Title of Regulation: 12VAC30-80. Methods and Standards for Establishing Payment Rates; Other Types of Care (amending 12VAC30-80-40).

Statutory Authority: §§ 32.1-324 and 32.1-325 of the Code of Virginia.

Public Hearing Information: No public hearings are scheduled.

Public Comments: Public comments may be submitted until 5 p.m. on August 7, 2009.

Agency Contact: Keith Hayashi, Project Manager, Department of Medical Assistance Services, 600 East Broad Street, Suite 1300, Richmond, VA 23219, telephone (804) 225-2773, or email keith.hayashi@dmas.virginia.gov.

Basis: Section 32.1-325 of the Code of Virginia grants to the Board of Medical Assistance Services the authority to administer and amend the Plan for Medical Assistance. Section 32.1-324 of the Code of Virginia authorizes the Director of DMAS to administer and amend the Plan for Medical Assistance according to the board's requirements. The Medicaid authority as established by § 1902 (a) of the Social Security Act (42 USC § 1396a) provides governing authority for payments for services.

Item 306 CC of Chapter 879 of the 2008 Acts of Assembly directed DMAS to promulgate emergency regulations to provide for this new specialty drug reimbursement methodology. DMAS complied with that mandate and is currently reimbursing for the drug products affected by this action under that new reimbursement methodology.

Purpose: The department is promulgating this regulation to create a specialty drug reimbursement methodology based upon the Wholesale Acquisition Cost (WAC) of designated specialty drugs. Specialty drug products are products used to treat chronic, high-cost or rare diseases, including drugs for the treatment of Hepatitis C and Multiple Sclerosis, as well as drugs such as growth hormone agents and interferon. These drugs tend to be much higher in cost than standard pharmaceutical products and also tend to have significantly higher per patient costs. This action implements a new methodology to help contain the higher costs associated with these drugs. This action is not expected to affect the health, safety, or welfare of citizens of the Commonwealth as it is a reimbursement methodology change. DMAS paid for these drugs prior to the current emergency regulations but with a methodology that was not as well controlled and lacked the care management component.

Substance: Currently, DMAS' regulations contain no specific provisions for the reimbursement of specialty drugs. These drugs are currently paid for, along with all other covered pharmaceuticals, under the existing reimbursement methodology set out in 12VAC30-80-40. The payment algorithm pays for drugs at the lowest of either: (i) the federal Upper Drug Limit, (ii) the higher of either the lowest Wholesale Acquisition Cost (WAC) plus 10%, or the second lowest WAC plus 6.0%, (iii) the provider’s usual and customary charge to the public, or (iv) the Estimated Acquisition Cost. Generally, these drugs are being reimbursed at the rate of the Wholesale Acquisition Cost plus 4.75%. Due to advances in pharmaceutical technology which typically produce ever more expensive and complex pharmaceutical products, DMAS has determined that it would be appropriate to separate out this particular group of drugs for a unique payment and care management methodology.

Specialty (or "biotechnology") drugs are a category of drugs resulting from advances in drug development research, technology, and design. These drugs are used to treat specific chronic or genetic conditions. Specialty drugs include biological drugs, blood-derived products, complex molecules, and select oral, injectable and infused medications. They also typically include tailored patient education for safe and cost-effective use, patient-specific dosing, close patient monitoring, and can require special handling (such as refrigeration). Examples of some conditions that specialty drugs address include Acromegaly, Cancer, Chronic Granulomatous Disease, Cystic Fibrosis, HIV/AIDS, Multiple Sclerosis, Psoriasis, Rheumatoid Arthritis, Hepatitis C, and Respiratory Syncytial Virus (RSV).

Specialty drugs have a direct impact on any health benefit program’s prescription drug expenditures. A 2004 DMAS analysis revealed that nationwide, total population spending on specialty medications grew 26.6% in 2003 with surges in treatments for Rheumatoid Arthritis and Cancer. According to the 2004 analysis, annual per patient costs of specialty drug therapies can range from $6,000 to $350,000 annually. Total public and private sector spending reached $54 billion by the end of 2007 and is expected to reach $100 billion by 2010.

In Virginia, it is estimated that within the fee-for-service component of the Medicaid program, about $18 million annually is expended on specialty drugs related to only five chronic or genetic conditions. This point-of-sale data represented 9,000 claims and affected only 2,700 individual recipients.

Recipients who receive care through managed care organizations (MCOs) currently get their prescriptions through the MCO’s network of providers. MCOs, via the capitation payments received from Medicaid, provide all required prescription drugs and assume the risk that one of their members will require such specialty prescriptions. No additional payments are made to MCOs in such instances.

A 2005 article from a Cigna Pharmacy Management newsletter indicates that the cost of specialty drugs is increasing up to 30% annually, and utilization of these medications is increasing at a rate near 20%. Furthermore, at any given time approximately 800 new specialty drugs are under development; these new specialty drugs drive significant increases in medical expenditures. The rapid expansion of biotechnology drugs makes it the fastest growing segment for drug costs in America.

In an effort to control the growing costs of specialty drugs and improve the health outcomes of these affected recipients, DMAS has proposed the development of a specialty drug program. Appropriation Act language was included in the 2006-2008 budget language during the 2006 General Assembly to support the funding of a specialty drug program. In implementing a specialty drug program, DMAS has focused on (i) implementing an appropriate care management model for those patients who require specialty drug therapy and (ii) establishing a discounted pricing model. In achieving these objectives, DMAS is working to limit disruption in the specialty drug market, maintain patient access to specialty drugs, and minimize administrative requirements.

This action implements a new methodology for the reimbursement of designated specialty drugs. The new methodology, described in the new subdivision 5 of 12VAC30-80-40, is a formula based upon the Wholesale Acquisition Cost (WAC) of these specialty drugs. The methodology computes a price above a given percentage of the WAC for each specified drug. The current percentage value is 4.75%. In addition to the formula, the new subsection also references the location of the list of designated drugs subject to the new methodology on the DMAS website, and states that the new pricing methodology is reviewed and subject to the same dispute resolution and appeal rights as the standard Maximum Allowable Cost pricing methodology. Lowering the percentage of Average Wholesale Price (AWP) that DMAS pays for the specified specialty drugs will help limit some of the rising costs associated with specialty drugs.

Presently, both physicians and pharmacies are permitted to obtain these specialty drugs from manufacturers and bill their costs to the Medicaid program for Medicaid recipients. As a result of federal statutory requirements in the Deficit Reduction Act of 2005, DMAS is now securing rebates from the pharmaceutical manufacturers for these drugs. This open access by all such providers will not be affected by this regulatory action.

Specialty drugs are a dynamic group of emerging medications, and different strategies will have to be employed to better manage these expenditures, and coordinate patient care. The department will work with its Pharmacy Liaison Committee and other interested parties to develop appropriate care coordination models as part of the later phase of the specialty drug program. Through this process, DMAS and its partners will further identify additional disease conditions that lend themselves to improved outcomes when under specialty drug management and develop a program design that will most effectively manage these conditions.

DMAS may contract with a vendor to create a care management program for recipients with selected conditions requiring specialty drugs. Care management is expected to provide monitoring of patients’ utilization of services and relevant clinical data specific to each condition. The patient would be contacted directly and care coordination would be provided, when necessary. This program would be similar to the current disease management model being used by DMAS to manage selected health conditions (e.g., asthma, chronic obstructive pulmonary disease, congestive heart failure, coronary artery disease, and diabetes). Some recipients of specialty drugs already receive care management services from their specialty pharmacy providers, such as confidential counseling, compliance monitoring, educational information, and health care coordination. DMAS will continue to research opportunities to improve care management for recipients with hemophilia and implement services directly and/or through coordination with specialty pharmacies.

Issues: Specialty pharmaceuticals represent the fastest growing segment of the prescription drug market in the U.S. Industry projections estimate the growth rate at 20% per year. Typically, these products are used to treat complex chronic and/or rare diseases, are high cost, and can be administered by injection, infusion inhalation, or orally. DMAS is promulgating this regulation in an effort to help contain the costs of these complex and expensive drugs and to improve care management for these affected recipients. Pharmacy reimbursement is one of the highest dollar expenditures in the Medicaid budget.

The primary advantage to the Commonwealth of this regulatory action is expected to be improved health outcomes for these affected recipients as well as some cost savings for the agency and Commonwealth. The disadvantage to the pharmaceutical industry will be reduced profits due to reduced payments for these drugs.

The Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. Pursuant to Chapter 879 of the 2008 Acts of Assembly, Item 306 CC, the proposed regulations establish a new reimbursement methodology for specialty drugs. The proposed regulations have already been in effect under emergency regulations since October 2008.

Result of Analysis. The benefits likely exceed the costs for all proposed changes.

Estimated Economic Impact. Pursuant to Chapter 879 of the 2008 Acts of Assembly, Item 306 CC, the proposed regulations establish a new reimbursement methodology for specialty drugs. Specialty drugs are drugs that are bio-engineered in laboratories from living cells rather than chemicals to treat diseases such as cancer, multiple sclerosis, and hepatitis-C. They may also include growth hormone agents. Unlike most other drugs, their production may not be replicated easily. The key element in their production is not the chemicals used but rather the process by which the living cells are bio-engineered. This bio-engineering process is non-public information often considered “a trade secret” which is not subject to expiration like a patent may be. These characteristics create a monopolistic market for specialty drugs. In the absence of competition, the market price is set by the seller (irrespective of the cost of production) that maximizes the revenues. For example, even though a specialty drug may cost only a few dollars to produce, its price may be in thousands of dollars.

According to a 2004 analysis by the Department of Medical Assistance Services (DMAS), annual per patient costs of specialty drug therapies can range from $6,000 to $350,000 annually. Also, it is estimated within the fee-for-service component of the Virginia Medicaid program, about $18 million annually is spent on specialty drugs related to only five chronic or genetic conditions. Also, DMAS analysis revealed that nationwide total population spending on specialty medications grew 26.6% in 2003. Given the high per patient costs and the fast growth in utilization and innovation, Medicaid specialty drug expenditure growth appears to be vulnerable.

Prior to the emergency regulations, specialty drugs were reimbursed just like any other drugs. The reimbursement was the lowest of i) the federal Upper Drug Limit, ii) the higher of either the lowest Wholesale Acquisition Cost (WAC) plus 10%, or the second lowest WAC plus 6%, iii) the provider’s usual and customary charge to the public, or iv) the estimated Acquisition Cost. The proposed regulations establish that specialty drugs shall be reimbursed by the lowest of i through iv and also WAC price plus WAC percentage which is identified each year for all generic code numbers. This year WAC percentage in effect is 4.75%. The proposed changes give DMAS the ability to apply a different reimbursement price specific to specialty drugs and also the ability to designate specialty drugs by publishing them on its website.

Economic theory supports the use of concentrated market buying power (such as the one Medicaid has) to negotiate and reduce the price set by a monopoly (such as the producers of specialty drugs). Note that neither the monopolistic seller nor the monopsonistic buyer even consider the cost of production while trying to determine the prevailing market price. Instead, the market price is determined by the relative bargaining powers of the unique seller and large buyer. In that sense, the proposed regulations are well justified in the sense that it gives DMAS an additional bargaining power when purchasing these drugs for the Medicaid recipients.

Since the proposed regulations are already implemented under emergency regulations, no savings are expected immediately upon promulgation of the proposed regulations. However, DMAS estimates that roughly about $250,000 annually may be saved in total funds upon promulgation of the proposed new pricing methodology for specialty drugs. Due to Medicaid funding mechanism, one half of the savings are expected to accrue to the Commonwealth while the rest are expected to accrue to the federal government. On the other hand, DMAS estimates that approximately $63,750 initially and approximately $75,000 on ongoing basis is needed to be paid to private contractors to implement and maintain the proposed new specialty drug reimbursement methodology.

Businesses and Entities Affected. The proposed regulations affect the prices of specialty drugs. Roughly about 20 manufacturers are estimated to be supplying the specialty drugs whose prices may be affected by the proposed changes.

Localities Particularly Affected. The proposed regulations apply throughout the Commonwealth.

Projected Impact on Employment. The effect on the employment in Virginia may be positive as the demand for contractor services to administer the new methodology is likely to increase.

Effects on the Use and Value of Private Property. The direct effect on the use and value of private property in Virginia is not known with any certainty but not anticipated to be significant.

Small Businesses: Costs and Other Effects. The proposed regulations are not likely to directly affect small businesses as the directly affected entities are drug manufacturers that cannot be considered small businesses.

Small Businesses: Alternative Method that Minimizes Adverse Impact. The proposed regulations are not anticipated to directly affect any entity that may be considered a small business.

Real Estate Development Costs. No real estate development costs are expected.

Legal Mandate. The Department of Planning and Budget (DPB) has analyzed the economic impact of this proposed regulation in accordance with § 2.2-4007.04 of the Administrative Process Act and Executive Order Number 36 (06). Section 2.2-4007.04 requires that such economic impact analyses include, but need not be limited to, the projected number of businesses or other entities to whom the regulation would apply, the identity of any localities and types of businesses or other entities particularly affected, the projected number of persons and employment positions to be affected, the projected costs to affected businesses or entities to implement or comply with the regulation, and the impact on the use and value of private property. Further, if the proposed regulation has adverse effect on small businesses, § 2.2-4007.04 requires that such economic impact analyses include (i) an identification and estimate of the number of small businesses subject to the regulation; (ii) the projected reporting, recordkeeping, and other administrative costs required for small businesses to comply with the regulation, including the type of professional skills necessary for preparing required reports and other documents; (iii) a statement of the probable effect of the regulation on affected small businesses; and (iv) a description of any less intrusive or less costly alternative methods of achieving the purpose of the regulation. The analysis presented above represents DPB’s best estimate of these economic impacts.

Agency's Response to the Department of Planning and Budget's Economic Impact Analysis: The agency concurs with the economic impact analysis prepared by the Department of Planning and Budget regarding the regulations concerning MAC Reimbursement for Specialty Drugs (12VAC30-80-40).

Summary:

This proposed action creates a method of reimbursement for specialty drugs, which are covered by the Virginia Medicaid program, based on the Wholesale Acquisition Cost of the drug. Specialty drug products are those which are used to treat chronic, high-cost or rare diseases, including drugs for the treatment of Hepatitis C and Multiple Sclerosis, as well as drugs such as growth hormone agents and interferon. These drugs tend to be much higher in cost than standard pharmaceutical products, can sometimes require special handling techniques and typically also require unique patient education and monitoring. This action implements a new methodology to help contain the higher costs associated with these drugs.

12VAC30-80-40. Fee-for-service providers: pharmacy.

Payment for pharmacy services shall be the lowest of items 1 through 5 (except that items 1 and 2 will not apply when prescriptions are certified as brand necessary by the prescribing physician in accordance with the procedures set forth in 42 CFR 447.331 (c) 42 CFR 447.512(c) if the brand cost is greater than the Centers for Medicare and Medicaid Services (CMS) upper limit of VMAC cost) subject to the conditions, where applicable, set forth in subdivisions 6 and 7 of this section:

1. The upper limit established by the CMS for multiple source drugs pursuant to 42 CFR 447.331 42 CFR 447.512 and 447.332 447.514, as determined by the CMS Upper Limit List plus a dispensing fee. If the agency provides payment for any drugs on the HCFA Upper Limit List, the payment shall be subject to the aggregate upper limit payment test.

2. The methodology used to reimburse for generic drug products shall be the higher of either (i) the lowest Wholesale Acquisition Cost (WAC) plus 10% or (ii) the second lowest WAC plus 6.0%. This methodology shall reimburse for products' costs based on a Maximum Allowable Cost (VMAC) list to be established by the single state agency.

a. In developing the maximum allowable reimbursement rate for generic pharmaceuticals, the department or its designated contractor shall:

(1) Identify three different suppliers, including manufacturers that are able to supply pharmaceutical products in sufficient quantities. The drugs considered must be listed as therapeutically and pharmaceutically equivalent in the Food and Drug Administration's most recent version of the Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book). Pharmaceutical products that are not available from three different suppliers, including manufacturers, shall not be subject to the VMAC list.

(2) Identify that the use of a VMAC rate is lower than the Federal Upper Limit (FUL) for the drug. The FUL is a known, widely published price provided by CMS; and

(3) Distribute the list of state VMAC rates to pharmacy providers in a timely manner prior to the implementation of VMAC rates and subsequent modifications. DMAS shall publish on its website, each month, the information used to set the Commonwealth's prospective VMAC rates, including, but not necessarily limited to:

(a) The identity of applicable reference products used to set the VMAC rates;

(b) The Generic Code Number (GCN) or National Drug Code (NDC), as may be appropriate, of reference products;

(c) The difference by which the VMAC rate exceeds the appropriate WAC price; and

(d) The identity and date of the published compendia used to determine reference products and set the VMAC rate. The difference by which the VMAC rate exceeds the appropriate WAC price shall be at least or equal to 10% above the lowest-published wholesale acquisition cost for products widely available for purchase in the Commonwealth and shall be included in national pricing compendia.

b. Development of a VMAC rate that does not have a FUL rate shall not result in the use of higher-cost innovator brand name or single source drugs in the Medicaid program.

c. DMAS or its designated contractor shall:

(1) Implement and maintain a procedure to add or eliminate products from the list, or modify VMAC rates, consistent with changes in the fluctuating marketplace. DMAS or its designated contractor will regularly review manufacturers' pricing and monitor drug availability in the marketplace to determine the inclusion or exclusion of drugs on the VMAC list; and

(2) Provide a pricing dispute resolution procedure to allow a dispensing provider to contest a listed VMAC rate. DMAS or its designated contractor shall confirm receipt of pricing disputes within 24 hours, via telephone or facsimile, with the appropriate documentation of relevant information, e.g., invoices. Disputes shall be resolved within three business days of confirmation. The pricing dispute resolution process will include DMAS' or the contractor's verification of accurate pricing to ensure consistency with marketplace pricing and drug availability. Providers will be reimbursed, as appropriate, based on findings. Providers shall be required to use this dispute resolution process prior to exercising any applicable appeal rights.

3. The provider's usual and customary charge to the public, as identified by the claim charge.

4. The Estimated Acquisition Cost (EAC), which shall be based on the published Average Wholesale Price (AWP) minus a percentage discount established by the General Assembly (as set forth in subdivision 8 9 of this section) or, in the absence thereof, by the following methodology set out in subdivisions a through c below of this subdivision.

a. Percentage discount shall be determined by a statewide survey of providers' acquisition cost.

b. The survey shall reflect statistical analysis of actual provider purchase invoices.

c. The agency will conduct surveys at intervals deemed necessary by DMAS.

5. MAC methodology for specialty drugs. Payment for drug products designated by DMAS as specialty drugs shall be the lesser of subdivisions 1 through 4 of this section or the following method, whichever is least:

a. The methodology used to reimburse for designated specialty drug products shall be the WAC price plus the WAC percentage. The WAC percentage is a constant percentage identified each year for all GCNs.

b. Designated specialty drug products are certain products used to treat chronic, high-cost or rare diseases; the drugs subject to this pricing methodology and their current reimbursement rates are listed on the DMAS website at the following internet address: http://www.dmas.virginia.gov/downloads/pdfs/pharm-special_mac_list.pdf.

c. The MAC reimbursement methodology for specialty drugs shall be subject to the pricing review and dispute resolution procedures described in subdivisions 2 c (1) and 2 c (2) of this section.

5. 6. Payment for pharmacy services will be as described above; however, payment for legend drugs will include the allowed cost of the drug plus only one dispensing fee per month for each specific drug. Exceptions to the monthly dispensing fees shall be allowed for drugs determined by the department to have unique dispensing requirements. The dispensing fee for brand name and generic drugs is $3.75.

6. 7. The Program pays additional reimbursement for unit dose dispensing systems of dispensing drugs. DMAS defines its unit dose dispensing system coverage consistent with that of the Board of Pharmacy of the Department of Health Professions (18VAC110-20-420). This service is paid only for patients residing in nursing facilities. Reimbursements are based on the allowed payments described above plus the unit dose per capita fee to be calculated by DMAS' fiscal agent based on monthly per nursing home resident service per pharmacy provider. Only one service fee per month may be paid to the pharmacy for each patient receiving unit dose dispensing services. Multisource drugs will be reimbursed at the maximum allowed drug cost for specific multiple source drugs as identified by the state agency or CMS' upper limits as applicable. All other drugs will be reimbursed at drug costs not to exceed the estimated acquisition cost determined by the state agency. The original per capita fee shall be determined by a DMAS analysis of costs related to such dispensing, and shall be reevaluated at periodic intervals for appropriate adjustment. The unit dose dispensing fee is $5.00 per recipient per month per pharmacy provider.

7. 8. Determination of EAC was the result of a report by the Office of the Inspector General that focused on appropriate Medicaid marketplace pricing of pharmaceuticals based on the documented costs to the pharmacy. An EAC of AWP minus 10.25% shall become effective July 1, 2002.

The dispensing fee for brand name and generic drugs of $3.75 shall remain in effect, creating a payment methodology based on the previous algorithm (least of subdivisions 1 through 5 of this subsection above section) plus a dispensing fee where applicable.

8. 9. Home infusion therapy.

a. The following therapy categories shall have a pharmacy service day rate payment allowable: hydration therapy, chemotherapy, pain management therapy, drug therapy, total parenteral nutrition (TPN). The service day rate payment for the pharmacy component shall apply to the basic components and services intrinsic to the therapy category. Submission of claims for the per diem rate shall be accomplished by use of the CMS 1500 claim form.

b. The cost of the active ingredient or ingredients for chemotherapy, pain management and drug therapies shall be submitted as a separate claim through the pharmacy program, using standard pharmacy format. Payment for this component shall be consistent with the current reimbursement for pharmacy services. Multiple applications of the same therapy shall be reimbursed one service day rate for the pharmacy services. Multiple applications of different therapies shall be reimbursed at 100% of standard pharmacy reimbursement for each active ingredient.

9. 10. Supplemental rebate agreement. Based on the requirements in § 1927 of the Social Security Act, the Commonwealth of Virginia has the following policies for the supplemental drug rebate program for Medicaid recipients:

a. The model supplemental rebate agreement between the Commonwealth and pharmaceutical manufacturers for legend drugs provided to Medicaid recipients, submitted to CMS on February 5, 2004, and entitled Virginia Supplemental Drug Rebate Agreement Contract A and Amendment #2 to Contract A has been authorized by CMS.

b. The model supplemental rebate agreement between the Commonwealth and pharmaceutical manufacturers for drugs provided to Medicaid recipients, submitted to CMS on February 5, 2004, and entitled Virginia Supplemental Drug Rebate Agreement Contract B and Amendment #2 to Contract B has been authorized by CMS.

c. The model supplemental rebate agreement between the Commonwealth and pharmaceutical manufacturers for drugs provided to Medicaid recipients, submitted to CMS on February 5, 2004, and entitled Virginia Supplemental Drug Rebate Agreement Contract C, and Amendments #1 and #2 to Contract C has been authorized by CMS.

d. Supplemental drug rebates received by the state in excess of those required under the national drug rebate agreement will be shared with the federal government on the same percentage basis as applied under the national drug rebate agreement.

e. Prior authorization requirements found in § 1927(d)(5) of the Social Security Act have been met.

f. Nonpreferred drugs are those that were reviewed by the Pharmacy and Therapeutics Committee and not included on the preferred drug list. Nonpreferred drugs will be made available to Medicaid beneficiaries through prior authorization.

g. Payment of supplemental rebates may result in a product's inclusion on the PDL.