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Impact of the Final AMP Rule on Trade and ChannelSpecialty Product Distribution and Channel Optimization

October 27, 2016

2© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative

(“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



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



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Withdrawn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



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



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



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



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



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



RCP Exclusions:

• Pharmacies that dispense prescription

medications to patients primarily through the

mail

• 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



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



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



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

http://www.kpmg.com/global/en/industry/healthcare/center-of-excellence/pages/default.aspx





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:



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



• “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



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



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



“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



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



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



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



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



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



• 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



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



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



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



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



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



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



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?



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)?



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



■ 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



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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Contact:

Lynn Buhl

[email protected]

+1 213 955 8601

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