United States: In Latest Medicaid Rule, CMS Aims To Define Line Extensions

As many of our astute readers are aware, on June 17, 2020 CMS released a long-awaited Medicaid proposed rule addressing a number of far-ranging issued involving Medicaid coverage and payment for prescription drugs, including new regulations to encourage the development value-based purchasing arrangements between states and manufacturers. Over the next several days we will be posting our thoughts on a number of these key policy proposals, including CMS' new proposal to encourage value-based purchasing arrangements, changes to how authorized generics are treated, and the impact on PBM accumulator programs.

One issue that is causing those of us that have been doing this for more than a few years a bit of déjà vu is CMS' long-awaited proposal to define line extensions. To understand the impact of this rule for manufacturers, one must start with a short stroll through memory lane.

Background on the Line Extension Policy

Prior to the enactment of the Affordable Care Act of 2010 (ACA), manufacturers' line extension drugs often were treated as new drugs for Medicaid rebate purposes, and as such, could avoid the additional inflation related Medicaid rebate obligation set forth in statute at Section 1927 of the Social Security Act. At that time, the Congressional Budget Office pointed out that "[u]nder current law, even a minor change to an existing drug can lead to a 'new' product designation that does not trigger the inflation-related rebate even if the initial price for that new product is substantially higher than the price for the original formulation."

The Affordable Care Act (ACA) made changes to Section 1927 (the Medicaid Drug Rebate Program), including changing the rebate obligation of manufacturers for a drug that is a "line extension of a single source or innovator multiple source drug that is an oral solid dosage form." Under the ACA-developed policy, the additional rebate for line extensions is equal to the greater of: (1) the additional rebate percentage calculated under existing law for the old product; or (2) the additional rebate percentage calculated for any strength of the original drug. In 2016, Congress passed CARA further amending this definition to exclude from the definition "an abuse-deterrent formulation of the drug."

At the time of the passage of the ACA, Congress defined a line extension only as "with respect to a drug, a new formulation of the drug, such as an extended release formulation." Because Congress did not further define the term, since 2012 CMS has undergone rulemaking in an attempt to establish such a definition, although no definition has ever been finalized. CMS has previously provided guidance to manufacturers to use "reasonable assumptions" in their determination of whether a drug qualifies as a line extension

In the proposed rule released on June 17th, CMS proposes to establish a new definition for a "line extension" drug.

Proposed Line Extension Definition

In the proposed rule, CMS begins by noting that, after several years of experience with manufacturers self-reporting their line extension, "we have noted inconsistency among manufacturers in their identification of drugs as line extensions." CMS also notes that manufacturers may have an incentive to be "underinclusive" in their identification of line extension drugs. To account for these concerns, CMS is proposing a "broad" definition of a line extension in this proposed rule, such that many drugs currently not subject to the additional rebate could face enhanced liability if the rule is finalized.

Line Extension Need Not Be an Oral Solid Dosage Form

In its 2012 proposed rule, CMS had proposed that, to be a line extension, both the initial brand name drug and the line extension drug had to be an oral solid dosage form. CMS now states that the statutory language can be reasonably construed so as to provide that only the initial single source drug or innovator multiple source drug must be an oral solid dosage form. This interpretation expands the universe of drugs that can be line extensions, as under the prior interpretation, a manufacturer of a drug that would otherwise be a line extension - except for the fact that it is not in oral solid dosage form - could have made a reasonable assumption that it was not subject to the line extension policy and therefore avoid paying the additional rebate.

Defining Line Extension as a "New Formulation"

Consistent with the statutory language, CMS is proposing to adopt a definition of "line extension" at 42 C.F.R. § 447.502 to mean "for a drug, a new formulation of the drug, but does not include an abuse-deterrent formulation of the drug (as determined by the Secretary)." To effectuate this language, CMS is also adopting a new definition for "New Formulation" to mean:

For those with a good memory, this definition is similar to the definition proposed by CMS back in 2012, which would have relied on FDA chemical types (except that new ester, salt, or noncovalent derivatives are excluded). Perhaps the most notable change that narrows this definition compared to the 2012 proposal is the requirement that "the new formulation contains at least one active ingredient in common with the initial brand name listed drug." With respect to new indications, CMS is specifically seeking feedback about whether a drug approved with a new indication that is not separately identifiable should be considered a new formulation and, if so, how such a drug could be identified in DDR for purposes of calculating the alternative URA.

Defining Oral Solid Dosage Form

Under CMS' current definition of an oral solid dosage form at 42 C.F.R. § 447.502, the term is defined to mean "capsules, tablets, or similar drugs products intended for oral use as defined in accordance with FDA regulation at 21 CFR 206.3 that defines solid oral dosage form." CMS is now proposing to expand this definition to mean:

This definition is notably broader than FDA's definition, such that it could include, for example, a sublingual film or a powdered drug administered by oral inhalation. CMS also notes that an oral solid dosage form that incorporates a medical device would not be exempt from this definition solely due to the addition of a device to the oral solid dosage form.

Further Comments on Combination Products

CMS proposes to include combination products (provided that the new formulation contains at least one active ingredient in common with the initial brand name listed drug) in the definition of line extension. In response to concerns from commenters in response to the 2012 rule that this could place at risk confidential pricing information to commenters, CMS reminds commenters that the additional rebate is only required if the manufacturer of the line extension also manufacturers the initial brand name listed drug. CMS also clarifies that it believe the initial brand name listed drug can be a combination product itself, meaning that if FDA subsequently approves a new drug consisting of only one of the new molecular entities composing the combination product, such a drug could also be considered a line extension (as a new formulation).

CMS does solicit comments on whether there may be some better way to define and identify combination drugs, recognizing that "some combination drugs are very different drugs than the initial brand name listed drug" and others appear only to be slightly different than the existing drug.

Further Comments on New Strength

Interestingly, CMS has previously taken the positon that, because not specifically called out by the statute, "new strengths" would generally not be considered to be a line extension. In the proposed rule, CMS reverses course, proposing that a new strength of a drug, produced or distributed at a later time than the initial strength, should be identified as a line extension and made subject to the line extension additional rebate.

Further Comments on New Indication

In response to comments from the 2012 rule, CMS notes that because a new indication for an already approved drug may not result in a different drug product, it would not be logical that a drug is a line extension of itself. As such, CMS is proposing that a line extension will include a change in indication that is accompanied by marketing as a separately identifiable drugs (for example, a different NDC).

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