Bloomberg Law
May 26, 2023, 5:05 PM

Drug Label Anti-Fraud Provisions Solidified in Medicaid Proposal

Ganny Belloni
Ganny Belloni

A proposal to enforce stricter regulations on the way pharmaceutical companies label drugs and set prices in Medicaid’s drug rebate program aims to clarify the impact of litigation in a drug misclassification case involving Mylan Inc.'s EpiPen, attorneys say.

The proposed rule (RIN 0938-AU28) would overhaul the Medicaid Drug Rebate Program by addressing significant issues, such as drug misclassification, opacity in pharmacy benefit managers’ pricing, and concerns regarding whether or not drug companies were offering the statutorily required lowest drug prices for Medicaid.

The program overseen by the Centers for Medicare and Medicaid Services requires manufacturers to offer the lowest price available for drugs to Medicaid agencies, said Edwin Park, a research professor at the Georgetown University McCourt School of Public Policy. In exchange, Medicaid agrees to cover most of the manufacturers’ drugs.

Historically, the MDRP has been a critical tool for managing drug costs within Medicaid. Under the program, brand-name or “innovator” drugs get higher rebates when compared to generic drugs. This is meant to drive the use of cost-effective generic drugs when they are available and appropriate, but also ensures that Medicaid programs can afford to provide access to newer, designer drugs when necessary, according to MACPAC.

While this agreement should, in theory, make outpatient drugs more affordable for Medicaid beneficiaries, said Antonio Ciaccia, CEO of 46brooklyn Research, he noted several challenges that have impacted the program’s effectiveness and cost efficiency. 46Brooklyn is a nonprofit focused on improving the accessibility and usability of US drug pricing data.

He said one challenge has been the misclassification of drugs by manufacturers, which leads to inaccurately low rebates and, consequently, inflated costs for Medicaid. Typically, manufacturers misclassify their drugs as generics, evading higher rebates associated with brand-name drugs, Ciaccia said.

In 2017, Mylan faced litigation involving drug pricing fraud. The pharmaceutical firm agreed to a $465 million settlement to resolve allegations of violating the False Claims Act by misclassifying the EpiPen, a brand-name drug, as a generic drug. This misclassification allowed Mylan to dodge paying higher rebates to Medicaid from 2010 to 2016. This happened even while Mylan increased the EpiPen’s price by approximately 400%.

New Penalties Proposed

Under the proposed rule issued May 23, if a manufacturer is found to be misclassifying a drug, CMS could levy penalties ranging from forcing companies to correct the misclassification to imposing fines up to $100,000 or suspending the manufacturer from the MDRP.

But the precedent set by the Mylan case leaves no room for confusion about what drug companies can and can’t do, said Sean Dickson, senior vice president of pharmaceutical policy and strategy at AHIP, which represents health insurance companies.

“While many manufacturers may have stopped engaging in some of these practices due to the litigation risks, following the Mylan case, the agency found it important to make sure there wasn’t any lack of clarity so that instances like that don’t happen again,” said Dickson.

The rule would also introduce a drug price certification survey that would increase clarity from manufacturers regarding why certain drugs are expensive and help states better negotiate the cost of high-cost drugs.

“What CMS is proposing is for certain manufacturers of high-cost drugs to be subject to a survey where manufacturers have to report pricing information, including elements related to how they set their prices and change their list prices over time,” Park said. “The idea is to help facilitate greater negotiation of these voluntary supplemental rebates to make these drugs more affordable for state Medicaid programs to ensure access”

Spread Pricing

The rule also takes aim at opaque “spread pricing” practices by pharmacy benefit managers.

Spread pricing allows PBMs to charge Medicaid managed care plans a higher amount for a prescription drug than what they reimburse the dispensing pharmacy, said Ciaccia. The difference, known as the “spread,” is kept by the PBM and can lead to increased spending due to artificially inflated costs, he said.

PBMs have come under increasing scrutiny in recent years due to their lack of transparency over their pricing strategies. A 2018 report by auditors for the state of Ohio and Ciaccia found that from April 2017 to March 2018, PBMs in Ohio retained 31% of the money they received for generic drugs. The state ended up paying out an additional $208 million due to the practice, the report said.

To tackle this issue, the proposed CMS rule would mandate transparent reporting of drug payment information in contracts between states, Medicaid-managed care plans, and third-party contractors like PBMs.

Both Ciaccia and Park, however, point out that many of the provisions in this rule might be seen as overdue policy.

“From what I’m seeing, the types of issues that they’re encountering today are either a result of general accounting failures or documentation mistakes by companies and not necessarily intentional acts,” Ciaccia said. “I think the problem has been largely solved through the precedent set by the Mylan case.”

“A lot of the rule is just conforming to statutory changes in the last few years. These things get enacted, and they have already taken effect, but the agency sometimes takes a while to actually come into full conformity with new regulations,” said Park.

To contact the reporter on this story: Ganny Belloni at

To contact the editors responsible for this story: Karl Hardy at; Cheryl Saenz at

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