Kusserow on Compliance: Medicaid paid millions more for generic drugs than necessary

The HHS Office of Inspector General (OIG) released an audit report that found generic drug price increases exceeded the specified statutory inflation factor applicable to brand-name drugs for 22 percent of the prices it reviewed. The OIG also reported that if the provision for brand-name drugs were extended to generic drugs, the Medicaid program would receive additional rebates. The agency calculated that Medicaid would have received a total of $1.4 billion in additional rebates for the top 200 generic drugs, ranked by Medicaid reimbursement, from 2005 through 2014. The additional rebates for the top 200 generic drugs increased most years, from more than $39 million in 2005 to more than $464 million in 2014. The audit was requested by Congress.

Under the Medicaid Drug Rebate Program, for a covered outpatient drug to be eligible for funding, the drug’s manufacturer must enter into a rebate agreement that is administered by CMS and must pay quarterly rebates to the states. A participating manufacturer is required to report the average manufacturer price (AMP) and, if applicable, the best price for each covered outpatient drug to CMS on a quarterly basis. The payment of additional rebates for single-source and innovator multiple-source drugs (collectively brand-name drugs) under certain situations is also required. Generally, the amount of the additional rebate is based on the amount that the drug’s reported AMP exceeds its inflation-adjusted baseline AMP, and manufacturers pay the additional rebate for each unit of the drug reimbursed by Medicaid. The law and regulations do not include a similar inflation-based rebate provision for generic drugs.

The findings of the current report is consistent with their previous work and support prior recommendations that CMS consider seeking legislative authority to extend the additional rebate provisions to generic drugs. On November 2, 2015, the Bipartisan Budget Act of 2015 (P.L. No. 114-74) was enacted and included provisions extending the additional rebate to generic drugs. The additional rebate for generic drugs will apply to rebate periods beginning with the first quarter of 2017. As such, the OIG did not offer any additional recommendations.


Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2015 Strategic Management Services, LLC. Published with permission.