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Focus on Regulation

“Double Dip” Effectively Approved by Center for Medicare and Medicaid Services

*Associates Ryan Harrigan and Samantha Marshall also contributed to this post

Last week the Centers for Medicare and Medicaid Services (CMS) issued Release No. 104 to Manufacturers and Release No. 180, which invalidated earlier agency releases addressing the treatment under the Medicaid drug rebate program of Federal Supply Schedule (FSS) purchases by Indian Health Service (IHS) facilities.


In releases issued in 2002, CMS stated that “Staff with the Department of Veterans Affairs (DVA) have informed us that under the requirements of the FSS program, these drugs should not be billed to a third party payor, such as Medicaid” and that “IHS facilities should maintain a separate inventory of drugs purchased at open market prices dispensed to Medicaid patients.” See MDRP Manufacturer Release #53, and MDRP State Medicaid Directors Release #113.  CMS indicated in those 2002 releases that it understood that IHS facilities were “prohibited from billing their FSS-obtained drugs to the Medicaid program.” Id.  Based on this understanding, CMS noted that manufacturers would not be required to pay rebates on such FSS contract-based utilization.  Id.

In 2014, the U.S. Health & Human Services Department Office of Inspector General (which has oversight over both CMS and IHS) echoed CMS’s understanding that IHS facilities should not bill Medicaid for drugs acquired under the FSS, pointing out that FSS prices are already discounted.  See Inconsistencies in States’ Reporting of the Federal Share of Medicaid Drug Rebates at 2.

In last week’s releases, however, CMS informed manufacturers and States as follows:

“There is no statutory or regulatory provision that precludes drugs purchased through the FSS from being billed to and reimbursed by State Medicaid agencies when they are dispensed to Medicaid beneficiaries.  Additionally, there is no statutory or regulatory preclusion barring states from billing manufacturers for rebates for these drugs when they are dispensed to Medicaid patients.”

CMS, Medicaid Drug Rebate Program Notice, Manufacturer Release No. 104, (May 2, 2017); CMS, Medicaid Drug Rebate Program Notice, State Release No. 180 (May 2, 2017).

These statements are consistent with 2016 Medicaid Program guidance provided to the States in connection with the Final Rule on Covered Outpatient Drugs, which provided: “Some covered entities (that is, tribal facilities), may be able to purchase CODs under the FSS and seek Medicaid payment.”  81 Fed. Reg. 5169, 5319 (Feb. 1, 2016).


These new CMS releases serve to highlight the potential that Medicaid coverage of drugs and biologics purchased under FSS contracts can create a so-called “double dip” or duplicate discount — where a manufacturer has charged a deeply discounted statutory Federal Ceiling Price (at a minimum, 24% off of wholesaler pricing per the Veterans Health Care Act of 1992) to the IHS, and then is required to pay a Medicaid rebate to the States on that same utilization.  As State Medicaid programs increasingly reimburse providers based on drugs’ “actual acquisition costs,” this duplicate discount scenario generally accrues to the benefit of the States and not the IHS facilities (as States would reimburse for IHS utilization at discounted FSS pricing, and then would receive rebates from manufacturers on those same transactions). See, e.g., 42 C.F.R. § 447.512.

Misuse of Schedule Purchases?

These new releases may not sit well with the U.S. Department of Veterans Affairs (VA), the agency that administers the FSS contracts for drugs and other medical items, or the U.S. General Services Administration (GSA), the agency that maintains overarching authority over the FSS program (and that delegated the authority to VA to administer its FSS contracts for medical items).  The VA has taken the position in the past that product purchased off of FSS contracts should not be billed to third party payor reimbursement programs, such as Medicaid.   See  MDRP State Medicaid Directors Release #113.   And, while we are not aware of any statutory or regulatory language specifically prohibiting a Medicaid rebate duplicate discount with respect to FSS purchases (as exists as to 340B program purchases, for example), there is GSA FSS program guidance that strictly limits the use of the schedules, and includes a reference to a prohibition on “resale” of items purchased under FSS contracts.  See GSA Order 4800.2G(7)(d)(5).  Additionally, the FSS solicitation for drugs contains a clause that prohibits unauthorized transfer of FSS contract items “for the purpose of generating a profit on the difference between FSS prices and commercial prices (such as “AWP”).”  See FSS Solicitation Document (M5-Q50A-03-R7) at 6, AS3023 Diversion of Pharmaceutical Products (Sept 2010).

Now what?

Whether the VA or the GSA will respond publicly to the new release remains to be seen.  Meanwhile, the impact of this new guidance will depend on each products’ utilization at the IHS combined with the level of discounting incorporated into its FSS pricing and the applicable Medicaid rebates, which are, in general, at least 23.1% of AMP.

For more information about the recent CMS releases or potential drug pricing and contracting issues, please contact one of the Hogan Lovells attorneys listed in this post or any other Hogan Lovells attorney with whom you work.