On December 12, 2014, the U.S. Department of Health & Human Services Office of Inspector General (OIG) published a report titled: “States’ Collection of Offset and Supplemental Medicaid Rebates”  (OEI-03-12-00520).  This report was based on the findings of a 2013 OIG survey of all fifty states and the District of Columbia relating to their collection and reporting of the federal ”offset rebates”.  Very basically, the offset rebates are the amounts attributed to the Medicaid drug rebate increase required by the Affordable Care Act (ACA) that must be remitted by the states to the Centers for Medicare & Medicaid Services (CMS).  While the report is relatively technical with respect to the state offset rebates (which the OIG finds were accurate), it also includes some interesting background data and recommendations regarding states’ supplemental rebate agreements (SRA) with pharmaceutical manufacturers.

SRAs are agreements under which state Medicaid programs seek so-called “supplemental“ rebates from drug manufacturers (in “supplement” to the federal Medicaid drug rebates under 42 U.S.C. § 1396r-8).  Typically supplemental rebates are paid by manufacturers in consideration for having a drug listed on a state Medicaid preferred drug list (or “PDL”) without prior authorization restrictions.  Among other things, the report notes that: “[a]s of January 2013, 44 States reported having SRAs in effect, allowing them to collect supplemental Medicaid rebates. These States reported collecting approximately $1.7 billion in rebates in 2011 and 2012 combined.” The report includes an appendix listing those states that collected Medicaid supplemental rebates as of January 2013.  The OIG further notes that: “[o]f the 44 States that collect supplemental Medicaid rebates, 17 States have single-State SRAs, 25 States have multi-State SRAs, and 2 States have both single-State and multi-State SRAs.”  In addition, the OIG notes that: “[t]hirty-two of the forty-four States that collect supplemental rebates also had contracts with [Medicaid Managed Care Organizations (MCOs)]. Six of these States reported that they are or intend to begin collecting supplemental rebates on drugs covered through a Medicaid MCO.”  Under the ACA, the Medicaid Drug Rebate Statute was expanded to require federal drug rebates be paid with respect to Medicaid MCO utilization.  However, until recently, supplemental rebates have been generally invoiced by states only for their fee-for-service utilization.

Perhaps most significantly, the OIG recommends that  CMS “[e]ncourage States to explore alternate methods for calculating supplemental rebates.”  The OIG expresses concern that guaranteed net pricing, a common form of supplemental rebates, “may reduce rebate amounts” in that “[u]nder most States’ rebate agreements, supplemental rebates are inverse to Federal rebate amounts (which include offset rebates): if the Federal rebate increases, the supplemental rebate decreases by an equal amount is directly affected by the Federal rebate increase.”  The OIG notes that for “all but 3 of the 44 States that collect supplemental Medicaid rebates, the method for calculating these rebates (i.e., basing the rebate amount on a guaranteed price) is directly affected by the Federal rebate increase.”   In response the report, CMS concurred with the OIG’s recommendation to encourage alternate methods to calculate supplemental rebates.  As a practical matter, this means states may be encouraged to seek rebates that are calculated separately from the federal rebate amount (such as a percent off of wholesale acquisition cost rather than a guaranteed net unit price).  However, ultimately the mechanism used to calculate supplemental rebates is not mandated by OIG nor by CMS, and thus flexibility will likely remain for negotiation between the states and manufacturers.

Posted by Kathleen Peterson

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