October 3, Via and First-Class Mail

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1 October 3, 2013 Via and First-Class Mail Cynthia Mann Deputy Administrator & Director Center for Medicaid and CHIP Services Centers for Medicare and Medicaid Services 7500 Security Blvd., Room C Mail Stop S Baltimore, MD Re: Medi-Cal State Plan Amendment B Dear Ms. Mann: We, the undersigned organizations, are writing to express our concerns regarding California Medicaid (Medi-Cal) State Plan Amendment B (SPA B), which requires safety-net providers that participate in the Public Health Service Act Section 340B federal drug discount program (340B program) to use only 340B drugs for Medi-Cal patients and to bill such drugs at actual acquisition cost (AAC). 1 We believe that Medi-Cal did not meet applicable federal requirements when preparing and implementing SPA B and that California s requirement that 340B providers use only 340B drugs for Medi-Cal patients is contrary to federal law. In addition, Medi-Cal failed to ensure that reimbursement was adequate to cover 340B providers costs. As a result, SPA B could have an adverse impact on Medi-Cal patients and the safetynet providers that serve them. Therefore, we ask that CMS immediately disapprove SPA B and encourage Medi-Cal to work with 340B providers on developing a shared savings arrangement instead. We also request a meeting with you to discuss our concerns, which we elaborate below. Our organizations represent providers enrolled in the 340B program. As the legislative history of the 340B statute makes clear, the purpose of giving safety-net providers access to 340B discounts is to enable them to stretch their scarce resources, so that they may reach more patients and furnish more comprehensive services. 2 They rely on the savings generated from the program to help finance their mission of serving vulnerable patient populations. As discussed in a recent Government Accountability Office report, providers are using their savings to further the program s purpose by maintaining services and expanding services to treat existing and additional patients. 3 I. Medi-Cal Did Not Meet Federal Requirements for SPAs Federal law requires states to follow certain procedures when amending their Medicaid plans. Among these procedures is a requirement that a state explain to the public why it is changing 1 Medi-Cal State Plan Amendment B. 2 H.R. Rep , pt.2, at 12 (1992). 3 Government Accountability Office, Drug Pricing: Manufacturer Discounts in the 340B Program Offer Benefits, but Federal Oversight Needs Improvement 17 (Sept. 2011), available at

2 Cynthia Mann October 3, 2013 Page 2 of 7 its payment rates. 4 The state failed to provide the public with a rationale for the reimbursement changes. On August 28, 2009, Medi-Cal issued a notice in the California Regulatory Law Bulletin that the agency intended to change its billing and reimbursement requirements for drugs, including 340B medications. The notice described the changes and noted their expected fiscal impact but, contrary to federal law, did not explain why Medi-Cal was making the changes. 5 Medi-Cal failed to satisfy federal SPA-related procedures in another way. Federal law is clear that a state may not implement a SPA before the Centers for Medicare and Medicaid Services (CMS) approves it. 6 In a 2010 letter regarding the SPA review process, CMS reminded states that the agency must review and approve SPAs before a [s]tate may implement Medicaid program modifications. 7 In this case, the state implemented SPA B before receiving CMS approval. The changes have been in effect since October 1, 2009, but, to our knowledge, CMS has never approved SPA B. It is noteworthy that a federal court recently determined that the state law enacted to implement the SPA was invalid for that very reason. 8 II. California s Carve-in Requirement is Contrary to Federal Law As we explain in more detail below, Medi-Cal s reimbursement rates for 340B drugs are inadequate to cover providers costs. Worse yet, California has forced 340B providers to accept inadequate reimbursement by prohibiting them from purchasing their drugs for Medicaid patients outside the 340B program, a practice which is both permitted and protected under federal law. We therefore believe that California s mandate requiring 340B providers to use 340B drugs when serving Medi-Cal patients is contrary to federal law. When creating the 340B program, Congress directed the Secretary of Health and Human Services (HHS) to develop a mechanism to protect manufacturers from giving both a Medicaid rebate and 340B discount on the same drug, often referred to as a duplicate discount. 9 HHS complied with this directive and, in 1993, established a mechanism that avoids duplicate discounts. 10 Under the mechanism, a provider can (1) buy its drugs for Medicaid patients outside the 340B program and accept a state Medicaid program s standard reimbursement rate ( carve out ) or (2) notify HHS and the state that it intends to purchase its drugs for Medicaid beneficiaries at 340B prices, so that the state can exclude 340B claims from its Medicaid rebate requests to 4 42 CFR (c)(3). 5 California Department of Health Care Services, CRLB 377 (Aug ). 6 Development Services Network v. Toby Douglas, 666 F.3d 540, 546 (9th Cir. 2011). 7 Letter from the Centers for Medicare and Medicaid Services (CMS) to State Medicaid Directors and Health Officials Regarding Revised State Plan Amendment Review Process 1 (Oct. 1, 2010), available at 8 AIDS Healthcare Found. v. Toby Douglas, 2013 U.S. Dist. LEXIS 64554, at *11 (C.D. Cal 2013) U.S.C. 256b(a)(5)(a)(ii). 10 Health Resources and Services Administration (HRSA), Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Duplicate Discounts and Rebates on Drug Purchases, 58 Fed. Reg (May 7, 1993). This notice was finalized without change in Final Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Duplicate Discounts and Rebates on Drug Purchases, 58 Fed. Reg (June 23, 1993).

3 Cynthia Mann October 3, 2013 Page 3 of 7 manufacturers ( carve in ). 11 The carve-out option allows a 340B provider to purchase drugs outside of 340B for Medicaid patients if it determines that the state s reimbursement rate for 340B drugs is inadequate. This choice is consistent with the Congressional purpose of the 340B program. A safety-net provider cannot reach more patients or furnish more comprehensive services if its 340B drugs are reimbursed at rates that do not cover its costs. 12 CMS should reject SPA B on the grounds that it is contrary to federal law. By asking CMS to approve SPA B, California is seeking to implement a state law that conflicts with the federal mechanism for protecting manufacturers from duplicate discounts. The U.S. Supreme Court recognizes that, pursuant to the Supremacy Clause of the Constitution, 13 any state law that conflicts with a federal law is without effect. 14 Such an impermissible conflict exists when compliance with both federal and state regulations is a physical impossibility or where the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. 15 The Medicaid statute creates a federal-state partnership and anticipates a balance between federal and state objectives. The 340B statute, on the other hand, is purely federal, directing that covered entities shall not request payment under Medicaid for rebate-eligible drugs unless HHS establishes a suitable mechanism to prevent duplicate discounts. In this case, it is impossible for California safety-net providers to implement the federally protected carve-out option and to comply with the mandatory Medi-Cal carve-in requirement. California has impermissibly removed the carve-out choice. Under California s regulatory scheme, safety-net providers must use 340B drugs for Medicaid patients, or they cannot participate in the 340B program. This policy has actually deterred a number of eligible providers from enrolling in the 340B program. Faced with the choice of losing significant Medi-Cal reimbursement or not receiving 340B discounted pricing in the first place, several children s hospitals in California have opted for the latter. 16 The California mandatory carve-in legislation is exactly the kind of obstacle to the accomplishment and execution of the full purposes and objectives of Congress that the Supreme Court views as prohibited under the Supremacy Clause. We would like to be clear that we believe the states are free to go above and beyond the federal law, but cannot create or enforce requirements that conflict with it. For example, some states require covered entities to submit modifiers when billing claims involving 340B drugs. The states use these modifiers to further identify claims that must be excluded for their rebate requests. Such a requirement does not disturb the federal rule. California s requirement, however, directly conflicts with the federal law because it serves to regulate the actions of a favored class of safetynet providers specifically identified by Congress and forecloses a federally authorized method by which those 340B covered entities may bill state Medicaid programs. 11 Id. 12 H.R. Rep , pt.2, at 12 (1992). 13 U.S. CONST. art. VI, cl Altria Group, Inc. v. Good, 555 U.S. 70 (2008). 15 Edgar v. MITE Corp. 457 U.S. 624, 631 (1982) (internal quotations and citations omitted). 16 According to HRSA s 340B covered entity database, only two California children s hospitals have decided to participate in the 340B program. HRSA, 340B Covered Entity Database, (last visited Oct. 1, 2013).

4 Cynthia Mann October 3, 2013 Page 4 of 7 III. Medi-Cal Did Not Ensure Reimbursement Was Adequate under Federal Law Federal law requires states to ensure that Medicaid payments to providers are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan to the extent that such care and services are available to the general population in the geographic area. 17 Medi-Cal failed to meet this federal requirement because the agency did not study 340B providers costs of administering or dispensing drugs. Without such a study, the state could not have considered providers costs when setting the reimbursement rates, could not have determined whether they were adequate to cover providers costs, and, most importantly, could not have ensured that Medicaid beneficiaries would have sufficient access to care. A federal court recently determined that the law enacted to implement the SPA was invalid because the state failed to consider these factors. 18 We know firsthand and have heard reports that the new reimbursement rates are woefully inadequate given providers costs. Indeed, Medi-Cal s own study determined that California s dispensing fee is too low to support the average cost of dispensing prescriptions. 19 The study explains that pharmacies are expected to make up the difference from the margin on a drug s ingredient cost. 20 SPA B would take away that margin, leaving many covered entities to suffer a loss on every fill. The low rate is especially problematic for physician-administered drugs. As explained above, Medi-Cal did not take steps to ensure that the new rates would cover 340B providers costs. The state also improperly applied a dispensing fee designed for self-administered medications to physician-administered drugs, which have much higher handling and overhead costs. 21 In a December 2009 letter, CMS asked Medi-Cal how the agency determined that the current dispensing fee is a reasonable dispensing fee for 340B providers. 22 In its June 2010 draft response to the CMS letter, Med-Cal stated that [t]the current dispensing fee was established in It is our understanding that the 2004 dispensing fee was intended to apply to self-administered drugs only. Therefore, the state established and forced 340B providers to accept a dispensing fee for 340B physician-administered drugs that did not account for the significantly higher handling and overhead costs associated with such drugs. Furthermore, Medi-Cal did not factor in how financially and administratively burdensome it would be for some 340B providers to satisfy SPA B s requirement that 340B drugs be billed at AAC USCS 1396a(a)(30)(A). 18 AIDS Healthcare Found. v. Toby Douglas, 2013 U.S. Dist. LEXIS 64554, at *11-12 (C.D. Cal 2013). 19 Myers & Stauffer, Survey of Dispensing and Acquisition Costs of Pharmaceuticals in the State of California 8-9 (2007). 20 Id at Pharmacy handling and overhead costs represent over 25 percent of the total cost of physician-administered drugs. Medicare Payment Advisory Commission, Report to Congress 140 (June 2005). 22 Letter from Larry Reed, Director, Pharmacy Division, CMS, to Toby Douglas, Chief Deputy Director, Health Care Programs, California Department of Health Care Services (Dec. 18, 2009) [attached]. 23 Draft Letter from Pilar Williams, Chief, Pharmacy Policy Division, to Larry Reed, Director, Pharmacy Division, CMS (June 14, 2010) [attached].

5 Cynthia Mann October 3, 2013 Page 5 of 7 Hospital chargemasters cannot bill physician-administered drugs to one payer at a different rate than what it bills other payers. To meet the SPA s AAC billing requirement, hospitals have had to invest in expensive software upgrades, acquire a second chargemaster just for billing Medicaid, or devise burdensome manual workarounds. Safety Net Hospitals for Pharmaceutical Access (SNHPA) surveyed its California members on how the SPA has impacted them. Ninety-three percent of hospitals reported spending at least $100,000 to implement AAC billing for physicianadministered drugs, and 9 percent said they spent $500,000 or more. 24 These compliance costs come on top of lost revenue due to inadequate reimbursement for physician-administered drugs. Ninety percent of hospitals reported that they lost revenue on 340B physician-administered drugs. 25 Of those hospitals that lost revenue, 48 percent reported an annual loss of at least $100,000, while 36 percent stated a loss of $1 million or more. 26 Medi-Cal s failure to examine 340B providers costs also is contrary to CMS s recently proposed approach to Medicaid reimbursement of 340B drugs. In a 2012 proposed rule, CMS took steps to ensure that states consider 340B providers unique circumstances when setting and changing reimbursement rates for 340B drugs 27 If implemented, the rule would require that a state s Medicaid plan comprehensively describe the state s reimbursement methodology for drugs dispensed by 340B covered entities and that a state provide adequate data regarding 340B providers costs to support any proposed change to its ingredient cost reimbursement or professional dispensing fee for 340B drugs. 28 In an October 2012 notice to states, CMS encouraged states to consider that covered entities may have additional costs associated with dispensing [340B] drugs compared to a retail pharmacy and [to] consider those dispensing costs when looking at overall payment to covered entities. 29 In this instance, Medi-Cal failed to provide any data concerning 340B providers costs to support its proposed reimbursement methodology for 340B drugs or to demonstrate that it even considered covered entities additional costs when developing the proposal. IV. Medi-Cal Failed to Consider the Harmful Impact That the Changes Could Have on Medi-Cal Beneficiaries and Other Patients By not making sure that reimbursement rates were adequate to cover 340B providers costs, Medi-Cal failed to ensure that Medicaid patients would have sufficient access to quality care. The inadequate reimbursement rates and costly compliance challenges may cause some providers to withdraw from the 340B program, or, at a minimum, decrease services that are supported by their 340B savings. Any of these results would negatively impact Medicaid beneficiaries access to care since 340B safety-net providers treat a disproportionate share of Medicaid patients. As explained 24 Safety Net Hospitals for Pharmaceutical Access (SNHPA) Survey Regarding Impact of Medi-Cal s 340B Billing and Reimbursement Rules on 340B Hospitals (2012). 25 Id. 26 Id. 27 CMS, Proposed Rule Regarding Medicaid Program; Covered Outpatient Drugs, 77 Fed. Reg. 5318, 5350 (Feb. 2, 2012). 28 Id. at CMS, Medicaid Program Rebate Notice-Release No , (Oct. 26, 2012).

6 Cynthia Mann October 3, 2013 Page 6 of 7 above, SPA B has dissuaded some providers from enrolling in 340B, thereby depriving them of the opportunity to use 340B savings to benefit their patients, including Medicaid beneficiaries. According to 2011 reports released by SNHPA 30 and the National Association of Community Health Centers 31 and a 2004 report commissioned by the Health Resources and Services Administration, 32 safety-net providers use their 340B savings to reduce drug costs and to increase and enhance pharmacy and non-pharmacy services for their vulnerable patient populations. Therefore, by reducing the 340B savings available to California s providers, the SPA diminishes their capacity to serve Medicaid, uninsured, underinsured, and otherwise low-income patients who lack access to care. V. CMS Should Encourage Medi-Cal to Work with 340B Providers on Developing a Shared Savings Arrangement We urge CMS to educate Medi-Cal on the value of shared savings arrangements. Setting reimbursement at AAC and thereby encouraging providers not to participate in the 340B program represents a missed opportunity because 340B-discounted prices may be significantly lower than what Medicaid ordinarily pays for covered outpatient drugs, even taking into consideration the rebates that states collect from manufacturers under the Medicaid rebate statute and state supplemental rebate programs. To encourage participation in the 340B program, Medi-Cal must find a middle ground that, on the one hand, generates savings for the state and, on the other hand, leaves enough revenue for the covered entity that it will decide against withdrawing from 340B. The opportunity to find a middle ground is real. According to a 2005 report issued by the Congressional Budget Office, the average Medicaid reimbursement rate for brand name drugs is 25 percent above the average 340B price. 33 Apexus, which runs the 340B Prime Vendor Program, has stated that the gap between 340B prices and Medicaid net payments has widened even further as a result of changes to the Medicaid rebate and 340B discount formulas made by Congress under health reform. 34 The difference is sufficiently large that sharing the savings between the parties in a 30 SNHPA, Demonstrating the Value of the 340B Program to Safety Net Hospitals and the Vulnerable Patients They Serve (June 29, 2001), available at 31 National Association of Community Health Centers (NACHC), NACHC Study: Benefits of the 340B Drug Pricing Program for Health Centers (May 2011), available at 32 Mathematica Policy Research, Inc., The PHS 340B Drug Pricing Program: Results of a Survey of Eligible Entities (Aug. 30, 2004), available at ftp://ftp.hrsa.gov/bphc/pdf/opa/340bsurveyrpt.pdf. 33 Calculated based on Prices for Brand Name Drugs Under Selected Federal Programs, at 3, 9 (showing on p. 3 that the average Medicaid post-rebate price is 64 percent of Average Wholesale Price (AWP) and on p. 9 that the 340B ceiling price is 51 percent of AWP. The difference between the 340B ceiling price and the Medicaid post-rebate price is 13 percentage points, which represents percent of the Medicaid post-rebate price.) Medicaid payment varies depending on several state-specific factors, such as the state s reimbursement rate for the drug and the size of any supplemental rebate collected by the state. 34 Letter from SNHPA et al. to Department of Health and Human Services Secretary Kathleen Sebelius 4 (Jan. 31, 2011), available at d.pdf.

7 Cynthia Mann October 3, 2013 Page 7 of 7 way that creates a win-win is entirely feasible. Indeed, Massachusetts has calculated that it saved $6.5 million in 2010 alone through its shared savings plan. 35 By adopting shared savings arrangements, Medi-Cal also can enable safety-net providers to carry out the purpose of the 340B program. 340B providers can use their portion of the savings to maintain and expand services that benefit low-income people, such as Medicaid beneficiaries, and other vulnerable patient populations who depend on safety-net providers as their first line of care. In short, shared savings arrangements are a win-win for the Medicaid and 340B programs. * * * The undersigned organizations respectfully request a meeting with you to discuss our concerns detailed above. We further ask that CMS immediately disapprove SPA B because of Medi-Cal s failure to follow federal rules governing the state plan amendment process, to establish reimbursement rates that are adequate to 340B providers costs, and to consider the harmful impact that the changes would have on safety-net providers and Medicaid patients. Lastly, we urge CMS to encourage Medi-Cal to work with 340B providers on developing a shared savings arrangement instead. If you have any questions, please contact Safety Net Hospitals for Pharmaceutical Access General Counsel Maureen Testoni ( , maureen.testoni@snhpa.org) or Associate Counsel Greg Doggett ( , greg.doggett@snhpa.org). Thank you for your consideration of our concerns and request. Sincerely, California Hospital Association California Association of Public Hospitals California Children s Hospital Association Planned Parenthood Affiliates of California Planned Parenthood Federation of America AIDS Healthcare Foundation Safety Net Hospitals for Pharmaceutical Access cc: Barbara Edwards, Director, Disabled and Elderly Health Programs Group, CMS Center for Medicaid and CHIP Services Larry Reed, Director, Division of Pharmacy, Disabled and Elderly Health Programs Group, CMS Center for Medicaid and CHIP Services Dr. Mary Wakefield, Administrator, HRSA Cheryl Dammons, Associate Administrator, Healthcare Systems Bureau, HRSA Krista Pedley, Director, Office of Pharmacy Affairs, HRSA Toby Douglas, Director, California Department of Health Care Services 35 Debra C. Demers, Presentation on State Medicaid Partnership with 340B Entities, 340B Coalition Conference, July 11, 2011 (citing to Massachusetts Medicaid 340B Cost Analysis May 2007/Massachusetts 340B Cost Analysis 2003).

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12 DRAFT Not to be considered a formal response pursuant to section 1915(f) of the Social Security Act Place on DHCS letterhead [insert date] Larry Reed Director, Pharmacy Division Centers for Medicare and Medicaid Services 7500 Security Boulevard, Mail Stop S Baltimore, MD Dear Mr. Reed: The purpose of this letter is to respond to the questions raised in your letter of December 18, Our responses to your [bolded] questions from December 2009 are as follows: 1. Please explain how the notice you published in the California Regulatory Notice Register complies with the Federal regulations at 42 CFR Also, please verify the date the notice was published. 42 CFR declares that the State must provide public notice of any significant proposed change in its methods and standards for setting payment rates for services and that the notice must appear as a public announcement in one of the following publications: (i) A State register similar to the Federal Register, (ii) The newspaper of widest circulation in each city with a population of 50,000 or more, or (iii) The newspaper of widest circulation in the State, if there is no city with a population of 50,000 or more. The State of California complied with 42 CFR (d)(2)(i) and published a notice in the State register on August 28, 2009, describing the proposed changes to reimbursement in methods and standards, explaining why the changes were occurring, as well as providing an estimate of cost savings to the Medi- Cal Program. A local agency and address were identified where copies of the proposed changes are available for public review and comments from the public may be forwarded. Please see attached document, Register 2009, 35-Z, August 28, On the CMS-179 form, you indicated no impact under block 7. However, in the notice published in the California Regulatory Notice Register, you

13 indicated the reimbursement changes in this SPA are expected to generate a total General Fund savings of $20.9 million in budget year Please provide a revised estimate of the impact of this amendment for Federal fiscal years 2010 and 2011 under block 7 of the CMS-179 form. Our revised estimates (prior to when the preliminary injunction delaying full implementation was filed on May 5 th ) were $33.6 million for FFY , $49.7 million for FFY and $47 million for FFY We note that several pages of this SPA overlap with your SPA B, which is pending approval by CMS. Until the issues regarding B are resolved, we will be unable to take the favorable action on this SPA. The State acknowledges that initially, favorable action could not be taken on this SPA until issues with SPA B, which was pending approval by CMS, had been resolved. However, we understand that subsequently, CMS has had a policy change for the State Plan review and approval process that would allow approval of this SPA without having to wait for approval of the prior SPA related to pharmacy reimbursement. However, as of May 5, 2010, the usual and customary and MAIC components of this SPA are subject to a preliminary injunction, and will not be implemented until the injunction is lifted or otherwise resolved. 4. On page 1, paragraph A.1., you define estimated acquisition cost (EAC) as the lowest of average wholesale price (AWP) 17%, the MAIC, the federal upper limit (FUL) of reimbursement for listed multiple source drugs, or the provider s usual and customary charge to the public. However, on page 5, paragraphs 1 and 2, you define EAC as the lowest of AWP 17%, the selling price, the FUL, or the MAIC. Please specify which formula is being adopted and submit revised plan pages(s) as appropriate. The definition of Estimated Acquisition Cost (EAC) which will be adopted is the one described on page 1, paragraph A.1. The term selling price was inadvertently included in the EAC definition on page 5. Since selling Price is an AMP-based number and CMS has yet to release AMP information to states, selling price cannot be used. It has been removed from the definition of EAC on Page On page 3, you define AWP as the AWP in the department s primary price reference source. What is the department s primary price reference source? The Department s current primary price reference source is First Data Bank. 6. On page 4, in the definition of usual and customary charge, please revise third-arty to third party.

14 The words third-party have been corrected on page Also on page 4, you added a definition of wholesaler acquisition cost. We note that wholesale acquisition cost (WAC) is a term used in the pharmacy industry to represent the manufacturer s list price. Please clarify which terms you intend to use. Wholesale Acquisition Cost (WAC) as defined on Page 4 is not an attempt to redefine the term WAC. Our objective was simply to acknowledge that the Department s source for WAC, if used, would be the Department s primary price reference source, currently First Data Bank. 8. On page 5, you indicated that the EAC will be the lowest of the several prices, one of which is the selling price. Since this term is not defined elsewhere in your plan, please provide a definition of this term or, if it was used inadvertently, please revise the page accordingly. As discussed in #4, above, the term selling price has been removed from page 5 (see attached) 9. On page 6, you indicated that the MAIC will be based on the mean of AMPs of drugs generically equivalent to the particular innovator drug plus a percent markup determined by the Department to represent the average purchase price paid by retail pharmacies in California. Since we cannot currently provide these AMPs to you, please explain how you intend to obtain AMPs for this purpose and clarify how you will determine the current markup. Also, please explain how the department will determine the average purchase price paid by retail pharmacies in California. This provision is only relevant if CMS provides AMPs. Please note that the section that immediately follows the paragraph in question on page 6 describes what will happen if AMPs are unavailable. The methodology for determining the average purchase price paid by pharmacies is described in our response to item #10. If AMPs are available from CMS the percent markup would be determined using average drug purchase information gathered from surveys of California wholesalers and/or pharmacy providers and the mean of the AMPs of drugs generically equivalent to the particular innovator drug. The Department of Health Care Services or a vendor would conduct the wholesaler or provider surveys. 10. Also on page 6, you indicate that if AMPs are unavailable, the department will establish the MAIC as either the volume weighted average of wholesaler acquisition costs of drugs generically equivalent to the particular innovator drug plus a percent markup determined by the Department to be necessary for the MAIC to represent the average purchase price paid by retail pharmacies in California pursuant to a contract with a vendor for the purpose of surveying drug price information, collecting data, and calculating a proposed MAIC.

15 Please explain how California will decide which methodology to use to calculate the MAIC and provide further documentation as to these methodologies. Given the uncertainty of the availability of certain types of data needed to establish reasonable MAICs, California statute specifically gives the Department the flexibility to select from a variety of approaches. The deciding factors specifically will be the availability of AMP data from CMS, whether wholesalers are willing to provide average purchase price data to the Department (since there is no current mandate for them to do so) or whether funds are available to execute a vendor contract to survey prices and propose MAICs. 11. On page 7, you include three paragraphs that duplicate language already appearing on page 6. Please review this language and delete as necessary. The duplicate language on page 7 has been deleted. 12. On page 8, you indicate that the State prior approval mechanism is used for approval and payment for drugs not on the state Medicaid Drug Formulary, known as the Medi-Cal List of Contract Drugs. Please explain how this mechanism works. As stated in the SPA, overrides to both the state and federal price ceilings are available only through a state prior approval mechanism. In California, prior approval is linked to medical necessity. A request for prior approval is known as a Treatment Authorization Request (TAR). Such requests must include the patient s information, diagnosis, and medical justification for receiving the medication. A state consultant (oftentimes a pharmacist) at a central location reviews the TAR, makes a decision based on the information provided and responds to the dispensing pharmacy. A TAR can either be: 1) approved, in which the dispensing pharmacy submits the claim, the claim is approved, and the drug is given to the patient, 2) deferred, whereby the state consultant requests more information for further review before approving or denying the request, or 3) denied. If the pharmacy receives a denial, the patient has the option to pay out-of-pocket for the drug, request a different drug from the doctor, or not receive the drug. It should be noted that Section F of the Plan was already part of the existing State Plan and not subject to revision under this request. 13. On page 8, you specify that 340B covered entities will be allowed to bill no more than the actual acquisition cost for a 340B drug plus the professional fee or dispensing fee set by the State. Please explain the basis for making the determination that the current dispensing fee is a reasonable dispensing fee for these providers. Also, please explain the difference between a professional fee and a dispensing fee. Finally, while we understand your authority to set payment rates for these providers, please clarify your authority to require those providers bill at their actual acquisition cost.

16 This proposal does not change the dispensing fee for 340B entities. The current dispensing fee for Medi-Cal and 340B providers was established in 2004 subsequent to a rate study and negotiations with pharmacy provider advocacy groups. The dispensing fee was approved by the California legislature and CMS at the time. A change in dispensing fee would require a legislative change. In the document, the terms professional fee and dispensing fee are used synonymously. California s Welfare and Institutions (W&I) Code and federal guidance both provide the Department with the authority to require that 340B providers bill at their actual acquisition cost. More specifically, California s W & I Code Section (b) states: A covered entity shall dispense only 340B drugs to Medi-Cal beneficiaries. California s W&I Code (d) states: A covered entity shall bill an amount not to exceed the entity s actual acquisition cost for the drug. Federal guidance (Federal Register Vol. 65 No. 51, pg.13984) instructed covered entities to refer to their respective Medicaid State agency drug reimbursement guidelines for applicable billing limits. 14. Please explain what impact each of the proposed changes will have on beneficiary access to prescription drugs. What reaction have you received from pharmacy providers regarding each of these changes? The Department believes that the proposed changes in SPA will not negatively impact beneficiaries access to necessary medications. While the revised definition of usual and customary was implemented effective October 1, 2009, pharmacy providers are still dispensing medications to beneficiaries and the Department has not seen a statistically significant decrease in Medi-Cal claims. As indicated above, and as of May 5, 2010, the usual and customary and MAIC components of this SPA are subject to a preliminary injunction, and will not be implemented until the injunction is lifted or otherwise resolved. 15. Do pharmacy providers retain all of the State and Federal Medicaid payments (including dispensing fees, ingredient costs, benefit management costs, etc.) or are the providers obligated to return any portion of the Medicaid payment to the State or local government entity, or any other intermediary organization or entity? Pharmacy providers do not return any portion of the Medicaid payments to the State or local government entities (unless an overpayment has occurred), or are otherwise required by the State to return any of those payments to other organizations or entities.

17 16. If pharmacy providers are obligated to return any portion of the payment, the State must provide a full description of the repayment methodology including: a complete list of pharmacy providers that return their payments; the amount or percentage of the payment; and the disposition and use of the funds once they are returned to the State (i.e., general revenue fund, medical services account, etc.) Not applicable. 17. Describe whether the State share is from appropriation from the legislature, through intergovernmental transfer agreements (IGT), certified public expenditures (CPE), provider taxes, or any other mechanism used by the State to provide the State share. The State share is funded through an appropriation from the Legislature. 18. Please provide the estimate of total expenditures and the State share amounts for each type of Medicaid payment. Not sure what the question means. This question may be irrelevant, in light of our responses to the other funding questions. Please clarify what each type of Medicaid payment refers to, so we can respond appropriately, if needed. If the question is related to pharmacy reimbursement, the State estimates gross expenditures of approximately $3.2 billion total funds ($1.2 billion State general funds). These amounts are offset by approximately $1.4 billion in federal and supplemental rebates. 19. If any of the State share is being funded by IGTs or CPEs, please fully describe the matching arrangement. If CPEs are used, please describe how the State verifies that the expenditures being certified are eligible for Federal matching funds in accordance with 42 CFR (b). Not applicable. 20. The total amount for each enhanced or supplemental payment provided to pharmacy providers and the precise service cost this payment is covering. No enhanced or supplemental payments are being provided. Although we acknowledge that we can not implement the new definition of usual and customary and the new methodology for establishing MAICs that are components of this state plan amendment until the preliminary injunction is resolved, we felt it best to respond to your questions in preparation for such time that the injunction is resolved. Thank you for your assistance in this process.

18 Sincerely, Pilar Williams, Chief, Pharmacy Policy Division Attachments: cc: Vanessa Baird, Deputy Director, Health Care Policy, California Department of Health Care Services Michelle Baldi, CMS San Francisco Regional Office Beverly Binkier, CMS Health Insurance Specialist, San Francisco Regional Office Toby Douglas, Chief Deputy Director, Health Care Programs, California Department of Health Care Services Gloria Nagle, Associate Regional Administrator, CMS San Francisco Regional Office Marge Watchorn, CMS Health Insurance Specialist, Baltimore bcc: Teresa Miller Mike Wofford Sarah Umeda Paul Pontrelli Mack Sajjan