Government Pricing, Rebate Processing and Contract Management

Should you include government contracting and pricing in your commercialization plan?

You may have heard references to government contract management or government pricing. In fact, the scope is broader than either term suggests, and requires substantial effort to remain compliant with the terms of the various government programs. In the United States, about 50 percent of prescriptions filled are paid through an assortment of state and federal government programs. The other half are primarily covered through some type of commercial health plans with a very small percentage paid for by cash buyers.

This means that for most pharmaceutical companies, it is critically important to evaluate and consider including government contracting as part of a comprehensive commercialization plan.

The process for securing most government contracts can be straightforward. But some require a complex, lengthy application process and have long lead times to secure an effective date. All of these programs will contractually require a pharmaceutical manufacturer to participate in rebate or discount programs, or some type of negotiated pricing scheme. These agreements require complex price computations and strict time constraints, and have significant financial penalties for noncompliance. It is critical that you follow a disciplined approach managed against a formal SOP to stay fully compliant.

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Government programs and the implications of entering into contracts.

The type of patients most likely to require your product will drive your program participation. Most manufacturers regard a CMS Medicaid Agreement as the default starter. We cover a few others here.


Medicaid is the most demanding of the government programs in terms of required resources. Pharmaceutical companies must submit monthly and quarterly AMP calculations to CMS as well as to the several states requiring separate submissions. You use the AMP value to derive a URA, or Unit Rebate Amount, which represents the dollar value of rebates that must be paid for each unit of product dispensed to Medicaid beneficiaries.

Without carefully assessing and scrubbing sales data, then computing pricing values prescribed by your CMS Medicaid agreement, you will likely pay inappropriate overall rebates and be out of compliance.
Read More on Medicaid.


Section 340B of the Public Health Service Act calls for each manufacturer of covered outpatient drugs to enter into an agreement with the Secretary, Health and Human Services.  In general, if a manufacturer of covered outpatient drugs signs a Medicaid Drug Rebate Program (MDRP) Agreement, they are expected to enter into a Pharmaceutical Pricing Agreement with the Secretary and provide discounted prices to Covered Entities. This requirement is monitored by the Center for Medicaid/Medicare Services (CMS) where they can impose fines, penalties or even termination from the MDRP if violated.

Covered Entity Requirements – The term ‘‘Covered Entity’’ includes six categories of hospitals: disproportionate share hospitals (DSHs), children’s hospitals and cancer hospitals exempt from the Medicare prospective payment system, sole community hospitals, rural referral centers, and critical access hospitals. Hospitals in each of the categories must be (1) owned or operated by state or local government, (2) a public or private non-profit corporation which is formally granted governmental powers by state or local government, or (3) a private non-profit organization that has a contract with a state or local government to provide care to low-income individuals who do not qualify for Medicaid or Medicare.

Covered entities are expected to avoid duplicate discounts specific to Medicaid Fee for Service programs. Covered entities must review their Medicaid MCO contracts to ensure that their 340B billing practices comply with the contracts. Entities must also ask their state Medicaid agencies whether they have any requirements regarding billing 340B drugs to managed care. The Medicaid Exclusion File is used to help covered entities, states, and manufacturers protect against duplicate discounts. Should a covered entity knowingly violate this requirement, they can be fined and lose their 340B status.

Manufacturer Pricing Requirements – PHS and MDRP are linked in terms of the discounts manufacturers must offer to covered entities. PHS Prices are determined by taking the calculated quarters Average Manufacturing Price (AMP) less the Unit rebate amount (URA) for that product. This price must then be rounded to 6 decimal places, then rounded to 2 when published and submitted.

Since these are both calculated at the per unit level, it is important to then multiply by the package size to get the PHS prices. AMP and URA are direct components of the required calculations of the MDRP. 340B price is established two quarters beyond the quarter of AMP being calculated. For example, 2nd quarter AMP calculations are used to produce 4th quarter PHS prices. This is due to the fact that when the 2nd quarter AMP is calculated, it is already July (3rd quarter) and those prices are currently in effect.

A manufacturer may not charge more than the 340B ceiling price to covered entities regardless of whether the covered entity purchases pharmaceuticals through a wholesaler or directly from the manufacturer.

It is entirely possible for a drug’s URA to be greater or equal to its AMP, resulting in a “0” or negative ceiling price or ceiling price per unit of less than $0.01. Therefore, to convert these prices to practical prices, HRSA developed the Penny Price Policy, which advises manufacturers to charge entities one penny per unit in these situations. For example, if the unit of measure is a tablet and there are 100 tabs per bottle, the PHS price in this scenario would be $1.00 ($.01*100Tabs).

For newly launched products, given the lag in the calculation versus actual sales data, the PHS price may require an estimated value for the first quarter or two post launch. Manufacturers are required to make reasonable assumptions based upon current customers, targeted pricing and WAC price to estimate the ceiling price on a new launch.

Manufacturer Submission Requirements – Since 2019, HRSA released functionality for drug manufacturers to allow for the upload of quarterly PHS pricing to the OPAIS pricing system. This system cross checks the AMP and URA against the MDRP Drug Data Reporting (DDR) repository to confirm accurate PHS ceiling prices are established and reported.  Any discrepancy must be reviewed and explained on the OPAIS portal before the submission is considered complete.

In addition to submitting the PHS Ceiling Price to OPAIS, manufacturers are required to make these prices available to all covered entities. This happens through pricing notifications to all authorized wholesalers and distributors of 340B pharmaceuticals. This notification process is done in the same manner as any other government or non-government contract pricing submission.

VA/Federal Supply Schedule

Brand manufacturers contracting with government programs, such as Medicaid, are required to offer their products to the VA through a Federal Supply Schedule agreement. It is likely the most complex and time-consuming government contracting process pharmaceutical manufacturers will face, although less resource-intensive than Medicaid.

The VA consists of four major agencies, often referred to as the Big Four: Veterans Affairs, Department of Defense, Public Health Service and Coast Guard. Other eligible entities may be able to purchase from the Federal Supply Schedule and are referred to as OGAs (Other Government Agencies).

In addition to committing to offer products based on mandatory quarterly and annual pricing calculations, manufacturers are required to complete multiple solicitations, establish and maintain a SAM (System for Award Management) registration and perform other required annual reporting. While not required, manufacturers of generics may choose, provided their drugs are manufactured in TAA (Trade Agreement Act) compliant countries, to offer their products to the VA to expand their patient coverage.

New Drug Launch – Upon launch of a new drug, brand manufacturers are expected to offer their products to the VA through an interim agreement, followed by the immediate submission of a full solicitation package within 30 days of the interim agreement being submitted. The interim agreement is intended to serve as a temporary contract to allow for the coverage of a new prescription drug while the full solicitation is under way. The full agreement process can take more than a year from start to finish and requires a substantial amount of work effort to complete and negotiate the terms.

Pharmaceutical Prime Vendor – Typically, manufacturers choose to offer their product through the Pharmaceutical Prime Vendor (essentially the VA’s preferred wholesaler). In some cases, depending on the distribution arrangements that a vendor has in place, manufacturers may choose to supply the VA through only direct orders or through specialty distribution channels.

National Contract – Another contracting method with the VA is through a National Contract. Separate from the FSS Agreement, the National Contract can be thought of as a “preferred award” and allows for manufacturers to bid pricing for a chance to serve as one of the primary suppliers to the Pharmaceutical Prime Vendor for the drug that they bid.

Learn more by reading three things to know about the challenges of VA/FSS contracting.


TRICARE is a healthcare program which provides civilian health benefits to U.S. Armed Forces military personnel, military retirees and their dependents. In most cases, TRICARE allows for the coverage of drugs and healthcare services at non-VA entities. Think of this as the “retail” arm of coverage for the Veterans Affairs Administration.

Brand manufacturers who have an agreement with the VA are required to offer their product to TRICARE for coverage. The contracting process for establishing coverage with TRICARE is nowhere near as complex or time consuming as a VA/FSS Agreement. TRICARE requires manufacturers to execute several contracting documents and set up portal access to access TRICARE refund claims.

Once the TRICARE Agreement is in place, manufacturers are required to offer discounts equal to that which the VA receives for any claims processed. Manufacturers are required to login to the TRICARE Retail Refunds website and pay quarterly rebates, based on TRICARE utilization reported. Unlike VA sales, which are typically handled through the wholesaler (resulting in chargebacks to eligible entities), TRICARE refunds are paid directly through the TRICARE quarterly rebate process by manufacturers. The refund amount is calculated by taking the Annual NFAMP – Annual FCP (Federal Ceiling Price) multiplied by the units dispensed to determine the total refund amount owed.

Medicare Part D Coverage Gap Program

The Medicare Part D Discount Program (also known as “Medicare Donut Hole,” “Coverage Gap,” “Gap Discount” or “Discount Program”) makes manufacturer discounts available to eligible Medicare beneficiaries receiving applicable, covered Part D branded drugs, while in the “Coverage Gap.” Medicare Part D coverage is unique in that enrollees have a deductible period, an initial coverage period, a “gap” and a Catastrophic Coverage period.

These four stages of Medicare Part D are as follows:

  1. Annual Deductible – The patient pays either a full or discounted price for medication until the annual deductible is met ($445 in 2021). Once the deductible is met, the patient enters the next stage of initial coverage.
  2. Initial Coverage – The patient pays a copay for medications based on the drug formulary. The copay is based on the tier in which the specific medication falls. The patient remains in this stage until the patient and insurance provider have reached a total combined spend of $4,130 (limit for 2021). Once this dollar amount is met, the patient enters the “Coverage Gap” or “Medicare Donut Hole.”
  3. The Coverage Gap – After the initial coverage limit for the year is met, the Coverage Gap is reached. While in the gap, the patient will only pay 25% of the retail cost of the medication. The manufacturer is required to pay 70% of the medication cost, while the insurance provider pays the remaining 5%. The patient remains in the gap until the patient reaches an out-of-pocket maximum spend of $6,550. Once this is reached, the patient enters Catastrophic Coverage.
  4. Catastrophic Coverage – Once catastrophic coverage is reached; the insurance provider covers 95% of the medication cost for the remainder of the year while the patient covers the remaining 5%.

For branded drugs to be covered by Part D, manufacturers need to enter the Government Gap Discount Program and agree to pay rebates based on Medicare Part D Utilization and the cost incurred by the patient during the Coverage Gap. Beginning in 2011, only those applicable branded drugs that are covered under a signed manufacturer agreement with CMS can be covered under Part D.

Obtaining a Part D agreement requires a fair amount of advanced planning as the lead time is significant. The deadline to secure an agreement is January 31 for a contract in the year following. This means that if a manufacturer were to sign an agreement on January 15, 2021, they would have an agreement effective date of January 1, 2022. However, if the agreement were signed February 1, 2021 (or any other date after the January 31 deadline), the agreement would not be effective until January 1, 2023.

While the Medicare Part D Gap Discount only applies to innovator drugs covered under an NDA (New Drug Application), which includes both brand and authorized generic products, it may be prudent for a generic manufacturer to obtain an agreement to be prepared for any possible branded drug launch at any time in the future, as it would significantly cut down on or eliminate the contract lead time.

In the event a manufacturer needs Part D coverage quickly and does not have it, there is also the possibility to partner with a manufacturer that already has a Part D agreement in place. This is known as a “Piggyback Agreement.” Manufacturers without an effective Part D agreement can piggyback, or essentially have their labeler code added to another manufacturer’s agreement until the effective date of the piggybacking manufacturer’s agreement is met.

Typically, a fee is paid to the Part D agreement holder for the opportunity to piggyback on their agreement and to offset the additional liability that comes along with the additional labeler code and additional rebate dollars due.

Once a manufacturer has a Part D agreement in place, the 70% rebates due are reconciled and paid on a quarterly basis. A manufacturer can expect rebate liability to increase throughout the year with the majority paid in the third and fourth quarters as more patients enter the Coverage Gap.

Medicare Part B

Medicare Part B covers two types of services – preventive services and medically necessary services. In this context, medically necessary is defined as services or supplies that are needed to diagnose or treat a medical condition that meets accepted standards of medical practice.

While there are no government rebates paid by a drug manufacturer for Medicare Part B coverage, there are pricing computations a manufacturer may be required to complete and submit to CMS based on the type of drugs sold. This calculation and the value derived is known as Average Sales Price or ASP.

The types of drugs that may require ASP calculations include:

  • Physician-administered drugs (injected, infused, implanted, inhaled, instilled)
  • Dialysis drugs
  • Some cancer/oncology drugs (chemotherapy)

Average Sales Price (ASP) – Average Sales Price is used in determining the reimbursement rates for Medicare Part B covered drugs. ASP must be calculated every calendar quarter and submitted to CMS within 30 days of the close of the quarter. CMS collects ASP data for each specific drug from all manufacturers selling that drug. CMS then performs analysis and determines a blended reimbursement rate for each specific covered drug.

ASP calculations must follow certain guidelines as set forth by CMS. These guidelines closely mirror that of AMP and Best Price calculations in terms of eligible and ineligible sales and rebates based on Class of Trade. Once the ASP values are derived, the ASP and volume of sales for each NDC must be submitted to CMS via an online submission portal and certified by the manufacturer’s Chief Executive Officer (CEO); the manufacturer’s Chief Financial Officer (CFO); or an individual who has delegated authority to sign for, and who reports directly to, the manufacturer’s CEO or CFO.

ACA Branded Prescription Drug Fee

The Affordable Care Act brought many changes to the financing of healthcare, and Pharma was no exception. One of the changes implemented with the Affordable Care Act was the introduction of the Branded Prescription Drug Fee (BPD Fee). The BPD Fee imposes an annual fee for any covered entity that manufacturers or imports branded prescription drugs. Unlike any of the other government programs for which manufacturers incur fee or rebate liabilities, the ACA BPD Fee requires no contract and awards no additional access to certain groups of patients in the United States. For all intents and purposes, it is a tax imposed on brand manufacturers, for the sole purpose of generating federal tax revenue.

The fees begin when manufacturers sell more than $5M of drugs to specified government programs (Medicaid, Medicare, Veterans Affairs, Department of Defense and TRICARE). Much like personal federal income taxes, the fees paid by manufacturers scale up based on their total sales to the government. However, the actual computation to determine BPD Fee liability is quite different from traditional federal income taxes. Instead of the tax rate escalating by being multiplied by each tier’s sales revenue, the percentage of sales taken into account in the BPD Fee calculation increases.

For most manufacturers, the BPD Fee is certainly not going to be one of the largest expenditures on their annual financial statements, however, if manufacturers don’t accrue for the expense, it can be a shock when the bill arrives from the IRS. What is unique about this fee is the delay in billing. The fee is paid nearly two years after all of the sales took place.

For example, the fees paid in 2021 are based upon 2019 sales. Therefore, manufacturers must account for this in their own accrual processes to avoid a surprise later on. Every manufacturer that will owe a fee should receive a letter from the IRS in March which will contain preliminary calculations and allow for manufacturers to report any potential errors in the data that the IRS provided. The IRS final fee letter is mailed to manufacturers no later than August 31st and payment of the final fee is due by September 30. The fee is paid through the same federal government portal used by a company to submit routine payroll tax payments.

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