CMS Releases Guidance on Interpretation of Medicaid Covered Outpatient Drug

This article was exclusively distributed to subscribers on July 28, 2025. Click to receive additional information about how to subscribe and to activate a complimentary trial subscription.

On July 24, the Centers for Medicare & Medicaid Services (CMS) released to pharmaceutical manufacturers intended to clarify certain aspects of the Medicaid Drug Rebate Program (MDRP) issued by the agency last year, particularly with respect to the modified definition of covered outpatient drugs (CODs) that are eligible for rebates under the MDRP.

In the MDRP final rule, CMS modified its definition of COD to expressly define “direct reimbursement” to provide that if reimbursement for the drug is grouped with the relevant service in a single inclusive payment, it can be considered a COD eligible for rebates if:

• The drug, charge for the drug, and the number of units are separately identified on the actual claim;
• The inclusive payment includes an amount “directly attributable” to the drug; and
• The amount paid that is attributable to the drug is based on a reimbursement methodology included in the state plan.

CMS reiterated that its clarification is intended to address the fact that states are increasingly using payment methodologies “where it is not entirely clear whether drugs reimbursed through that new methodology are CODs.”

However, the new definition still left stakeholders with questions. For example, CMS did not specify whether a drug’s “direct reimbursement” amount must correspond to the actual cost of the drug, nor did it specify whether the “direct reimbursement” needs to be additive to the original inclusive payment amount.

CMS attempts to clarify some of these questions. For example, CMS distinguishes between: a) reimbursement methodologies that incorporate the cost of the drug into the final payment amount (e.g., outpatient hospital payment methodologies such as Enhanced Ambulatory Patient Group [EAPG]-like methodologies), and b) those bundled payments where the cost of the drug is not a direct component of the final payment (e.g., inpatient hospital Diagnosis-Related Group [DRG] models).

According to CMS, the former would count as “direct reimbursement” and thus qualify as a COD, as there are typically identifiable amounts attributable to drugs and other components within a payment for an episode of care in this context. As such, “drugs reimbursed through these kinds of methodologies … provide sufficiently identifiable reimbursement amounts attributable to those drugs to qualify as direct reimbursement.”

However, the latter (e.g., drugs included in a bundled payment like a DRG model) would not, because in these cases the drug is not separately identified and the final reimbursement for the patient’s care does not vary based on which drugs are administered. CMS also clarifies that payment methodologies that include an outlier payment would not qualify as direct reimbursement, because outlier payments are typically calculated as a percentage of the total additional costs for a particular service, and do not separately identify such additional services and costs. 

Click to receive additional information about how to subscribe to and to activate a complimentary trial subscription.