Inherent Reasonableness for Drugs and Biologicals

20.5.6 - Inherent Reasonableness for Drugs and Biologicals (Rev. 11140, Issued: 12-02-21, Effective :01-04-22, Implementation: 01-04-22) Section 4316 of the Balanced Budget Act of 1997 permits A/B MACs (B) to establish realistic and equitable payment amounts for drugs when the existing payment amounts are inherently unreasonable because they are either grossly excessive or deficient. Refer to chapter 23, for a complete description of Inherent Reasonableness rules. Examples of the factors that may result in grossly deficient or excessive payment amounts include, but are not limited to the following: 1. Payment amounts for drugs or biologicals are grossly higher or lower than acquisition or production costs for the category of items or services. 2. There have been increases in payment amounts that cannot be explained by inflation or technology. In some instances, the calculation of the AWP may lead to a payment limit that is not reasonable for the purpose of paying for drugs and biologicals. A/B MACs (B) can apply the principal of inherent reasonableness in selecting the drugs to be included in the calculation. For instance in situations where there are some drugs in a HCPCS grouping that are significantly more expensive due to having preservatives added, there is no effect on the quality of the drug whether or not there are preservatives. Therefore, leave the drugs with preservatives out of the calculation. While A/B MACs (A) and (B) may determine under their inherent reasonableness authority that a greater than 15 percent increase or decrease in payment amounts is warranted, they may not increase or decrease the payment amounts for any item by greater than 15 percent in any given year. However, a contractor may determine that a 25 percent reduction is warranted, and accomplish the adjustment over 2 years, e.g., 15 percent applied the first year, and 10 percent applied the following year. In addition, a contractor must inform CMS of any inherent reasonableness determinations. The CMS will then acknowledge receipt of the notification. The payment adjustment may not take effect until the contractor has notified CMS and received CMS’s acknowledgment of the notification.