Tricky Base AMP Calculations

By: Chris Cobourn, VP of Regulatory Compliance
chriscobourn@cis-partners.com

In working with many of our clients, we have encountered the tricky question of Lagged Rebate Price Concessions and how they figure into the calculation of Base AMP.

Technically speaking, Base AMP is set in the first full quarter of sales. So, if a product was initially sold in November, which occurs in the middle of the 4th Quarter, Base AMP would be set in 1st Quarter, the first full quarter of sales. The problem is that manufacturers sometimes establish initial stocking allowances and other incentives to create market share for new products. These types of discounts have historically been offered prior to the first full quarter of sales.

Prior to the requirement that lagged rebate price concessions be included in AMP, these initial stocking allowances would not be included in the Base AMP calculation, and Base AMP would be set solely on the first full quarter of sales. However, due to the requirement to include lagged or smoothed price concessions, these incentives can now be part of the Base AMP calculation if they can in any way be considered a lagged discount. This can have an unfortunate impact on the manufacturer. The idea of using only the first full quarter of sales to calculate Base AMP seems fair, as doing so creates a Base AMP more aligned with the “normal” quarterly AMP the manufacturer would witness going forward. Including incentives and initial stocking allowances in the calculation can set an artificially low Base AMP, which could set the manufacturer up for increased CPI-U penalties over the course of the product’s life.

This change is important food for thought, as manufacturers consider strategy decisions such as providing initial stocking allowances. Make sure that you are aware of which discounts are lagged, and which are not. In addition, it may be worth modeling various pricing strategies to evaluate the potential impact these decisions will have on the Base AMP, especially relative to the potential sales that may be achieved as a result of those incentives.