New law will impose penalties for Medicaid drug misclassification

Law gives enforcement powers to CMS, OIG

On April 18, legislation that makes a number of key changes to the Medicaid Drug Rebate Program (MDRP) was signed into law by the president.

April 26, 2019 | Health care


Among other provisions, the Medicaid Services Investment and Accountability Act of 2019 (the 'Act') grants the Centers for Medicare and Medicaid Services (CMS) and the Department of Health and Human Services (HHS) Office of the Inspector General (OIG) new authorities to address drug misclassifications within the MDRP most notably by directly reclassifying a drug, requiring retroactive rebates to Medicaid programs where warranted, or imposing civil monetary penalties in instances where a misclassification occurs knowingly.

Established nearly three decades ago, the MDRP requires any drug manufacturer that participates Medicaid to pay rebates for each unit of an outpatient drug purchased by a state Medicaid program. Under the MDRP, the rebate formula requires a minimum percentage rebate of 23.1 percent for brand-name “innovator” drugs, while mostly generic non-innovator drugs require a minimum rebate of 13 percent.

In 2017, the OIG conducted a study finding that Medicaid may have lost $1.3 billion in drug rebates between 2012 and 2016 due to the misclassification of drugs under the MDRP. Until now, CMS authorities were limited to issuing a request that the manufacturer reclassifies a drug. In response to these findings, Congress drafted the Right Rebate Act, which was later included as Section 6 of the recently signed Medicaid Services Investment and Accountability Act.

Misclassification enforcement

Civil monetary penalties (CMPs)

Under the Act, drug manufacturers that “knowingly” misclassify a covered outpatient drug are subject a penalty of two times the difference between the total rebates paid and the total rebates they would have been required to pay under proper classification. A knowing misclassification is when one occurs with actual knowledge, deliberate ignorance, or in reckless disregard of the truth. In addition, manufacturers remain subject to CMPs of $100,000 for every instance of false information under existing drug classification provisions.

In instances where a misclassification occurs, that does not meet the law’s “knowing” threshold, manufacturers may still be subject to CMPs. If a manufacturer does not correct misclassifications after being instructed to do so, HHS may require a penalty of 23.1 percent of the Average Manufacturer Price of the misclassified drug, multiplied by the number of units in question.

Of note, the Act grants HHS the authority to defray the costs of the Act’s enforcement using CMPs received, as well as an additional 25 percent of CMPs for the purpose of increasing its enforcement and oversight activities.

Other enforcement actions

The Act allows CMS to reclassify a drug unilaterally in any instances where the government has found misclassification to occur. CMS is required to notify the manufacturer and require that the manufacturer correct the misclassification in a timely manner. Beyond CMPs, CMS may also suspend a misclassified drug from receiving federal funds under the Medicaid program until the issue is resolved.

Clarification of definitions

Industry stakeholders have operated under ambiguous language in statute pertaining to the definition of innovator drugs, leaving some to speculate that a portion of drug misclassifications are due to misinterpretation of the drug categories. The Act clarifies that any drug approved under a New Drug Application (NDA) is considered to be an innovator for the purpose of rebate calculations.

The new definition of innovator-class drugs codifies into law the “narrow exception” for older drugs approved under a different process that is still referred to as an NDA despite such drugs’ practical status as non-innovators. Manufacturers seeking a narrow exception from the innovator classification must petition CMS directly.

Remaining questions

The Act means that HHS now has significant authorities to investigate and remediate misclassifications of drugs under the MDRP, but important questions remain unanswered by the statute and may require HHS to issue more specific regulation.

First, the time period for resolution is not specified, leaving it as a question for regulators. Second, the Act is not specific about whether drug misclassifications may be enforced retroactively to the law’s date of enactment. Regulators will need to determine whether or how to enforce misclassifications or levy penalties retrospectively.

Without knowing the timing of enforcement, early disclosure and correction of any discrepancies are valuable in establishing good faith with regulators. Drug manufacturers would be well-advised to review their product masters, category codes under each National Drug Code, and examine the status of their drugs with the MDRP as well as any remediation obligations that may arise from participation in the 340B drug pricing program.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Contact us

Paul Silver
Life Sciences Regulatory & Compliance leader
Deloitte Risk and Financial Advisory
Deloitte & Touche LLP


Ethan Joselow

Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

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