed through a retail community pharmacy 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 retail community pharmacies or wholesalers for drugs distributed to retail community pharmacies.
• A manufacturer is responsible for determining and reporting to CMS whether a 5i drug is not generally dispensed through a retail community pharmacy on a monthly basis
Regulation
Preamble
• Threshold, Level and Basis
• …the new threshold “would promote stability and consistency in the AMP
calculation… 70/30 is to be determined by units, and calculated at the NDC-9 level• Frequency
• The determination of “Not Generally Dispensed” must be done monthly. “Since the quarterly AMP is reported as a weighted average of the 3 monthly AMPs, we agree with commenters that it is not necessary to require manufactures to determine the “not generally dispensed” requirement on both a monthly and quarterly basis”
5i Not Generally Dispensed DeterminationSelected Final Rule Topics
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Preamble
• Base AMP for New Products
• if a 5i drug in the first full calendar quarter after the day the drug is first marketed
meets the ‘‘not generally dispensed’’ threshold, the manufacturer is responsible for
calculating the base date AMP using the 5i AMP methodology.
• If a 5i drug in the first full calendar quarter after the day in which the drug is first
marketed does not meet the ‘‘not generally dispensed’’ threshold, manufacturer is
responsible for calculating the base date AMP using the standard AMP
methodology.
• AMP Quarterly Calculation for Switch Products
• As to the commenters question regarding how to calculate quarterly AMP for
quarters when the drug flips between AMP and AMP for 5i drugs not generally
dispensed through retail community pharmacies within the months of that quarter,
we note that the quarterly AMP is reported as a weighted average of the 3 monthly
AMPs reported by the manufacturer; thus, manufacturers are to calculate the
quarterly AMP as a weighted average of the 3 monthly AMPs irrespective of the
methodology used to calculate each monthly AMP…
5i AMP Calculation - ConsiderationsSelected Final Rule Topics
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Manufacturers may use reasonable assumptions in identifying and calculating monthly
AMPs for 5i drugs not generally dispensed through retail community pharmacies. CMS
expects to issue operational guidance in the future providing additional instructions
clarifying how manufacturers may identify and calculate monthly AMP for 5i drugs.
Identification of 5i
drugs / 5i AMP
calculation
In the absence of guidance and adequate documentation to the contrary, manufacturers
may make reasonable assumptions to determine whether prices paid to manufactures by
wholesalers are for drugs distributed to entities eligible for inclusion in the calculation of
AMP for 5i drugs not generally dispensed through retail community pharmacies.
5i AMP and
wholesalers
Manufacturers have the option to make reasonable assumptions in their AMP calculations
for oral CODs not generally dispensed through RCPs in the absence of guidance, and may
make certain presumptions consistent with the requirements and intent of section 1927 of
the Act and federal regulations.
Switching between
5i AMP and AMP
CMS is requiring manufacturers to determine on a monthly basis when the 5i drug is not
generally dispensed through retail community pharmacies although, manufacturers may
make reasonable assumptions regarding this determination.
“Not Generally
Dispensed”
Determination
Manufacturer is permitted to smooth the monthly calculation based upon 12 months of data
as part of its reasonable assumptions in determining the NGD threshold.
Smoothing: “Not
Generally
Dispensed”
Determination
CMS rejected suggestions that manufactures should have two baseline AMPs for products
that might fluctuate between the standard and 5i methodologies. CMS believes reasonable
assumptions and the option to use a unit-smoothing process in the “not generally
dispensed” determination will result in more stable AMPs.
AMP for oral CODs
not generally
dispensed through
RCPs
5i AMP Discussion – Reasonable AssumptionsSelected Final Rule Topics
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1 Physicians
2 Pharmacy benefit managers
3 Health maintenance organizations (HMOs, including managed care organizations (MCOs)
4 Insurers (except for rebates under section 1927 of the Act and this subpart)
5 Hospitals
6Clinics and outpatient facilities (for example, surgical centers, ambulatory care centers, dialysis
centers, mental health centers)
7 Mail order pharmacies
8
Long-term care providers, including nursing facility pharmacies, nursing home pharmacies, long-term
care facilities, contract pharmacies for the nursing facility where these sales can be identified with
adequate documentation, and other entities where the drugs are dispensed through a nursing facility
pharmacy, such as assisted living facilities
9 Hospices (inpatient and outpatient)
10Sales to manufacturers, or any other entity that does not conduct business as a wholesaler or retail
community pharmacy
1… Bona fide service fees as defined in § 447.502 paid by manufacturers to wholesalers or retail
community pharmacies. …
2 Patients
3 Government pharmacies (for example, a Federal, State, county, or municipal-owned pharmacy)
4 Charitable pharmacies
5 Not-for-profit pharmacies
Inclu
de
Exclu
de
5i COT Inclusions and Exclusions Analysis – Regulatory LanguageSelected Final Rule Topics
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GP calculation compliance depends on accurate class of trade assignment
Challenges are increasing exponentially and include:
Customers’ rapid pace of diversification, innovation, and consolidation
Changing regulations/requirements
Expansion & evolution of governmental & commercial sources of COT relevant data
Evolving commercial COT-based causes of litigation
A renewed focus by enforcement personnel
COT is Important and Increasingly ComplexClass of Trade Considerations
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• Uses: Same code for
GP, pricing policy &/or
other business
purposes?
• Scope: 340b? Intl?
• Schema: Robust
definitions both
included & excluded.
• Data Sources:
Universe considered,
principals, selection.
• Uses in GP
Methodology: Bill-to v.
ship-to, all price types
on single matrix, etc.
Methodology
• Source Adequacy: Is one enough?
• Structured Data Source Selection: Preference for
government sources &/or definitive code matching?
Tradeoff between precision & process complexity?
• Analyst Judgment: How much, under what
circumstances, subject to what review/approval, &
how documented?
• Additional Research: What sources, when required,
how documented, etc.
• Assignment Documentation: Conflicts? Product-
based? Uncertain matches? Analyst judgment
beyond documented process?
• Monitoring & Auditing: How much, internal v.
external, trx sample &/or population analytics,
random vs. judgmental, process audit, etc?
Policy
• MDM: Single customer
master? Duplicates
allowed? New entity
confirmation steps.
• Assignment Flow:
Start w/ contract?
Automate structured
sources? Workflow
review/approval?
• Maintenance: Triggers
& time-based (e.g.
annually)? Full bottom-
up?
• Organizational
Responsibility: COT
Committee? Separate
direct & indirect?
Process
Legal IT, MDM, COT Analysts, IA, SoXCompliance & GP
Select ConsiderationsClass of Trade Considerations
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Government source data
External non-government source data
Internally available sources
Internal Sources
■ Contracts
■ Chargebacks
■ Calling the entity
■ GPO membership lists
Private/Subscription Based
Drug Enforcement Administration (DEA)
number from National Technical
Information Service (NTIS)
Public
■ Centers for Medicare & Medicaid
Services (CMS)
■ Prime Vendor List
■ U.S. Department of Veterans Affairs
■ Department of Defense Master List
Private/Subscription Based
■ Health Industry Number (HIN) from
Health Industry Business
Communications Council (HIBCC)
■ National Council for Prescription Drug
Programs (NCPDP)
■ IMS
Public
■ American Hospital Association (AHA)
Database
■ National Association of Chain Drug
Stores (NACDS)
Commonly Used Private/Subscription, Public, and Internal SourcesClass of Trade Considerations
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Codes and definitions for specialty and mail-orderNCPDP
• Utilization Review Accreditation Commission (URAC)
• Accreditation Commission for Health Care (ACHC)
Pharmacy
Accreditation
Agencies
Specialty PharmaciesClass of Trade Considerations
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Customer 1
• HIBCC: Government Agency
• DEA: Pharmacy
• IMS: Home Health
Customer 2
• HIBCC: Home Care
• DEA: Pharmacy
• IMS: Medical Group
Customer 3
• HIBCC: Non-Health Miscellaneous
• DEA: Pharmacy
• IMS: Owner Subsidiary
Example Data Source InconsistenciesClass of Trade Considerations
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First, at a detailed level, every source code assessed against every COT using the following scale:
Green: Both clear and definitive
Yellow: Clear but not definitive
Red: Not clear and/or definitive.
Then, at a higher level, every source assessed using the following criteria
1) Overall purpose consistency
2) Extent match with manufacturer’s individual COTs
3) Government vs. commercial sourcing
4) Matching mechanism
5) Frequency of use
Data Source EvaluationClass of Trade Considerations
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Manufacturer COT
Data source #1 COT
Physician Independent pharmacy Chain pharmacy Distributor Analytical lab
Physician
Pharmacy
Distributor
Wholesaler
Government Research Lab
Example of Detailed Level ApproachClass of Trade Considerations
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CMS
ASP & ACA File Rule Variations
Veterans Affairs
Dear Manufacturer Letters
10/18/2006:
Wholesaler fees associated with inventory management agreements, fees charged by general wholesalers (pharmaceutical prime vendors) to manufacturers that have chargeback agreements with them, are excludable from non-FAMP, as long as they are defined service charges imposed on manufacturers generally. Product discounts or rebates granted by manufacturers to wholesalers in order to make their drugs more attractive in the market place cannot be excludable fees.
10/26/2007
In reference to the letter above:
Q: Does VA agree that exclusion from non-FAMP is also proper for percent-of-sales fees offered to wholesalers by manufacturers as incentives for the wholesalers to adopt certain beneficial practices or meet certain standards of efficiency?
A: No. VA’s P.L. 102-585, Sec. 603, Policy Group views percent-of-sales incentive fees offered to wholesalers, in order to achieve business goals of the manufacturer, as not being IMA fees that are excludable from non-FAMP. Specific fee situations that may not clearly fit into the IMA or incentive fee categories should be discussed with auditors from VA’s Office of Inspector General.
Bona fide service fees means a fees paid by a
manufacturer to an entity, that
1. Represents fair market value for a bona fide,
2. Itemized service actually performed on behalf of
the manufacturer
3. That the manufacturer would otherwise perform
(or contract for) in the absence of the service
arrangement, and
4. That are not passed on in whole or in part to a
client or customer of an entity, whether or not
the entity takes title to the drug.
The fee includes, but is not limited to, distribution
service fees, inventory management fees, product
stocking allowances, and fees associated with
administrative service agreements and patient care
programs (such as medication compliance
programs and patient education programs).
GuidanceBona Fide Service Fees
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Key QuestionsBona Fide Service Fees
— What are the services delineated in the contract?
— For the services delineated in the contract, what exactly is being done and why?
— Are there any other specific services being provided by the vendor and being paid for that are not delineated in
the contract? Does the manufacturer have the ability to refuse to pay the fee based on an identified failure of the
vendor to perform?
#1 What are the itemized
services?
— Does the manufacturer confirm that the services were provided consistent with the agreement before paying
the fee?
— Do you otherwise know that the service has been provided?
— What evidence is available for each?
#2 Is the service actually
performed?
— Whose idea was it for the service to be provided? Did the manufacturer request the service from the vendor or
did the vendor propose the service to the manufacturer?
— Does the vendor have an independent legal or contractual obligation to perform the service?
— Would the vendor do the work anyway, even if the manufacturer didn’t pay the fee?
— If the manufacturer had the option cancelling the service and no longer paying the fee, would it do so?
#3 Is the service performed on
behalf of the manufacturer?
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Key Questions (continued)Bona Fide Service Fees
— Are the services reasonably necessary or useful?
— Are the services associated with the efficient distribution of drugs?
#4 Would you otherwise perform or
contract for the service?
— Does the contract include a pass-through restriction?
— Has any related inquiry ever been made of the vendor?
— Any reason to believe that it might be passed-through?
#5 Is any portion of the fee passed-on
to a client/customer of the vendor?
— How much variation is there across customer for comparable services?
— If fee is based on a percentage of price, does relevant product price change much, and, if so, does the value of
the service reasonably vary with such price changes?
— Was the amount of the fee separately negotiated? If so, how was the negotiation objective determined and how
much did the initial price move?
— If you were able to purchase this service from an independent third party in an equal negotiating position, how
much do you think you might be willing to pay?
#6 Is the amount of the fee at fair
market value (FMV)?
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Key Standards Governing FMV
— Per 42 CFR § 411.351, the term "fair market value" means the value in arm's-length transactions, consistent
with the general market value. "General market value" means the price that an asset would bring, as the result
of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to
generate business for the other party; or the compensation that would be included in a service agreement, as
the result of bona fide bargaining between well informed parties to the agreement who are not otherwise in a
position to generate business for the other party, on the date of acquisition of the asset or at the time of the
service agreement. Usually, the fair market price is the price at which bona fide sales have been
consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or
the compensation that has been included in bona fide service agreements with comparable terms at the time
of the agreement.
— Per 42 CFR § 1001.952(d) (5) The aggregate compensation paid to the agent over the term of the agreement
is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a
manner that takes into account the volume or value of any referrals or business otherwise generated between
the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal
health care programs.
— FMV may also be impacted by Federal Anti-Kickback Standards, PhRMA Guidelines, Stark Law and PPSA.
Standard of ValueBona Fide Service Fees
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■ The cost approach considers reproduction or replacement cost as an indicator of value. The cost approach is
based on the assumption that a prudent investor would pay no more for an asset or service than the amount
for which he could replace or recreate it with an asset or service of similar utility.
■ The Cost-Plus Method involves an analysis of the specific services to be provided and the requisite costs,
including the consideration of market-based rates to reproduce the cost. The method then involves an analysis
of similar entities to generate an appropriate mark-up relative to the costs. A subjective analysis is then
conducted to arrive at an appropriate mark-up for the asset or service being valued. The cost approach is often
the preferred approach as it considers the cost to recreate a service exclusive of the value and volume of
referrals in a bonafide transaction.
Cost Approach
■ The market approach involves gathering data on sales and offerings of similar assets or services. The market
approach measures the loss in value from all forms of physical, functional, and economic factors inherent in
the individual asset or serviced. The market approach is most reliable when there are sufficient sales of
comparable assets or transactions that can be independently verified. The market approach may not guard
against others who may be pricing based on the volume or value of referrals as set forth in the regulations.
Market
Approach
■ The income approach recognizes that the value of an asset or activity is premised on the receipt of future
economic benefits. These benefits can include earnings, cost savings, tax deductions, and the proceeds from
disposition. While the income approach may show that the service is economically viable, the uniqueness of
the service or the contribution of additional services to the economic benefits may make it difficult to satisfy the
requirements noted in the regulations under this approach.
Income
Approach
Generally Accepted Valuation ApproachesBona Fide Service Fees
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Potential Specialty Services Possibly Requiring ValuationBona Fide Service Fees
Data services (e.g., inventory reports)
Program setup & account management services
Telephone & services referrals
Adverse event reporting
Questions
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independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved. NDPPS 613419
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on
such information without appropriate professional advice after a thorough examination of the particular situation.
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