Continued Interest in Drug Categorization – OIG Finds Ten Potentially Misclassified Drugs May Have Led to $1.3 Billion in Lost Medicaid Rebates

January 4, 2018By Serra J. Schlanger & Alan M. Kirschenbaum

On December 20, 2017, the Department of Health and Human Services, Office of Inspector General (OIG) published a report entitled “Potential Misclassifications Reported by Drug Manufacturers May Have Led to $1 Billion in Lost Medicaid Rebates.” This report is the result of Congress’ September 2016 request for OIG to “evaluate the accuracy of manufacturer-reported drug classification data in the Medicaid rebate program, and the extent to which [the Centers for Medicare and Medicaid Services] CMS oversees drug classification data submitted by manufacturers.”

In order to be eligible for Federal payments for their covered outpatient drugs under Medicaid and Medicare Part B, drug manufacturers must enter into rebate agreements and pay quarterly rebates to the States. As part of these agreements, drug manufacturers must provide CMS with their average manufacturer price (AMP) and best price, if applicable, for each covered outpatient drug. Drug manufacturers must also report and certify certain data about each drug, including its “drug category” – i.e., whether the drug is an innovator (generally brand-name) or noninnovator (generic) product – in the Drug Data Reporting for Medicaid System. CMS uses the price and drug category data to calculate the applicable rebate amounts for each drug on a quarterly basis. States then use this to invoice manufacturers for the rebates owed for these drugs. The minimum rebate for innovator drugs is 23.1% of the AMP, while the minimum rebate for noninnovator drugs is only 13% of the AMP.

To conduct its review, OIG compared the drug classification data in the Medicaid System to FDA’s marketing categories for over 30,450 drug products. OIG found that 95% of the drugs in the Medicaid rebate program were appropriately classified. These drugs account for 98% of the $59.7 billion in Medicaid reimbursement in 2016 for the reviewed products. OIG also determined that approximately 3% of drugs were potentially misclassified in 2016; reimbursement for the potentially misclassified drugs totaled $813 million in 2016. OIG found that the majority of the potentially misclassified drugs (97%) were identified as noninnovator products in the Medicaid System but as innovator products in FDA’s data. This discrepancy means that manufacturers may have paid a lower base rebate amount and may not have paid applicable inflation-adjusted rebates for these products in 2016. OIG then took a closer look at the ten potentially misclassified drugs with the highest total Medicaid reimbursement in 2016. All ten drugs were classified as noninnovator products in the Medicaid System but as innovator products in the FDA data. OIG calculated that the manufacturers for these drugs may have owed an additional $1.3 billion in Medicaid rebates from 2012 to 2016. Notably, two drugs accounted for 90% of the potentially lost rebates.

OIG recommended that CMS pursue a means to compel manufacturers to correct inaccurate classification data reported to the Medicaid System; however, CMS indicated that it does not currently have the legal authority to compel such corrections. In response to OIG’s recommendation, CMS stated that it will consider how to improve agency efforts to compel manufacturer corrections. CMS also stated that it shares a joint responsibility with OIG to oversee manufacturers’ compliance with data reporting, and encouraged OIG to use its enforcement authority in this area. OIG confirmed that it has authority to pursue civil monetary penalties against manufacturers for certain violations of the Medicaid rebate statute. However, OIG stated that “it lacks legal authority to affirmatively pursue penalties for the submission of inaccurate drug classification data.” The report does not mention that the Federal False Claims Act (FCA) has been used in several instances to target the knowing submission of false drug category data.

OIG plans to provide CMS with lists of the drugs identified as potentially misclassified, the drugs that were missing from FDA files, and the drugs for which OIG could not determine an appropriate classification. As the Federal government and state Medicaid programs continue to focus on drug expenditures, we may see CMS and OIG take a more active role in requesting updated drug classification information from manufacturers. In fact, since 2016, CMS has increased its efforts to identify instances where the drug category reported by a manufacturer conflicts with its FDA manufacturing application type. At a minimum, we expect that the manufacturers of the 885 drugs that OIG identified as potentially misclassified will receive a follow-up inquiry from CMS, unless they applied for a “special exception” from the definition of an innovator drug by March 31, 2017. We can also expect to see the Department of Justice and whistleblowers continue to use the FCA to challenge the knowing submission of false drug category data.