What is the 340B program?

The 340B program is a government initiative that helps certain healthcare providers, like hospitals and clinics, buy prescription drugs at discounted prices. This program is aimed at increasing access to affordable medications for patients, especially those who are underserved or low-income.

“Covered Entities” within the program typically include but are not entirely limited to: disproportionate share hospitals (DSHs), cancer or children’s hospitals exempt from the Medicare prospective payment system, sole community hospitals, rural referral centers, and critical access hospitals.

This 340B discount for covered entities is directly incorporated into a pharma manufacturer's selling price, as opposed to being issued as a traditional rebate. Most often, covered entities purchase the drugs from a wholesaler at the discounted price and, in turn, the wholesaler issues a chargeback to the manufacturer to recoup the discount given.

What are the requirements for pharma manufacturers to participate in 340B?

For pharmaceutical manufacturers, this means entering a Pharmaceutical Pricing Agreement (PPA) with the U.S. Department of Health and Human Services (HHS) Secretary, agreeing to discounts on covered outpatient drugs to covered entities within the program, ensuring drugs are covered by Medicaid and Medicare Part B, and submitting Public Health Service (PHS) quarterly calculations to the Health Resources and Services Administration (HRSA).

Additionally, all pharmaceutical manufacturers participating in the Medicaid Drug Rebate Program (MDRP) are required to obtain a Pharmaceutical Pricing Agreement as a prerequisite.

Source:

Health Resources & Services Administration. 340B Drug Pricing Program

340B Health. 340B DRUG PRICING PROGRAM OVERVIEW

What is a 340B ceiling price?

The 340B ceiling price is the highest price that pharmaceutical manufacturers are permitted to charge to covered entities participating in the Public Health Service's 340B drug pricing program. The 340B ceiling price is equal to the quarterly Average Manufacturer Price (AMP) two quarters prior (i.e. 3Q 2023 AMP derives the 1Q 2024 340B ceiling price) minus the total Medicaid Unit Rebate Amount (URA). The value is rounded to six decimal places. Since the AMP and URA are calculated at the unit level, the per unit PHS price is lastly multiplied by the units per package – which is what the wholesalers would be selling to the covered entities at.

How do pharma manufacturers calculate a 340B ceiling price for new drugs?

Pharma manufacturers are obligated to estimate the 340B ceiling price for a new covered outpatient drug when it first becomes available for sale. This estimate is based on the wholesale acquisition cost (WAC) minus the appropriate rebate percentage until the drug's actual AMP is determined, which should happen no later than the 4th quarter after the drug's initial sale. Manufacturers must then calculate the actual 340B ceiling price and, if an overcharge is identified, refund or credit the covered entity the difference within 120 days of determining the overcharge.

Source:

Code of Federal Regulations. Subpart B—340B Ceiling Price

Knowledge Ecology International. Glossary of pharmacy and drug price terms

What is a 3PL?

A Third-Party Logistics company (3PL) is an organization that manages warehousing and shipping operations for pharmaceutical manufacturers or wholesale distributors. 3PLs are commonly leveraged by drug manufacturers to handle the distribution of their finished drugs. 3PLs typically offer order to cash services in addition to distribution services. Utilizing a 3PL allows manufacturers to operate virtually, resulting in lower investment into brick-and-mortar facilities and often expediting the time it takes to get products into the market. Additionally, as any company grows and needs more inventory space, a pharmaceutical manufacturer does not need to spend additional funds to expand the shipping operation. Another benefit of a 3PL is leveraging buying power to lower overall cost of shipping. Given the volume of shipping a typical 3PL handles, they can negotiate lower shipping terms more successfully than single pharma companies can on their own.

Source:

Wolters Kluwer.CT Expert Insights: Licensing landscape of third-party logistics providers handling pharmaceuticals

What are 5i drugs?

5i drugs pertain to specialty and/or physician-administered drugs that are administered in one of the following non-oral ways:

1. Injection
2. Instillation
3. Infusion
4. Implantation
5. Inhalation

When performing Government Pricing calculations, pharmaceutical manufacturers may need to handle 5i drugs differently when calculating the Average Manufacturer Price (AMP). Depending upon the proportion of sales that go through retail community pharmacies, they may be required to include certain payments, rebates, and discounts related to 5i drugs from their AMP calculations that would typically be excluded for non-5i drugs. These drugs are often not distributed through traditional retail community pharmacies, which can lead to limited data available for performing AMP calculations.

Source:

Centers for Medicare & Medicaid Services.CMS Publishes Final Rule Regarding Medicaid Drug Rebate Program

What is the Actual Acquisition Cost (AAC) in pharma?

The AAC is the final amount paid by a pharmacy for a drug.

A drug's ACC includes discounts, rebates, chargebacks, and various price adjustments, but excludes any associated dispensing fees.

AAC is used as a benchmark for drug reimbursement rates, most often associated with the Medicaid program.

Source:

Knowledge Ecology International.Glossary of pharmacy and drug price terms

What is an Admin Fee in pharma?

Admin fees refer to charges and payments made by pharmaceutical manufacturers to Pharmacy Benefit Managers (PBMs), wholesalers, GPOs, or other entities. 

Admin fees imposed on manufacturers can vary greatly depending on the entity that is charging the fee as well as what the fee is defined as representing. The fees are ultimately meant to cover various administrative costs that PBMs, wholesalers, and GPOs incur and are typically charged as a percentage of sales. There is much debate around what these fees actually represent and furthermore, how they should be treated with regard to Government Pricing calculations.  Admin fees will ultimately fall into one of two categories when it comes to treatment for Government Pricing calculations.

They’ll either be treated as a Bonafide Service Fee or a Non-Bonafide Rebate. The former would be excluded from GP calculations and would not have an impact on any of the calculated values. The latter would be considered a discount and would be included in GP calculations, which would impact the calculated values.

To be classified as a Bonafide Service Fee, the specific fee must satisfy all criteria in each part of the “Four Part Test”. The four criteria are as follows:

1. The fee paid must be for a bona fide, an itemized service that is performed on behalf of the manufacturer.
2. The manufacturer would otherwise perform or contract for the service in the absence of the service arrangement.
3. The fee must represent Fair Market Value for the services rendered.
4. The fee must not be passed on (in whole or in part) to a client or customer of any entity.

  If the fee does not satisfy any one or more of the criteria above, it may be considered a Non-Bonafide Rebate and included as a discount.

Source:

Law Insider, “Manufacturer Administrative Fees definition

How does the Affordable Care Act (ACA) impact pharma manufacturers?

The Affordable Care Act, also colloquially referred to as Obamacare, is a U.S. federal law passed on March 23, 2010 aimed at providing additional healthcare coverage to Americans. The Affordable Care Act (ACA) impacted pharma manufacturers in multiple ways.

One of the two major provisions introduced a new fee requirement for pharma manufacturers that sell large dollar amounts of branded prescription drugs to the government. The fee, often referred to as the Branded Prescription Drug Fee or Brand Tax, is quite different from other government fees that pharma manufacturers might be used to paying, as it is structured similarly to paying a tax and is administered by the IRS. Drug manufacturers who receive a fee calculation should receive a preliminary notice in the mail in early March if there is a fee to be paid. The final fee is owed by the end of September of that year. It’s important to note that this fee notice is delayed by a substantial period. For example, a fee for 2023 is based off the sales from 2021 (two calendar years ago).For additional details regarding the Branded Prescription Drug Fee calculation and details, see our blog, Branded Prescription Drug Fee Payment Deadline Approaching.

The second major provision created the Coverage Gap Discount Program. This resulted in manufacturers owing rebates on Medicare Part D coverage when patients hit the “donut hole” or coverage gap. This change resulted in manufacturers taking on significant financial responsibility for subsidizing patient costs when the Medicaid Part D program stopped paying during the gap. This program still exists today but is set to be substantially redesigned in 2025 as a result of the Inflation Reduction Act. More information on the redesigned program can be read on our blog, “Inflation Reduction Act Likely to Have a Negative Impact on Drug Manufacturers.”

Other provisions in the ACA resulted in increased minimum Medicaid rates, from 11% to 13% for generic drugs and 15.1% to 23.1% for branded drugs, extended Medicaid coverage to patients receiving drugs from MCOs, and the expansion of covered entity eligibility for the 340B program.

Source:

Prescription Analytics. Branded Prescription Drug Fee – Payment Deadline Approaching

Prescription Analytics. Inflation Reduction Act Likely to Have a Negative Financial Impact On Many Drug Manufacturers

What is an Alternate Rebate Formula in pharma?

The Alternate Rebate Formula is used to calculate the total Medicaid Unit Rebate Amount (URA) for line extension drugs (based on a previously approved molecule), which have different compliance requirements. The alternate rebate is only applicable to Line Extension drugs and Innovator/Single Source Drugs in the Medicaid Drug Rebate Program (MDRP). In essence, if a manufacturer receives an approval for a certain drug strength, say a 2.0MG and later receives an approval for a 4.0MG on the same drug, the 4.0MG would be considered a line extension, while the 2.0MG would be considered the original drug. The 4.0 is then subject to the alternate rebate formula. The alternate rebate formula is designed to inflict inflation penalties to line extensions when they exist on the original drug(s). Otherwise, it’s possible that on a brand product, a manufacturer could introduce a second strength of a product, aligned with commonly prescribed dosage(s), and launch that drug at a much higher price to avoid substantial inflation penalties that would have otherwise been incurred on the original drug. 

How do I calculate an Alternate Rebate Formula for a line extension drug?

To determine an Alternate URA, add the Base URA to the result of multiplying the quarterly Average Manufacturer Price (AMP) of the line extension drug by the highest additional rebate amount, calculated as a percentage of the AMP.

Source:

Medicaid.gov. Unit Rebate Amount (URA) Calculation for Line Extension Drugs with example

What is the Average Manufacturers Price or AMP in pharma?

The Average Manufacturer’s Price, or AMP as it’s more commonly referred within the pharmaceutical industry, is the average price at which manufactures sell prescription drugs to retail pharmacies, including wholesalers and other large purchasers. The AMP value is important as it’s used to derive Medicaid Unit Rebate Amounts (URAs) and PHS/340B pricing, which can significantly impact a manufacturer’s profitability within government programs. Evolving regulatory and compliance standards, such as the 2024 AMP Cap Removal provision, further magnify the critical need for manufacturers to take care in calculating and monitoring their AMP values before submitting to CMS on a monthly and quarterly basis to avoid revenue leakage through high calculated URA values. 

How do I calculate AMP in pharma?

The AMP calculation must follow CMS guidelines, including smoothing methodologies for sales transactions and discount data. It involves meticulously assigning Class of Trade (COT) to each line of data to determine what should be included (or excluded) from the AMP calculation. AMP is designed to calculate the weighted average retail price of a drug using actual transactional sales and discount data along with a guide of what is included vs excluded. 

Pharma manufacturers should establish a clear Standard Operating Procedure (SOP) for calculating their AMP. They should consistently apply these standards to monthly and quarterly calculations to comply with CMS guidelines and be ready for potential audits. Inaccurate, incomplete, or missed calculations can result in substantial penalties including fines and/or termination from government program participation. 

For additional details related to the AMP value and common reasons why they fluctuate, read our white paper, “Top 3 Reasons Your AMP Changed."

Source:

Prescription Analytics. Key Terms in Pharmaceutical Government Pricing,

Prescription Analytics. Top 3 Reasons Your AMP Changed

What is an ANDA drug?

An ANDA, short for Abbreviated New Drug Application, is a term in the pharma industry describing the FDA's approval process for certain drugs. ANDA drugs are generic versions of existing, commercially available drugs. In contrast, NDA drugs (New Drug Application) usually denote the brand-name versions of approved drugs. 

How are ANDA drugs treated differently than NDA drugs?

Drugs approved via the ANDA process, commonly referred to as ANDA drugs, have different compliance obligations and financial prerequisites in comparison to their branded, NDA counterparts. For example, ANDA and NDA drugs have different statutory rebate amounts (the base Unit Rebate amount is 13% for an ANDA vs. 23.1% for an NDA) within the Medicaid Drug Rebate Program, as well as different reporting requirements when it comes to various Government programs. NDA drugs must report their lowest price (Best Price) to any single entity during a quarter. This can often have a significant impact on the Unit Rebate Amount depending on the discount given. NDA drugs may be required to be offered to the Veterans Affairs Federal Supply Schedule, while ANDA drugs are not. Furthermore, NDA drugs require specific contracts such as the Coverage Gap Discount Program to be eligible for coverage on Medicare.

 

What is an API in pharma?

An Active Pharmaceutical Ingredient or API is the essential component of both over the counter (OTC) and prescription medications responsible for producing their intended therapeutic effects. APIs are produced by processing chemical compounds and are commonly categorized as either natural or synthetic. Natural APIs are chemicals or compounds found organically in nature and are used to make biologic drugs. For example, the API for Humira is Remicade and Rituxan, which are both natural. In contrast, the synthetic API for Aspirin is diphenhydramine.

APIs are subject to safety and quality standards that vary by country. 

The largest percentage of APIs for the U.S. market come from manufacturing facilities in the United States, European Union, India, and China.

Source:

Verywell Health. What is an Active Pharmaceutical Ingredient (API)?

Pharmaceutical Technology. Active pharmaceutical ingredients and intermediates for the pharmaceutical industry

BYJU’s Exam Prep. Active Pharmaceutical Ingredients [API]

U.S. Food and Drug Administration.Safeguarding Pharmaceutical Supply Chains in a Global Economy

What is ASP in pharma?

As it pertains to Government Pricing, the ASP (Average Sales Price) is a calculated value mandatory for all manufacturers to report regarding drugs covered by Medicare Part B, which focuses on physician-administered and injectable pharmaceutical products.

Medicare uses ASP values to establish reimbursement rates for healthcare providers administering medications covered under Medicare Part B.

The Medicare Part B ASP calculation is required to be reported to CMS on a quarterly basis. The calculation itself is similar to AMP as it ultimately calculates the average price that a manufacturer sells to its customers net of all eligible discounts. The main difference between ASP and AMP is that different customers, or classes of trade, are eligible and ineligible for each calculation and program, along with the difference in cadence of reporting requirements. 

ASP follows inclusion/exclusion criteria more closely aligned with the AMP Best Price calculation. One example of this is that sales and discounts to facilities such as Inpatient Hospitals would be included in the calculation for ASP, but not for AMP.

Source:

Prescription Analytics. Key Terms in Pharmaceutical Government Pricing

What is an authorized generic drug?

The term “authorized generic” (AG) drug typically refers to an FDA-approved brand-name medication that is sold without the brand name displayed on its label but is still covered under the same NDA as the branded drug.

An authorized generic can be marketed by either the brand-name drug manufacturer or another company with the brand company's consent. Occasionally, despite being identical to the brand-name product, a company may opt to offer the authorized generic at a lower price compared to the brand-name drug. Manufacturers nearing the end of their patents may consider this strategy to avoid the risk of market share loss with other drug companies entering the generic market.

Authorized generics often follow the same rules for government price reporting as their branded counterparts, including, but not limited to, higher base rebates, inflation penalties that follow a Baseline AMP established in the first full quarter after launch and mandatory rebates/coverage on a Coverage Gap Discount Program to be eligible for Medicare Part D.

While AGs are marketed in the same fashion as a typical generic or ANDA drug, when it comes to Government programs, they are still subject to the typical NDA drug rules and requirements. The main program where this can have an impact is Medicaid. Although AGs are marketed and often priced similar to other generics, they are still subject to the higher Medicaid Unit Rebate Amount as an NDA – 23.1% orAMP less Best Price, whichever is greater. AG’s drugs will be required to be listed on a Coverage Gap Discount Program agreement to be eligible for Medicare Part D. These drugs may also be required to be offered to the VA and placed on the Federal Supply Schedule. When compared to ANDA drugs there could be greater rebate liability and increased government requirements. 

Source:

U.S. Food and Drug Administration. List of Authorized Generic Drugs

Managed Healthcare Executive. What are Authorized Generics?

What is AWP in pharma?

AWP (Average Wholesale Price) was intended to represent the typical cost that a pharmacy pays when purchasing a drug from a pharmaceutical wholesaler. SWP (Suggested Wholesale Price) is often used interchangeably with AWP. 

AWP was historically used in the determination of pharmacy reimbursement rates. AWP is established based upon pricing compendia assigning a default value (typically 20% above WAC) or drug manufacturer’s establishing their own price. AWP has been the subject of litigation over the course of many years as the suits claimed manufacturers were inflating AWP for higher reimbursement rates. Today, many programs and PBMs have moved away from using AWP as the sole basis for reimbursement. 

As manufacturers and individual pricing compendia/databanks establish this pricing, this serves as merely a 'suggested price' in today’s landscape since most wholesalers offer medications to pharmacies at rates well below the SWP or according to contract pricing agreements directly negotiated between pharmacies and manufacturers.

Source:

Prescription Analytics.Key Terms in Pharmaceutical Government Pricing

What is a Baseline AMP?

A Baseline AMP is the AMP (Average Manufacturer’s Price) by which all future AMP values will be measured against for inflation penalty eligibility. If a manufacturer raises prices for a pharmaceutical drug above its Baseline AMP, and faster than the rate of inflation, that drug may be subject to fines called inflation penalties. Effective January 1, 2024, there will be no cap on the amount of inflation penalties manufacturers may be subject to, making monitoring of price changes critical for profitability.

When are Baseline AMPs established for Brand vs. Generic pharmaceutical drugs?

The baseline AMP for a branded (NDA) drug is the AMP recorded during the initial full quarter following its launch. For generic (ANDA) drugs, the Baseline AMPs are set following the fifth full-quarter AMP value after launch.

Once the baseline AMP is established, all subsequent quarterly AMP calculations are compared to the baseline AMP and the corresponding Consumer Price Index (CPI) value, with the baseline CPI representing the CPI for the month preceding the baseline quarter for branded drugs and the last month of the quarter for generic drugs. This comparison helps assess if the AMP is rising at a rate faster than the CPI.

Baseline AMP values will then live with the specific ANDA or NDA for the lifetime of that drug, regardless of manufacturer. All future launches of the same drug/strength under that FDA Application will be required to use the Baseline AMP established by the original manufacturer. If a company is looking to purchase a drug from another manufacturer and sell it under their own label, it is important to assess the impact that the baseline AMP could have on the rebates they will pay.

Source:

Prescription Analytics. 2024 AMP Cap Removal – What Pharma Manufacturers Need to Know

Prescription Analytics. Understanding Baseline AMP Rules Can Help You Avoid Pricing Decision Disasters

What is a Baseline CPI in pharma?

When the Baseline AMP is established for a drug, the Baseline CPI (Consumer Price Index) is also established. Baseline CPI then becomes an input within a formula to monitor the drug’s price changes as it relates to the Consumer Price Index and the drug’s price over time, specifically as it relates to increases faster than the rate of inflation.

Baseline CPIs are established in conjunction with the Baseline AMP and vary depending on whether the drug is an NDA or ANDA drug. For an NDA, the Baseline CPI is established as the CPI for the month prior to the NDA’s Baseline Quarter (IE: if the Baseline Quarter is 4Q23, the baseline CPI would be the September 2023 CPI). Baseline CPI’s for ANDA drugs are established as the CPI for the last month of the Baseline Quarter (IE: if the Baseline Quarter is 4Q23, the baseline CPI would be the December 2023 CPI).

The CPI values that are used for Medicaid purposes are the Consumer Price Index for All Urban Consumers, which is released by the U.S. Bureau of Labor Statistics monthly.

Source:

Prescription Analytics. Understanding Baseline AMP Rules Can Help You Avoid Pricing Decision Disasters

What is a Benchmark Period in pharma?

The benchmark period in pharma commonly refers to a drug’s price at a moment in time (typically a quarterly value early in the life cycle of a drug) against which future prices are measured to determine if a manufacturer is subject to penalties or inflation rebates for raising a drug’s price faster than the annual rate of inflation.

Benchmark periods are established by regulatory bodies and vary by program. Examples included the following:

• Medicare Part B (new in 2022): The value used is quarterly calculated ASP and going forward, the benchmark period is the third full quarter following launch. For drugs that were launched before December 1, 2020, the benchmark period is Q3 2021.
• Medicare Part D (new in 2022): For drugs marketed after 10/1/2021, the benchmark period is based on the Annual AMP of the first full calendar year (Jan 1 – Dec 31) after the first marketed date, as reported to CMS. For drugs marketed before this, the average AMP for the periods between January 1, 2021 and September 30, 2021.

What is a Benchmark Price in pharma?

The benchmark price is the drug’s price at the benchmark period for that given program. Typically, a pharmaceutical drug’s benchmark price is compared against the current month/quarter CPI-U value to determine if inflation rebates are applicable.

For example, if Pharmaceutical Drug A has a $1 benchmark price and the CPI for the benchmark period was 100, but the current price of the drug is $2 and the CPI-U value for the current quarter is 150, that drug will be subject to inflation rebates, as the allowable increase is 50%, but the actual increase was 100%. The change in CPI-U relative to the benchmark period is often used to determine the ‘allowable increase’ in the reported value (IE: AMP, ASP, etc.). If the reported value increases at a rate greater than the allowable increase per the change in CPI-U over time, that specific drug could then be subject to additional rebates/inflation penalties.

Source:

CMS: Medicare Part B Drug Inflation Rebates Paid by Manufacturers: Initial Memorandum, Implementation of Section 1847A(i) of the Social Security Act, and Solicitation of Comments, 2/9/2023

What does Best Price mean in pharma?

In the pharmaceutical industry, specifically the Medicaid Drug Rebate Program, "Best Price" refers to the lowest price at which a pharmaceutical manufacturer sells a Brand or NDA (New Drug Application) product to any purchaser, with certain exceptions, as mandated by the Medicaid Drug Rebate Program (MDRP). This means that pharmaceutical companies must provide drugs to Medicaid programs at the equivalent of the most favorable price offered to any other buyer. Understanding best price values is crucial for manufacturers, as they can directly impact the amount of Medicaid rebates they are obligated to pay across 300+ state Medicaid programs. These rebates are calculated at a rate of 23.1% of AMP or AMP less Best Price (whichever is greater).

How do I calculate Best Price for my pharmaceutical drug?

Best price should be calculated and reported for each applicable drug on a quarterly basis, per CMS requirements. Best price is calculated as the lowest price sold to any customer during the specific quarter in question. The price should be calculated net of all eligible discounts, rebates and non-bonafide fees, to determine the lowest net eligible price per strength of the reportable drug.

Source:

Health Affairs: Medicaid Best Price, AMCP

The Best Price Requirement of the Medicaid Rebate Program

The Big Four within the pharma industry commonly refers to the four largest government agencies that can purchase from the Federal Supply Schedule (FSS); they are Veterans Affairs (VA), Department of Defense (DOD), Public Health Service (PHS) and the Coast Guard.

During VA/FSS contracting, covered drug manufacturers are obligated to offer the same price point on a drug to all four of these entities, as well as other federal government entities eligible to purchase on the Federal Supply Schedule. The single price point offered is a calculated value, based on the drug’s submitted Non-Federal Average Manufacturer Price (NFAMP) and tracking customers.

Alternatively, manufacturers with an active VA/FSS agreement can also engage in “Dual Pricing” which allows the manufacturer to negotiate a separate price specifically for the FSS entities. Typically, the calculated “Big Four Price” is lower than the negotiated FSS pricing that is offered to all eligible government entities.

For additional information related to VA/FSS contracting, read our blog, "Three things to know about the challenges of VA/FSS contracting."

 

The Big Three refers to the three largest drug wholesalers in the United States: AmerisourceBergen (commonly referred to as ABC) – recently re-branded as Cencora, McKesson, and Cardinal Health.

Wholesale distribution holds significant strategic value for drug manufacturers seeking to reach a large consumer base, drive high volume, and minimize expiration risk. The top three pharmaceutical wholesalers command an overwhelming majority of the market share. A key driver behind a wholesaler's substantial market presence is its engagement in collective buying groups with major domestic retail chains -- including Walgreens, Walmart, and CVS. These buying groups make establishing a wholesale relationship nearly indispensable when dealing with large retailers. Furthermore, the extensive distribution networks of wholesalers offer a valuable opportunity for high volume, aiding in the timely turnover of drugs with short shelf lives and the subsequent risk of expiration.

 

What does bioequivalence mean in the pharma industry?

Bioequivalence indicates that two drugs will have the same therapeutic effect. This term is frequently raised in the process of securing approval of generic drugs. The FDA requires evidence of average bioequivalence in drug absorption be provided through the conduct of bioavailability and bioequivalence studies. A bioequivalence assessment is considered as a surrogate for clinical evaluation of the therapeutic equivalence of drug products and helps ensure an approved generic drug is a potential substitute for its branded equivalent.

Source:

National Library of Medicine, Bioavailability and Bioequivalence in Drug Development

What is a biologic drug?

Biologic products consist of active, living cells. Unlike many chemically synthesized drugs, biologic drugs are often derived from natural sources (such as human, animal, or microorganisms) and may exhibit some degree of variability in the source material. Humira, a well-known biologic drug, is produced using living cells. Specialized technology is usually necessary to produce biologics, and their supply chain management requires careful attention due to the sensitivity of their active ingredients, especially to temperature.

What unique compliance requirements do biologic drugs have?

Biologic drugs, while subject to regulations like brand drugs, entail unique compliance requirements. Unlike small molecule drugs governed by New Drug Applications (NDAs), biologic products require approval through a Biologics License Application (BLA) process, which involves more intricate scientific assessments due to the inherent variability and complexity of biologic products. Moreover, BLA drugs may face distinct pricing and reimbursement challenges, with considerations such as production costs, therapeutic value, and market demand influencing pricing decisions. Post-approval surveillance is crucial for assessing the long-term safety and efficacy of BLA drugs, considering their potential for immunogenicity and other biologic-specific risks. Additionally, the Inflation Reduction Act introduced new penalties, payments, and rebates for biologic drugs sold within U.S. government programs, including Medicare provisions for inflation penalties, adding further complexity to compliance requirements for manufacturers of BLA drugs. Navigating these nuances effectively is essential to ensure regulatory approval, market access, and ongoing compliance with evolving regulations.

Source:

FDA: What are “Biologics” Questions and Answers”,

What is a biosimilar drug?

A biosimilar drug is a biologic medication designed to closely resemble a reference drug, exhibiting no clinically notable differences in terms of safety, efficacy, and quality attributes. Unlike generic versions of small molecule drugs, biosimilars are created using living cells and complex manufacturing processes, necessitating advanced knowledge and cutting-edge technology throughout development and production. The regulatory approval pathway for biosimilars involves demonstrating comparability to the reference biologic through comprehensive analytical, nonclinical, and clinical studies, ensuring that the biosimilar exhibits highly similar pharmacological and clinical properties. Once approved, biosimilars typically enter the market at a lower cost compared to their reference biologic counterparts, offering cost-saving opportunities for patients and healthcare systems.

What are key considerations for drug manufacturers when introducing a biosimilar drug?

Gaining acceptance and market share for biosimilars requires strategic pricing, robust evidence generation, and effective education and communication efforts to overcome potential hesitancy among healthcare providers and patients regarding biosimilar interchangeability and efficacy. Moreover, post-marketing surveillance and pharmacovigilance remain critical for monitoring the long-term safety and effectiveness of biosimilars, given the complexity and variability inherent in biologic products. By understanding these nuances and navigating regulatory, pricing, and market access challenges effectively, drug manufacturers can capitalize on the growing opportunities presented by biosimilar development and commercialization.

As biosimilars are approved by the FDA under a BLA, they are also subject to additional reporting and rebate requirements when it comes to various government programs such as Medicaid and Medicare. Biosimilars are treated in a similar fashion to branded drugs/NDAs; meaning they are subject to greater Medicaid unit rebate amounts, and may be subject to additional inflation penalties under Medicare Part B and D.

Source:

FDA: Biosimilar Basics for Patients

What is a BLA in pharma?

A Biologics License Application (BLA) is an official submission to the U.S. Food and Drug Administration (FDA) for approval to distribute or introduce a biologic product into interstate commerce. Unlike traditional drug approvals governed by New Drug Applications (NDAs), BLAs specifically address biologic products derived from living organisms or their components. Upon approval, biologic products authorized through BLAs are deemed safe and effective for their intended use, allowing them to be marketed and distributed to healthcare providers and patients. These products, often referred to as BLA drugs, encompass a wide range of therapeutic treatments, including vaccines, blood products, gene therapies, and monoclonal antibodies, among others.

How are BLA drugs unique within the pharma industry?

BLA drugs are subject to unique regulatory considerations and approval pathways compared to small molecule drugs governed by NDAs. The approval process for BLAs typically involves more complex scientific assessments due to the inherent variability and complexity of biologic products. Additionally, pricing and reimbursement strategies for BLA drugs may differ from traditional pharmaceuticals, with factors such as production costs, therapeutic value, and market demand influencing pricing decisions. Furthermore, post-approval surveillance and monitoring play a crucial role in assessing the long-term safety and efficacy of BLA drugs, given their potential for immunogenicity and other biologic-specific risks. Manufacturers of BLA drugs must navigate these nuances effectively to ensure successful regulatory approval, market access, and ongoing compliance with regulatory requirements.

From a government pricing standpoint, BLA’s are subject to additional reporting and rebate requirements when it comes to various government programs such as Medicaid and Medicare. Drugs approved under a BLA are treated in a similar fashion to branded drugs/NDAs; meaning they are subject to greater Medicaid unit rebate amounts, and can be subject to additional inflation penalties under Medicare part B and D.

 

What is a brand drug in pharma?

A brand drug refers to a pharmaceutical product marketed under a specific name or trademark, safeguarded by patent protection. These drugs gain approval for sale in the United States through a meticulous New Drug Application (NDA) process. Typically, patents for brand drugs last for 20 years, but additional factors such as exclusivity terms post-FDA approval can influence their market longevity without competition.

In 2022, brand drugs constituted 9% of all prescriptions filled in the United States, with generic drugs making up the remaining 91%.

One point of frequent confusion are Authorized Generics (AG) products. AG drugs are developed and marketed under the authority of the original Brand Product NDA and therefore follow many of the same reporting rules with regards to Government Pricing as a brand drug.

What unique compliance requirements do brand drugs have?

Brand drugs, especially those supplied through government programs like Medicaid, PHS/340B, Medicare, and VA, are subjected to heightened compliance requirements, reporting obligations, and fees or discounts compared to generic alternatives. For instance, the Inflation Reduction Act of 2022 introduced various fees applicable to brand drugs, including inflation rebates commencing in 2022, Medicare Part B add-on payments in 2023, and drug price negotiations for top-selling drugs beginning in 2025. Additionally, brand drugs face lower price change thresholds in select states with State Price Transparency Reporting requirements.

Hence, it is crucial for brand manufacturers to possess a comprehensive understanding of existing and forthcoming fees, penalties, or payment obligations to uphold profitability and mitigate revenue loss.

Source:

HealthCare.gov

FDA.gov

https://www.fda.gov/drugs/generic-drugs/office-generic-drugs-2022-annual-report

What is the Branded Prescription Drug Fee / Brand Tax?

The Branded Prescription Drug Fee (BPD Fee), or Brand Tax as its commonly referred, was mandated by the Affordable Care Act and imposes charges on pharmaceutical manufacturers supplying branded drugs to the federal government. This fee includes federal government sales related to Medicare Part B, Medicare Part D, Medicaid, VA, DOD, and Tricare programs. Fees are determined based on a calculation, which uses on a tiered system similar to how tax brackets work with the brackets ranging from $0 for lower-volume sales to a larger percentage of sales for companies exceeding $400 million annually.

One significant aspect involves the initial fee, which encompasses both current and estimated future years, mirroring the concept of prepaying taxes. Manufacturers typically receive a preliminary notice in March detailing the fee calculation, with final invoices due by a specified deadline in September. Subsequent year fees are adjusted based on the variance between actual and preliminary calculations.

Additionally, it's crucial to note that fee notices are subject to a substantial delay, as fees for a given year are based on sales data from two years prior. For additional information regarding the Branded Prescription Drug Fee / Brand Tax, see our blog, “Branded Prescription Drug Fee – Payment Deadline Approaching.”

 

What is a pharmaceutical chargeback?

When a drug manufacturer sells to a Wholesaler, they sell at the Wholesale Acquisition Cost (WAC). The wholesaler will then sell that same product to a pharmacy at a negotiated discounted price (that a manufacturer has negotiated with a pharmacy chain, pharmacy, GPO or PBM, which is usually less than WAC. This transaction generates a pharmaceutical chargeback, which is a reimbursement request initiated by a wholesaler towards a drug manufacturer, aiming to reconcile discounted pricing agreements negotiated with the downstream organizations. Despite chargebacks being perceived as routine, minor discrepancies in contracts or pricing can have significant financial and compliance repercussions, affecting accounts receivable, rebate disbursements, and government pricing.

What options are available to manage chargeback processing for drug manufacturers?

Chargeback Processing often requires systematic validation as the volumes of chargeback lines, NDCs, and contracts can be overwhelming to attempt to validate manually. Files can be transmitted manually or by leveraging EDI technology. When fully implemented, utilizing EDI transmission of data creates an automated transmission between the manufacturer and wholesaler, often resulting in time savings as well as reducing the potential for missed correspondence, however, the cost of EDI can quickly scale up as EDI providers typically charge for both vendor connections and ongoing transaction volumes. Manual file transmissions can be more cumbersome to manage on a daily basis, as there are attached files that need to be mapped and uploaded to systems, but can be an effective way to manage lower volumes while avoiding the EDI expense. Many pharmaceutical companies choose to outsource chargeback processing due to the technological requirements and maintenance.

Effective chargeback validation demands meticulous management, expertise, and adherence to best practices, including disciplined contract maintenance, clear communication, prompt error resolution, and regular data review. Maintaining communication with wholesalers, monitoring submission timings, and analyzing chargeback rates relative to total sales are crucial for accuracy and compliance.

For additional information and best practices for pharma manufacturers on Chargeback Processing, see our white paper, “Chargeback Processing — Best Practices to Avoid Revenue Leakage & Risk.”

 

The Children's Health Insurance Program (CHIP), overseen by the US Department of Health and Human Services, allocates matching funds to states to furnish health insurance to qualifying families with children. This program extends coverage to children through both Medicaid and standalone CHIP initiatives, catering to families whose incomes exceed Medicaid thresholds yet fall short of private coverage affordability. Managed by states under federal directives, CHIP secures funding from both state and federal sources.

Pharmaceutical manufacturers participating in the Medicaid Drug Rebate Program (MDRP) are obligated to remit rebates on drugs dispensed through Medicaid and CHIP. State Medicaid agencies issue quarterly invoices to manufacturers based on utilization metrics. It is imperative for manufacturers to meticulously reconcile and validate all invoice values before payment remittance. Payments must be rendered within 37 days of the receipt or mail date to avoid incurring additional penalties or fees.

Source:

https://www.medicaid.gov/chip/index.html

https://www.medicaid.gov/chip-state-program-information/index.html

What is Class of Trade in pharma?

Class of Trade (COT) denotes the distribution channel through which pharmaceutical products reach the consumer market, encompassing retail pharmacies, hospitals, wholesalers, and long-term care facilities. These designations, assigned by manufacturers, play a pivotal role in government pricing computations, contracting agreements, and sales channel analysis, significantly impacting Medicaid rebate liabilities and government contract pricing. For instance, sales designated under "Retail Pharmacy" COT are factored into government pricing, whereas "Inpatient Hospital" sales may be excluded, affecting Medicaid rebates and contract pricing. There is no industry standard for COT assignment and some facilities can be perceived differently throughout the industry. Ensuring accurate and consistent COT assignment, documented within Standard Operating Procedures (SOP), is crucial for pharmaceutical manufacturers to navigate compliance and pricing challenges effectively.

What are the risks of getting Class of Trade wrong?

Incorrect Class of Trade (COT) assignments can pose significant risks for pharmaceutical manufacturers in various aspects of their operations. COT designations, which determine inclusion in government pricing computations and impact Medicaid rebate liabilities, are crucial for accurate pricing and contract negotiations. Errors in COT assignment can lead to inaccurate government pricing calculations, potentially resulting in over or underpayment of Medicaid rebates. Furthermore, inconsistent or incorrect COT assignments may jeopardize compliance with regulatory requirements and lead to disputes with government agencies. Manufacturers must ensure accurate and consistent COT assignments to mitigate these risks and maintain compliance with government pricing regulations.

For more information and best practices for drug manufacturers regarding Class of Trade, read our white paper, “Understanding Class of Trade in the Pharmaceutical Industry.”

 

The Centers for Medicare & Medicaid Services (CMS) is the single largest payer of health care benefits in the United States, providing funding for health care to more than 160 million Americans through Medicare, Medicaid, the Children's Health Insurance Program (CHIP), and the Health Insurance Marketplace. As a federal agency within the United States Department of Health and Human Services (HHS), CMS oversees vital healthcare programs, interprets regulations and provides guidance governing various aspects of healthcare delivery, reimbursement, and quality improvement initiatives.

Specifically, regarding pharmaceutical drugs and manufacturers, CMS sets policies concerning drug pricing, reimbursement, and program eligibility criteria within Medicare and Medicaid. Additionally, CMS conducts enforcement actions to ensure compliance with these regulations, including audits, investigations, penalties, and corrective measures for pharmaceutical manufacturers found to be non-compliant with program requirements.

Source:

https://www.cms.gov/

What is a COD?

A COD (Covered Outpatient Drug) is a medication included in the Medicaid Drug Rebate Program (MDRP). For a drug to qualify as a COD for Medicaid purposes, the manufacturer must sign an MDRP agreement. This agreement obligates the manufacturer to pay rebates that help federal, and state governments offset the cost of dispensing these drugs to Medicaid patients. CODs are subject to specific reporting, pricing, and rebate requirements under the MDRP. A drug is considered a Covered Outpatient Drug when the drug may be dispensed only upon prescription and if it meets at least one of the criteria as described in section 1927(k)(2) of the Social Security Act.

What rules does CMS have for CODs?

The Centers for Medicare & Medicaid Services (CMS) mandates that manufacturers submit detailed product and pricing data for CODs within 30 days after the last day of each month. Key required information includes drug classification, pricing metrics, and other identifiers. Failure to submit accurate or timely data can result in significant penalties, including suspension or termination from the MDRP. Additionally, timely reporting is crucial for CMS to calculate Unit Rebate Amounts (URAs) used by states to issue Medicaid rebate invoices.

For manufacturers, compliance with these rules ensures continued participation in Medicaid programs and helps avoid penalties or market access disruptions.

Source:

Prescription Analytics, CMS Final Rule: What Pharma Manufacturers Need to Know

SSA.gov, Payment for Covered Drugs

ECFR.gov, “Electronic Code of Federal Regulations: Title 42, Chapter IV, Subchapter C, Part 447, Subpart I”

What are commercial operations in pharma?

Commercial operations within the pharmaceutical and life sciences sectors are integral to the successful delivery of products and services to the market. This multifaceted function involves sales and marketing efforts, encompassing activities such as partner selection, pricing strategies, and contract negotiations. Additionally, commercial operations oversee market research initiatives and product launch planning to effectively position offerings and address customer needs.

Moreover, commercial operations teams play a pivotal role in maintaining relationships with key stakeholders, including healthcare providers and payers, to maximize market penetration and revenue generation. They also drive product lifecycle management strategies, ensuring regulatory compliance and monitoring market trends for informed decision-making. Overall, the efficient functioning of commercial operations is essential for driving growth, profitability, and sustained success within the pharmaceutical and life sciences industries.

How can Prescription Analytics support commercial operations for pharma manufacturers?

Prescription Analytics’ Commercial Operations Support services include activities such as Pricing & Contract Support, Commercial Rebate & Discount Reconciliation, Forecasting, Gross-to-Net calculations, and additional service needs such as partner assessment, sales reporting and advanced insights and analytics.

These activities support both the Finance and Sales teams, and the level of support we offer is based on the unique staffing and support needs of the client. For example, we have some clients where we serve as their entire Commercial Operations Department, and others that we step-in to fill a need if they have a short-term staffing shortage or simply want to focus on other areas of their business.

 

What is a contract manufacturer in pharma?

A contract manufacturer is a specialized company that provides manufacturing services to pharmaceutical companies on a contractual basis. These manufacturers offer facilities, expertise, and resources to produce pharmaceutical products according to the specifications and requirements of their clients. They handle various stages of drug production, including formulation development, manufacturing, packaging, and quality control, allowing pharmaceutical companies to outsource these processes rather than performing them in-house.

What are key considerations for pharmaceutical companies considering a contract manufacturer?

Pharmaceutical companies may consider using a contract manufacturer to leverage specialized expertise, access advanced manufacturing technologies, and reduce production costs. By outsourcing drug manufacturing processes, companies can focus on core competencies such as research, development, and marketing while benefiting from the efficiency and scalability offered by contract manufacturers. Key considerations in deciding whether to outsource manufacturing include assessing the contract manufacturer's capabilities, reputation, regulatory compliance, and cost-effectiveness compared to in-house production. Companies must also evaluate factors such as intellectual property protection, supply chain resilience, and the potential impact on product quality and control when making the decision to outsource or keep manufacturing in-house.

 

What is a copay assistance coupon in pharma?

Copay Assistance Coupons, utilized by pharmaceutical companies, aim to alleviate the financial burden on patients by reducing or covering copayments for specific prescription drugs. These coupons, distributed through healthcare providers or directly to patients, function by reducing the patient's out-of-pocket expenses at the pharmacy.

What considerations should drug manufacturers make when considering copay assistance coupons?

Despite their benefits, copay assistance programs require careful consideration by drug manufacturers. Compliance with regulations, particularly concerning anti-kickback statutes and program transparency, is crucial. Manufacturers must evaluate the financial implications, target programs strategically, and ensure long-term sustainability while fostering brand loyalty through effective communication and strategic targeting.

Pharmaceutical companies should weigh the financial impact of copay assistance programs, ensuring they align with broader corporate goals while remaining compliant with regulations. Strategic targeting should identify patient populations most in need of assistance, while transparent communication educates stakeholders and builds trust. Continuous monitoring and adaptation are necessary to optimize program performance and ensure affordability and access while minimizing financial risks. Considering alternative approaches such as patient assistance programs or value-based pricing arrangements can further enhance patient access and long-term sustainability.

Source:

https://oig.hhs.gov/documents/special-advisory-bulletins/878/SAB_Copayment_Coupons.pdf

What is the Coverage Gap Discount Program (CGDP)?

The Coverage Gap Discount Program established under Medicare Part D, provides discounts on prescription drugs for beneficiaries who reach the coverage gap, also known as the "donut hole." Pharmaceutical manufacturers participating in this program offer discounts on brand-name drugs purchased by Medicare beneficiaries during the coverage gap phase. These discounts, combined with Medicare's contribution, help reduce out-of-pocket costs for beneficiaries and contribute to their continued access to necessary medications despite the coverage gap.

How will the CGDP and Medicare Part D program change in 2025?

For pharmaceutical manufacturers, the 2025 changes in the Medicare Part D program, notably the elimination of the Coverage Gap Discount Program, will require adaptation. Currently, drug manufacturers cover 70% of patients' drug costs during the coverage gap phase (donut hole), but in the redesigned program – known as the Medicare Part D Discount Program -- this obligation will cease. Instead, manufacturers will be required to contribute financially throughout both the initial coverage and catastrophic periods, paying 10% of patient costs for all branded drugs during the initial coverage period and 20% during the catastrophic period, marking a substantial departure from the current reimbursement structure. Additionally, the introduction of expanded rebate obligations under the redesigned program poses further challenges, with the potential to increase Medicare Part D rebates for drug manufacturers.

Understanding and navigating these changes are crucial for manufacturers to ensure continued success in the pharmaceutical market, requiring careful financial planning, pricing strategy adjustments, and transparent communication with stakeholders. For additional information on these changes, see our blog, “Overview of the 2025 Medicare Part D Program Redesign: A Paradigm Shift for Pharma Manufacturers.“

 

What is the CPI?

The Consumer Price Index (CPI) is a measure of inflation used to track changes in the prices of a basket of goods and services over time. It reflects the average price level paid by urban consumers for various essential items such as food, housing, transportation, and healthcare. The CPI is calculated and published monthly by the Bureau of Labor Statistics (BLS) in the United States and serves as a key indicator for economic policymakers, businesses, and consumers alike, providing insights into trends in purchasing power and cost of living adjustments.

How is the CPI used in Medicaid AMP values?

The Consumer Price Index (CPI) serves as a benchmark for inflation in the Medicaid Drug Rebate Program (MDRP), and can have an impact on the Medicaid Unit Rebate Amount (URA). Manufacturers compare quarterly AMP values against the baseline AMP value and corresponding CPI to assess if AMP increases surpass inflation rates. In cases where AMP increases exceed the allowable increase amount per the change in inflation over the comparable timeframe, manufacturers may incur inflationary penalties, leading to additional Medicaid rebates. Recent periods of elevated inflation have provided some relief for certain manufacturers previously subject to penalties, allowing greater flexibility in pricing adjustments while mitigating the risk of inflationary penalties and managing financial liabilities related to Medicaid rebates.

For additional information for drug manufacturers related to CPI and AMP, see our blog, “Letting Some Air Out of the AMP Inflation Penalty.”

 

What is a customary prompt pay discount?

A Customary Prompt Pay Discount refers to a discount provided by a drug manufacturer to a wholesaler, or other customer, for promptly paying for purchased drugs within a specified timeframe, aligning with typical business payment practices and/or the terms of the specific contract.

How do drug manufacturers leverage prompt pay discounts?

Customary Prompt Pay discounts are a standard practice within the pharmaceutical industry, offering financial incentives to customers for timely payment processing. Drug manufacturers should recognize that offering customary prompt pay discounts can help foster positive relationships with customers, encouraging prompt payments and potentially enhancing supply chain efficiency. Additionally, understanding and adhering to industry-standard payment practices can contribute to smoother transactions and mitigate potential payment delays or disputes. Typical prompt pay discounts range from 1-3% of the customer's invoice price.

 

What is a DESI drug?

A DESI drug refers to a pharmaceutical product introduced between 1938 and 1962, reviewed under the FDA’s Drug Efficacy Study Implementation (DESI) program. These medications were initially approved based on safety but not efficacy, and some remain on the market without full FDA approval. Manufacturers can pursue streamlined approval via the 505(b)(2) pathway, leveraging historical data to expedite the process while minimizing development costs.

How are DESI drugs treated uniquely in the pharma industry?

DESI drugs operate in a regulatory gray area, often allowed to stay on the market under FDA enforcement discretion if deemed medically necessary and low risk. Compliance requires careful reporting and classification, as failure to align with FDA oversight can lead to removal from the market or penalties. The unique status of DESI drugs creates opportunities for manufacturers to secure approvals efficiently while navigating nuanced compliance rules.

Source:

FDA, Unapproved Drugs

Premier Consulting, DESI Drugs: Potential Targets for Quick Approvals

What is a Direct Contract for a Pharma Manufacturer?

A "direct contract" for a pharmaceutical manufacturer is an agreement under which the manufacturer sells its medications straight to wholesalers, distributors, or other customers at an agreed upon price per the contract. This arrangement can create a simpler, more direct sales process for the manufacturer. Often times wholesalers and distributors will purchase at the standardized Wholesaler Acquisition Cost (WAC), but other customers may purchase direct at a discount price that was negotiated as part of the contract.

 

What is an Extended Monopoly Drug?

An Extended Monopoly Drug is a brand-name medication approved by the FDA under a New Drug Application (NDA) or licensed biologic under a Biologics License Application (BLA) that has been on the market for 12 to 16 years. This designation excludes vaccines and drugs covered under specific agreements with the Secretary of Health and Human Services before 2030. The term applies only to originator drugs, not to generic drugs or biosimilars, as these do not hold market exclusivity and are priced competitively.

Compliance Requirements under the Inflation Reduction Act (IRA)

The IRA of 2022 introduced a Maximum Fair Price (MFP) cap for extended monopoly drugs, limiting their price to 65% of the average non-FAMP (Federal Average Manufacturer Price). This pricing change will take effect starting in 2026, with the new compliance requirements applying to drugs that have been on the market for 12 to 16 years.

Manufacturers must comply with stricter price reporting requirements and ensure alignment with IRA regulations to avoid penalties while balancing affordability and innovation incentives.

Source:

Hogan Lovells, CMS Issues Final Guidance on the Inflation Reduction Act (IRA) Drug Price Negotiation Program

What is a generic drug?

A generic drug is a medication that contains the same active ingredients as a brand-name drug and is designed to work in the same way. Generic drugs must meet strict FDA requirements for quality, safety, and effectiveness. To be marketed, a generic drug must be approved through an Abbreviated New Drug Application (ANDA), demonstrating that it is bioequivalent to the brand drug. Generics are typically introduced after the patent or exclusivity period for the brand-name drug has expired, offering a more affordable option while delivering the same therapeutic benefits.

What are key differences between generic and brand drugs?

While generic and brand drugs have the same active ingredients, they vary in terms of the following:

• Cost: Generic drugs are usually less expensive because they don’t have the same development and marketing costs associated with brand drugs.
• Patent Protection: Brand drugs are protected by patents that grant exclusive rights to the original manufacturer for a set period. Once the patent expires, other companies can produce generics, pending FDA approval via an ANDA. Patents for a new drug typically last for 20 years in the United States
• Approval Process: Brand drugs have a much more rigorous approval process with extensive clinical trials to prove safety and efficacy. Generic drugs follow an abbreviated FDA approval process, requiring proof of bioequivalence to the brand-name counterpart but not full clinical trials.
• Appearance and Packaging: Generic drugs cannot look identical to brand drugs by law, so they may differ in size, shape or color.

Source:

FDA, The Generic Drug Approval Process

FDA, Facts About Generic Drugs

FDA, Frequently Asked Questions: Patents and Exclusivity

What is an inflation penalty in pharma?

In the pharmaceutical industry, an inflation penalty is an additional Medicaid rebate that manufacturers must pay when their drug prices rise faster than the rate of inflation, as measured by the Consumer Price Index (CPI), over a specific period. Calculated using the Baseline Average Manufacturer Price (AMP), this penalty is triggered if the current AMP for a drug exceeds its inflation-adjusted baseline AMP. It ensures that manufacturers don't profit excessively from price increases beyond inflation, helping to control Medicaid spending.

Key Implications for Pharma Manufacturers

• Pricing Constraints: Manufacturers need to carefully model price adjustments to avoid triggering inflation penalties, which can significantly reduce profitability.
• Baseline AMP Monitoring: Accurate calculation and tracking of the Baseline AMP and CPI rates are crucial to mitigate unexpected rebate liabilities.
• 2024 AMP Cap Removal: Starting January 1, 2024, with the elimination of the Medicaid AMP cap, the total rebate amount (base rebate + inflation penalty) could exceed the drug’s AMP. This change could lead to higher rebate payments than the drug's sale price, potentially affecting portfolio strategies and revenue forecasts.

For additional insights on Inflation Penalties, reference our blog, "Letting Some Air Out of the AMP Inflation Penalty."

 

What is a J-Code in pharma?

A J-Code is a billing code, typically used in Medicare Part B, required for the accurate and standardized reimbursement of eligible drugs that are typically non-oral medications, such as chemotherapy drugs, immunosuppressants and respiratory treatments; or physician administered, such as injectable or infused medications. Each J-Code is a letter followed by four numbers and are usually paired with Current Procedural Terminology (CPT) codes. These codes are part of the Healthcare Common Procedure Coding System (HCPCS) and are essential for accurate billing under the medical benefit of a patient’s insurance plan. J-Codes are mandatory for healthcare providers when billing insurers for eligible specialty medications to ensure proper reimbursement and to avoid errors.

How do pharma manufacturers get a J-Code?

Pharmaceutical manufacturers obtain J-Codes through the HCPCS application process managed by the Centers for Medicare and Medicaid Services (CMS). When a new drug is launched, the following steps are taken to obtain a J-Code:

• Temporary Assignment: Initially, the drug may be issued a temporary, unclassified J-Code for billing.
• Permanent J-Code: The manufacturer must apply for a permanent J-Code by submitting detailed documentation about the drug's characteristics, administration method, and usage. Once CMS approves the application, a unique permanent J-Code is assigned. This process can typically take between 3-6 months. At the time of the permanent J-Code issuance, temporary codes should no longer be used.

J-Codes are critical for enabling providers to bill accurately for specialty drugs administered in healthcare settings, ensuring compliance and financial viability for manufacturers.

 

What is a pharmaceutical labeler?

A pharmaceutical labeler is an entity responsible for manufacturing, repackaging, or distributing a drug. They manage the creation and application of drug labels, ensuring compliance with regulations that require essential information, such as dosage instructions, warnings, and expiration dates, to be clearly displayed. Each labeler is assigned a unique 5-digit labeler code by the FDA, which is a component of the National Drug Code (NDC). The NDC is reported in an 11-digit format, which is divided into three sections. The first five digits indicate the manufacturer or the labeler; the next four digits indicate the ingredient, strength, dosage form and route of administration; and the last two digits indicate the packaging/quantity. This system ensures precise tracking, identification, and compliance within the pharmaceutical supply chain.

Pharmaceutical manufacturers may operate multiple labelers, particularly if they manage distinct divisions or product lines. A pharmaceutical manufacturer might have multiple labeler codes if they are distributing drugs under different brand names or labels, such as for private label products, or if they are repackaging drugs for another company, requiring them to use the labeler code of the company they are repackaging for, in addition to their own labeler code for their own branded products; essentially, each distinct brand or labeler they are selling under would necessitate a separate labeler code assigned by the FDA.

Key Points About Labeler Codes:

• Assigned by FDA: The FDA is the agency responsible for assigning unique labeler codes to pharmaceutical manufacturers.
• Part of NDC: A labeler code is the first segment of a National Drug Code (NDC), which uniquely identifies a drug product.
• Different brands, different codes: If a company markets drugs under different brand names, each brand may have its own labeler code.
• Private label distribution: When a company repackages a drug for another company's private label, they often will use the private label company's labeler code on that product.

Source:

FDA, CDER Direct Labeler Code Request Demo

What is Medicaid?

Medicaid is a public health insurance program established in 1965 to provide financial protection and healthcare access to low-income individuals and families, jointly funded and operated by federal and state governments. Covering 1 in 5 Americans, Medicaid operates under federal guidelines with state-specific adaptations, offering coverage through Fee-for-Service (FFS), Managed Care Organizations (MCOs), and other tailored programs. Prescription drug coverage is a critical component, with cost-sharing mechanisms between state and federal levels ensuring accessible medications for beneficiaries.

Key Implications for Pharma Manufacturers

Pharmaceutical manufacturers participating in Medicaid must sign a National Drug Rebate Agreement (NDRA) to access a vast prescription drug market. Required actions include calculating and reporting Average Manufacturer Prices (AMPs) and Best Prices, determining Unit Rebate Amounts (URA), and processing extensive numbers of rebate invoices quarterly. While Medicaid participation opens significant market opportunities, it imposes demanding operational, financial, and reporting requirements. Incentives include broad market access and predictable utilization, but participation also entails significant compliance challenges, including managing complex state programs, resolving invoice discrepancies, and adapting to frequent regulatory changes. The Medicaid Drug Rebate Program was established by the Omnibus Budget Reconciliation Act of 1990 and has evolved ever since.

For additional details for pharma manufacturers on Medicaid, see "Medicaid – From a Simple Concept to an Operational Labyrinth" and "Beware of the Many Operational Challenges of Medicaid Rebate Processing."

 

What is Medicare?

Medicare is a federal health insurance program primarily serving individuals aged 65 and older, as well as younger individuals with specific disabilities, end-stage renal disease (ESRD), or amyotrophic lateral sclerosis (ALS). The program is designed to help cover healthcare costs, including hospital stays, medical services, and prescription drugs, but it does not cover all medical expenses or most long-term care. The Centers for Medicare & Medicaid Services (CMS) oversees the program, while Social Security handles eligibility and enrollment processes.

Medicare has key parts that pharmaceutical manufacturers should understand:

• Part B: Medicare Part B typically covers injectable and infused pharmaceutical drugs administered by healthcare providers (e.g. chemotherapy) in outpatient settings, such as physician offices or clinics. Rebate amounts pharmaceutical manufacturers must pay for covered drugs are determined by price changes and the CPI of Average Sales Price (ASP), a calculated value that manufacturers must report quarterly to CMS.
• Part D (Prescription Drug Coverage): Helps beneficiaries pay for prescription drugs, including many generic and brand medications.

Key Implications for Pharma Manufacturers

As part of the 2022 Inflation Reduction Act, the Medicare Part D program is undergoing major changes in 2025. The Coverage Gap ("donut hole") being eliminated, and a new discount program which requires manufacturers to cover 10% of patient drug costs during the initial Coverage phase and 20% during the Catastrophic phase. Additionally, branded products will now be subject to an inflation penalty similar to Medicaid’s, based on a benchmarked baseline value adjusted for allowable inflation. For more on these changes, see our blog, "Overview of the 2025 Medicare Part D Program Redesign: A Paradigm Shift for Pharma Manufacturers."

The Medicare Part B program is also going through significant change. In addition to rebates and penalties on injectable or infused drugs, new requirements mandate that manufacturers pay rebates on unused portions of certain drugs. Non-payment penalties can be steep—up to 125% of the rebate amount. For more details on the Medicare Part B Drug Wastage ruling, read our blog, "2023 Drug Wastage Rule to Impact Pharma Manufacturers."

The Inflation Reduction Act represents a fundamental shift in Medicare’s financial structure, with far-reaching implications for pharmaceutical manufacturers. Staying informed on these changes is critical for industry stakeholders navigating the evolving landscape.

Source:

Social Security Administration: Medicare

Prescription Analytics, “Overview of the 2025 Medicare Part D Program Redesign: A Paradigm Shift for Pharma Manufacturers”

Prescription Analytics, “2023 Drug Wastage Rule to Impact Pharma Manufacturers”

What is PHS?

The Public Health Service (PHS) Pharmaceutical Pricing Agreement, also known as the 340B Program, is a federal initiative requiring pharmaceutical manufacturers to provide outpatient drugs at reduced prices to eligible healthcare organizations, or "covered entities." Participation in the program is mandatory for manufacturers engaged in Medicaid, as proof of compliance with 340B agreements is required by the Centers for Medicare & Medicaid Services (CMS) before approving Medicaid participation.

340B pricing is derived from a manufacturer’s quarterly Average Manufacturer Price (AMP), which determines the program's ceiling prices. This framework ensures affordable medication access for underserved populations while holding manufacturers accountable for accurate pricing submissions and compliance with federal standards.

Key Implications for Pharma Manufacturers

Pharmaceutical manufacturers participating in Medicaid must comply with the 340B Program’s rigorous requirements. This includes calculating and submitting accurate pricing data, maintaining comprehensive Standard Operating Procedures (SOPs), and adhering to submission deadlines. Failure to meet these requirements can lead to audits by the Health Resources and Services Administration (HRSA), where documentation and adherence to processes are heavily scrutinized.

To mitigate risk, manufacturers must ensure SOPs are current, pricing data aligns with program guidelines, and submissions are timely. Preparedness and disciplined compliance not only reduce the likelihood of penalties but also support the program’s mission to improve access to affordable medications for vulnerable populations.

For additional insights, reference our white paper, "PHS/340B Audit Survival Guide."

 

What is a PQAS in pharma?

A Prior Quarter Adjustment Statement (PQAS) is a reporting document created by pharmaceutical manufacturers using Form CMS-304a to reconcile adjustments to previous Medicaid rebate invoices received from state Medicaid programs or Pharmaceutical Benefit Managers (PBMs). Once an invoice is received, a PQAS is generated only in those instances where a change to an original quarterly rebate data submittal is necessary. These adjustments may arise from changes in utilization data or updates to the Unit Rebate Amount (URA). The PQAS helps manufacturers validate and respond to retroactive rebate claims, ensuring compliance with the Medicaid Drug Rebate Program (MDRP).

State Medicaid programs or their contracted PBMs can issue invoices for any past quarter that they determine have outstanding balances or credits due to the manufacturer, with no expiration on how far back they can request adjustments. For instance, if a drug first went on sale in 1990, Medicaid programs could still issue an invoice due to changes in utilization data or rebate calculations back to that program origination year. This would then be the pharmaceutical manufacturer’s responsibility to generate a PQAS form during the quarterly invoice cycle to resolve this adjustment. Each quarter year would need a separate PQAS form generated to ensure proper documentation and compliance with MDRP.

To mitigate risks and ensure compliance, pharmaceutical manufacturers must maintain well-organized, updated historical records of utilization data and payments. Without proper tracking, there’s a risk of duplicate payments for the same invoice, which can result in financial inefficiencies and errors.

For a deeper understanding of Medicaid rebate adjustments and their impact on pharmaceutical workflows, refer to our white paper: "Medicaid: From a Simple Concept to an Operational Labyrinth."

 

What is Public Law in pharma?

Public Law 102-585 requires manufacturers of “covered drugs” that are contracted and placed on the Department of Veteran Affairs Federal Supply Schedule (VA FSS) to provide discounted federal ceiling prices (FCPs) to agencies like the VA, DoD, and PHS, calculated annually as NFAMP – 24%. Pharma manufacturers must perform quarterly and annual pricing calculations, update their SAM (System for Award Management) registration, and submit modifications for product changes. These obligations ensure compliance which may impact pricing strategy and profitability, as reductions for key customers could lower federal prices. Non-compliance risks penalties and contract suspension, making accurate and timely management essential.

 

What is a ROSI?

A Reconciliation of State Invoice (ROSI) is a reporting document created by pharmaceutical manufacturers using Form CMS-304 to reconcile and respond to current-quarter Medicaid rebate invoices generated by state Medicaid programs. The ROSI outlines what rebates the manufacturer owes for drugs dispensed to Medicaid beneficiaries during the most recent quarter, essentially explaining any adjustments or disputes regarding the rebate amount owed to the state based on drug utilization data. Upon receipt of an invoice, manufacturers are responsible for creating a ROSI and validating the invoiced amounts to ensure accurate and timely payments and maintain compliance with the Medicaid Drug Rebate Program (MDRP). The use of Form CMS-304 by manufacturers is considered mandatory under the authority of Section 1927 of the Social Security Act and the National Drug Rebate Agreement.

Medicaid invoices are distributed by state Medicaid programs or their Pharmaceutical Benefit Managers (PBMs) in various formats, including digital downloads, PDFs via email and hard copies via the United States Postal Service (USPS), depending on the state’s process.

Pharmaceutical manufacturers must process and pay Medicaid rebate invoices within 37 calendar days from the postmarked date on the original invoice to avoid accruing interest charges. This timeline includes any mail transit delays, creating a tight window for adjudicating invoices. Payments may be grouped for jointly managed programs and paid via checks or ACH transactions. In addition to the payment, the pharmaceutical manufacturer is also responsible for sending the generated backup documentation to the state or PBM that includes a transmittal as well as the ROSI and PQAS forms for each quarter year.

To ensure compliance and prevent financial discrepancies, manufacturers should carefully validate the accuracy of invoices before creating ROSI and PQAS forms, monitor deadlines, and prioritize timely payment. For more insights into Medicaid rebate processing, refer to our white paper, "Medicaid: From a Simple Concept to an Operational Labyrinth."

 

What is an S Drug?

An S Drug is an abbreviation for a drug classification for “single source drugs” within the Medicaid Drug Rebate Program (MDRP). S Drugs are also commonly referred to as brand name drugs and are manufactured by one company. They do not have a generic or biosimilar alternative. These drugs are typically approved as an NDA or BLA.

These products have also typically been protected by US patents.

 

What is the TRICARE program in pharma?

TRICARE is a federal healthcare program that provides prescription drug benefits for active duty and retired military members, their families and survivors. It’s administered by the Defense Health Agency (DHA). Once a Department of Veterans Affairs Federal Supply Schedule (VA FSS) agreement is in place, manufacturers of ‘covered drugs’ (aka NDA and BLA products) must secure a TRICARE agreement, which involves validating and paying rebates for eligible prescriptions. While the process is less complex than Medicaid or VA contracting, it still requires regular management of rebate invoicing, claim validation, and payment reconciliation to ensure compliance. The TRICARE Rebate is based on the Annual Non-Federal Average Manufacturer Price (NFAMP) calculation less the Federal Ceiling Price (FCP).

Key Implications for Pharma Manufactures

Participating in TRICARE requires quarterly reconciliation of rebate invoices, validation of claims, and timely processing of payments. Accurate management of these tasks ensures compliance and maintains access to the program's broad beneficiary base, making it a vital component of federal market strategy for manufacturers.

 

What is a URA?

The Unit Rebate Amount (URA) is a critical value used to calculate the Medicaid rebates pharmaceutical manufacturers owe to state Medicaid programs when their drugs are dispensed under the Medicaid Drug Rebate Program (MDRP). To ensure Medicaid coverage for their products, manufacturers must enter into rebate agreements with the Centers for Medicare & Medicaid Services (CMS) and pay rebates promptly. These rebates are based on the URA and reflect the intent to align rebates with the drug's actual acquisition cost to pharmacies, which seek reimbursement from Medicaid after filling prescriptions for beneficiaries.

How are URA’s calculated?

Calculating a URA involves three steps:

• Determine the Base URA: This is calculated using the drug's Average Manufacturer Price (AMP) and applying the applicable rebate percentage per the drugs classification and/or any Best Price implications if applicable.
• Apply Inflation Penalties: If the drug's price increases faster than inflation (measured by the Consumer Price Index), an additional rebate or inflation penalty may be added. If the product qualifies as a line extension drug, additional inflation penalties may be inherited based on the original drug and whether that product has inflation penalties currently applied as well. (Understanding Prescription Drug Line Extensions)
• Calculate the Total URA: Add the Base URA to any applicable inflation penalties or additional rebate amounts to derive the final URA.

For manufacturers, understanding and accurately calculating the URA is crucial for maintaining compliance with CMS regulations and managing financial liabilities. Explore our detailed white paper, "How to Calculate a Unit Rebate Amount," for more insights into the calculation process.

 

What is the VA program?

The Department of Veterans Affairs (VA) Federal Supply Schedule (FSS) program is a federal contracting system through which pharmaceutical manufacturers supply drugs to government agencies including, but not limited to, Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard. Participation is mandatory for manufacturers of “covered drugs,” as defined by Public Law 102-585, when these products are approved under a New Drug Applications (NDA) or Biologics License Application (BLA).

The VA contracting process is extensive and detailed, involving both an initial setup phase and ongoing compliance requirements. Manufacturers must disclose pricing data, establish their tracking customer for pricing benchmarks, and manage pricing agreements through single or dual price awards. Contracts typically span five years, with ongoing reporting requirements and annual recalculations of pricing based on statutory formulas such as Annual NFAMP – 24%.

Key Implications for Pharma Manufacturers

For manufacturers new to the program, obtaining a VA agreement requires completing a System for Award Management (SAM) registration that allows a business to do business with the US federal government, securing an interim agreement, and undergoing a six-month solicitation process. Each step demands careful preparation, including accurate pricing disclosures and robust documentation to meet federal requirements.

For those with an existing VA contract, compliance is a continuous process. This involves submitting quarterly and annual pricing calculations, maintaining SAM registration, and managing modifications for product changes. Manufacturers must also calculate federal ceiling prices annually, submit industrial funding fee reports, and fulfill reporting obligations such as the Small Business Subcontracting Plan.

Successfully navigating the VA program requires a disciplined approach to documentation, pricing strategy, and timely submissions. By staying organized and proactive, manufacturers can meet compliance obligations and support the government’s mission of providing critical medications to federal beneficiaries. For additional guidance on VA contracting, see our white paper, "Three Things to Know about the Challenges of VA/FSS Contracting."

 

What is WAC in pharma?

The Wholesale Acquisition Cost (WAC) is the manufacturer's published list price for a drug when sold to wholesalers or direct purchasers, excluding any discounts or rebates. It represents the cost a wholesaler pays to acquire the drug from the manufacturer and serves as the starting point for pricing across the pharmaceutical supply chain.

How is WAC price used in pharma?

For pharmaceutical manufacturers, the WAC serves as a key pricing benchmark. It reflects the list price a manufacturer charges wholesalers, such as Cencora/AmerisourceBergen, Cardinal Health, or McKesson, before applying discounts or rebates. Manufacturers rely on WAC for calculating gross revenues, negotiating reimbursement rates with payers, and establishing pricing strategies. However, WAC does not represent the final transaction price, as it often excludes real-world discounts and rebates critical to market dynamics.

Why is WAC important?

WAC is an industry standard for describing the price of drugs. It is also used to calculate the cost of goods sold for wholesalers. WAC is used to estimate the Average Wholesale Price (AWP) of a drug.

For additional information related to WAC, reference our white paper, "Key Terms in Pharmaceutical Government Pricing."