In late December 2017, the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS) released the findings of a report titled Potential Misclassifications Reported by Drug Manufacturers May Have Led to $1 Billion in Lost Medicaid Rebates, which was conducted in response to a request from Congress to “evaluate the accuracy of manufacturer-reported drug classification data in the Medicaid rebate program.” The OIG determined that while the “vast majority” of some 30,000 drugs reimbursed under the Medicaid Drug Rebate Program (MDRP) were appropriately classified as either innovator or noninnovator products in 2016, there were 885 drugs potentially misclassified, with the misclassification of 10 of those drugs alone resulting in $1.3 billion in lost rebates to the Medicaid program.

Federal Agencies Comparing Notes

As we noted in a prior HealthCare Counsel blog post about Mylan’s $465 million settlement with the US Department of Justice related to its classification of EpiPen, a drug’s category under the MDRP is critically important; this classification determines the amount of rebate owed to state Medicaid programs from the drug’s manufacturer on utilization of that drug by state Medicaid program beneficiaries. 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.

As the basis for this particular study, OIG compared classification data as reported by manufacturers to the Centers for Medicare & Medicaid Services (CMS) with the marketing category reported by manufacturers to the Food and Drug Administration (FDA). Based on that comparison, the OIG – not surprisingly – found that most of the potential drug category errors resulted from drugs being categorized by manufacturers as noninnovator drugs (resulting in a lower rebate amount owed by manufacturers) when the FDA marketing categories reflected such products were approved under New Drug Applications (NDAs). However, since CMS also uses FDA data to identify potential misclassifications, the reliability of the underlying FDA data – which is derived from information self-reported by manufacturers to FDA – may be an issue for further investigation. (As noted in our recent alert, FDA has implemented new requirements for manufacturers to address inaccuracies in these data).

Small Numbers Have Significant Impact

The OIG found that even though a relatively small number of drugs were potentially misclassified in 2016, the impact of those potential misclassifications was significant. OIG selected 10 potentially misclassified drugs with the highest total reimbursement in 2016 and determined that “[m]anufacturers may have owed an additional $1.3 billion in rebates from 2012 to 2016 for the 10 potentially-misclassified drugs with the highest total reimbursement in 2016.” In addition, “just four manufacturers were responsible for over half (54%)” of the total number of potentially misclassified drugs in 2016.

New Rules Complicate the Issue

On February 1, 2016, CMS published the Medicaid Program Covered Outpatient Drug Final Rule (see our previous blog post summarizing the Final Rule for stakeholders). The Final Rule amended the regulatory definitions of Single Source, Innovator Multiple Source and Noninnovator Multiple Source Drugs by defining an “original NDA” as a NDA other than an ANDA. Under the Final Rule, CMS also created an exception process whereby manufacturers could petition CMS to have certain drugs (e.g., approval under a “paper NDA” before the enactment of the Hatch Waxman Act in 1984) categorized as “noninnovator multiple source drugs,” despite the fact that such drugs were approved under NDAs. Narrow exception requests were due to CMS by June 30, 2017 and CMS has been slow to respond to such exception requests. We are suspect that some of the 885 drugs identified by OIG as potentially being misclassified represent drugs that are the subject of narrow exception requests submitted and currently pending with CMS.

OIG Identifies Other Issues Impacting Classification Oversight

Ultimately, it is the drug manufacturer’s responsibility to ensure that drug classification data is accurately reported to CMS. In fact, manufacturers are required to certify the accuracy of the drug categories of their products in CMS’ Drug Data Reporting (DDR) for the Medicaid system. If CMS believes that information received from a manufacturer is incorrect or missing, the agency will often “request” that the manufacturer correct its error. As the OIG’s report points out, “CMS does not have explicit authority to compel manufacturers to change their [classification] data [reported to the MDRP].” Technically, CMS can terminate a manufacturer’s MDRP agreement if the manufacturer does not correct data reporting errors, including drug categories of their products, but CMS has been reluctant to do so, given “significant repercussions and…disruptions to beneficiaries’ access to drugs.” The OIG also found gaps in CMS’s own internal systems, namely that the agency does not maintain any sort of database of potential errors, or the steps that the agency may have taken to try to resolve those errors with the applicable manufacturer. The OIG recommended that CMS improve the DDR system to be able to track issues for follow up and pursue legislative authority from Congress “to compel manufacturers to submit accurate data and/or enhance its enforcement authority.”

Manufacturers Pay for Misclassification

As mentioned earlier, misclassification of drug categories in DDR was the basis for the $465 million False Claims Act settlement between Mylan and the Department of Justice early this year. The Department of Justice alleged that the misclassification of EpiPen as a noninnovator product in the DDR system was a false claim and resulted in state Medicaid programs being underpaid MDRP rebates on EpiPen utilization by Medicaid beneficiaries. The allegation against Mylan was similar to allegations raised in the United States District Court for the District of Massachusetts in the since-dismissed case, United States ex rel. Conrad v. Abbott Laboratories, Inc., 02-CV-11738-RWZ, related to improper classification of drugs in the DDR 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, in the State of Louisiana.