Class of Trade

July 2022

For pharmaceutical manufacturers, assigning Class of Trade designations to government pricing data can be a tedious exercise, however, it can have large implications on Medicaid rebate liabilities and present compliance risks if not managed correctly. Let’s take a look at what Class of Trade means and common challenges you may encounter when assigning designations.

Class of Trade

CLASS OF TRADE (COT)

Class of Trade (COT) is the type of distribution channel by which pharmaceutical products flow into the consumer market. These can include, but are not limited to, retail pharmacies, hospitals, wholesalers, or long-term care facilities. 

COT designations are assigned by pharmaceutical manufacturers to each purchaser and are leveraged in various ways including government pricing computations, contracting agreements and sales channel analysis. Within government pricing computations, the value of COT assignments should not be underestimated as it can have a significant impact on the computations fueling a pharmaceutical manufacturer’s Medicaid rebate liability and calculated pricing for various government contracts. 

The COT assignment determines if transactions will be included in a manufacturer’s Average Manufacturer Price (AMP), Non-Federal Average Manufacturer Price (NFAMP) and Best Price (BP) computations. For example, pharmaceutical manufacturer sales designated within a “Retail Pharmacy” COT will be included in government pricing calculations, while a sale at an “Inpatient Hospital” may be excluded. The inclusion or exclusion of sales by COT assignments in government pricing computations will ultimately impact the Medicaid rebate amounts, inflation penalties, the 340B/PHS ceiling price, and the VA/Federal Supply Schedule ceiling price. 

The Center for Medicare and Medicaid Services (CMS) provides general guidance on Class of Trade designations and what should be included in key computations; however, it is ultimately the pharmaceutical manufacturer’s responsibility to ensure that COT is assigned accurately and consistently and to have that process documented within a Standard Operating Procedure (SOP). 

COMMON CHALLENGES 

With 100+ possible designations for COT, there are several challenges pharmaceutical manufacturers face in developing and managing a consistent methodology for assigning COT to sales. Below are some of the most common, along with some potential solutions: 

  • Entities seemingly fit into multiple COT categories

    At face value, the name of purchasers may seem to fit into multiple COT categories. For example, a purchaser with “Surgery Center” in the title could be classified as “Ambulatory” or a “Medical Center.” When this occurs, look for keywords in the purchaser’s name that may provide context into the appropriate COT and whether that purchaser is an inpatient or outpatient facility. Inpatient facility purchasers of prescription drugs (i.e. hospitals) are generally excluded from government pricing computations while outpatient purchasers (i.e. retail pharmacies) are typically included. Keywords such as “Rx” and “Pharmacy” in the purchaser’s name may be clues to an outpatient COT designation. Keywords such as “IP” and “Inpatient Pharmacy” may be indicators that an inpatient classification is warranted and thus excluded from government pricing computations. These keywords can be a great starting point, but the facilities should always be investigated further to make a more exact determination as to which type of facility it is. Additional research can be done on the web as needed by searching the facility name, address and/or National Provider Identifier (NPI) to learn details that can inform an accurate COT designation.

  • Addressing unknowns

    It’s common to come across entities that lack the detail needed to make an informed COT designation or find a designation that was previously left blank in the absence of information. In these instances, it’s important to perform research on the purchaser’s entity to determine its appropriate COT. During COT cleanup efforts for new clients, we often see numerous unknown COT designations that were previously defaulted to a single COT. We recommend avoiding any default designations for unknowns. This action can be a high compliance risk due to its potential inaccuracy and often leads to over / underpaying a pharmaceutical manufacturer’s Medicaid rebate liability. Dedicate the time to researching the purchaser to make an informed COT designation.

  • Evolving business models

    Merger and acquisition activity and evolving business models mean that COT designations for a given entity are subject to change. This is especially common in channels that are changing in response to high growth such as the specialty drug market. There are strategies pharmaceutical manufacturers can implement to monitor evolving business models that may signal COT changes. One leading indicator that a COT change may be warranted is a new / changed DEA number for a purchasing entity. Manufacturers should also look for purchaser entity name changes such as going from “Bob’s Neighborhood Pharmacy” to “Bob’s Home Infusion.”

  • Lack of consistency across teams

    With a subjective lens required to assign COT, having multiple individuals or teams apply a consistent methodology to designate COT can be a challenge—especially as sales volumes grow. Having a documented SOP, a COT reference library, and a thorough audit process are critical steps in applying an accurate and consistent methodology.

SUMMARY

The most important aspect of COT assignment is consistency. Developing a methodology that allows assignments to follow a pre-determined process and disciplined application of that process every time will result in COT assignments that you can have confidence in. Lack of consistency and altering assignments among facilities over time results in inaccurate data, which will ultimately lead to less accurate government pricing computations.

Dan Piergies Prescription Analytics

Dan Piergies
Chief Analytic Officer

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