Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
P M
OTENTIAL  ISCLASSIFICATIONS 
R D  M
EPORTED BY  RUG ANUFACTURERS 
M H L $1 B L
AY  AVE  ED TO  ILLION IN  OST 
M R  
EDICAID  EBATES
Daniel R. Levinson 
Inspector General 
December 2017 
OEI-03-17-00100   
   
Report in Brief 
December 2 017 
OEI-03-17-00100 
A 
 
Potential Misclassifications Reported by Drug 
Why OIG Did This Review  
Manufacturers May Have Led to $1 Billion in Lost 
Manufacturers with rebate agreements are 
Medicaid Rebates   
required to report all of their covered 
outpatient drugs to the Medicaid Drug  What OIG Found 
Rebate Program (Medicaid rebate program).  
The vast majority of the approximately 30,000 drugs in the Medicaid 
The Centers for Medicare & Medicaid 
rebate program were classified appropriately.  However, we found that 
Services (CMS) calculates rebate amounts 
manufacturers may have misclassified 885 of these drugs (3 percent) in 
using manufacturer-reported pricing and 
classification data.  Congress asked the  2016.  We found that from 2012 to 2016, Medicaid may have lost 
Office of Inspector General (OIG) to evaluate  $1.3 billion in base and inflation-adjusted rebates for 
the accuracy of manufacturer-reported data  10 potentially-misclassified drugs with the highest total reimbursement in 
in the Medicaid rebate program, and CMSs  2016.   
oversight of that data. 
When CMS determines that information reported by manufacturers may 
The Food and Drug Administrations (FDAs)  be incorrect, it requests that manufacturers change the data.  CMS does 
marketing categories, which also are 
not have the explicit legal authority to require manufacturers to change 
manufacturer-reported, can be used to help 
their classification data.  CMS did report that when it identifies potential 
determine whether a drug is classified as an 
errors in classification data, it works with manufacturers to assist them in 
innovator, e.g., brand-name, or 
correcting the errors.  However, CMS does not track or maintain a central 
noninnovator, e.g., generic, product, for the 
database of these potential errors or their resolutions.  Therefore, we had 
purposes of calculating Medicaid rebates.  
no way to determine which drugs CMS identified as 
Innovator products are generally subject to 
higher base rebate amounts.  Manufacturers  potentially-misclassified, or what steps, if any, CMS took to address these 
are required to pay an additional,  potential misclassifications. 
inflation-adjusted rebate if a drugs price 
  Exhibit 1: Manufacturers may have owed an additional $1.3 billion for 
increases faster than inflation.  When 
10 potentially-misclassified drugs with the highest total reimbursement in 2016 
information provided by manufacturers is     
incorrect or missing, State Medicaid agencies 
 
may not be able to collect all appropriate 
rebates.   
 
 
How OIG Did This Review 
 
We compared manufacturer-reported 
 
classifications for drugs in the Medicaid 
rebate program to drug information in FDA  Source: OIG analysis of Medicaid and FDA drug classification data, 2016. 
files.  We determined the Medicaid drug 
What OIG Recommends  
classifications that matched FDAs, and those 
We recommend that CMS (1) follow up with manufacturers associated 
that did not match, i.e., were potentially 
with potentially-misclassified drugs identified in this report to 
misclassified, in 2016.  We then estimated 
the rebate amounts that Medicaid may have  determine whether current classifications are correct, (2) improve its 
lost from 2012 to 2016 for the  Drug Data Reporting for Medicaid System to minimize inconsistent data 
10 potentially-misclassified drugs with the  submissions and track potential classification errors for followup, and 
highest total reimbursement in 2016.  Finally,  (3) pursue a means to compel manufacturers to correct inaccurate 
we reviewed CMSs policies and procedures  classification data reported to the Medicaid rebate program.  CMS 
for ensuring appropriate oversight of data  concurred with all three recommendations.  
submitted to the Medicaid rebate program. 
 
Full report can be found at http://oig.hhs.gov/oei/reports/oei-03-17-00100.asp   
   
TABLE OF CONTENTS 
 
Objectives ....................................................................................................1 
Background ..................................................................................................1 
Methodology ................................................................................................5 
Findings........................................................................................................7 
Drug manufacturers may have misclassified a small percentage  
of drugs in the Medicaid rebate program .........................................7 
Over the past 5 years, Medicaid may have lost $1.3 billion in 
rebates for 10 potentially-misclassified drugs .................................8 
CMS has modified its procedures to oversee classification data     
in the Medicaid rebate program, but opportunities remain for 
improvement ....................................................................................9 
Conclusion and Recommendations ............................................................ 11 
Agency Comments and Office of Inspector General Response .....14 
Appendices .................................................................................................15 
A: Detailed Methodology ..............................................................15 
B: Agency Comments ....................................................................19 
Acknowledgments......................................................................................22 
   
   
OBJECTIVES 
1.  To determine whether manufacturers potentially misclassified drugs in 
the Medicaid Drug Rebate Program (Medicaid rebate program) in 
2016, and how much Medicaid may have lost in rebates as a result of 
these potential misclassifications from 2012 to 2016. 
2.  To determine the extent to which the Centers for Medicare & Medicaid 
Services (CMS) has policies and procedures in place to identify 
incorrect drug classification data. 
BACKGROUND  
Manufacturers with rebate agreements are required to report all of their 
covered outpatient drugs (hereinafter referred to as drugs) to the Medicaid 
rebate program.  As part of their rebate agreements, Federal law generally 
requires drug manufacturers to pay quarterly rebates to State Medicaid 
agencies.  CMS calculates unit rebate amounts (URAs) using 
manufacturer-reported drug pricing and product data, such as drug 
classifications.  If manufacturers do not provide accurate pricing and 
classification data to CMS, rebates may not be calculated appropriately 
and State Medicaid agencies may not invoice the manufacturers for the 
total rebates owed for these drugs.  
Previous Office of Inspector General (OIG) work found that 
manufacturers may have misclassified some drugs in the Medicaid rebate 
program as innovator (brand-name), or noninnovator (generic) products.1  
As a result, manufacturers may not have paid the appropriate rebate 
amounts for these drugs.  In September 2016, Congress asked OIG to 
evaluate the accuracy of manufacturer-reported drug classification data in 
the Medicaid rebate program, and the extent to which CMS oversees drug 
classification data submitted by manufacturers.  In response to the 
congressional request, this study evaluates drug classification data 
submitted to the Medicaid rebate program and CMSs policies and 
procedures to ensure appropriate oversight of this data.  
Medicaid Payment for Drugs 
Medicaid provides medical assistance for low-income individuals and 
families.  Medicaid is administered by States and financed using State and 
Federal funds.  State Medicaid agencies reimburse pharmacies for drugs 
dispensed to Medicaid beneficiaries.  Reimbursement for drugs is based 
 
1 OIG, Accuracy of Drug Categorizations for Medicaid Rebates (OEI-03-08-00300), 
July 2009.   
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  1   
   
on national drug codes (NDCs), which are 11-digit identifiers that indicate 
the manufacturer, product code, and package size of each drug product.  
Medicaid paid $60.5 billion for drugs in 2016. 
The Medicaid Rebate Program 
For Federal payments to be available for covered outpatient drugs 
provided under Medicaid, manufacturers are generally required to enter 
into rebate agreements with the Secretary of Health and Human Services 
and pay quarterly rebates to the States.2  As part of the rebate agreements, 
manufacturers must provide CMS with the average manufacturer 
price (AMP) and best price, if applicable, for each of their covered 
outpatient drugs.3, 4  
Manufacturers also must provide CMS with drug classification data that 
indicates whether each drug is (1) an innovator, i.e., a single-source or an 
innovator multiple-source product, or (2) a noninnovator multiple-source 
product.  Manufacturers report and must certify this drug classification 
data in the Drug Data Reporting for Medicaid System (reporting system) 
and CMS publishes the reported information in the Medicaid rebate drug 
product file.5   
Medicaid Rebate Calculations.  The calculation of the rebate amount for a 
drug depends on whether the drug manufacturer classifies it as an 
innovator or noninnovator product.  The current base URA for innovator 
drugs is usually either 23.1 percent of AMP (17.1 percent of AMP if it is 
exclusively pediatric or a clotting factor) or the difference between AMP 
and best price, whichever is greater.  The URA for noninnovator drugs is 
equal to 13 percent of AMP.  However, if the AMP for a drug has risen 
faster than inflation, manufacturers are required to pay an additional, 
inflation-adjusted rebate amount.6   
 
2 Section 1927(a)(1) & (b)(1) of the Social Security Act (the Act)   
3 AMP is defined as the average price paid to a manufacturer of a drug in the United 
States by a wholesaler for drugs distributed to retail community pharmacies and by retail 
community pharmacies that purchase drugs directly from the manufacturer, with certain 
exclusions.  42 CFR  447.504. 
4 Best price is defined in  1927(c)(1)(C)(i) of the Act as essentially the lowest price 
available from the manufacturer during the rebate period to any purchaser in the United 
States, with certain exceptions.  Manufacturers are required to report best price only for 
their innovator products because best price is used only in the calculation of rebates for 
innovator products. 
5 CMS, Medicaid Drug Rebate Data Guide for Labelers, January 2017. 
6 Before January 2017, only innovator products were subject to the inflation-adjusted 
rebate amount (see 1927(c)(2) of the Act).  However, the Bipartisan Budget Act of 2015 
(P.L. 114-74) expanded this rebate to apply to noninnovator drugs, beginning January 1, 
2017. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  2   
   
At the end of every quarter, CMS calculates a URA for each drug included 
in the Medicaid rebate program and makes this data available to State 
Medicaid agencies.  States then invoice manufacturers to collect the 
rebates owed for drugs reimbursed by Medicaid.  However, manufacturers 
are ultimately responsible for calculating URAs and paying the correct 
rebates to States.   
Food and Drug Administration Approval  
With certain exceptions, drugs must be approved by the Food and Drug 
Administration (FDA) for safety and effectiveness to qualify for Federal 
payments under Medicaid.  Manufacturers are generally required to 
provide FDA with a list of all the drugs that they manufacture, prepare, 
propagate, compound, or process for commercial distribution.7  FDA 
maintains this information in directories that include drugs names, NDCs, 
manufacturers, and application types, which are listed as marketing 
categories.   
FDA marketing categories are one factor used to determine whether a drug 
is an innovator or noninnovator product for the purposes of calculating 
Medicaid rebates.  Exhibit 2 provides a list of FDA marketing categories 
that directly correspond to Medicaid drug classifications. 
Exhibit 2: Selected FDA Marketing Categories that Correspond to Medicaid 
Classifications 
FDA Marketing  Corresponding 
Description 
Category  Medicaid Classification 
New Drug Application  Product that was approved for 
 
(NDA)  marketing as a new drug 
Innovator Product:   
Product that was approved for 
Biologic License  Single-Source or 
marketing as a biologic, 
Application (BLA)  Innovator 
e.g., allergenics and gene therapies  
Multiple-Source 
Product approved as a brand-name 
Authorized Generic  drug that is marketed without the   
brand-name label  
Abbreviated New Drug  Product that was approved for 
Noninnovator Product 
Application (ANDA)  marketing as a generic drug  
Source: FDA, Drugs@FDA Glossary of Terms, 2017 and FDA List of Authorized Generic Drugs, 2017. 
CMS Oversight of Medicaid Rebate Data 
It is the drug manufacturers responsibility to ensure that classification 
data is reported accurately to the Medicaid rebate program.  When 
information provided by manufacturers is incorrect or missing, State 
Medicaid agencies may not be able to collect all appropriate drug rebates.  
For example, if manufacturers incorrectly classify their drugs as innovator 
or noninnovator products, this may result in incorrect rebate calculations 
 
7 21 U.S.C.  360. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  3   
   
for these drugs.  As a result, manufacturers may not pay the appropriate 
rebate amounts, as required under the rebate agreement.   
CMS reports that it routinely seeks to identify potential misclassifications 
and takes action when they are identified.  To identify potential 
misclassifications, CMS compares Medicaid drug classifications reported 
by manufacturers to FDA data on a quarterly basis.  If CMS identifies any 
errors in manufacturer-reported data, CMS stated that it typically contacts 
the manufacturer to request that the manufacturer correct the reported 
information.  CMS may terminate a manufacturer from participation in the 
Medicaid rebate program for good cause.8  If a manufacturer does not 
correct errors in reported data, CMS could potentially determine that the 
manufacturer is subject to termination for good cause. 
In February 2016, CMS issued the Covered Outpatient Drug final rule 
with comment period.  In this rule, CMS recognized there could be limited 
circumstances in which it might be appropriate to treat a drug approved 
under an NDA as if it were approved under an ANDA and classified as a 
noninnovator product.  CMS established a process through which 
manufacturers of innovator drugs could apply for this narrow exception 
that would allow them to pay noninnovator rebate amounts.9  Under this 
process, manufacturers had until March 31, 2017 to submit applications 
and supporting materials to request this exception.  CMS will respond to 
the manufacturers in writing to confirm or deny the narrow exception 
request.10   
   
 
8 Section 1927(b)(4)(B) of the Act. 
9 81 Fed. Reg. 5169 (February 1, 2016). 
10 CMS does not provide a comprehensive list of narrow exceptions, but has provided 
examples of which drugs may qualify.  For example, these narrow exceptions may apply 
to drugs approved under a paper NDA before 1984, or drugs approved under certain types 
of literature-based approvals after 1984.  81 Fed. Reg. 5169, 5191 (February 1, 2016). 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  4   
   
METHODOLOGY 
Data Collection and Analysis 
Medicaid Classifications.  We obtained fourth-quarter 2016 drug 
classifications for 30,469 NDCs, i.e., drugs, included in the Medicaid 
rebate program.11  As shown in Exhibit 3, we compared the Medicaid 
classifications reported to CMS for these drugs to marketing categories 
from FDA files.  We determined the number and percentage of drugs with 
Medicaid classifications that matched the FDA marketing categories and 
considered these drugs to be appropriately classified.  We also determined 
the number and percentage of drugs with Medicaid classifications that 
contradicted the FDA marketing categories, i.e., they were potentially 
misclassified.12  For the purposes of this study, we considered each 
11-digit NDC to be an individual drug.  Therefore, our list of 
potentially-misclassified drugs could include different package sizes of the 
same drug product. 
Exhibit 3: OIG Classification Determinations for Drugs in the Medicaid 
Rebate Program, 2016 
OIG Classification  FDA Marketing 
Medicaid Classification 
Determination  Category 
Single-Source or   NDA, BLA, Authorized 
Appropriately Classified Innovator Multiple-Source  Generic 
 
  Noninnovator 
ANDA 
Multiple-Source 
Single-Source or 
ANDA 
Potentially Misclassified   Innovator Multiple-Source 
  Noninnovator  NDA, BLA, Authorized 
Multiple-Source  Generic 
Source: OIG analysis of Medicaid and FDA Classification data, 2016. 
We were unable to determine whether certain drugs were appropriately 
classified because not all FDA marketing categories directly correspond to 
a Medicaid classification.  We identified the number and percentage of 
drugs with FDA marketing categories that did not directly correspond to a 
Medicaid classification and categorized these as unable to determine.  In 
addition, some drugs were not listed in the FDA files.  We categorized 
these drugs as missing from FDA files and identified the number and 
percentage of these drugs. 
We also compared Medicaid classifications to drug compendia 
classifications for drugs that were potentially misclassified.  Drug 
 
11 We did not include terminated drugs or drugs categorized by Medicaid as 
over-the-counter, unapproved, or less-than-effective.  
12 To be conservative, we considered a drug to be classified appropriately if the marketing 
category in at least one of the two FDA files reviewed corresponded to the drugs 
Medicaid classification.   
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  5   
   
compendia are private information repositories that maintain and provide 
information about drug prices, drug classifications, and manufacturers.  
These resources are often updated daily and can be used by State Medicaid 
agencies and providers to obtain recent information about drugs.  We used 
the Redbook and First Databank drug compendia, which include variables 
that identify a drugs classification.  
Rebate Calculations.  To provide some indication of the potential lost 
rebates to Medicaid as a result of misclassifications, we selected 
10 potentially-misclassified drugs with the highest total reimbursement in 
2016 to calculate additional rebates that could have been collected.  We 
estimated the base and inflation-adjusted rebates that Medicaid may have 
lost due to potential misclassifications for these drugs from 2012 to 2016.   
CMS Oversight.  We reviewed and summarized CMSs policies and 
procedures for ensuring the accuracy of drug classification data.   
Appendix A provides a detailed methodology for our analysis. 
Limitations 
We use the term potentially misclassified and describe rebates that may 
have been lost in this report because CMS has not completed its review 
of the narrow exception requests submitted by manufacturers.  If CMS 
grants a manufacturers request for a narrow exception for any of the 
drugs identified as potentially misclassified in this report, this 
determination could affect our list of potentially-misclassified drugs and 
any associated lost rebates.   
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors General 
on Integrity and Efficiency. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  6   
   
FINDINGS 
Drug manufacturers may have misclassified a small 
percentage of drugs in the Medicaid rebate program 
Medicaid classifications for 95 percent of drugs in the Medicaid rebate 
program matched FDA data in 2016.  This means that most drugs classified 
as innovator products in the Medicaid file had innovator marketing 
categories in the FDA files, and most drugs classified as noninnovator in 
the Medicaid file had noninnovator marketing categories in the FDA files.13  
These appropriately classified drugs accounted for 98 percent of the 
$59.7 billion in Medicaid reimbursement in 2016 for the drugs reviewed. 
Of the remaining drugs, 3 percent had classifications that contradicted 
FDA data, i.e., they were potentially misclassified in 2016.14  As shown in 
Exhibit 4, Medicaid reimbursement for potentially-misclassified drugs 
totaled $813 million in 2016.15  The vast majority (93 percent) of the 
885 drugs that were potentially misclassified according to FDA were also 
potentially misclassified according to at least 1 of the 2 drug compendia 
reviewed.16   
Exhibit 4: Classification Determinations for Drugs in the Medicaid Rebate 
Program in 2016 
Classification  Number of  Percentage of  Medicaid 
Determination  Drugs  Drugs  Reimbursement 
Appropriately  
28,945  95%  $58,690,484,856 
Classified 
Potentially 
  Misclassified  885  3%  $813,324,981 
Unable to 
339  1%  $139,138,150 
Determine 
Missing from  
300  1%  $19,049,845 
FDA files 
Total  30,469  100%  $59,661,997,832 
Source: OIG analysis of Medicaid and FDA classification data, 2016. 
 
13 One drug had conflicting marketing categories across the two FDA files; this drug had 
an ANDA marketing category in one FDA file, but an NDA marketing category in the 
other FDA file.  The drug was classified as a noninnovator product in the Medicaid file.  
Because the Medicaid classification matched the marketing category in one FDA file, 
we considered this drug to be classified appropriately. 
14 One percent of drugs had FDA marketing categories that did not directly correspond 
to a Medicaid classification.  Therefore, we were unable to determine whether these 
drugs were classified appropriately.  Another 1 percent of drugs were missing from both 
FDA files. 
15 There was no Medicaid reimbursement for 266 of the 885 potentially-misclassified 
drugs in 2016. 
16 The remaining 7 percent of potentially-misclassified drugs were either missing from 
both compendia, or they had compendia classifications that matched the Medicaid 
classifications. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  7   
   
The vast majority (97 percent) of the potentially-misclassified drugs were 
classified as noninnovator products in the Medicaid file but as innovator 
products in FDA data.  Manufacturers would have paid a lower base 
rebate amount (using the noninnovator calculation instead of the innovator 
calculation) for these drugs in 2016.  In addition, manufacturers would not 
have paid additional inflation-adjusted rebates, when applicable, for these 
innovator drugs in 2016.   
Four manufacturers were associated with more than half of the 
potential misclassifications 
Manufacturers are responsible for reporting accurate drug classification 
data to CMS.  Potential misclassifications were associated with 
54 different manufacturers in 2016.  However, just four manufacturers 
were responsible for over half (54 percent) of the potential 
misclassifications.  
Over the past 5 years, Medicaid may have lost 
$1.3 billion in rebates for 10 potentially-misclassified 
drugs 
Manufacturers may have owed an additional $1.3 billion in rebates from 
2012 to 2016 for the 10 potentially-misclassified drugs with the highest 
total reimbursement in 2016.  The top 10 drugs accounted for 68 percent 
of Medicaid reimbursement for potentially-misclassified drugs in 2016.  
Most (90 percent) of these potentially-lost rebates were associated with 
only two drugs.   
Exhibit 5: Manufacturers may have owed 
All 10 of these drugs were classified 
an additional $1.3 billion for 
 
as noninnovator products in the  10 potentially-misclassified drugs with 
the highest total reimbursement in 2016 
Medicaid file, but as innovator 
products in FDA data.  As a result, 
manufacturers paid lower base 
noninnovator rebates and did not pay 
any inflation-adjusted rebates for 
these drugs.  As shown in Exhibit 5, 
Medicaid claimed $199 million in 
base noninnovator rebates for these 
drugs from 2012 to 2016.    
If manufacturers had classified the 
10 drugs differently, i.e., according 
to their listed FDA marketing 
category, manufacturers may have 
owed an additional $1.3 billion in 
Source: OIG analysis of Medicaid and FDA drug 
higher innovator base rebates and 
classification data, 2016. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  8   
   
inflation-adjusted rebates over the 5 years.17  This $1.3 billion in 
potentially-lost rebates is equivalent to 87 percent of the $1.5 billion in 
total Medicaid reimbursement for these 10 drugs from 2012 to 2016.   
CMS has modified its procedures to oversee 
classification data in the Medicaid rebate program, but 
opportunities remain for improvement  
CMS identified several enhancements to its reporting system that have 
improved its ability to oversee manufacturer-reported data.  CMS reported 
that it has developed new methods to ensure that manufacturers provide 
accurate information, but the agency stated that there are limitations to 
CMSs authority to correct classification data.  
CMS provides ongoing training to help staff effectively oversee 
classification data in the Medicaid rebate program.  Training is provided 
when there is a legislative change to the program, or as needed.  The 
training varies, as appropriate, on the basis of the staffs assigned areas of 
responsibility.  However, these training sessions are not regularly 
scheduled.  
CMS reported that it identified potential errors in classification data 
reported to the Medicaid rebate program during the past 5 years.  It also 
reported that it reached out to manufacturers to provide instructions on 
how to correct the potential errors.  However, CMS did not provide the 
specifics or the results of the outreach to these manufacturers.  CMS also 
stated that manufacturers had identified incorrect reporting, and CMS 
worked with these manufacturers to correct their classifications.   
When asked to provide a list of manufacturers and the drugs associated 
with these potential misclassifications, CMS explained that it does not 
maintain a database of identified potential errors.  CMS also could not 
provide specific actions that it took to address potential errors.  Therefore, 
we could not determine what steps CMS might have taken to address any 
identified misclassifications or whether manufacturers voluntarily 
submitted corrected data.  
CMS improved its reporting system, but inconsistencies 
remain in the Medicaid drug rebate product file  
In 2014 and 2016, CMS added new variables and modified the reporting 
system to better detect the submission of inconsistent 
manufacturer-reported classification data.  For example, CMS added a 
 
17 If the remaining 875 potentially-misclassified drugs had been classified differently in 
2016, manufacturers could have owed an additional $25 million in base rebates from 
2012 to 2016. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  9   
   
covered outpatient drug status field, in which manufacturers report to 
CMS their drugs FDA marketing categories, in addition to reporting their 
drugs innovator and noninnovator classifications.   
CMS stated that it modified the reporting system so manufacturers would 
no longer be able to enter a new drug classification that did not correspond 
to the drugs FDA marketing category that manufacturers report to CMS.    
Specifically, CMS reported that only single-source or innovator 
multiple-source classifications can be selected when manufacturers report 
to CMS that a drug was approved under an NDA, and only a noninnovator 
classification can be selected when manufacturers report to CMS that a 
drug was approved under an ANDA.   
CMS has implemented system changes to improve the internal consistency 
of manufacturer-reported data.  However, the system did not review NDCs 
that were entered prior to these changes, and we found 695 drugs with 
inconsistent classification data.  In all of these cases, manufacturers 
entered their drugs classifications as noninnovator, but in the same 
reporting system they reported that the drugs had been filed under NDAs.   
Some of the potentially-misclassified drugs we identified could be the 
subject of narrow exception requests submitted by manufacturers.  CMS 
may approve narrow exceptions, which, if granted, would enable 
manufacturers of innovator drugs to pay lower, noninnovator rebate 
amounts in a limited number of circumstances.  CMS staff also reported 
that they do not have a method to compile a list of drugs, from CMSs data 
system, that were granted narrow exceptions.   
CMS does not have the authority to compel manufacturers to 
correct inaccurate classification data  
CMS reported that it performs a quarterly match of manufacturer-reported 
classification data against FDAs data to identify potential discrepancies.  
If CMSs review identifies a potential misclassification, CMS reported 
that it contacts the manufacturer requesting an update to the reported data.   
When manufacturers are made aware of a potential misclassification and 
choose not to submit corrected data, CMS does not have explicit authority 
to compel manufacturers to change their data.  CMS could potentially 
determine that a manufacturers refusal to change its drug classification 
gives rise to good cause for termination from the Medicaid rebate 
program.  However, CMS staff stated that if manufacturers were 
terminated for misclassifications, this action would have significant 
repercussions and could cause disruptions to beneficiaries access to 
drugs. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  10   
   
CONCLUSION AND RECOMMENDATIONS 
Although the vast majority of drugs in the Medicaid rebate program were 
classified appropriately, manufacturers may have misclassified 3 percent 
of drugs in 2016.  Medicaid may have lost $1.3 billion in base and 
inflation-adjusted rebates for 10 potentially-misclassified drugs between 
2012 and 2016.   
When CMS determines that information reported by manufacturers may 
be incorrect, it can request that the manufacturer change its data or work 
with the manufacturer to resolve the potential errors.  However, CMS does 
not have the explicit legal authority to require manufacturers to change 
their classification data.  CMS did report that it identified potential errors 
in classification data, but does not maintain a database of these identified 
potential errors.  Therefore, we were unable to determine which drugs 
CMS identified as potentially misclassified, and whether these potential 
misclassifications were addressed.  
CMS implemented edits to prevent internal inconsistencies in its reporting 
system.  However, the system did not review NDCs that were entered 
prior to these changes and we found 695 drugs with inconsistent Medicaid 
classification data in 2016.  CMS staff also reported that they do not have 
a method to compile a list of drugs, from CMSs data system, that were 
granted narrow exceptions.  Therefore, there is no clear way to 
differentiate drugs that may have inaccurate classification data from drugs 
that might have qualified for a narrow exception in the Medicaid file.   
We recommend that CMS: 
Follow up with manufacturers associated with 
potentially-misclassified drugs identified in this report to 
determine whether current classifications are correct 
Manufacturers may have misclassified 885 drugs in the Medicaid rebate 
program in 2016.  These potential misclassifications may have resulted in 
lost rebates for Medicaid.  We will provide CMS with the drugs that were 
potentially misclassified, drugs that were missing from FDA files, and the 
drugs for which we were unable to determine an appropriate classification.   
There are limited circumstances that may have allowed some of these 
drugs to qualify for an exception from innovator rebates.  Manufacturers 
needed to apply for these narrow exceptions by March 31, 2017.  CMS 
should review its files to determine whether any drugs we identified as 
potentially misclassified are subject to a narrow exception.  To the extent 
they are not, CMS should follow up with the manufacturers of the 
remaining potentially-misclassified drugs.  
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  11   
   
Improve its Drug Data Reporting for Medicaid System to 
minimize inconsistent data submissions and track potential 
classification errors for followup 
CMS stated that it implemented edits to prevent manufacturers from 
reporting inaccurate classification data for new drugs; however, we 
identified 695 drugs with internal inconsistencies in data reported by 
manufacturers to the Medicaid reporting system.  Therefore, CMS should 
review and improve its existing edits to ensure that there is no inconsistent 
classification data for any drugs, unless an exception has been granted.   
CMS stated that it is continuing to make improvements to its reporting 
system.  As part of these improvements, we recommend that CMS add a 
variable to indicate whether a drug has been granted a narrow exception.  
This would allow CMS to more easily identify innovator drugs for which 
manufacturers are appropriately paying a noninnovator rebate.  In 
addition, it would enable CMS to distinguish these from drugs that may be 
potentially misclassified.   
CMS could not provide us with a list of potential drug misclassifications 
that it identified or the manufacturers associated with these 
potentially-misclassified drugs.  Because CMS does not track instances in 
which manufacturers may have reported incorrect classification data, it 
may not be able to effectively monitor its activities to follow up with 
manufacturers about potential errors in their reported classification data.  
Therefore, CMS should add another variable in its system to identify drugs 
that may be misclassified.  A new variable may help CMS identify 
manufacturers that may be paying inaccurate rebate amounts for 
potentially-misclassified drugs.  CMS also should maintain records of all 
attempts to follow up with manufacturers that submitted potentially 
inaccurate classification data.  CMS also should use this information to 
track any cases in which the manufacturer refused to change its 
classification data. 
Pursue a means to compel manufacturers to correct 
inaccurate classification data reported to the Medicaid rebate 
program 
When CMS staff identify potential errors in data submitted to the 
Medicaid rebate program, they indicated that they notify manufacturers to 
correct the data.  While this engagement with manufacturers may be 
sufficient in many instances, it may not always be sufficient.  In the 
instances in which voluntary engagement does not result in accurate 
classification data, CMS does not have the legal authority to compel 
manufacturers to correct classification data.  CMS could potentially 
determine that a manufacturers refusal to change its drug classification 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  12   
   
constitutes good cause for termination from the Medicaid rebate program.  
However, CMS also stated that terminating a manufacturer from the 
program could limit access for beneficiaries.  If manufacturers do not 
update their classification data, they may continue to pay the wrong rebate 
amounts and Medicaid may not receive the appropriate rebate amounts for 
potentially-misclassified drugs.   
CMS could consider the following options to compel manufacturers to 
correct inaccurate classification data: (1) CMS could seek legislative 
authority, e.g., an A-19, to compel manufacturers to submit accurate data 
and/or enhance its enforcement authority and (2) CMS also 
could determine whether it has the authority to suspend 
potentially-misclassified drugs from participation in the Medicaid rebate 
program until the manufacturer corrects all inaccurate information.   
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  13   
   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with all three of our recommendations. 
In response to our first recommendation, CMS stated that it will review 
the drugs OIG identified as potentially misclassified.  CMS also stated it 
previously identified potentially-misclassified drugs and communicated 
with manufacturers to make them aware of the incorrect reporting.   
In response to our second recommendation, CMS noted that it is 
developing a new Medicaid Drug Program system which it believes will 
help identify and reduce inconsistent data submissions.   
Finally, in response to our third recommendation, CMS stated that it will 
consider methods to improve agency efforts to compel manufacturers to 
correct inaccurate drug classification data.  Additionally, CMS stated that 
it shares a joint responsibility with OIG to oversee manufacturers 
compliance with data reporting, and encouraged OIG to use its 
enforcement authority in this area.  CMS operates the Medicaid rebate 
program and is ultimately responsible for overseeing the accuracy of drug 
classification reporting by manufacturers.  The Medicaid rebate statute 
authorizes civil monetary penalties in certain circumstances, and authority 
to pursue such penalties has been delegated to OIG.  Consistent with the 
scope of the statute, OIG will continue to pursue penalties against 
manufacturers where appropriate. However, OIG believes it lacks legal 
authority to affirmatively pursue penalties for the submission of inaccurate 
drug classification data.  
We appreciate CMSs efforts to address potential drug misclassifications 
in the Medicaid rebate program and we look forward to working with 
CMS on these issues in the future.  Appendix B contains the full text of 
CMSs comments.   
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  14   
   
APPENDIX A 
Detailed Methodology 
 
Data Collection 
Medicaid Data.  We obtained 2016 drug classification data from the 
Medicaid rebate drug product file (the Medicaid file), which is publicly 
available on Medicaid.gov.  We removed NDCs, i.e., drugs, from the 
Medicaid file that were:  
  categorized as over-the-counter,  
  terminated and not reactivated before January 1, 2016,  
  listed with the covered outpatient drug status of unapproved, or  
  considered to be less than effective.18 
We evaluated classifications for the remaining 30,469 covered outpatient 
prescription drugs in the fourth-quarter 2016 Medicaid file.19  For the 
drugs under review, we obtained Medicaid reimbursement and utilization 
data for 2012 through 2016 from Medicaid.gov.20  We also obtained 
CMSs quarterly AMP data to estimate potentially-lost rebates from 2012 
to 2016. 
For the 10 potentially-misclassified drugs with the highest reimbursement 
in 2016, we obtained the total rebate amounts claimed and the number of 
units reimbursed from 2012 to 2016 from the Medicaid Drug Rebate 
system.     
FDA Data.  We collected information from the NDC Directory and the 
NDC Structured Product Labeling Data Elements File (available on 
FDAs website) to obtain the marketing categories reported by FDA for 
NDCs in our review. 
Compendia Data.  We obtained drug classification data from two national 
drug compendia, First Databank and Redbook.  We used the First 
Databank innovator variable and the Redbook product category 
variables to determine the compendia classifications for drugs. 
Inflation Data.  We obtained consumer price index for urban 
consumers (CPI-U) data from the Bureau of Labor Statistics.  We used this 
data to estimate additional inflation-adjusted rebates for the 
 
18 Certain Drug Efficacy Study Implementation drugs are considered to be less than 
effective.  These drugs are not eligible for coverage under the Medicaid rebate program. 
19 We included drugs that had classification data in the fourth-quarter 2016 to ensure 
that we accounted for the most recent classification data reported by manufacturers.     
20 Not all drugs that were in the Medicaid file had reimbursement amounts in 2016. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  15   
   
10 potentially-misclassified drugs with the highest reimbursement in 2016.  
For the analysis of the top 10 drugs, we included only drugs that were 
potentially misclassified according to all sources reviewed.  
CMS Policies and Procedures.  We requested information from CMS on 
its policies and procedures for reviewing drug classifications in the 
Medicaid rebate program.  We asked CMS to describe any training or 
guidance provided to staff to assist them in overseeing classification data 
submitted to the Medicaid rebate program.  We also asked CMS how it 
identifies and addresses instances in which drugs are potentially 
misclassified in the Medicaid file.  We asked CMS to list all instances in 
which it identified potential misclassifications, and the actions taken in 
response to these potential misclassifications over the past 5 years.   
Data Analysis 
Drug Classifications.  We determined the number and percentage of drugs 
that were classified as innovator and noninnovator in the fourth-quarter 
2016 Medicaid file.  We checked for internal inconsistencies in the 
Medicaid file by determining whether a drugs classification corresponded 
to its covered outpatient drug status, which identifies the drugs marketing 
category.     
We then compared these drugs classifications to the marketing categories 
in the FDA files and determined the number and percentage of drug 
classifications that matched, as well as the number and percentage of 
drugs that did not match.21  We considered the nonmatching drugs to be 
potentially misclassified.  Specifically, drugs with innovator classifications 
in the Medicaid file should correspond to NDA, BLA, or authorized 
generic marketing categories in the FDA files, and noninnovator drugs in 
the Medicaid file should correspond to ANDA marketing categories in the 
FDA files.   
We also calculated the number and percentage of drugs with Medicaid 
classifications for which we were unable to determine whether the 
Medicaid classification matched the FDA marketing category, and the 
number and percentage of drugs that were missing from the FDA files. 
We identified drug compendia classifications for drugs that were 
potentially misclassified.  We compared these classifications across all 
files, i.e., the Medicaid file, FDA files, and both drug compendia, to 
determine the number and percentage of drugs that were classified as 
innovator and noninnovator in each data source.   
 
21 We compared drugs, using the 11-digit NDCs provided by manufacturers to CMS and 
FDA. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  16   
   
We calculated 2016 Medicaid reimbursement for the 
potentially-misclassified drugs, drugs for which we could not determine 
whether the Medicaid classification matched FDA data, and drugs missing 
from FDA files.  We also determined which manufacturers were associated 
with the greatest number of potential misclassifications in 2016.   
Rebates.  To provide some indication of the potential lost rebates to 
Medicaid as a result of misclassifications, we selected 
10 potentially-misclassified drugs with the highest total reimbursement in 
2016 to calculate additional rebates that could have been collected from 
2012 to 2016.  Specifically, we determined Medicaid reimbursement for 
all potentially-misclassified drugs in 2016.  We then selected 
10 potentially-misclassified drugs with the highest total reimbursement 
that year and estimated the amounts that Medicaid may have received in 
additional rebates for these drugs from 2012 to 2016.  All 10 of these 
drugs were classified as noninnovator products in the Medicaid file but 
classified as innovator or brand-name products in the FDA and compendia 
files. 
We estimated the (1) base rebates (based on calculating 23.1 percent of 
AMP) and (2) inflation-adjusted rebates manufacturers would have owed 
if these drugs had been classified as innovator products.  We followed 
statutory guidance on calculating the inflation-adjusted rebate amounts.  
We used CPI-U and AMP data to determine the inflation-adjusted rebates 
for the NDCs under review for each quarter from 2012 to 2016.22  We 
summed the base and inflation-adjusted rebates and then multiplied this 
total by the number of units reimbursed for each NDC in each quarter.  We 
subtracted the total Medicaid rebate amounts actually claimed each quarter 
from our calculated total to estimate the rebates that Medicaid may have 
lost due to potential misclassifications for these 10 drugs over the 5-year 
period. 
We calculated Medicaid reimbursement for these 10 drugs from 2012 to 
2016.  We then determined the total lost base and inflation-adjusted 
rebates as a percentage of Medicaid reimbursement across the 5 years. 
We also estimated the base rebates that Medicaid would have collected 
from 2012 to 2016 if the remaining 875 potentially-misclassified drugs 
had been classified differently in 2016.23  For this analysis, we calculated 
 
22 When a drug is purchased or acquired from another manufacturer, the NDC for that 
drug may change.  However, the inflation-adjusted rebate amount is calculated on the 
basis of the market date of the original NDC.  We identified the original NDCs for the top 
10 drugs to estimate the inflation-adjusted rebates for these drugs.    
23 We used the classification data available in the fourth-quarter 2016.  We did not 
determine which drugs were potentially misclassified from 2012 to 2016. 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  17   
   
an estimate of the base rebates manufacturers owed for each of these 
875 drugs by multiplying each drugs quarterly utilization by its URA.  
We then calculated an estimate of the base rebate amounts for each of 
these drugs had they been classified differently by multiplying the 
estimated base rebate amount (either 13 percent of AMP or 23.1 percent of 
AMP) by the quarterly utilization.  We then subtracted the base rebates 
under the 2016 classification from the estimated base rebates had the 
drugs been calculated differently to determine potentially-lost rebates.  We 
did not calculate the additional inflation-adjusted rebates for these drugs.   
CMS Policies and Procedures.  We reviewed and summarized CMSs 
responses about its policies and procedures for ensuring the accuracy of 
drug classification data.   
Limitations 
We did not verify the completeness or accuracy of the drug pricing or 
classification data from CMS, FDA, or the compendia. 
We use the term potentially misclassified and describe rebates that may 
have been lost in this report because CMS has not completed its review 
of the narrow exception requests submitted by manufacturers.  If CMS 
grants a manufacturers request for a narrow exception for any of the 
drugs identified as potentially misclassified in this report, this 
determination could affect our list of potentially-misclassified drugs and 
any associated lost rebates.   
FDA files and compendia data can be updated daily and therefore could 
have changed during the timeframe under review.  We used the drug 
classifications from the fourth quarter of 2016 and downloaded the FDA 
files and compendia data in the first quarter of 2017.  We did not 
determine whether Medicaid drug classifications changed in the quarters 
following the fourth quarter of 2016.   
Base rebate amounts for innovator drugs are usually calculated as the 
difference between AMP and best price, or 23.1 percent of AMP, 
whichever is greater.  All 10 of the potentially-misclassified drugs with the 
highest total reimbursement were classified as noninnovator products, and 
manufacturer-reported best price information was not available for these 
drugs.  Therefore, we estimated the base rebate amounts using only the 
23.1 percent of AMP formula.   
All of the top 10 drugs had market dates on or before September 30, 1990.  
To calculate the inflation-adjusted rebates for these drugs, we used the 
earliest AMP data available, which was often from the first quarter of 
1991.   
   
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  18   
   
APPENDIX B  
Agency Comments 
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  19   
   
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  20   
   
 
   
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  21   
   
ACKNOWLEDGMENTS 
Stefanie Vance served as team leader for this study.  Others in the Office 
of Evaluation and Inspections who conducted the study include Aisha 
Davis and Emily Dieckman.  Office of Evaluation and Inspections staff 
who provided support include Clarence Arnold and Meghan Kearns. 
We would also like to acknowledge the contributions of other Office of 
Inspector General staff, including Jessica Swanstrom.  
This report was prepared under the direction of Linda Ragone, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and Edward K. Burley, Deputy Regional Inspector 
General.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
To obtain additional information concerning this report or to obtain copies, 
contact the Office of Public Affairs at Public.Affairs@oig.hhs.gov.  
Potentially-Misclassified Drugs May Have Led to $1 Billion in Lost Medicaid Rebates (OEI-03-17-00100)  22   
Office of Inspector General 
https://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: 
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issues.  These evaluations focus on preventing fraud, waste, or abuse and promoting 
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The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
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