As the healthcare industry progresses into 2011, pharmaceutical manufacturers continue to adapt to the increasing changes of the Patient Protection and Affordable Care Act (PPACA)1 and the Health Care and Education Reconciliation Act of 2010 (HCERA).2

With the changes come expansions in both access and regulatory authority of U.S. government programs. These evolutionary changes in healthcare reform have many implications in the industry. Government subsidized expansions to Medicaid, Medicare and Public Health Services (PHS 340B)3allow life sciences manufacturers to serve more of the indigent, retired and underprivileged U.S. populations, at the cost of additional business processes and activities.

Increasingly, manufacturers are finding that the ability to capture more of these revenues through various government programs implies an increased level of sophistication that limitations in staff knowledge or availability cannotaccommodate. Therefore, the question of whether to keepthis function in-house or outsourced must be asked by all manufacturers.

Our conclusion when taking all factors in aggregate indicates that government program Business Process Outsourcing (BPO) is the direction in which the life sciences industry is headed. An exploration of both the regulatory aspect of its business as well as the operational aspect of people, processes and systems follows, along with a comparison of all manufacturer factors that must be considered in whether to keep Government Pricing (GP) functions internalized.

Regulatory Review

The current U.S. regulatory environment is characterized by three major themes: (a) the expansion of government programs, (b) increased government reporting requirements, and (c) enhanced penalties and prosecutorial trends toward regulatory compliance enforcement.

Government program expansion in the U.S. involves growth in healthcare coverage in both population and budget expenditure. The Congressional Budget Office (CBO) estimates that through a combination of Medicaid, Medicare, PHS 340B and other safety network programs, insurance coverage in the U.S. will increase by 32 million people in the next nine years.4

Additionally, the Department of Health and Human Services (HHS) expects more than $200 billion in increased national U.S. healthcare expenditures in the same period,5with a large majority allocated to Medicaid and Medicare. Manufacturers that want to maximize revenue gain from these sources should be prepared to scale up operations in reporting sophistication to avoid penalties of non-compliance with the myriad of government regulations.

Government Reporting Requirements

Medicaid: The Medicaid Drug Rebate Program (MDRP) has changed significantly:

1.Pricing and Reimbursement – Many manufacturers are reporting two distinct Monthly and Quarterly Average Manufacturer Price (AMP) methodologies: Retail Community Pharmacy (RCP) AMP and 5 I (inhalation, infusion, instilled, implanted, injectable) AMP.Initial policy drafts and calculation methodologies will need to be reviewed for compliance with CMS-2338-F2.6 To the extent that monthly AMP calculations are not fully automated, manufacturers may wish to review staffing and resources necessary to manage additional work streams before setting methodology parameters at a reasonable level that prevents an occasional product sale to an RCP from causing a 5 I AMP to toggle back and forth from a RCP AMP.

2.Access – As the MDRP expands to encompass more lives and higher scriptvolumes due to the inclusion of Medicaid Managed Care Organization (MCO) utilization and the expansion of Medicaid rolls, the risk ofduplicateMDRP and Medicaid MCO formulary/market share rebate payments grows.Freeing up operational staff to focus on financial impacts and data validation will become essential to sustained profitability.

3.Authority – Program Integrity initiatives will increase funding and resources for investigating, prosecuting and punishing fraud, waste and abuse, resulting in more audits for manufacturers.7 Gaps in process, policies and audit trails will pose risks.Manufacturers should review options to upgrade compliance infrastructure.

Medicare: The PPACA establishes a Patient Centered Outcomes Research Institute (PCORI) responsible for the identification, prioritization and execution of comparative effectiveness research (CER). It may ultimately yield results that influence prescriber script-writing patterns nationally.

1.CER – CMS now operates The Center for Medicare and Medicaid Innovation (CMI), designed to improve quality and cost-effectiveness in Medicare and Medicaid.8 This paradigm shift to measuring relative outcomes (quality) will affect future product penetration in all federally funded healthcare programs, with “spillover” impacts upon commercial markets and P/Ls. Manufacturers familiar with resources and utilization associated with clinical practice patterns based upon research and outcome studies will have an advantage in marketingproducts to government and commercial payers.9

2.Access – As the U.S. population ages and baby boomers hit retirement age, the Part D Prescription Drug Benefit will cover more and more Americans so that manufacturers will wish to start communicating the relative efficacy, safety and value of their products. Accountable Care Organizations (ACOs) will likely play a key part in normalizing utilization and costs around the nation. It is likely that pharmacists will be well represented in these ACOs.10

3.Part D Donut Hole – The Medicare Part D gap in beneficiary prescription drug coverage is now being filled with 50% discounts on brand (innovator) products as of Jan. 1, 2011. This effectively removes one incentive to switch to a generic for many Medicare beneficiaries.

340B Drug Pricing Program Developments: Notably, on Dec. 15, 2010, the Medicare and Medicaid Extenders Act of 2010 was enacted and pursuant to Section 204, restoring pediatric hospital access to 340B ceiling pricing for orphan drugs.11 Manufacturers that market orphan drugs will need to establish separate contract membership to avoid the Medicaid Best Price implication associated with inadvertently selling orphan drugs at the 340B ceiling price to ineligible Covered Entities.

Additionally, The Health Resources and Services Administration (HRSA) requested an additional $3 million in funding12 to enable its Office of Pharmacy Affairs (OPA) to efficiently govern the 340B Drug Pricing Program13 by:

1.Validating the accuracy of manufacturer ceiling prices charged to 340B-covered entities and establishing formal procedures for manufacturers to refund overcharges, and resolve pricing and unit count disputes.14

2.Auditing manufacturer pricing and assessing civil monetary penalties (CMPs) of as much as $5,000 per violation pursuant to section 7102(a) of the Patient PPACA and published rules.15

3.Publishing 340B prices on a covered-entity and state Medicaid agency accessible-database.16

Certification – AMP, Best Price (BP) and Average Sales Price (ASP) across both the Medicaid and Medicare government programs require a chief executive officer, chief financial officer or delegee to certify17 that submitted GP is legitimate:

“I hereby certify that to the best of my knowledge, the data being sent to CMS with this submission iscomplete and accurate at the time of this submission, and was prepared in accordance with the Manufacturer’s good faith, reasonable efforts based on existing guidance from CMS and the Manufacturers reasonable assumptions regarding the provision of section 1927of the Social Security Act, the National Rebate Agreement, and applicable federal regulations. Iunderstand that the information contained in thissubmission may be used for Medicaid rebate and payment purposes.”

Penalties for non-compliance with the above reporting requirements can be significant for business entities as well as for the executives tasked with accountability for compliance oversight. Given prior 2003 DHHS OIG guidance coupled with the July 2007 DRA final rule requirement at 42 C.F.R. 447.510 (e)18 that C-level executives certify the accuracy, completeness and timeliness of ASP, AMP, BP, CPPD and BP to CMS,19 the spillover distance from FDA violations to CMS and VA is shrinking each day.Of note, a string of indictments and guilty charges against multiple drug manufacturers’ CEOs has signaled a change in regulatory oversight from the Executive Branch.

Sustainable compliance is a necessity for any organization, no matter how small or new, that elects to participate in federal and state healthcare programs.

Operational Review

Given the above regulatory environment, manufacturers must consider how to execute on the above requirements while minimizing strain on employee and IT system resources.

C-Level certification:20 Making a CEO or CFO (or delegate) required to certify that all submitted Medicaid and Medicare prices are correct implies robustness of methodology that needs to be provided to the certifying party that the procedures are correct. With the growing government price-reporting requirements, it is increasingly difficult for manufacturers to design this level of compliance oversight into their operations while they scale up in government contracting complexity and methodologies.

Management level oversight: Given the complex nature of GP, to the extent that monthly AMP calculations are not fully automated, manufacturers must review staffing and resources necessary to manage additional work streams to achieve compliance. For many manufacturers, the requirements for accuracy and timeliness come at the price of both FTEs and timeline constraints that are increasingly onerous to keep in house.

Line-level calculations and validations: Because GP calculations are fundamentally an exercise in mathematical rigor and execution of a government policy document, the burden of ensuring that the GP calculations are correct falls squarely on the shoulders of the analysts, associates and specialists within any compliance, finance or contracting office who tend to be overtaxed with other responsibilities. As government regulations continue to grow in complexity, workload continues to demand these resources, thereby increasing the risks of errors in calculation methodology.

System costs: In order for a manufacturer to meet the myriad of government reporting requirements summarized above, an intelligent IT system needs to both (1) document all methodologies, assumptions, and steps in calculating a GP, and (2) validate the correctness of the GP reporting details:

1.Document in writing all new interpretations and executions of proposed methodologies in all systems and business processes, including competing AMP methodologies, a manufacturer’s product composition, class of trade designations for both direct and indirect customers, and data granularity. Additionally, ensure that all customer master lists and CoTs are auditable and accurate.

2.Validate whether MDRP rebate payments, SPAP rebates, ADAP rebates, SCHIP rebates, Medicare Part D Coverage Gap rebates, TRICARE rebates, 340B PHS Covered Entity chargebacks and commercial MCO rebates are being correctly included or excluded from price calculations and that the utilization reported is validated prior to payment, to avoid revenue leakage associated with counting the same units over for redundant rebates. Additionally, ensure that member lists are cross-walked appropriately and are in fact aligned with the manufacturer’s approved classes of trade.

Ideal State Analysis

With the above considerations in mind, the factors that go into whether government reporting and Medicaid rebate payment functions should be maintained internally or outsourced must be individually analyzed. Based on our research in the space, each of the following factors weighs the benefits and considerations between these alternatives:

Automation: The ideal state for ongoing business processes in GP must reduce existing manual processes of ongoing government participation. Given that outsourcing inherently confers specialization to the process, maintaining an automation factor in-house is less ideal than the alternative. Verdict: If your company doesn’t have an established automated solution, then consider Outsourcing as the alternative to building one.

Thought Leadership: With the GP calculation and Medicaid rebate payment process fraught with regulatory potholes, foresight and thought leadership must be taken for guidance and direction on existing and emerging regulations. Verdict: It is Equally possible to retain a staff of experts internally, as well as to outsource the entire process.

Scalability: With regulations still not yet finalized in spite of ongoing expansion in government programs, the established process must be able to handle significant increases to volume of direct sales, chargeback and discounting data. While IT systems and FTE costs can easily scale up internally, a proper outsourcing model takes this factor into account by design. Verdict: If acquiring this scalable IT infrastructure is not something your organization would like to take on, then Outsourcing is a great alternative.

Configurability: The myriad of potential healthcare reform changes has not yet been finalized, so the GP calculation and Medicaid rebate payment process must accommodate the need for regulatory flexibility. Verdict: With the right models, both internal and outsourcing functions are Equally Tied to delivering GP results flexibly.

Cost Effectiveness: The ideal state calculation and payment process should take into account a low cost of ownership over a sustained period as compared to the alternative. Verdict: While outsourcing is performed by default at a reasonable price point, it is also Equally possible to keep costs low internally through more risky manual processes and less infrastructure investment.

Enterprise-Level Sophistication: The solution needs to have a rigorous, auditable and defensible methodology and logic. Verdict: While it is possible for manufacturers to achieve this through the implementation of various government program revenue contract management systems, if your organization has not yet implemented this solution, a proper Outsourced model that already builds in sophistication may be ideal.

Risk Mitigation: The ability to reduce ongoing risks to the company – including staff turnover and human errors – is paramount in the ideal solution. Verdict: Dedicated staff on a proper BPO model indicates that Outsourcing may be the better alternative for this factor if you are concerned with turnover and human errors.

Implementation Effort: The degree of ease with which the ideal government programs reporting and payment solution can be implemented in a company’s environment is just as significant as the ongoing efforts. Verdict: If developing a calculation and payment system after 12 months of implementation does not seem appealing, then Outsourcing with a transition timeframe of two to three months may be more ideal for your organization.

With the above factors considered in aggregate, it is clear that the benefits of outsourcing the government calculation, payment and regulatory oversight process clearly outweigh the alternative of maintaining this function in-house.

If the pace and scope of government program regulatory change is distracting you from focusing on equally vitalcore business development and management obligations, business process outsourcing should be an option worth your consideration.

References

1 http://www.gpo.gov/fdsys/pkg/PLAW-111publ148/pdf/PLAW-111publ148.pdf

2 http://www.gpo.gov/fdsys/pkg/PLAW-111publ152/pdf/PLAW-111publ152.pdf

3 http://www.gpo.gov/fdsys/pkg/BILLS-111hr4994enr/pdf/BILLS-111hr4994enr.pdf

4 http://cboblog.cbo.gov/?p=546

5 https://www.cms.gov/ActuarialStudies/Downloads/S_PPACA _2009-12-10.pdf

6 http://edocket.access.gpo.gov/2010/2010-28649.htm

7 http://www.hrsa.gov/about/pdf/budgetjust2011.pdf The funding will sustain annual verification of all covered entities ensuring accuracy and integrity of the 340B database over time and will support 508 compliance of the Pharmacy Services Support Center (PSSC)/ Office of Pharmacy Affairs (OPA) website.

8 Section 3021 of Public Law 111-148, The Patient Protection and Affordable Care Act of 2010, provided for the establishment of a Center for Medicare and Medicaid Innovation

(CMI) within the Centers for Medicare & Medicaid Services by January 1, 2011. The stated purpose of the CMI is to test innovative payment and service delivery models to bring about a reduction in Medicare and Medicaid programexpenditures while preserving or enhancing quality of care.

9 See generally the collective works of John Wennberg, MD et al at Dartmouth and see http://www.dartmouthatlas.org/ and http://tdi.dartmouth.edu/

10 http://www.nacds.org/user-assets/pdfs/2010/newsrelease/ 11_19_NCQA_ACO_comments.pdf

11 http://www.gpo.gov/fdsys/pkg/BILLS-111hr4994enr/pdf/BILLS-111hr4994enr.pdf

12 http://www.hrsa.gov/about/pdf/budgetjust2011.pdf The funding will sustain annual verification of all covered entities ensuring accuracy and integrity of the 340B database over time and will support 508 compliance of the Pharmacy Services Support Center (PSSC)/ Office of Pharmacy Affairs (OPA) website.

13 Section 602 of the Veterans Health Care Act of 1992(P.L. 102-585) established the 340B Drug Pricing Program and the PPACA and The Reconciliation Act expanded the program to include additional covered entities (including children’s hospitals) but then excluded such additional entities from purchasing orphan drugs (many of which have pediatric indications) as defined in �256 of the Federal Food Drug and Cosmetic Act at the 340B price.

14 The September 20, 2010 notice of proposed rule and request for comments http://edocket.access.gpo.gov/2010/pdf/2010-23461.pdf

15 http://oig.hhs.gov/fraud/docs/alertsandbulletins/2010/SpAdvBullet in_AMP_ASP.pdf

16 See Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers available as PDF file at http://www.oig.hhs.gov/fraud/docs/complianceguidance/042803pharmacymfgnonfr.pdfThe 2003 DHHS OIG Guidance for Pharmaceutical Manufacturers states that one of the potential risk areas for non-compliance was “(1) integrity of data used by state and federal governments to establish payment.

17 Pp. 11-12 expound upon this issue:

a. Integrity of Data Used to Establish or Determine Government Reimbursement

Many federal and state health care programs establish or ultimately determine reimbursement rates for pharmaceuticals, either prospectively or retrospectively, using price and sales data directly or indirectly furnished by pharmaceutical manufacturers. The government sets reimbursement with the expectation that the data provided are complete and accurate. The knowing submission of false, fraudulent, or misleading information is actionable. A pharmaceutical manufacturer may be liable under the False Claims Act if government reimbursement (including, but not limited to, reimbursement by Medicare and Medicaid) for the manufacturer’s product depends, in whole or in part, on information generated or reported by the manufacturer, directly or indirectly, and the manufacturer has knowingly (as defined in the False Claims Act) failed to generate or report such information completely and accurately. Manufacturers may also be liable for civil money penalties under various laws, rules and regulations. Moreover, in some circumstances, inaccurate or incomplete reporting may be probative of liability under the federal anti-kickback statute.

Where appropriate, manufacturers’ reported prices should accurately take into account price reductions, cash discounts, free goods contingent on a purchase agreement, rebates, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits offered to some or all purchasers. Any discount, price concession, or similar benefit offered on purchases of multiple products should be fairly apportioned among the products (and could potentially raise anti-kickback issues). Underlying assumptions used in connection with reported prices should be reasoned, consistent, and appropriately documented, and pharmaceutical manufacturers should retain all relevant records reflecting reported prices and efforts to comply with federal health care program requirements.

18 42 C.F.R. 447.510(e) reads:

(e) Certification of pricing reports.

Each report submitted under paragraphs (a) through (d) of this section must be certified by one of the following:

(1) The manufacturer’s chief executive officer (CEO);

(2) The manufacturer’s chief financial officer (CFO);

(3) An individual other than a CEO or CFO, who has authority equivalent to a CEO or a CFO; or

(4) An individual with the directly delegated authority to perform the Certification on behalf of an individual described in subsections (1) through (3).

19 See CMS 22238-FC preamble at 39154 Federal Register / Vol. 72, No. 136 / Tuesday, July 17, 2007 / Rules and Regulations at Section 1927(b)(3)(C) of the Act describes penalties for manufacturers that provide false information or fail to provide timely information to CMS. In light of these requirements, we proposed to require that manufacturers certify the pricing reports they submit to CMS in accordance with � 447.510. We proposed to adopt the certification requirements established by the Medicare Part B Program for ASP in the interim final rule with comment period published on April 6, 2004. Each manufacturer’s pricing reports would be certified by the manufacturer’s chief executive officer (CEO), chief financial officer (CFO), or an individual who has delegated authority to sign for, and who reports directly to, the manufacturer’s CEO or CFO.

20 The ASP Certification reads:

“I certify that the reported Average Sales Prices were calculated accurately and that all information and statements made in this submission are true, complete, and current to the best of my knowledge and belief and are made in good faith. I understand that information contained in this submission may be used for Medicare reimbursement purposes.

The CMS reporting system for the MDRP, the Drug Data Reporting (DDR) system requires monthly and quarterly certifications. 42 C.F.R. � 447.510(e)mandates that the Manufacturer submit a certification to CMS, executed by a Manufacturer representative meeting specified criteria, with their Base Date AMP, Monthly AMP, Quarterly AMP, Best Price, Customary Prompt Pay Discount and Nominal Price submissions as well as with any and all restatements of such. As currently written that DDR certification provides that:

I hereby certify that to the best of my knowledge, the data being sent to CMS with this submission is complete and accurate at the time of this submission, and was prepared in accordance with the Manufacturer’s good faith, reasonable efforts based on existing guidance from CMS and the Manufacturers reasonable assumptions regarding the provision of section 1927 of the Social Security Act, the National Rebate Agreement , and applicable federal regulations.I understand that the information contained in this submission may be used for Medicaid rebate and payment purposes

Tony Chen is associate director of Government Pricing, at Alliance Life Sciences Consulting Group. Rob Fellman is a senior consultant and Albert Chan is a consultant at ALSCG. For more information about this article, please contact sales@alscg.com or visit www.alscg.com.