October 2012 Volume 9 Number 2

OIG Work Plan 2013 & the Medicaid Drug Rebate Program:
Compliance Enforcement in an Uncertain Regulatory Environment

By Matthew T. Fornataro, Arnold & Porter LLP, Washington, D.C.

AuthorI. Introduction

The Department of Health and Human Services Office of Inspector General (“OIG”) recently released its Work Plan for Fiscal Year 2013 (the “Work Plan”), which contains numerous oversight and enforcement objectives for the Medicaid Drug Rebate Program (“MDRP”).1 In 2013, the OIG’s review of MDRP requirements will include manufacturer compliance with calculating Average Manufacturer Price, timely reporting of drug prices, and calculating and paying accurate rebates for product “line extensions.”

While the OIG will undertake these objectives, manufacturers and other industry stakeholders are operating in uncertain territory. Many elements of the Work Plan are driven by changes to the MDRP made by the Patient Protection and Affordable Care Act of 2010,2 but the Centers for Medicare & Medicaid Services (“CMS”), the agency that oversees the MDRP, has not yet issued final regulations that would implement PPACA’s changes and clarify manufacturer obligations. CMS released a proposed rule early this year that would implement PPACA’s changes to the MDRP (the “Proposed Rule”);3 however, until CMS finalizes these rules, manufacturers are faced with the difficult challenge of remaining compliant in a shifting and often unclear legal framework.

This article will first provide a brief overview of the MDRP, including the legislative and regulatory history of the program. It will then highlight several operational areas that the OIG will scrutinize in 2013 and consider how the MDRP’s unresolved regulatory structure may affect manufacturer compliance efforts. The OIG and CMS are stepping up enforcement in the drug pricing arena, and the article will therefore offer recommendations throughout for manufacturers to consider amidst this environment of increasing government oversight and rigorous enforcement.

II. Legislative and Regulatory Overview

The MDRP, in effect since the first quarter of 1991, obligates pharmaceutical manufacturers to enter into a National Drug Rebate Agreement with the Secretary of Health and Human Services to pay rebates to the states on “covered outpatient drugs” in order for federal funds to be available to pay for the manufacturer’s products under Medicaid and Medicare Part B.4 The MDRP ensures that state Medicaid programs receive prices on manufacturers’ products that are comparable to the prices charged in the commercial marketplace (e.g., by taking into account commercial discounting arrangements). Manufacturers pay these rebates based on statutory formulas that incorporate each covered outpatient drug’s Average Manufacturer Price (“AMP”) and Best Price.5 AMP must be reported to CMS both on a monthly and quarterly basis, and Best Price must be reported quarterly.6 The rebate calculation is performed on a drug unit basis (yielding the manufacturer’s “Unit Rebate Amount” or “URA”) and the amount paid by the manufacturer depends generally on whether the drug is a single-source, innovator multiple-source, or non-innovator product.7

The Deficit Reduction Act of 2005 and its implementing regulations, promulgated in July 2007, constituted the first substantial revision to the MDRP. Other than incremental changes or clarifications, issued mainly through CMS Manufacturer and State Releases8 and FAQs posted on the CMS website, there were few notable changes to the MDRP from 2007 until Congress enacted PPACA. Under PPACA, the MDRP was extensively modified, principally by increasing the basic rebate percentage for single-source and innovator multiple-source products from 15.1 percent to 23.1 percent for most products, mandating an alternative rebate calculation for line extensions (i.e., new formulations) of existing products, and requiring rebates on Medicaid Managed Care utilization.9

Many challenges currently exist for manufacturer compliance, in part because aspects of PPACA are open to multiple reasonable interpretations and the Proposed Rule sought not only to implement PPACA’s changes but also to revamp many other established areas of the MDRP. The Proposed Rule would, among numerous other changes, significantly revise the way that manufacturers calculate AMP, change the formulas for determining the URA, seemingly impose automatic civil monetary penalties for late price reporting, and implement PPACA’s requirement for an alternative rebate on line extension products.

III. Work Plan & Compliance Objectives

Below are three of the major points identified in the Work Plan related to the MDRP. Each OIG objective is discussed in combination with the relevant changes enacted under PPACA and those that the Proposed Rule would effect on the MDRP.

Calculation of AMPs

The OIG will “review selected drug manufacturers” to evaluate their pricing methodologies for calculating AMP and Best Price, including determining “whether the methodologies are consistent with statutes, regulations, and manufacturers’ rebate agreements and the CMS Drug Manufacturer Release(s).10 The federal government has already been very active in this area, and it is clear that both the OIG and CMS will continue to bolster their efforts at reviewing the way in which manufacturers calculate AMP and Best Price. The federal government will continue to use all enforcement tools available to it, including bringing False Claims Act cases, which are often derived from the allegations of whistleblowers. Several notable settlements have occurred, including GlaxoSmithKline’s agreement earlier this year to pay $300 million to resolve price reporting allegations as a part of its $3 billion settlement with the Department of Justice.11

While many of PPACA’s changes to the MDRP are clear -- for example, increasing the basic rebate percentages -- other revisions are open to vastly different interpretations and require CMS guidance. For instance, PPACA imposed new requirements for calculating the AMP of inhalation, infusion, instilled, implanted, or injectable (“5i”) drugs. Those products would be subject to different calculation requirements to the extent that they are “not generally dispensed through a retail community pharmacy.”12 PPACA did not specify exactly when a product is “not generally dispensed” in this manner, and it is likely that drug manufacturers are currently applying different standards for making this determination. Under the Proposed Rule, CMS would apply a 90 percent standard -- i.e., a product would be “not generally dispensed” if 90 percent or more of its sales go to entities other than retail community pharmacies.13

While a final rule implementing PPACA is pending, likely to be released at some point in 2013, manufacturers must ensure they are taking reasonable measures to comply with all available statutes, regulations, and other sub-regulatory guidance. On issues open for interpretation, such as the “not generally dispensed” determination, manufacturer business personnel should ensure that their company has developed and is applying reasonable assumptions that will withstand scrutiny. Without a final rule in place implementing PPACA, the OIG’s examination of manufacturer compliance with various obligations will depend on consistency and documented reasonable assumptions.14

AMP Reporting Requirements

The Work Plan notes that the OIG “will review manufacturer compliance with AMP reporting requirements and determine what percentage of manufacturers complied with the requirements in 2011.”15 Both the OIG and CMS have made this a priority area since a 2008 OIG Report showed that more than half of drug manufacturers in the MDRP failed to submit quarterly AMPs to CMS in at least one quarter and more than three-fourths of manufacturers did not fully comply with monthly submission requirements.16 The increased enforcement in this area has resulted in penalties for manufacturers. For example, two manufacturers paid $100,000 and $230,000, respectively, in civil monetary penalties in 2011 related to late price reporting.17 AMP reporting will continue to be heavily scrutinized, and manufacturers who fail to report by the statutorily-imposed deadlines will increasingly be singled out and targeted for enforcement.

As noted, the Proposed Rule contains major changes to the definition of AMP. Most significantly, the Proposed Rule would abandon the method by which manufacturers have been determining AMP since the inception of the MDRP. Historically, most manufacturers have calculated AMP by assuming, absent contrary evidence, that products sold to drug wholesalers are eligible, and thus included, in the calculation. The Proposed Rule would replace this longstanding and fundamental aspect of the MDRP with a requirement that manufacturers proactively verify that sales to wholesalers were in turn sold to AMP-eligible customers.18 This and many other aspects of the Proposed Rule suggest that the AMP calculation will require major revisions to manufacturers’ systems and policies and will take a significant amount of time to implement.

The Proposed Rule does not indicate whether CMS intends any final rule to apply on a prospective or retrospective basis, and it also does not designate implementation timeframes for its proposals. Once released, manufacturers will need to review the final rule carefully to analyze the application of the rule and whether CMS has provided guidance regarding how quickly manufacturers will be expected to operationalize new mandates. Should CMS intend the final rule to apply on an immediate basis, manufacturers will need to act quickly to ensure that they remain compliant with their monthly and quarterly AMP reporting obligations. Manufacturers should consider reviewing their data sources and testing their systems to determine how they would implement the calculation of AMP in the absence of presumed inclusion and in light of other proposed changes. Business personnel may want to consult with their legal departments or outside counsel to understand how the CMS proposals, if finalized, would affect their business. Manufacturers should determine whether they need to revisit any reasonable assumptions adopted following the enactment of PPACA and whether new assumptions are necessary upon the release of a final rule.

Line Extensions

The Work Plan indicates that the OIG will “determine whether manufacturers have correctly identified all their drugs that are subject” to a new provision in PPACA that would increase the required rebates for certain drugs that are “line extensions” of existing products.19 The OIG proposes this Work Plan objective, however, despite that the Proposed Rule would implement this provision of PPACA in a cumbersome and overbroad manner and in the face of clear statutory language. PPACA defines “line extension” products as those that represent “a new formulation of the drug, such as an extended release formulation.”20 The Proposed Rule would instead deem many different types of products “line extensions,” based on the Food and Drug Administration’s drug Chemical Types, including new combination products and products that merely receive a new indication.21

Notably, the FDA has revised its Chemical Type list since the release of the Proposed Rule. Since the Proposed Rule necessarily depends on this FDA list for its application of the line extension rebate determination, CMS will need to revisit its understanding of the alternative line extension rebate. Pending the release of a final rule, however, manufacturers have only the statutory language for a guide, and the Proposed Rule is not binding on the industry. Manufacturers should consider documenting their methodologies for identifying and calculating rebates for line extension products as part of their reasonable assumptions.

IV. Conclusion

In an era of increased scrutiny and enforcement of MDRP price reporting obligations, and in the absence of a final rule implementing many of the significant changes made by PPACA, manufacturers must remain vigilant in their compliance efforts. A careful understanding of existing law and the CMS Proposed Rule will help bolster compliance efforts during this time of regulatory change.


Office of Inspector General Work Plan, Fiscal Year 2013 available at https://oig.hhs.gov/reports-and-publications/archives/workplan/2013/Work-Plan-2013.pdf.

2Within this article, the term “PPACA” is meant to refer to the Patient Protection and Affordable Care Act of 2010 as amended by the Health Care and Education Reconciliation Act of 2010, the Medicare and Medicaid Extenders Act of 2010, the Education, Jobs, and Medicaid Funding Act of 2010, and other subsequent legislation, all of which are commonly referred to as 2010’s “healthcare reform.”

Medicaid Program: Covered Outpatient Drugs, 77 Fed. Reg. 5318 (Feb. 2, 2012) (42 C.F.R. pt. 447). CMS has given little indication when a final rule will be issued, however one is expected at some point in 2013.


Social Security Act (“SSA”) § 1927. The MDRP was enacted pursuant to the Omnibus Budget Reconciliation Act of 1990 and went into effect January 1, 1991.


Best Price, defined by statute and regulation, generally represents the lowest price to eligible customers in the United States.


SSA § 1927(b)(3).


The terms “single-source,” “innovator multiple-source,” and “non-innovator” are given meaning by statute and regulation and generally relate to the way that each product is approved by the Food and Drug Administration -- e.g., pursuant to a New Drug Application, an Abbreviated New Drug Application, or otherwise. “Innovator” products may generally be thought of as “branded” while “non-innovator” products can generally be considered “generic.” Manufacturers pay a “basic” rebate on single-source and innovator multiple-source products, and they are also required to pay an “additional” rebate to the extent that the price of a particular product exceeds the rate of inflation. SSA § 1927(c)(1)-(2). Manufacturers pay only a basic rebate for non-innovator products. SSA § 1927(c)(3). For single-source and multiple-source innovator products, the basic URA is the greater of: [23.1 percent of AMP] or [AMP less Best Price]. SSA § 1927(c)(1)(A)(ii)(I)-(II).


Manufacturer and State Releases are a form of sub-regulatory guidance that CMS issues from time to time to clarify issues related to the MDRP. These releases often handle routine issues and, especially during recent years, do not involve significant policymaking. The Releases may be found at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Program-Releases.html.


Manufacturers previously were not required to pay rebates on Medicaid Managed Care utilization. The inclusion of these entities within manufacturers’ rebate obligations will increase the amount of rebates that each manufacturer pays in the aggregate.


Work Plan at 51.

11See http://www.justice.gov/opa/pr/2012/July/12-civ-842.html.

SSA § 1927(k)(1)(B)(i)(IV).


77 Fed. Reg. at 5335.

14The National Rebate Agreement that manufacturers enter into with the Secretary indicates that, in the absence of clear statutory, regulatory, or sub-regulatory guidance on a particular subject, manufacturers may make “reasonable assumptions” in their calculation of AMP and Best Price “consistent with the intent of the [SSA], Federal regulations and the terms of this agreement.” See National Drug Rebate Agreement available at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Downloads/SampleMedicaidDrugRebateAgreement.pdf.

Work Plan at 52.


OIG Report, “Drug Manufacturers’ Noncompliance with Average Manufacturer Price Reporting Requirements,” OEI-03-09-00060 at 10-12 (Sept. 2010).


See https://oig.hhs.gov/fraud/enforcement/cmp/drug-price.asp.


77 Fed. Reg. at 5330.


Work Plan at 54.

20PPACA § 2501.
21The Chemical Type represents the newness of a drug formulation or a new indication for an existing drug formulation. For example, Chemical Type 1 is assigned to an active ingredient that has never before been marketed in the United States in any form. See http://www.fda.gov/Drugs/informationondrugs/ucm079436.htm.

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