Department of Health and Human Services
 
OFFICE OF 

 
INSPECTOR GENERAL 

 
 
 
 
 
 
 
 
AC  CURACY OF DRUG 

 
C
ATEGORIZATIONS FOR 

 
 
M R  
EDICAID  EBATES 

 
 
 
 
 
 
Daniel R. Levinson 
  
Inspector General 

 
July 2009 
 
OEI-03-08-00300 
   
Office of Inspector General

http://oig.hhs.gov  
 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as  
amended, is  to protect the integrity of the Department of  Health and Human Services  
(HHS)  programs, as well as the health and welfare of beneficiaries  served by those 
programs.  This statutory mission  is  carried  out through  a nationwide network  of  audits, 
investigations, and inspections conducted by the  following operating components:  
Office of Audit Services 
The Office  of  Audit Services  (OAS) provides auditing services  for HHS, either by  conducting  
audits  with its own audit resources or by  overseeing  audit work done by others.  Audits  
examine the performance of HHS programs and/or its grantees and contractors in carrying  
out their respective responsibilities and are intended  to provide independent assessments of 
HHS programs and operations.  These assessments help reduce waste, abuse, and  
mismanagement and promote economy and efficiency  throughout  HHS. 
Office of Evaluation and Inspections  
The Office  of  Evaluation and Inspections (OEI)  conducts national evaluations to  provide 
HHS, Congress, and the public with timely, useful, and reliable information on significant 
issues.  These evaluations focus on preventing fraud,  waste, or abuse  and promoting  
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving  program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations  
of  fraud and misconduct  related to HHS programs, operations, and beneficiaries.  With 
investigators working in all 50 States and the District of Columbia, OI  utilizes its resources 
by actively  coordinating with the Department  of Justice  and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to  criminal 
convictions, administrative sanctions,  and/or  civil monetary  penalties.  
Office of Counsel to the Inspector General 
The Office of Counsel to the  Inspector  General (OCIG) provides general legal services to 
OIG, rendering  advice and opinions on HHS programs and operations and  providing all  
legal support for OIGs  internal operations.  OCIG represents  OIG in all civil and 
administrative fraud and abuse cases involving HHS programs,  including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In  connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program  guidance, publishes fraud alerts, and provides other  
guidance  to  the health care industry concerning the anti-kickback statute and other  OIG  
enforcement authorities.    
   
 
 
E X E C U T I V E   S U M M A R Y  
  E X E C U T I V E   S U M M A R Y
OBJECTIVE 
 
To determine whether the drug categorizations used to calculate 
Medicaid rebates are consistent with the categorizations listed in 
national compendia. 
BACKGROUND 
Medicaid is a health insurance program for certain low-income and 
medically needy people, jointly funded by Federal and State 
governments.  Currently, all 50 States and the District of Columbia 
offer prescription drug coverage as part of their Medicaid benefit 
packages. In 2007, Medicaid expenditures for prescription drugs totaled 
$22 billion. 
For Federal payments to be available for covered outpatient drugs 
provided under Medicaid, sections 1927(a)(1) and (b)(1) of the Social 
Security Act (the Act) require drug manufacturers to (1) enter into  
rebate agreements with the Secretary of the Department of Health and  
Human Services and (2) pay quarterly rebates to State Medicaid 
agencies.  In addition, covered  outpatient drugs must be approved by 
the Food and Drug Administration (FDA) for safety and effectiveness, 
with certain exceptions, to qualify for Federal payments.  As set forth in 
section 1927(b)(3) of the Act, manufacturers must provide the Centers 
for Medicare & Medicaid Services (CMS) with the average manufacturer 
price (AMP), by national drug code (NDC), for each of their covered 
outpatient drugs. 
The rebate amount for a drug is based in part on whether it is  
categorized as an innovator or a noninnovator product.  For rebate 
purposes, innovators include both single-source (typically a brand-name 
product that has no available generic versions) and innovator multiple-
source (typically a brand-name product that has available generic 
versions) products.  Noninnovators are typically generic versions of 
multiple-source drugs.  Manufacturers provide CMS with the drug 
categorizations for the NDCs of their covered outpatient drugs in 
conjunction with AMP data.  Innovator products are generally subject to 
higher rebates than noninnovator products. 
We compared drug categorizations in CMSs fourth-quarter 2007 AMP 
file (AMP file) to drug categorizations in two national compendia for 
more than 17,000 NDCs.  National drug compendia are databases 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   i  
   
   
EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY    
compiled by private companies using data from such sources as drug 
manufacturers and FDA. We then conducted a manual review of the 
drug categorizations for 75 nonmatching NDCs associated with high 
Medicaid expenditures, using information obtained from FDAs Drug 
Information directories, FDA staff, and manufacturer Web sites.  
Further, we  determined  the percentage of NDCs  with Medicaid  
utilization in the fourth quarter of  2007 that were not included in that 
quarters AMP file. 
FINDINGS 
Most AMP file drug categorizations  matched the categorizations in 
two national compendia. For 90 percent of the 17,121 NDCs in our 
comparison, the drug categorizations in the fourth-quarter 2007 AMP 
file were the same as the categorizations in the national compendia. 
However, drug categorizations did not match for 1,730 NDCs. Overall, 
these nonmatching NDCs were associated with just 3 percent of total      
fourth-quarter 2007 Medicaid expenditures for the NDCs under review. 
A manual review of 75 of the 1,730 nonmatching NDCs found that 35 of 
the 75 nonmatching NDCs included in the manual review appear to 
have been correctly categorized in the AMP file under Medicaid rebate 
program requirements. This means that the drugs innovator status in 
the AMP file matched the drugs innovator status found in FDAs Drug 
Information directories. 
Another 8 of the 75 drugs were associated with NDCs that appear to 
have been incorrectly categorized in the AMP file. These drugs were 
categorized as noninnovators in the AMP file but had been approved 
through new drug applications by FDA. It appears that under Medicaid 
rebate program requirements, these NDCs should have been 
categorized by their manufacturers as innovators. Because 
manufacturers pay smaller rebates for noninnovator drugs, States may 
not be receiving the rebates to which they are entitled for these eight 
NDCs. Fourth-quarter 2007 Medicaid expenditures for the drugs 
represented by these eight NDCs totaled nearly $14 million.  
The remaining 32 nonmatching NDCs in the manual review were for 
drugs not listed in FDAs Drug Information directories. According to 
FDA, none  of the drugs associated with these NDCs had been approved.  
Medicaid paid $20 million for these drugs in the fourth quarter of 2007. 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   ii  
   
   
 EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY    
A substantial number  of NDCs were excluded from the drug 
categorization comparison, primarily because of missing data. We 
were unable to compare drug categorizations for 42 percent (12,557 of 
29,678) of NDCs with fourth-quarter 2007 Medicaid utilization for 
several reasons: (1) the NDCs were  not listed in the AMP file, (2) the 
NDCs were  not listed in one or both of the two national drug compendia, 
or (3) the NDCs had drug categorization that differed in the two 
national compendia. These NDCs  accounted for less than 10 percent of 
total Medicaid reimbursement for prescription drugs in the fourth 
quarter of 2007. 
We excluded 65 percent (8,101 of 12,557) of these NDCs from the 
comparison  of drug categorizations because data were missing from the 
AMP file. Over half of these NDCs  were also not listed in the previous 
quarters AMP file. For the remaining NDCs excluded from  this 
comparison, 24 percent (3,031 of 12,557) were not listed in one or both of 
the national compendia. An additional 11 percent (1,425 of 12,557) of 
these NDCs  were excluded because their innovator status in  one 
compendium did not match their innovator status in the other. 
RECOMMENDATIONS 
We found that for the purposes of Medicaid drug rebates, manufacturers 
typically categorize their drugs in the same way as national compendia.  
Based on our review, most drug categorizations used to calculate 
Medicaid rebates appear to be correct. However, our manual review 
identified (1) a potential problem with Medicaid payment for drugs that 
do not have  FDA approval and (2) instances in which certain drugs 
appear to have been categorized incorrectly in the AMP file, potentially 
resulting in a loss of rebates for States. Because we were able to  
identify these specific problems only for drugs that were included in our  
manual review of 75 nonmatching NDCs, it is likely that our findings 
understate the number of drugs that fit into each category. We will 
provide CMS with a list of the drugs that we identified as being 
unapproved or potentially miscategorized. 
Finally, we were not able to compare drug categorizations for a large 
number of NDCs, primarily because AMP data were missing. The 
absence of AMP data would likely inhibit CMS from calculating unit 
rebate amounts in a timely manner.  In these cases, it is the  States 
responsibility to collect any amounts that are owed. 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   iii  
   
   
 EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY    
To address these issues,  we recommend that CMS: 
Work closely  with FDA to identify  any  potentially problematic Medicaid 
payments for drugs that have not been approved by FDA. 
Work  with manufacturers to determine the correct categorizations of  
the drugs that we identified as being potentially  miscategorized in the 
AMP file  and assist States in collecting any  unpaid rebates that they  are 
owed.  
Continue to explore and undertake a range of efforts to ensure that 
drug manufacturers are submitting the required AMP data in a timely  
manner, including collaborating with the Office of Inspector General on 
administrative remedies for noncompliance.   
AGENCY COMMENTSAND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
In its comments on the draft report, CMS did not indicate whether it 
concurred with OIGs three recommendations. However, CMS did note  
that it has taken and will continue to  take steps related to each of OIGs 
recommendations. 
CMS responded to our recommendation on potentially unapproved  
drugs by stating that it has worked and will continue to work closely 
with FDA to identify potentially problematic Medicaid payments for  
drugs that do not meet the definition of a covered outpatient drug. In 
its response  to our recommendation on potentially miscategorized  
drugs, CMS stated that it is contacting the manufacturers for which 
OIG identified a potential problem with drug categorizations. CMS 
responded to our recommendation on timely reporting of AMP data by 
stating that it will continue to ensure that drug manufacturers are 
submitting the required AMP data in a timely manner.   
We ask that CMS indicate in its final management decision  whether 
it concurs with each of our recommendations. Ongoing OIG work will 
further evaluate CMSs and FDAs ability to identify and remove 
drugs that may not be  eligible for coverage under the Medicaid drug 
rebate program. In addition, OIG is exploring potential actions 
against manufacturers that fail to provide AMP data in a timely 
manner.                                                                                    
  OEI-03-08-00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   iv  
   
  T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
  
 
 
I N T RO DUC T IO N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 
  
 
 
F I N D IN G S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11 
  
Most AMP file drug categories matched the drug categories in    
      
two national compendia  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11 
  
A substantial number of NDCs were excluded from the drug    
 
category comparison, primarily because of missing data  . . . . . . .  13 
  
 
R E C O MMEN D A T ION S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15 
  
  Agency Comments and Office of Inspector General Response  . . .  16 

 
APPENDIX  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18 
  
A:  Agency Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18 
  
 
A C K NO WL E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21 
    
   
  I N T R O D U C T I O N
OBJECTIVE 
To examine  whether the drug categorizations used to determine 
Medicaid rebates are consistent with the categorizations listed in 
national compendia. 
BACKGROUND 
Medicaid Prescription Drug Coverage 
Medicaid is a health insurance program for certain low-income and 
medically needy people, jointly funded by Federal and State 
governments.  Individual States establish eligibility requirements, 
benefit packages, and payment rates for their Medicaid programs under 
broad Federal standards.  Currently, all 50 States and the District of 
Columbia offer prescription drug coverage as part of their Medicaid 
benefit packages. In 2007, Medicaid expenditures for prescription drugs 
totaled nearly $22 billion.1  
Medicaid Drug Reimbursement  
Medicaid beneficiaries typically receive covered drugs through 
pharmacies, which are reimbursed for these drugs by State Medicaid 
agencies.  Generally, covered  outpatient drugs must be approved by the 
Food and Drug Administration (FDA) for safety and effectiveness, with 
certain exceptions, to qualify for Federal payments.2  Reimbursement 
for covered outpatient prescription drugs is based on national drug 
codes (NDC), which are 11-digit identifiers that indicate the 
manufacturer, dosage form, and package size of each drug product.  
Federal regulations require, with certain exceptions, that each States 
reimbursement for a drug not exceed the lower of its estimated  
 
1 Centers for Medicaid & Medicare Services (CMS), State Drug  Utilization Data.  
Available online at http://www.cms.hhs.gov/MedicaidDrugRebateProgram/SDUD/list.asp. 
Accessed on June 16, 2008.  The figure does not include any rebates collected by States 
through the Medicaid drug rebate program. 
2 Exceptions include drugs  which were commercially used or sold in the United States 
before the date of the enactment of the Drug Amendments of 1962; drugs for which the 
Secretary has determined there is a compelling  justification  for their medical need; drugs 
for which the Secretary has  not issued a notice of an opportunity  for a hearing on a 
proposed order of the Secretary to withdraw  approval of an application because the 
Secretary has determined that the drug is less than effective; and drugs that have not been  
subject to a final determination that they are new drugs.     
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   1  
   
   
 
 
I N T R O D U C T I O N   
 
acquisition cost plus a reasonable dispensing fee  or the providers usual 
and customary charge to the public.3     
CMS allows States flexibility when defining estimated acquisition cost.  
Each State is required to submit a Medicaid State plan to CMS 
describing its reimbursement methodology for covered drugs. States 
use a variety of mechanisms when setting drug reimbursement 
amounts.  Currently, most States base their calculations of estimated  
acquisition cost on a drugs average  wholesale price (AWP) discounted  
by a certain percentage or its wholesale acquisition cost plus a certain 
percentage.4  For some multiple-source drugs, States also use the 
Federal upper limit and/or State maximum allowable cost programs in 
determining reimbursement amounts.5  
Medicaid Drug Rebate Program  
For Federal payments to be available for covered outpatient drugs 
provided under Medicaid, sections 1927(a)(1) and (b)(1) of the Social 
Security Act (the Act) require drug  manufacturers to enter into rebate 
agreements with the Secretary of the Department of Health and Human 
Services and pay quarterly rebates to State Medicaid agencies. Under  
these rebate agreements and pursuant to section 1927(b)(3) of the Act, 
manufacturers must provide CMS with the average manufacturer price 
(AMP) by NDC for each  of their covered outpatient drugs.  As defined in 
section 1927(k)(1) of the Act, the AMP is the average price paid to the 
manufacturer of the drug in the United States by wholesalers for drugs  
distributed to the retail pharmacy class of trade.  The AMP is  
determined without regard to customary prompt pay discounts extended 
to wholesalers. 
The AMP is  calculated as a weighted average of prices for all of the 
manufacturers package sizes of a drug sold during a given time period 
and is reported for the lowest identifiable quantity of the drug           
 
3 42 CFR  447.512. 
4 CMS, Medicaid Prescription Reimbursement  Information by StateQuarter Ending  
March 2008. Available online at  
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/downloads/RxReimbursementRateM 
arch2008.pdf. Accessed on June 13, 2008. 
5 States use the Federal upper limit and/or State maximum allowable cost programs to 
establish ceiling prices for certain multiple-source drugs.  CMS has established Federal 
upper limit amounts for more than 500 drugs.  Individual States determine the types of 
drugs included in their maximum allowable cost programs and the methods by  which the 
maximum allowable cost for a drug is calculated.    
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   2  
   
   
I N T R O D U C T I O N   
 
(e.g., 1 milligram, 1 milliliter, 1 tablet, 1 capsule).  Currently, 
manufacturers submit  AMP data on monthly and quarterly bases, with 
submissions due 30 days after the end of the rebate period. 
In the Medicaid drug rebate program, drugs are generally categorized as 
one of three  types:  single-source, innovator multiple-source, or  
noninnovator multiple-source.  Manufacturers provide CMS with the 
drug category for each of their NDCs in conjunction with AMP data. 
Generally, pursuant to section 1927(k)(7)(A) of the Act and                    
42 CFR  447.502, (1) a single-source drug is a covered outpatient drug 
produced or distributed under an  original new drug application 
approved by FDA, including a drug product marketed by any cross-
licensed producers or distributors operating under the new drug 
application; (2) an innovator multiple-source drug is a multiple-source 
drug that was initially marketed under an original new drug application 
approved by FDA; and (3) a noninnovator multiple-source drug is a 
multiple-source drug that is not an innovator multiple-source drug.6  7   
In general terms, a single-source drug would typically be a     
brand-name product with no available generic versions.  An innovator             
multiple-source drug would typically  be a brand-name product that has 
available generic versions.  A noninnovator multiple-source drug would 
simply be a generic version of any multiple-source product. 
In addition to AMP, section 1927(b)(3) of the Act requires 
manufacturers of single-source and innovator multiple-source drugs to  
provide CMS with the best price available for each of its covered  
outpatient drugs.  Best price is generally defined as the lowest price 
available from the manufacturer during the rebate period to any 
wholesaler, retailer, provider, health maintenance organization, 
nonprofit entity, or governmental entity within the United States, with 
certain exceptions.8  Manufacturers of noninnovator multiple-source 
 
6 The regulation (42 CFR  447.502) also generally provides that for drugs that entered 
the market in 1962 or later, a noninnovator multiple-source drug is a drug marketed under 
an abbreviated new drug application; for drugs that entered the market before 1962, it is a 
drug not originally marketed under an original new drug application.  
7 Pursuant to 42 CFR  447.502, single-source and innovator multiple-source drugs also 
include covered  outpatient drugs approved under product license approvals, establishment 
license approvals, or antibiotic drug approvals.  Single-source drugs also include covered 
outpatient drugs approved under a biological license application.   
8 Section 1927(c)(1)(C)(i) of the Act. 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   3  
   
   
 I N T R O D U C T I O N   
drugs are not required to provide their best price.  CMS maintains AMP 
and best price data as part of its quarterly AMP files (AMP file). 
Medicaid Drug Rebate Calculations 
The amount of rebates owed by manufacturers to State Medicaid  
agencies for a drug is determined by two figures:  (1) the unit rebate 
amount of the drug and (2) the number of units of the drug reimbursed 
by the State in a given quarter. Pursuant to section 1927(c) of the Act, 
the formula used to determine the unit rebate amount depends on the 
drug category reported by the manufacturer.   Under Medicaid rebate 
law, unit rebate amounts for single-source and innovator multiple-
source drugs are calculated using the same formula.  Therefore, for the 
purposes of this report, both single-source and innovator multiple-
source drugs are hereinafter referred to as innovator products, while 
noninnovator multiple-source drugs are referred  to as noninnovators.   
For innovator drugs, the unit rebate amount equals the greater of     
15.1 percent of the AMP or the difference between the AMP and best 
price.9  For noninnovator drugs, the unit rebate amount is 11 percent of 
the AMP.10    
At the end  of every quarter, CMS calculates a unit rebate amount for 
each NDC included in the Medicaid drug rebate program and provides 
this amount to State Medicaid agencies.  To determine total rebates due 
from manufacturers, the unit rebate amount is multiplied by the total 
number of units of the NDC reimbursed by the State during the 
quarter.  
In some cases, States may have reimbursed for drugs that do not have  
AMPs reported by the manufacturers in the given quarter.  As a result, 
CMS is unable to calculate unit rebate amounts for the affected NDCs.  
However, States are still owed rebates for these drugs.  CMS has 
instructed States to include the NDCs that have unit rebate amounts of  
zero because AMP data are missing or have been  rejected as part of the  
quarterly rebate statement sent to manufacturers, listing the number of 
units of the NDC reimbursed by the State in the quarter.11  The 
 
9 Section 1927(c)(1)(A) of the Act.
  
10 Section 1927(c)(3) of the Act. 

11 CMS, Medicaid Drug Rebate Program  Bulletin for Participating Drug 
 
Manufacturers, Release Number 69.  Available online at 
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/03_DrugMfrReleases.asp. Accessed 
on December 12, 2008.  
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   4  
   
   
I N T R O D U C T I O N   
 
manufacturers calculate their own unit rebate amounts for the NDCs 
according to Medicaid drug rebate program rules  and determine the 
total rebates owed based on the utilization provided.12  However, 
according to CMS staff, manufacturers do not always follow through 
with this process, causing States to expend substantial efforts to recoup 
the unpaid amounts.13  14  
Drug Compendia 
Drug compendia are databases compiled by private companies using 
data from such sources as drug manufacturers and FDA.  National drug 
compendia are references for health care professionals that provide 
access to drug-pricing and drug category data.  Two commonly used 
drug compendia on the market today are the Red Book (published by 
Thomson Healthcare) and the First  DataBank National Drug Data File 
(First DataBank) (published by the Hearst Corporation). 
FDA Drug Information Directories 
FDA publishes information via several sources regarding drugs that it 
has approved.  For example, FDAs National Drug Code Directory 
(NDC Directory) is supposed to list the application numbers for NDCs 
associated with drugs approved by FDA.15  16  However, previous OIG 
work has found the NDC Directory to be incomplete, primarily because 
of insufficient reporting by drug manufacturers.17  In addition, FDA 
 
12 CMS, Medicaid Drug Rebate Program  Bulletin for Participating Drug  
Manufacturers, Release Number 38.  Available online at 
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/03_DrugMfrReleases.asp. Accessed 
on October 24, 2008. 
13 Because States are responsible for tracking  collections and reporting those amounts to 
CMS, the responsibility falls on States to collect the rebates owed to them when  
manufacturers do not follow through with this process.    
14 Previous Office of Inspector General (OIG)  work found that many  States do not receive 
all possible drug rebates from manufacturers because of missing AMP data. 
15 Available online at http://www.fda.gov/cder/ndc/index.htm. Accessed on              
October 10, 2008. 
16 FDA inputs the NDC and the information submitted as part of the listing process into 
a database known as the Drug  Registration and Listing System (DRLS).  Several times a 
year, FDA extracts some of the information  from the DRLS database (currently, properly  
listed marketed  prescription drug products and insulin) and publishes that information in 
the NDC Directory. 
17 OIG, The Food and Drug Administrations National Drug Code Directory,            
OEI-06-05-00060, August 2006.  
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   5  
   
   
II NN TT RR OO DD UU CC TT II OO NN    
recently stated that the NDC directory is neither fully accurate nor 
complete.18    
The NDC Directory does not indicate whether the application numbers 
are for new drug applications (i.e., represent innovator drugs) or  
abbreviated new drug applications (i.e., represent noninnovator drugs). 
The FDA Approved Drug Products directory (Drugs@FDA) provides 
each drugs  approval history, including whether it was approved under 
a new drug application or an abbreviated new drug application; 
however, it does not list any of this information  by NDC.19  Drugs@FDA 
is searchable by application number, proprietary drug name, and active  
ingredient; therefore, with information gathered  from FDAs NDC  
Directory, Drugs@FDA can be used to identify NDCs as innovators or  
noninnovators. 
METHODOLOGY 
Scope and Data Collection 
Scope. We reviewed only NDCs with Medicaid utilization in the fourth 
quarter of 2007 (October 1 to December 31). There were 29,678 NDCs 
with Medicaid utilization in the quarter under review. We were able to 
compare drug categorizations only if  NDCs were present in all data 
sources. Therefore, any NDCs that were not listed in the fourth-quarter       
2007 AMP file or either of the two national drug compendia (Red Book 
and First DataBank) were excluded from our comparison. In addition, 
we excluded drugs whose drug categorizations differed in the two 
national compendia (i.e., drugs that were considered innovators in Red 
Book and noninnovators  in First DataBank or vice versa). As a result of 
these steps, our comparison of drug categorizations included            
17,121 NDCs. These 17,121 NDCs accounted for 91 percent ($4.9 billion 
of $5.4 billion) of total Medicaid reimbursement for prescription drugs 
in the fourth quarter of 2007. 
Data collection. We identified all NDCs with Medicaid reimbursement 
in the fourth quarter of 2007 using CMSs National Drug Utilization 
Database, which contains the Medicaid utilization and expenditures by 
 
18 FDA response to Representative Edward J. Markey. Available online at 
http://www.ascp.com/medicarerx/upload/FDAltrMerkey.pdf. Accessed on 
November 17, 2008. 
19 FDA, Drugs@FDA: Frequently Asked Questions. Available online at 
http://www.fda.gov/cder/drugsatfda/FAQ.htm. Accessed on September 22, 2008. 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   6  
   
   
II NN TT RR OO DD UU CC TT II OO NN    
  
NDC.20  In February 2008, we obtained the Medicaid drug rebate 
fourth-quarter 2007 AMP file from CMS. We obtained variables that 
identify drug categorizations from fourth-quarter 2007 versions of two 
national drug compendia (Red Book and First DataBank). We also 
obtained information from FDAs Drug Information directories (NDC 
Directory and Drugs@FDA) for use during our manual review of drug  
categorizations. 
Data Analysis 
Compendia data. Drug compendia do not contain individual drug 
category variables that identify NDCs as single-source, innovator 
multiple-source, or noninnovator multiple-source drugs, as defined by 
Medicaid drug rebate law. Therefore, we developed our own variable 
based on a combination of other variables contained in the compendia. 
For both compendia, we used the variable that identifies NDCs as 
brand-name or generic in conjunction with a variable that identifies 
NDCs as single-source or multiple-source to create our comparison 
variable. We used the following criteria for our categories: 
1. 	  NDCs categorized as brand-name and single-source were  considered   
single-source and therefore innovators for purposes of this analysis. 
2. 	  NDCs categorized as brand-name and multiple-source were 
considered innovator multiple-source and therefore innovators for  
purposes of this analysis. 
3. 	  NDCs categorized as generic and multiple-source were considered 
noninnovator multiple-source and therefore noninnovators for 
purposes of this analysis. 
As previously stated, to avoid potential confusion, NDCs for which 
drug categorizations differed in the two national compendia were  
excluded from further analysis of drug categorizations.21    
Comparison of drug categorizations. We compared the drug 
categorizations listed in national compendia to the drug categorizations  
in the AMP file for the 17,121 NDCs under review. We placed NDCs for 
 
20 CMS, State Drug  Utilization Data. Available online at 
http://www.cms.hhs.gov/MedicaidDrugRebateProgram/SDUD/list.asp. Accessed on 
May 20, 2008. 
21 We excluded 1,425 NDCs from  our analysis because the drug categorizations in Red 
Book did not match the drug  categorizations in First DataBank.    
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   7  
   
   
 I N T R O D U C T I O N   
which the rebate categorizations in the AMP file did not match the 
compendia categorizations into one of two groups: 
1. 	  NDCs categorized as noninnovator drugs in the AMP file but 
categorized as innovator drugs in drug compendia.   
2. 	  NDCs categorized as innovator drugs in the AMP file but 
categorized as noninnovator drugs in drug compendia.  
We determined the potential effect of miscategorizations by calculating 
(1) the percentage of NDCs and (2) the percentage of total Medicaid  
reimbursement in the fourth quarter of 2007 associated with each group 
(i.e., innovators in the AMP file, noninnovators in drug compendia, and 
vice versa).   
Manual review. In addition to comparing Medicaid rebate 
categorizations to the two drug compendia, we conducted a manual 
review of 75 high-expenditure, nonmatching NDCs to address concerns  
that neither the AMP file nor drug  compendia are completely accurate 
and reliable sources of drug category data.  These 75 NDCs consisted of 
the 50 NDCs categorized as noninnovators in the AMP file (but 
innovators in compendia) and the 25 NDCs categorized as innovators in  
the AMP file (but noninnovators in  compendia) with the highest 
expenditures in the fourth quarter of 2007.   
We identified reasons for any differences in drug categorizations by 
examining drug approval status and drug categorization data in FDAs 
Drug Information directories.  For each of the 75 NDCs included in our  
manual review, we used a two-step method to determine the correct 
drug category.  First, we  used FDAs NDC Directory to search for the 
products application number. Because the application number alone 
does not identify an NDC as innovator or noninnovator, we then used  
the Drugs@FDA directory to identify whether the application numbers 
belonged to drugs that were approved under new drug applications   
(i.e., innovators) or abbreviated new drug applications                        
(i.e., noninnovators).  We considered the drug categorization in the AMP 
file to be correct only when its drug category corresponded to  the  
appropriate approval status in the FDA directories.22  A small number 
 
22 Generally, under the Medicaid drug rebate program, drugs categorized as innovators 
have new drug applications and drugs categorized as noninnovators have abbreviated new 
drug applications (with certain exceptions).  Section 1927(k)(7)(A) of the Act and                  
42 CFR  447.502. 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   8  
   
   
I N T R O D U C T I O N   
 
of drugs associated with the 75 NDCs under review were not listed in 
FDAs NDC Directory but were listed in Drugs@FDA.  Although 
Drugs@FDA does not list drugs by NDC, we were able to verify the 
approval status of these NDCs using a combination of product and  
manufacturer data from the database.23    
For some  of the NDCs included in our manual review, we were unable  
to locate information in any of FDAs online sources.   Therefore, a third  
step was necessary.  We  provided FDA staff with a list of these NDCs  
and obtained further information  about the approval status and 
categorization for each of the associated drugs.  We also obtained  
information about these NDCs from their manufacturers  Web sites. 
Drugs not included in the AMP file and/or compendia. For some NDCs, we  
were unable to compare the Medicaid drug categorizations to those in the 
national compendia because the data were missing from at least one of the 
files. First, we calculated the percentage of NDCs with Medicaid 
utilization in the fourth quarter of  2007 that were not included in that 
quarters AMP file.24  We also determined whether any of the NDCs with 
missing fourth-quarter 2007 AMPs did not appear in the third-quarter 
2007 AMP file.  Then, we calculated the percentage of NDCs with 
Medicaid utilization in the fourth quarter of 2007 that were missing from 
one or both of the national compendia.  Finally, we calculated the 
percentage of NDCs with Medicaid utilization in the fourth quarter of 
2007 that were listed in both compendia, but the drug categorizations 
differed in each source. 
Limitations 
The editorial policies of national drug compendia permit submission of 
data from manufacturers, distributors, Government publications, 
internal research, and medical literature as sources of drug information.   
However, publishers of compendia do not perform formal data reviews 
for every new release.  We did not verify the accuracy of data provided 
by First DataBank or Red Book. In addition, we did not verify the 
accuracy of the data provided by CMS or FDA.   More current AMP data 
may have become available after we completed our analysis. For 
 
23 Drugs@FDA is searchable by application number, proprietary drug  name, or active  
ingredient. 
24 According to CMS Drug Rebate Program Release No. 69, individual State Medicaid 
agencies are responsible for collecting rebates for NDCs with Medicaid utilization that are 
not included in the AMP file.   
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   9  
   
   
I N T R O D U C T I O N   
example, the fourth-quarter 2007 AMP file provided to us by CMS on 
February 2, 2008, may have been updated after our analysis was 
completed.   
The eligibility for Medicaid payments of the unapproved drugs 
identified by our manual review is beyond the scope of this study.  We  
did not determine whether any Federal funds were used to  pay for 
drugs that were not approved by FDA. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and 
Efficiency and the Executive Council on Integrity and Efficiency (now 
the Council of the Inspectors General on Integrity and Efficiency). 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   10  
   
   
F I N D I N G S  
  F I N D I N G S  
Most AMP file drug categories matched the drug  For 90 percent of the 17,121 NDCs in 
categories in two national compendia  our comparison, the drug  
categorizations in the fourth-quarter 
2007 AMP file were the same as the categorizations in the national 
compendia. Drugs with matching categorizations accounted for           
97 percent of Medicaid expenditures  for the NDCs under review. In the  
AMP file, 29 percent of the 17,121 NDCs under review were categorized 
as innovators, and 71 percent were categorized as noninnovators.  
However, as shown in Table 1, there were 1,730 NDCs (10 percent of 
NDCs in our comparison) whose drug categorizations in the AMP file 
did not match the drug categorizations in the national compendia.  The 
nonmatching NDCs represented 12 percent of the NDCs categorized as 
innovators in the AMP file and 9 percent of the NDCs categorized as 
noninnovators in the AMP file.  Overall, these nonmatching NDCs were 
associated with 3 percent ($146 million of $4.9 billion) of the total 
fourth-quarter 2007 Medicaid expenditures for the NDCs under review.  
Table 1.  Comparison of Drug Categorizations in the  AMP File and Two  National Drug Compendia  
AMP Drug Categorization  Number of NDCs That  Number of NDCs That Did     Total Number of NDCs by  
Matched Compendia Drug  Not Match Compendia  AMP File Drug 
Categorization  Drug Categorization  Categorization  
Innovator (single-source, innovator  
multiple-source)   4,389  585   4,974 
Noninnovator  11,002  1,145   12,147 
Total  15,391  1,730  17,121 
OIG analysis of data contained in AMP file, Red Book, First DataBank. 
A manual review of 75 of the 1,730 nonmatching NDCs indicates that 
many drugs identified as such in Table 1 may have been correctly 
categorized for rebate purposes.25  As Table 2 illustrates, several factors 
contributed to nonmatching drug categorizations in the AMP file and 
national compendia, including (1) questionable categorizations in 
compendia (i.e., correct categorizations in the AMP file),26 (2) incorrect 
 
25 Our manual review comprised the top 50 nonmatching NDCs  (by total Medicaid  
expenditures in the fourth quarter of 2007) categorized as noninnovators in the AMP file 
and the top 25 nonmatching NDCs (by total Medicaid expenditures in the fourth  quarter of  
2007) categorized as innovators in the AMP file. 
26 Because compendia are not required to categorize drugs according to Medicaid rebate 
law, it  would be  erroneous to refer to these cases as incorrect in the compendia.  
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   11  
   
   
FFF IIIN NND DDI IIN NNG GG SSS  
categorizations in the AMP file, and (3) the presence of unapproved  
drugs in the AMP and Medicaid reimbursement files. 
Table 2. Reasons for Nonmatching Drug Categorizations Between  AMP File and National Compendia   
AMP Drug Categorization  Questionable  in   Incorrect in AMP  Unapproved Drugs  Total Nonmatching 
Compendia (Correct in  File  NDCs Reviewed  
AMP File) 
Innovator (single-source, 
innovator multiple-source)  25  0  0  25 
Noninnovator  10  8  32  50 
Total  35  8  32  75 
OIG analysis of data contained in AMP file, Red Book, First DataBank, Drugs@FDA,  and NDC Directory.  
Nearly half of nonmatching NDCs that  we reviewed appear to have been 
categorized correctly  in the AMP file 
Thirty-five of the seventy-five nonmatching NDCs that underwent  
manual review appear to have been  correctly categorized in the AMP 
file according to Medicaid drug program requirements                        
(i.e., categorizations in the compendia were questionable). This number 
includes all 25 nonmatching NDCs categorized as innovators in the 
AMP file (but noninnovators in the compendia). Each of the drugs 
represented  by these NDCs had been approved through a new drug 
application according to Drugs@FDA. 
Further, 10 of 50 nonmatching NDCs categorized as noninnovators in  
the AMP file (but innovators in the compendia) had  been approved  
through abbreviated new drug applications, according to Drugs@FDA. 
According to Medicaid drug program requirements, it appears that 
these NDCs were also categorized correctly in the AMP file.    
A small number of nonmatching NDCs that  we reviewed resulted from 
apparent incorrect drug categorizations in the AMP file 
Eight of seventy-five NDCs that underwent manual review appear to 
have been incorrectly categorized in the AMP file. All eight of these 
NDCs were categorized as noninnovators in the AMP file but had been 
approved through new drug applications according to Drugs@FDA. It 
appears that under Medicaid drug program requirements, these NDCs  
should have been categorized by their manufacturers as innovators.   
Because manufacturers pay smaller rebates for noninnovator drugs, 
States may not be receiving the amount of rebates to which they are 
entitled for these eight NDCs. Fourth-quarter 2007 Medicaid 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   12  
   
   
F I N D I N G S  
expenditures for the drugs represented by these  eight NDCs  totaled  
nearly $14 million.   
Over 40 percent of nonmatching NDCs that  we reviewed were for drugs not 
approved by FDA 
Thirty-two of the seventy-five NDCs (43 percent) that underwent 
manual review corresponded to drugs not listed in FDAs Drug 
Information directories.  Each of these nonmatching NDCs was 
categorized as a noninnovator in the AMP file and an innovator in the 
compendia.  According to FDA, none  of the drugs associated with these 
NDCs had been approved.  Based on information obtained from FDA 
staff and manufacturer Web sites, the unapproved drugs indentified by 
our manual review were  enzyme-replacement products awaiting new 
drug application approvals, multivitamins (prenatal or otherwise), 
cough suppressants, antihistamines, or hydrating lotions.  Medicaid 
paid $20 million for drugs associated  with these 32 NDCs in the fourth 
quarter of 2007.27   
We were unable to compare drug 
A substantial number of NDCs were excluded 
categorizations for 42 percent     
from the drug category comparison, primarily  
(12,557 of 29,678) of NDCs with 
because of missing data  
fourth-quarter 2007 Medicaid 
utilization for several reasons: (1) the NDCs were not listed in the AMP 
file, (2) the NDCs were not listed in one or both of the two national drug 
compendia, or (3) the NDCs had drug categorizations that differed in 
the two national compendia.  NDCs in these three groups accounted for 
less than 10 percent of total Medicaid reimbursement for prescription 
drugs in the fourth quarter of 2007.   
Lack of data in the AMP file accounted for most of the excluded NDCs 
We excluded 65 percent (8,101 of 12,557) of the NDCs from the 
comparison  of drug categorizations because data were missing from the 
AMP file. Fourth-quarter 2007 payments for these NDCs totaled              
$338 million. More than half of these NDCs were also not listed in the 
previous quarters AMP file.  According to CMS staff, States sometimes 
face difficulty in obtaining the rebates owed for products with late or 
missing AMP data. 
 
27 Generally, for Medicaid Federal financial participation to be available, most covered 
outpatient drugs must be approved by FDA for safety and effectiveness, with certain  
exceptions. 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   13  
   
   
F I N D I N G S  
For the remaining NDCs excluded from this comparison,                   
3,031 (24 percent of excluded NDCs) were not listed in one or both of the 
national compendia.28  These NDCs accounted for $60 million in 
Medicaid payments in the fourth quarter of 2007.  An additional      
1,425 NDCs (11 percent of excluded NDCs) were excluded because their 
innovator status in one compendium did not match their innovator 
status in the other. These NDCs accounted for $99 million in Medicaid 
payments in the fourth quarter of 2007.  Table 3 provides a statistical 
breakdown of the reasons we excluded NDCs from our comparison of 
drug categorizations. 
Table 3. Reasons for Exclusion of NDCs From the Drug Categorization Comparison    
Reason for Exclusion From  Analysis  Number of NDCs Excluded  Medicaid Expenditures in the 
Fourth Quarter of 2007 
NDC missing from AMP file  8,101  $338,017,282 
NDC not listed in one compendium or both compendia  3,031  $59,823,807 
NDCs drug categorization differed in the two national 
compendia  1,425  $99,353,525 
Total  12,557  $497,194,614 
OIG analysis of data contained in AMP file, Red Book, First DataBank, and Medicaids fourth-quarter 2007 National Utilization File. 
Note: Medicaid expenditures are rounded to the nearest dollar. 
 
28 Of the 3,031 NDCs excluded from our comparison because compendia data were  
missing, 2,916 were listed in one of the two national compendia.  Only 115 of the NDCs 
were missing from both.  
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   14  
   
   
  R E C O M M E N D A T I O N S
 
For this review, we compared drug categorizations in the fourth-quarter  
2007 AMP file to those in two national drug compendia.  Because each 
drugs innovator status determines the rebate amount paid by the 
manufacturer to State Medicaid agencies, incorrect drug categorizations 
could reduce Medicaid drug rebates paid to States.  We found that for 
the purposes of Medicaid drug rebates, manufacturers typically 
categorize their drugs in the same  way as national compendia.  In other 
words, most drug categorizations used to calculate Medicaid rebates 
appear to be correct.   
However, in our manual review of 75 nonmatching NDCs, we identified 
a potential problem involving unapproved drugs:  Medicaid paid         
$20 million in the fourth quarter of 2007 for 32 drugs that were not 
approved by FDA.   These products may not be currently eligible for 
Federal payment under Medicaid because of their FDA approval status.  
According to FDA, unapproved drugs pose a significant health risk 
because they may not meet modern standards for safety, effectiveness, 
quality, and labeling. Further, FDA has noted that many health care 
providers may be prescribing unapproved drugs because they are  
unaware of the drugs approval status.   
Our manual review of 75 NDCs revealed eight instances in which 
certain drugs appear to have been  categorized incorrectly in the AMP 
file, potentially resulting in a loss of rebates for States.  Although total 
Medicaid expenditures for these eight NDCs were relatively small        
($14 million in one quarter), manufacturers may still owe States that 
reimbursed  for these products higher rebates than the amounts that 
States collected.   
In both cases, the figures presented in our findings were limited to 
drugs included in our manual review  of 75 high-expenditure              
nonmatching NDCs and are therefore likely to understate the actual 
amount spent on all drugs that fit into each category.  We will provide 
CMS with a list of the drugs that we identified as being unapproved or 
potentially miscategorized. 
Finally, we were not able to compare categorizations for a large number  
of NDCs, primarily because AMP data were missing.  The lack of AMP 
data would likely inhibit CMS from calculating unit rebate amounts in a 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   15  
   
   
R E C O M M E N D A T I O N S  
timely manner.  In these cases, States are responsible for collecting any 
amounts that are owed.    
To address the issues raised in this report, we recommend that CMS: 
Work closely  with FDA to identify  any potentially problematic 
Medicaid payments for drugs that have not been approved by FDA.  
Work  with manufacturers to determine the correct categorizations of  
the drugs that we identified as being potentially  miscategorized in the 
AMP file  and assist States in collecting any  unpaid rebates that they  are 
owed.  
Continue to explore and undertake a range of efforts to ensure that 
drug manufacturers are submitting the required AMP data in a timely  
manner, including collaborating with OIG on administrative remedies 
for noncompliance.                                                                                                                 
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
In its comments on the draft report, CMS did not indicate whether it 
concurred with OIGs three recommendations.  However, CMS did note  
that it has taken and will continue to  take steps related to each of OIGs 
recommendations. 
CMS responded to our recommendation on potentially unapproved  
drugs by stating that it has worked and will continue to work closely 
with FDA to identify potentially problematic Medicaid payments for  
drugs that do not meet the definition of a covered outpatient drug for 
the purposes of the Medicaid drug rebate program.  CMS explained  
that FDA provides it with information on unapproved drugs that may 
be ineligible for coverage under the Medicaid drug rebate program.   
CMS reviews that information and  determines whether action should  
be taken to  remove these drugs from the list of covered drugs.   
In its response to our recommendation on potentially miscategorized  
drugs identified in the AMP file, CMS stated that it is contacting the 
manufacturers for which OIG identified a potential problem with 
drug categorizations. If CMS determines that a manufacturer has 
miscategorized a drug and additional rebates are due, it will work 
with that manufacturer to ensure that a revised categorization is 
submitted so that the manufacturer can pay States appropriate 
rebates.  CMS also noted that it has been working with 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   16  
   
   
R E C O M M E N D A T I O N S  
manufacturers to correctly categorize drugs that manufacturers 
themselves have identified as being misreported.   
CMS responded to our recommendation on timely reporting  of AMP 
data by stating that it will continue to ensure that drug 
manufacturers are submitting the required AMP data in a timely 
manner.   To that end, after each quarter, CMS contacts drug  
manufacturers that have failed to submit timely AMP data to remind 
them of their responsibilities and request that their data be 
submitted immediately. In addition, on a quarterly basis, CMS 
provides OIG with a list of drug manufacturers that have failed to 
report timely data for two or more  quarters in a four-quarter period 
for further investigation and/or review.  CMS states that OIG may 
impose civil monetary penalties for manufacturers that appear on this 
quarterly report and indicated that issuing these penalties would 
assist in ensuring that drug manufacturers submit their required 
pricing data in a timely manner. 
We ask that CMS indicate in its final management decision  whether 
it concurs with each of our recommendations.  Ongoing OIG work will 
further evaluate CMSs and FDAs ability to identify and remove 
drugs that may not be  eligible for coverage under the Medicaid drug 
rebate program. In addition, OIG is exploring potential actions 
against manufacturers that fail to provide AMP data in a timely 
manner. 
The full text of CMSs comments is provided in Appendix A. 
 
 
 
 
 
 
 
 
 
 
 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   17  
   
   
  A P P E N D I X ~ A
 
Agency Comments 
 
~tersforMedicare&MedicaidServ,ces
-.
(',
) 200IndependenceAvenueSW
2D09MAY 19 PI:12: /2
Washington,DC 20201
.
MAY 18 2009 ;(.
GEI'IER/\L
DAT
TO: Daniel R, Levinson
InspectorGeneral
C~lA~"b-0~
FROM: Charlene Fnzzera
ActingAdministrator
S BJECT: OfficeofInspectorGeneral(OIG)DraftReport: 'AccuracyofDrug
CategorizationsforMedicaidRebates"(OEI-03-08-00300)
Thankyou fortheopportunityto reviewandcommentontheOIGDraftReportentitled
"AccuracyofDrug ategorizationsforMedicaidRebates"(OEI-03-08-00300), Thepurposeof
thisreportwastodeterminewhetherthedrugcategorizationsused tocalculateMedicaidrebate
areconsistentwiththecategorizationslistedinnationalcompendia.
TheOIGreportpre entsfindingsthatcomparedrugcategorizationsusedtodetermineMedicaid
rebatestodJUgcategorizationsin twowidelyused nationalcompendia. Therebateamount fora
drugisbasedonwhetherthedrugiscategorizedasa ingle-source,innovatormulti-source,or
non-innovatormultiple-sourcedrugproduct.
Drugcategorizationsinthefourth-quarter2007averagemanufacturerprice(AMP)filewere
comparedtodrugcategorizationsintwonationalcompendiaformorethan 17,000nationaldrug
codes(NDCs). Amanual revicwwasconductedofthedrugcategori".ation for75non-matching
ND a sociatcdwithhighMedicaidexpenditures usinginfomlationobtained from theFood
and DrugAdministration's(FDA)Druglnfonnationdirectories,FDAstaff,and manufacturcr
Websites. Thereportalsodctermined lhepercentageof DCswithMedicaidutilizationinthe
fourth-quarterof2007thatwerenotincludedillthatquarter' AMP file.
ror90percentof DCs,itwasfound thatthedrugcategorizationsin thcfourth-quarter2007
AMPfilewerethesameasthecategorizationsinthcnationalcompendia. Drugcategorizations
didnotmarchfor 10percentof DCs, Overall thesenon-matchingNDCswerea ociatedwith
3percentoftotalfourth-quarter2007Medicaidexpendituresforthe DCsunderreview. A
manual reviewof75high-expenditurenon-matching DCsrevealed that32NDCswerefor
drugsthathad notbeenapprovedbytherDA.
OIG Recommendation
TheCenters forMedicare& Medicaid ervices(CM )shouldworkcloselywiththeFoodand
DrugAdministration(FDA)toidentifyallypotentiallyproblematicMedicaidpayment fordrugs
thathavenotbe napproved bytheFDA.
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   18
  
   
   
AA PP PP EE NN DD II XX   ~~   AA  

 
 
 
 
  I'age2- Daniel R. Levinson
  CMSResponse
  TheeMShasbeenandwillcontinuetoworkcloselywiththeFDAtoidentifypotentially
problematicMedicaidpaymcntsfordrugsthatdonotmeetthedefinitionofacoveredoutpatient
drugforpurposesoftheMedicaidDrugRebateProgram(MDRP). FDAprovidesCMSwith
 
informationon unapproveddrugsthatmaybeineligiblcforcoverageundertheMDRP,CMS
reviewsthatinformationanddetermineswhetheractionshouldbetakentoremovethedrug.
 
CMSalsoworkswiththeFDAtoidentifysimilardrugsthatmightalsobeineligibleforcoverage
undcrtheMDRE'. ThcFDAgencrallyidentifiesadrugbasedonpharmaceuticalingredients,and
 
CMSidentificsNDCsintheMDRJlthatmaycontainthoseingredicnts. Subsequently,these
productsarealsoremoved from thelistofcovereddrugsintheMDRI'andCMSnotifiesStates
 
andthcaffectedlabelersofthisaction.
  OIG Recommendation
  CMSshouldworkwithmanufacturerstodeterminethecorrectcategorizationsofthedrugsthat
weidentifiedasbeingpotcntiallymiscategori7..edintheAMPfilcandassistStatcsincollecting
  anyunpaidrcbatesthattheyareowed.
  CMSResponse
Wcarepleasedthatthe010found thatalmostalldrugswerecorrectlyclassified. Nevertheless,
 
wewanttoensurethatmanufacturerscorrectlyrepontheirdrugclassification,andweareinthe
processofcontactingthosemanufacturerswherethe010hasidentifiedapotentialproblem. If
 
wedeterminethatamanufacturerhasmiscategori7..cdadrugandadditionalrebatesaredue,we
will workwiththemanufacturertoensurethatarevisedclassificationissubmiuedsothat
 
manufacturerscanpayStatestheappropriaterebates. Wenotethatit isthemanufacturer's
responsibilitytosubmitdatatoeMSthatreflectstheFDA'sapprovalprocessforthedrugand
  nottorelysolclyonotherinfonnationsuchasthatinthecompendia.
  Wehavealsobeenworkingwithmanufacturerstocorrectlycategorizedrugsthathavebeen
misreported. Whenamanufactureridentifiesthataproducthasbeenmiscategorized,wereview
  theproductanddetenninewhetherthemanufacturerhasidentifiedthecorrectdrugproduct
catcgory. Ifthedrugismiscategorizcd,CMSrequeststhatthemanufacturerprovideinformation
  insupportofaspecificdrugcategory,thceffectivedateofthechange,andthefinancial impact
asaresultofthischange. CMSwillthenusctheFDAdatabasestodeterminethecorrectdrug
  categorybasedontheFDAdrugapplicationnumberandverifythattheNDCislistedinthe
FDANational DrugCodeDirectory.
 
OIGRecommendation
 
CMSshouldcontinuetoexploreandundenakeanmgeofeffortstoensurethatdrug
manufacturersaresubmittingtherequiredAMPdatainatimelymanner.includingcollaborating
 
withthe010onadministrativeremediesfornoncompliance.
 
 
 
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   19
  
   
   
AA PP PP EE NN DD II XX   ~~   AA  

 
Page3- Daniell{, Levinson
eMS Response
TheeMSwillcontinuetoensurethatdrugmanufacturersarcsubmittingtherequiredAMI'data
inatimelymanner,includingcollaboratingwiththeDIGtonotifythemofinstancesof
manufacturcrnoncompliancewithrespecttotimelydatasubmission. Currently,aftereach
quarterlydatasubmissiondeadline,CMScontactsdrogmanufacturersthathavefailed tosubmit
timelypricingdatatoremindtbemoftheirdatasubmissionresponsibilitiesandrequestthattheir
databesubmittedimmediately.
TheCMSalsoincludesdatareportingstatusinfonnation intheDrugData ReportingSystem
applicationsothat,uponloggingintotheapplication,labelersmayidentifywhatthcnext
reportingduedatesareandhowmuchdatathelabelerhassubmittedandcertilied(Le.,whether
ornotthelabelerisoulofcompliancewiththeirdatareportingrequirements). Inaddition,ona
quarterlybasis,CMSreportstotheDIGthedrugmanufacturersthathavcfailedtoreporttimely
datafortwoormorequartersina four-quarterperiodforfurtherinvestigationand/orreview. It
isourunderstandingthattheDIGmayimposecivilmonctarypenaltiesforthemanufacturersthat
appearonthisquarterlyreport,andCMSbelievesthattheissuanceofsuchpenaltieswouldassist
further inensuringthatdrugmanufacturerssubmittheirrequiredpricingdatatimely.
TheCMSwould,again,liketothanktheDIGfortheireffortsinreviewingtheaccuracyofdrug
categorizationsforMedicaidrebates. eMSwillcontinuetoworkcloselywiththeFDA10ensure
thatmanufacturershavecorrectlyreportedtheirdrugclassificationsandthatdrugmanufactures
aresubmittingtherequiredAMPdatainatimelymanner. Wehavereceivedthelistof
manufacturersfrom theDIGandarcintheprocessofplanningtocontactthosemanufacturers
regardingpolentialdrugmisclltegorizalions. Furthermore,wewillcontinuetocollaboratewith
theDIGregardingadministrativcremediesfornOJlcompliance. eMSiscommittedtoensuring
theaccuracyofdrugcategorizationsandal1 Medicaidrebatedata,
  OEI-03-08 -00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   20
  
   
   
 AAA  ACCP CPKK KENN NNOO ODWW WILLXLEE~EDDADGG GMM MEE ENN NTT TSS S    
 A P P E N D I X ~ B  
This report was prepared under the direction of Robert A. Vito, 
Regional Inspector General for Evaluation and Inspections in the 
Philadelphia regional office, and David E. Tawes, Director, 
Prescription Drug Pricing Unit.   
Roman Strakovsky served as the lead analyst for this study.  Other 
principal Office of Evaluation and Inspections staff from the  
Philadelphia regional office who contributed to the report include 
Edward Burley; other central office staff who contributed include      
Lyn Killman. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  OEI-03-08-00300  ACCURACY OF  DRUG CATEGORIZATIONS FOR  MEDICAID REBATES   21