Increased Oversight and Penalties for Drug Misclassifications under the Medicaid Services Investment and Accountability Act of 2019

On April 18, 2019, President Trump signed H.R. 1839—Medicaid Services Investment and Accountability Act of 2019—into law.  The new law adds stiff penalties for companies who misclassify drugs to gain additional reimbursement and was adopted in response to the Epi Pen controversy.

This Act amends title XIX provisions regarding Medicaid. Included in this bill are extended protections prevent spousal impoverishment, establishment of coordinated care to children with complex medical conditions, prevention of drug misclassifications in the Medicaid drug rebate program, and other associated amendments.

Section 6 addresses drug misclassifications, specifically the problem of misclassification of innovator and non-innovator drugs. Additionally, under this section, CMS and other regulatory authorities are given greater power to enforce compliance with the Medicaid prescription drug rebate program.

The Medicaid Drug Rebate Program (MDRP) was developed as a collaboration between CMS, state Medicaid agencies, and drug manufacturers to help offset “Federal and state costs of most outpatient prescription drugs dispensed to Medicaid patients.” Drug manufacturers enter into three federal agreements to have their products covered by Medicaid plans—a national rebate agreement with the Secretary of HHS, a pricing agreement for Section 340B Drug Pricing Program, and a master agreement for the Federal Supply Schedule. Participating MDRP drug manufacturers are required to pay to the federal government a percentage of their total product sales. The percentage paid is determined by the product’s classification. For non-innovator drugs, the percentage is 13%, whereas the percentage paid for innovator drugs is at least 23.1%.

The Medicaid Services Investment and Accountability Act of 2019 addresses the perception that drug manufacturers deliberately misclassify their products to pay lower rebate amounts. This perception comes, in part, from a reaction to a December 2017 OIG report tiled Potential Misclassifications Reported by Drug Manufacturers May Have Led to $1 Billion in Lost Medicaid Rebates .   For this report, OIG compared manufacturer-reported classifications of drugs in the MDRP to the drug information on-file with the FDA. In 2016, out of approximately 30,000 drugs in the program, OIG found 885 possible misclassifications, 10 of which resulted in a loss of $1.3 billion in rebates to Medicaid. “All 10 of these drugs were classified as non-innovator products in the Medicaid file, but as innovator products in FDA data.” This comes on the heels of the outrage following Mylan’s price hikes for EpiPen. Mylan classified EpiPen as a non-innovator drug resulting in $1.27 billion underpayment to Medicaid between 2006 through 2016.

Several new enforcement and penalty provisions come with the enactment of H.R. 1839.

First, any drug manufacturer in the MDRP who knowingly misclassifies a covered outpatient drug, is “subject to a civil money penalty for each covered outpatient drug that is misclassified in an amount not to exceed 2 times the amount of the difference” between the total amount of rebates paid for all rebate periods the drug was misclassified and the total amount of rebates the manufacturer should have paid during that timeframe, not to exceed $100,000.

Second, OIG is entitled to recoup from offending drug manufacturers 25% of the “total amount of civil money penalties collected” to cover investigation, litigation, and enforcement costs.[1] Third, regardless of whether the misclassification was knowingly made, States may recover unpaid rebate amounts from drug manufacturers equal to the difference between the per-unit rebate paid to the State and the per-unit rebate that should have been paid and the total units of the drug paid for by the State plan.

Finally, HHS received the authority to require reclassification of drugs determined by the Secretary to be misclassified. Failure to correct the misclassification may result in the Secretary reclassifying the drug, suspending the drug’s status as covered by Medicaid, and/or imposing a civil penalty for each rebate period the drug was misclassified for. These changes take effect immediately.

The consequences of misclassification of drugs is steep. Not only do drug manufacturers face heavy fines for misclassification, they run the risk of exclusion from government programs. It is imperative that innovator and non-innovator drugs are appropriately classified within the constraints of their legal definitions. Moreover, the information used for the MDRP needs to coincide with the drug information on file with the FDA. Finally, drug manufacturers need to maintain transparency with their classification process, oversight, and reporting to ensure compliance with the federal regulations.