Drug manufacturers should immediately evaluate whether they have been correctly classifying their products in data submitted to the Medicaid Drug Rebate Program (MDRP) to minimize penalties they could face for any errors. The Centers for Medicare and Medicaid Services (CMS) recently issued new guidance that sets a July 5 deadline for manufacturers to contact CMS to identify drugs that have been misclassified.1 The Medicaid Services Investment and Accountability Act of 2019 (MSIAA) gave CMS new authority to take compliance actions and impose monetary penalties when drugs are misclassified. In addition to repaying underpaid rebates, manufacturers could be liable for penalties of up to twice the amount of the underpayment for knowingly misclassifying drugs, so they will need to think carefully about how to identify and report misclassified drugs.
Classification of Drugs Under the Rebate Program
In order to have their outpatient drugs covered by state Medicaid programs, manufacturers are required to agree to pay minimum rebates to each state (which are shared with CMS). The size of the minimum rebate is set in section 1927 of the Social Security Act and varies depending on whether a drug is a single source or multiple source innovator drug (i.e., brand) approved by the FDA under a new drug application (an NDA) or a multiple source noninnovator drug (i.e., generic) approved under an abbreviated new drug application (an ANDA), which has a smaller mandatory rebate.
In certain instances, CMS may apply a “narrow exception” to a drug approved under an NDA if such drug may be more appropriately treated as if it were approved under an ANDA and classified as a generic.2
New Penalties for Misclassifying Drugs
Prior to the MSIAA, CMS did not have explicit authority to compel manufacturers to update drug information for those drugs misclassified or misreported as satisfying the narrow exception. The Department of Health and Human Services Office of Inspector General (OIG) concluded in December 2017 that about three percent of drugs in the rebate program are misclassified and the ten costliest misclassified drugs resulted in more than $1 billion in lost rebates over a five-year period.3
The MSIAA gives CMS new and expanded enforcement authority to ensure that drug manufacturers correctly report drug information. First, the MSIAA codifies manufacturers’ obligation to pay prior unpaid rebate amounts due to misclassification of covered outpatient drugs. Additionally, the MSIAA grants the Secretary both penalty and compliance authorities, ranging from civil monetary penalties for misclassification and misreporting, to suspension of a drug from Medicaid coverage. CMS may:
- Correct a misclassification on behalf of a manufacturer;
- Suspend a misclassified drug and the drug’s status as a covered outpatient drug under a rebate agreement;
- Exclude a misclassified drug from federal financial participation;
- Impose civil monetary penalties of up to twice the amount of the underpaid rebates for each rebate period for knowingly misclassifying or otherwise misreporting drug products; and
- Use other remedies previously available for drug misclassification.
Action Items for Drug Manufacturers
CMS asks manufacturers to ensure all drug market dates are correct and that covered outpatient drugs are correctly classified in the CMS drug data reporting system, even for drugs with inactive national drug codes. CMS asks manufacturers to contact CMS if they have currently or previously misclassified a drug and have not yet been in touch with CMS. Manufacturers interested in correcting misclassifications and misreporting should do so by July 5 at rxdrugpolicy@cms.hhs.gov. While CMS does not state that doing so by this deadline provides any sort of amnesty, remedying misreported data as soon as possible may reduce the risk of substantial penalties.
1 CMS, Medicaid Prescription Drug Program Manufacturer Release No. 113 (2020), available at: https://www.medicaid.gov/prescription-drugs/downloads/mfr-rel-113.pdf.
2 Medicaid Program; Covered Outpatient Drugs, 81 Fed. Reg. 5170, 5191 (Feb. 1, 2016), available at: https://www.govinfo.gov/content/pkg/FR-2016-02-01/pdf/2016-01274.pdf. See also CMS, Medicaid Prescription Drug Program Manufacturer Release No. 98 (2016), available at: https://www.medicaid.gov/medicaid-chip-program-information/by-topics/prescription-drugs/downloads/rx-releases/mfr-releases/mfr-rel-098.pdf.
Examples of such qualifying drugs include:
- Parenteral drugs in plastic immediate containers required to be filed as an NDA by the FDA;
- Certain drugs approved under a paper NDA prior to Hatch-Waxman; and
- Certain drugs approved in connection with 505(b)(2) NDA approvals after Hatch-Waxman.
3 Office of Inspector General, Potential Misclassifications Reported by Drug Manufacturers May Have Led to $1 Billion in Lost Medicaid Rebates, available at: https://oig.hhs.gov/oei/reports/oei-03-17-00100.pdf.