This article is the third in a series of articles discussing the Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) Work Plan for the 2013 fiscal year (FY) that was published on October 3, 2012. The Work Plan summarized activities that the OIG plans to pursue regarding HHS programs and the health care industry during FY 2013. In the FY 2013 Work Plan, the OIG announced it will initiate several new review programs and continue existing programs that affect the pharmaceutical and device industries.

The OIG plans to review public health agency programs, as well as Medicare and Medicaid prescription drug programs.

Agency Review

  • Oversight of Wholesale Prescription Drug Distributors. Currently all pharmaceutical wholesalers must be licensed under state licensing systems, which in turn must comply with Food and Drug Administration (FDA) guidelines. The OIG announced it will review FDA’s oversight of wholesale prescription drug distributors to determine whether FDA has ensured that the state licensing systems comply with state and federal law.
  • Complaint Investigation Process.  Through FDA’s “Consumer Complaint System,” consumers may file complaints with FDA about any product regulated by the FDA. FDA relies on these complaints to protect consumers from adulterated foods, drugs, medical devices, cosmetics, and biological products. The OIG will evaluate FDA’s investigations into these complaints. For instance, the OIG plans to determine the extent to which FDA properly records complaints in the Consumer Complaint System and the extent to which it investigates them in a timely manner.
  • Oversight of Investigational New Drug Applications. In order to begin clinical trials on a new drug, a pharmaceutical manufacturer must submit an Investigational New Drug (IND) application to FDA. Once FDA receives this application, it has 30 days to review it. After the 30 day period expires, the pharmaceutical manufacturer may begin studies on the new drug, even if FDA has not approved the IND application. Thus, it is critical for FDA to review IND applications in an expeditious manner if it determines the clinical study should not proceed. The OIG plans to determine the extent to which FDA reviews IND applications in a timely manner, as well as identify any difficulties in the IND application review process.
  • Implementation of the Risk Evaluation and Mitigation Strategies Program. FDA relies on the Risk Evaluation and Mitigation Strategies (REMS) program to ensure drug safety. Through the REMS program, FDA requires certain pharmaceutical manufacturers to abide by REMS plans if the risks of the manufacturers’ drug may outweigh its benefits. The OIG will evaluate FDA’s success at ensuring that pharmaceutical manufacturers fulfill REMS program requirements. In particular, OIG intends to consider pharmaceutical manufacturer comments on the REMS program.
  • 510(k) Process for Device Approval. To gain FDA approval, high-risk medical devices must undergo a rigorous “Premarket Approval” process. However, for other lower risk devices, section 510(k) of the Federal Food, Drug, and Cosmetics Act, together with its implementing regulations, requires the filing of a premarket notification (510(k)) by a medical device manufacturer prior to 1) initial marketing of a device; 2) making a change or modification to a cleared device that could significantly affect the safety or effectiveness of the device; or 3) making a major change to the intended use of the device. The OIG will assess whether FDA documented its decisions to clear devices through the “Premarket Notification” 510k process in 2010.

Prescription Drugs under Medicare Parts A and B

  • Conflicts of Interest Involving Prescription Drug Compendia. Medicare usually covers drugs that are approved by FDA and supported by at least one drug compendium recognized by the Centers for Medicare & Medicaid Services (CMS). Through reporting requirements and mitigation policies, prescription drug compendia ensure that conflicts of interest do not result in determining which drugs are covered. The OIG will analyze the adequacy of the prescription drug compendia in overseeing conflicts of interest.
  • Off-Label Use of Medicare Part B Drugs. In order for prescription drugs to be covered under Medicare Part B, physicians must prescribe prescription drugs according to medically accepted indications, such as an FDA-approved indication or an indication supported by at least one of the authoritative drug compendia designated by HHS. Thus, provided that one of the identified compendia has determined that there is sufficient evidence that a certain drug is safe and effective for treating one of its indications, a drug may be covered by Medicare Party B even if the drug is used off-label. The OIG anticipates it will identify off-label and off-compendia uses of Medicare Part B prescription drugs to determine whether certain compendia provide support for coverage. The OIG will also assess CMS procedures related to off-label use of drugs.
  • Manufacturer Sales of Prescription Drugs in Short Supply. Given that more drugs were in short supply in 2011 than in years past, the OIG intends to assess the impact of drug shortages on pharmaceutical manufacturer sales and differences between demand and average sales drug prices.

  • Potential Savings from Manufacturer Rebates for Part B Drugs. Pharmaceutical manufacturers are currently mandated to remit rebates for prescription drugs paid under Medicaid, which allows both federal and state government to save 37% of the $29 billion that Medicaid spent on prescription drugs in 2010. However, a similar rebate program does not exist for Medicare Part B. The OIG will ascertain the amount the government would save if pharmaceutical manufacturers were required to pay rebates to Medicare Part B for drugs Part B pays for on behalf of beneficiaries who are not also eligible for Medicaid.

  • Comparison of Average Sales Prices. Medicare pays for most Part B drugs based on the average sales prices (ASP). The OIG will review Medicare Part B drug prices by identifying drug prices if a drug’s ASP exceeds the drug’s average manufacturer price (AMP) by 5%. Further, if OIG finds that the ASP of Part B drug exceeds the drug’s widely available market prices (WAMP) by 5 %, Medicare is to base payment for the drug on the WAMP or 103% of the AMP, whichever is lesser.

Prescription Drugs under Medicare Part D

  • Part D Drugs Approved and Registered by FDA. CMS has a new policy to ensure that Part D beneficiaries receive only drugs that are registered with FDA. The OIG will determine the extent to which FDA found Part D drugs to be safe and effective.

  • Beneficiary Use of Manufacturer Copayment Coupons. A recent survey indicates that beneficiaries are using copay coupons to obtain specific brand-name prescription drugs, causing Part D to pay more than necessary when less expensive generic versions of the same drugs are available. The OIG will examine those precautions pharmaceutical manufacturers have established to prevent this from happening.

  • Discrepancies Between Negotiated and Actual Rebates. Medicare calculates payments to sponsors based on amounts Part D actually paid to sponsors, net of direct or indirect remunerations (DIR). DIR includes all rebates, subsidies, and other price reductions from sources such as manufacturers. CMS requires that Part D sponsors submit DIR reports for use in payment negotiation. The OIG will determine any differences between rebate amounts negotiated between Part D sponsors and pharmaceutical manufacturers.

Prescription Drugs under Medicaid

  • Calculation of Average Manufacturer Drug Prices. The Medicaid drug rebate statute affects the calculation of the drug’s AMP and the drug’s best price, the amount that pharmaceutical manufacturers report under the Medicaid drug rebate program, and the Federal upper limit (FUL) for drug reimbursement. CMS uses the AMP and the best price to determine Unit Rebate Amount (URA). Manufacturers must pay rebates based on the URAs. The OIG will evaluate drug manufacturers’ procedures to calculate the AMP, the best price for the Medicaid drug rebate program, and for drug reimbursement. The OIG will also identify whether the methods comply with the law, manufacturers’ rebate agreements, and CMS Drug Manufacturer Releases.
  • Manufacturer Compliance with AMP Reporting Requirements. Manufacturers have monthly and quarterly AMP price-reporting obligations. In 2008, according to CMS, more than half of the drug manufacturers that were required to submit quarterly AMPs to CMS failed to comply with reporting requirements in at least one quarter. The OIG will determine if manufacturers are complaint with AMP reporting requirements, and whether CMS and OIG effectively increased manufacturer compliance through enforcement actions.
  • States’ Collection of Rebates on Physician-Administered Drugs. States are required to collect manufacturer rebates on covered outpatient drugs to be eligible for federal matching funds. The OIG will determine whether states have established adequate accountability and internal controls for collecting Medicaid rebates on physician-administered drugs from manufacturers.
  • States’ Collection of Supplemental Manufacturer Rebates. State Medicaid agencies negotiate supplemental rebate agreements (SRA) with manufacturers. In the SRAs, manufacturers agree to pay states higher rebates than required under the basic Federal rebate agreement. The OIG will analyze whether states are collecting from manufacturers increases in the basic federal minimum rebate amount as required by the Patient Protection and Affordable Care Act of 2010. The OIG will also determine the dollar amount of supplemental drug rebates states negotiated and collected between 2008 and 2011.
  • Deficit Reduction Act of 2005’s Effect on Rebates for Generic Drugs. Manufacturer rebates to states are based on the differences between the drug’s AMP and the drug’s best price. The definition of “best price” was clarified to include the lowest price available to any entity for any such drug sold under a new drug application. The OIG will determine the extent to which manufacturers are adequately reporting pricing data and paying rebates for authorized generic drugs to state Medicaid agencies. Further, the OIG will ascertain the differences in Medicaid rebates and number of authorized generics since the implementation of certain provisions
  • Zero-Dollar unit Rebate Amounts. Previously, OIG determined that states may not be collecting all possible drug rebates from manufacturers when CMS is unable to calculate URAs. URAs are based on pricing data reported by drug manufacturers. If manufacturers have not reported certain data for the calculations, the URAs for such products are listed as $0, i.e., zero-dollar URAs. If this occurs, manufacturers must calculate URAs and the rebate payments for the drugs. The OIG will determine whether states have procedures to track and collect drug rebates for drugs with zero-dollar URAs. Moreover, the OIG will determine each state’s rebate collection rate for high-dollar drugs with zero-dollar URAs in the fourth quarter of 2010 and the first quarter of 2011.
  • New Formulations of Existing Drugs. Manufacturers now must pay an additional rebate for drugs with new formulations of existing drugs based on Medicaid drug rebate requirements. The OIG will review pharmaceutical manufacturers’ compliance with these requirements. The OIG will also determine if manufacturers have correctly identified all their drugs that are subject to the new provision.
  • States’ Efforts and Experiences with Resolving Rebate Disputes. Manufacturers are required to enter into rebate agreements as a prerequisite to coverage of their drugs under Medicaid State plans. OIG reports have determined states have not collected large amounts in rebates.

The OIG will evaluate Medicaid rebate disputes and resolutions.


The OIG’s plans for FY 2013 may significantly affect the drug and device sector. Many of the new issues the Work Plan addresses may lead to OIG proactive audits. The Work Plan provides pharmaceutical and device manufacturers with valuable insight into the areas that FDA may pursue. The drug and device industry should take note of these areas of focus, as many of the areas identified will result in OIG reviewing manufacturer conduct and reimbursement issues.

Click here for OIG Work Plan FY 2013.1