Mylan recently announced a $465 million settlement with the US Department of Justice and other government agencies regarding the company’s covered outpatient drug (COD) classification of its EpiPen (and EpiPen, Jr.), an epinephrine auto-injector, under the Medicaid Drug Rebate Program (MDRP).

A drug’s COD classification under the MDRP is critically important. The statutorily-prescribed rebates paid for “single source” and “innovator multiple source” (generally brand-name) drugs are higher than the rebates paid for “noninnovator multiple source” (generally generic) drugs. Rebates for single source and innovator drugs are the greater of (1) 23.1% of average manufacturer price (AMP) or (2) the difference between AMP and Best Price. In addition, Medicaid utilization of a single source and innovator drug is also subject to an additional discount to the extent the AMP for such drug rises faster than inflation. The rebate for noninnovator drugs is 13% of AMP. A noninnovator drug is not yet subject to an additional discount under the MDRP to the extent the AMP rises faster than inflation, but noninnovator drugs will be beginning in first quarter 2017, pursuant to the Bipartisan Budget Act of 2015.

As we noted here, in the Final AMP Rule published earlier this year, CMS finalized regulatory definitions of the COD classifications by defining “original New Drug Application (NDA)” as a NDA other than an Abbreviated New Drug Application (ANDA). Except for very limited circumstances (e.g., approval under a “paper NDA” before the enactment of the Hatch Waxman Act in 1984), products approved under a NDA that are added to Medicaid Drug Data Reporting system after April 1, 2016, should be classified as single source or innovator multiple source drugs.

In the statement announcing the settlement, Mylan indicated that the EpiPen has been classified as a noninnovator drug since before acquiring the product in 2007 “based on longstanding written guidance from the federal government.” In an October 5, 2016, letter to the Senate Finance Committee, Acting CMS Administrator Andrew Slavitt noted that, according to CMS records, until the fourth quarter of 1997, EpiPen had been reported as a single source drug, but has since been reported as a noninnovator drug. Apparently, the predecessor owner and manufacturer of EpiPen received written communication from CMS endorsing the classification of the product as a noninnovator product. EpiPen was approved by the Food and Drug Administration under a NDA, has patent protection, and has no FDA-approved therapeutic equivalents—facts that CMS says indicate that EpiPen should be classified as a single source, rather than innovator multiple source, drug.

The Department of Justice has alleged that the misclassification of EpiPen as a noninnovator product in the MDRP reporting system is a false claim and resulted in state Medicaid programs being underpaid MDRP rebates in EpiPen utilization by Medicaid beneficiaries. The allegation against Mylan is similar to allegations raised in the United States District Court for the District of Massachusetts in United States ex rel. Conrad v. Abbott Laboratories, Inc., 02-CV-11738-RWZ, related to improper COD classification of drugs in the MDRP system and false claims flowing therefrom. The merits of the case were never reached as the case was dismissed under the public disclosure bar to the False Claims Act. A similar case, State of Louisiana vs. Abbott Laboratories, Inc., is currently on appeal from the 19th judicial district for the Parish of East Baton Rouge, State of Louisiana.

This settlement should serve as a reminder to all pharmaceutical manufacturers to review their product masters and the COD status of all drugs in their product masters for accuracy and compliance with MDRP requirements.