Medicaid “Right Rebate” Provisions Clear Congress

The Senate on Tuesday passed H.R. 1839, a bill of Medicaid amendments that included new penalties for mis-categorizing a drug under the Medicaid Drug Rebate Program (MDRP).  The bill already cleared the House on March 25, and is now headed to Donald Trump for signature.  The bill grew out of an investigation conducted by Senate Judiciary Committee Chairman Chuck Grassley into Mylan’s Epi-Pen.  In August 2017 Mylan settled qui tam allegations brought under the Federal False Claims Act by Sanofi-Aventis that Mylan had reduced its rebates under the MDRP by mis-classifying Epi-Pen as a non-innovator drug.  Mylan did not admit the allegations and there was no determination of liability.  Although the Mylan case made headlines, in part because of the Congressional investigation, other drug manufacturers have settled similar allegations in the past.

Under the MDRP, a manufacturer pays greater per-unit rebates for innovator drugs (i.e., those approved under NDAs) than for non-innovator drugs (i.e., those approved under ANDAs and certain unapproved drugs).  The drug category ─ innovator or non-innovator ─ is reported to CMS by the manufacturer.  The Medicaid Rebate statute already contains civil penalties for providing false drug information, and Federal False Claims Act penalties may also apply as discussed above, but Section 6 of H.R. 1839 imposes several additional penalties on manufacturers who misclassify their drugs.  First, a manufacturer that knowingly misclassifies a drug must pay a penalty of twice the difference between the rebates that the manufacturer paid and the amount it would have paid had the drug category been correctly reported.  Second, if CMS determines that a manufacturer misclassified a drug – whether or not the manufacturer knew or should have known that the drug was misclassified – CMS must notify the manufacturer about the error and require a timely category correction, and the manufacturer must pay the underpaid rebates.  If a manufacturer is so notified but fails to timely correct the misclassification, CMS may either correct the misclassification on its own initiative, suspend the drug from the MDRP and exclude it from Medicaid coverage, impose a civil penalty of 23.1% of the drug’s average manufacturer price multiplied by the number of units dispensed during the period of the misclassification, or any combination of the above.  Finally, an exclusion penalty may be imposed on a manufacturer who knowingly misclassifies a drug, fails to correct a misclassification, or provides false information.  These provisions become effective upon enactment.

The bill also contains a long overdue “clarifying definition.”  Since enactment in 1990, the Medicaid rebate statute’s definitions of single source and innovator multiple source drugs – i.e., the drugs subject to higher rebates – refer to drugs approved under an “original new drug application,” a term that is not defined.  Over the years, many manufacturers, and even CMS in a regulation proposed in 1995 (never finalized), have construed that term to exclude NDAs that rely on literature studies or data previously submitted in other applications – for example section 505(b)(2) applications or applications submitted under FDA’s pre-1984 “paper NDA” policy – since those NDAs arguably are not “original”.  In a 2016 final rule, CMS read the term “original” out of the statute and construed “original NDA” to simply mean “NDA”, unless CMS grants a narrow exception.  Congress has now codified that approach by deleting the confusing term “original”, and adding that a drug approved under an NDA is an innovator unless CMS determines that a “narrow exception” applies.  Thus, Congress has finally eliminated a word that has been a source of confusion, controversy, misclassifications and disputed classifications, and an enormous sum of penalties during the 29 years since enactment.