Department of Health and Human Services 
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
S  C
T  ATES   OLLECTION OF 
 
O S
FF  SET AND  UPPLEMENTAL 
 
M R  
EDICAID  EBATES 
 
Daniel R. Levinson   
Inspector General  
 
December 2014 
OEI-03-12-00520   
   
 
EXECUTIVE SUMMARY:  STATES COLLECTION OF OFFSET AND SUPPLEMENTAL 
MEDICAID REBATES  
OEI-03-12-00520 
 
WHY WE DID THIS STUDY 
To reduce Medicaid expenditures for prescription drugs, the Centers for Medicare & Medicaid 
Services (CMS) and the State Medicaid agencies (States) have implemented the Medicaid drug 
rebate program.  In addition, many States have negotiated supplemental rebate agreements (SRAs) 
with drug manufacturers to generate additional rebates and further reduce expenditures.  The 
Affordable Care Act (ACA) increased Federal Medicaid rebatesby an amount referred to as the 
offset rebatein a way that may affect States collection of supplemental Medicaid rebates.   
 
HOW WE DID THIS STUDY  
In February 2013, we emailed surveys to 51 States.  In the survey, we asked each State to report the 
total amount of offset rebates for 2011 and 2012.  We then asked each State whether it had an SRA 
and, if so, to provide the total amount of supplemental rebates collected for drugs dispensed 
between 2010 and 2012.  We also asked each State with an SRA in effect to describe its policies 
and procedures as they relate to calculating supplemental rebates and to describe how recent 
changes related to the ACA have affected the States collection of supplemental rebates.  We  
received responses from all 51 States. 
 
WHAT WE FOUND 
Forty-eight States reported $2 billion in ACA offset rebates for 2011 and 2012, and 44 States 
reported collecting $1.7 billion in supplemental Medicaid rebates during the same time period.  We 
also found that the method most States used to calculate supplemental rebates may reduce rebate 
amounts.  Finally, we found that six States reported making changes to their SRAs as a result of 
changes related to the ACA. 
 
WHAT WE RECOMMEND  
We recommend that CMS ensure that all States appropriately report offset rebate amounts.  We also 
recommend that CMS consider further whether all States should be encouraged to establish 
supplemental rebate programs and to encourage States to explore alternate methods for calculating 
supplemental rebates.  CMS concurred with all three recommendations.   
  
 
 
 
 
   
TABLE OF CONTENTS 
 
Objectives ....................................................................................................1 

Background..................................................................................................1 

Methodology................................................................................................6 

Findings........................................................................................................8 

Forty-eight States reported a total of $2 billion in ACA offset 

rebates for 2011 and 2012  ...............................................................8 

Forty-four States reported collecting a total of $1.7 billion in 

supplemental Medicaid rebates in 2011 and 2012 ...........................8 

The method that most States used to calculate supplemental  
rebates may reduce rebate amounts .................................................9 

Six States reported making changes to their SRAs as a result of 

changes related to the ACA............................................................10 

Conclusion and Recommendations ............................................................13 

Agency Comments and Office of Inspector General Response .....14 

Appendixes ................................................................................................15 

A: States Collecting Supplemental Medicaid Rebates as of 

January 1, 2013 ..............................................................................15 

B: The Potential Effect of Offset Rebates on Supplemental 

Medicaid Rebates...........................................................................17 

C: Supplemental Rebates on Drugs Covered through MCOs.......18 

D: Agency Comments  ...................................................................19 

Acknowledgments......................................................................................22 

 
   
   
OBJECTIVES 
1. 	  To determine the amount of offset rebates that State Medicaid agencies 
(States) reported in 2011 and 2012. 
2. 	  To determine the amount of supplemental drug rebates that States 
collected in 2011 and 2012. 
3. 	  To determine how States calculate supplemental rebate amounts.   
4.	   To determine the impact of changes related to the Affordable Care Act 
(ACA) on the collection of supplemental rebates, as reported by States.  
BACKGROUND 
Medicaid 
The Medicaid program, established under Title XIX of the Social Security  
Act (the Act), provides medical assistance for certain low-income and 
medically needy individuals.  Medicaid is administered by States and 
financed using State and Federal funds.  Federal Medical Assistance 
Percentage (FMAP) payments are the Federal funds each State receives 
for its Medicaid program and are based on the States per capita income.1    
Medicaid Reimbursement for Prescription Drugs 
Currently, all 50 States and the District of Columbia offer prescription 
drug coverage as part of their Medicaid benefit packages.  The Office of 
Inspector General (OIG) estimates that gross Medicaid expenditures for 
prescription drugs totaled approximately $36 billion in 2012.2    
Medicaid beneficiaries typically receive covered drugs through 
pharmacies, which are then reimbursed by States.  Federal regulations 
require, with certain exceptions, that each State Medicaid agencys  
reimbursement for a covered outpatient drug not exceed (in the aggregate) 
the lower of (1) the estimated acquisition cost (EAC) plus a reasonable 
dispensing fee or (2) the providers usual and customary charge to the 
public for the drug.3  CMS gives States flexibility to define EAC; most 
States base their calculations on average wholesale price (AWP) or 
____________________________________________________________ 
1 Pursuant to   1905(b) of the Act, FMAPs generally total between  50 and 83 percent of a 
States Medicaid cost.    
2 This estimate was calculated  from two sources:  CMSs Medicaid Budget and 
Expenditure System (MBES) and Medicaid  State utilization  data.  To calculate this 
estimate, we combined the fee-for-service (FFS) Medicaid expenditures from MBES and 
the expenditures from Managed Care Organization (MCO)  records in the Medicaid State  
utilization data.  This total does not include rebates and excludes problematic MCO 
utilization data from one  State. 
3 42 CFR   447.512.    
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   1 
   
   
wholesale acquisition cost (WAC), although some States have begun to 
use average acquisition costs as the basis for reimbursement.4,  5,  6    
Medicaid Drug Rebate Program 
To reduce expenditures for Medicaid prescription drugs, CMS and the 
States have implemented certain cost-containment measures, such as the 
Medicaid drug rebate program.7 Between 2010 and 2012, the rebate 
program saved Medicaid an average of about $15 billion annually.  CMS 
and the States share these rebates on the basis of each States FMAP  
amount.  For Federal payment to be available for covered outpatient drugs 
provided under Medicaid, drug manufacturers are generally required to 
enter into rebate agreements with the Secretary of Health and Human 
Services and pay quarterly rebates to States.8   As of July 2013, all States 
and approximately 600 pharmaceutical companies participated in the 
Medicaid drug rebate program.9    
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 national drug code (NDC) for their covered outpatient 
drugs. An NDC is an 11-digit identifier that represents a specific 
manufacturer, product, and package size.  AMP is 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 
____________________________________________________________ 
4 Historically, the majority of States obtained AWPs from the publisher First Databank.  
However, First Databank stopped publishing AWPs in September 2011.  This  has caused  
many States to  reevaluate their reimbursement methodologies.  Unlike WAC,  which is  
prescribed by Federal  law (in   1847A(c)(6)(B) of  the Act), AWP  is not defined in  statute 
or  regulation.  Further, previous OIG work  consistently  found  that AWPs often greatly  
exceeded  prices available in the marketplace. 
5 Section 1847A(c)(6)(B) of the Act defines  WAC as the manufacturers list price for the 
drug to wholesalers or  direct  purchasers in the United States, not including certain kinds 
of discounts or rebates, as reported in wholesale price guides or  other publications of  
drug pricing data.   
6 CMS, Medicaid Covered Outpatient Prescription Drug Reimbursement Information by 
StateQuarter Ending  September 2013. Accessed at http://www.medicaid.gov/  
Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/State-
Prescription-Drug-Resources.html on November 12, 2013.   
7 Congress established the Medicaid drug rebate program in   1927  of the Act as added  
by  the Omnibus Budget Reconciliation Act of  1990, P.L. No. 101-508.  Other examples  
of cost-containment  measures include the Federal  upper limit program and State 
maximum allowable cost  programs.   
8 Sections 1927(a)(1) and (b)(1) of the Act.   
9 CMS, Medicaid Drug Rebate Program.   Accessed at 
http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/ 
Prescription-Drugs/Medicaid-Drug-Rebate-Program.html on July 18, 2013. 
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   2 
   
   
pharmacies that purchase drugs directly from the manufacturer, with 
certain exclusions.10    
Section 2501(c) of the ACA expanded the Medicaid drug rebate program  
to include covered outpatient drugs dispensed to beneficiaries who receive 
care from Medicaid MCOs if the MCO is responsible for coverage of such 
drugs.11  Managed care plans aim to maximize efficiency by negotiating 
rates, coordinating care, and managing the use of services.  MCOs differ 
from the traditional FFS system in that States prospectively pay MCOs a 
fixed monthly amount (called a capitation payment) for each Medicaid 
enrollee, regardless of whether that beneficiary seeks care during the 
month.12    
States may pay for drugs dispensed through MCOs using either a 
carve-in or a carve-out approach.  In the carve-in approach, States 
include in the MCOs fixed monthly payment amounts the payment for the 
drugs dispensed to beneficiaries. In the carve-out approach, States exclude  
from the MCOs fixed monthly payment amounts the payment for drugs 
dispensed to beneficiaries and instead pay for these drugs using the 
traditional FFS system.13    
Medicaid Drug Rebate Process 
For some drugs covered under the Medicaid drug rebate program, CMS 
uses the AMP and best price to calculate the unit rebate amount (URA); 
for other drugs, a rebate percentage is used.14   The URA varies depending 
on whether the drug is brand name or generic.  CMS calculates a URA for 
each NDC and transmits this information to the States.  States then 
calculate the total quarterly rebates that participating manufacturers owe 
by multiplying the URA for a specific drug by the number of units of that  
drug for which the State reimbursed providers in that quarter.  States 
invoice manufacturers for the units reimbursed and manufacturers then 
pay the rebates to the States. 
____________________________________________________________ 
10 Section 1927(k)(1) of the Act as amended by  2503(a)(2)  of the ACA, P.L. 

No. 111-148.  

11 Section 1927(b)(1)(A) of the Act as amended  by  2501(c) of the ACA.   
 
12  42  CFR  438.2.   CMS, Managed Care. Accessed at 

http://www.medicaid.gov/medicaid-chip-program-information/by-topics/delivery-
systems/managed-care/managed-care-site.html  on December 1, 2014. 

13 The Lewin Group.  Projected  Impacts of Adopting a Pharmacy Carve-In Approach 

Within Medicaid Capitation Programs, February 2011.   

14 Section 1927(c) of the Act.  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. 

States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   3 
   
   
URAs Pre-ACA. Prior to the ACA, the basic URA for brand-name drugs 
was equal to either 15.1 percent of AMP or the difference between AMP  
and best price, whichever was greater.  If the AMP for a brand-name drug 
had risen at a rate greater than inflation, then the drugs manufacturer was 
required to pay an additional rebate amount that was added to the basic 
rebate amount.15   The URA for generic drugs was 11 percent of AMP.    
URAs Post-ACA. Effective January 1, 2010, sections 2501(a) and (b) of 
the ACA increased URAs for brand-name and generic drugs.  The basic 
URA for brand-name drugs is now equal to either 23.1 percent of AMP or 
the difference between AMP and best price, whichever is greater.16   
Manufacturers are still required to pay an additional rebate if the AMP for 
a brand-name drug has risen at a rate greater than inflation.  The URA for 
generic drugs is now equal to 13 percent of the AMP.17    
The ACA also requires the amounts attributed to these increased  
rebatesamounts known as the offset rebateto be applied against the 
amounts that the Federal Government pays to the States.18   Therefore, 
States are prohibited from keeping the additional ACA-required rebate 
amounts. 
In a September 2010 letter to State Medicaid Directors, CMS outlined its 
plans to calculate the offset rebate amount for each drug (i.e., the amount 
attributed to the rebate increase required by the ACA that must be remitted  
to CMS). After consulting with the States, CMS decided to calculate a 
unit rebate offset amount (UROA), which will identify the offset amount 
per unit of a drug.  States multiply the UROA by the number of units of 
each drug for which they receive payment from the manufacturer to 
determine the quarterly rebate offset amount (hereinafter referred to as 
____________________________________________________________ 
15 Section 1927(c)(2) of the Act.      
16 Section 1927(c)(1) of the Act as amended  by   2501(a)  of  the ACA.  The URA  for  
certain  brand-name drugs (e.g., a clotting factor  for which a separate furnishing  payment 
is made or a drug approved exclusively for pediatric indications) was increased to  
17.1 percent of AMP.
  
17 Section 1927(c)(3) of the Act as amended  by   2501(b) of  the ACA.  
  
18 Section 1927(b)(1)(C)  of the Act.   

States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   4 
   
   
offset rebates).  This offset amount will be included on the Quarterly 
Expenditure reports.19     
Because of changes to Medicaid rebates under the ACA, CMS was not 
able to modify its systems to calculate URAs during 2010.  As a result, 
States invoices to manufacturers included the number of units reimbursed 
for the drugs but did not contain URAs.20  CMS reminded manufacturers 
to calculate the URAs and make the appropriate rebate payments to States 
in accordance with the rebate changes for that year.21  In May 2011, CMS 
provided 2010 URAs to States as a prior-period adjustment.  See Figure 1  
for an illustration of rebate collection.    
Figure 1. Calculation and Collection of Medicaid Drug Rebates, Post-ACA  
 
. 
   
Manufactu rer   1. AMP/Best Price Data   CMS/Federal 
Government  
 
 
  3. Rebate Invoice with  2. Rebate Amounts 
sp Utilization Data 
 
 
 
  4.  Rebates*  State Medicaid 
  Agency  
     
Source:  CMS, Medicaid Drug Rebate  Data Guide for States, section 1927(b) of the Act.  
* With the exception of offset rebates (which States are prohibited  from keeping), CMS and the States share Medicaid rebates on the basis  
 
of each States FMAP.    
 
Supplemental State Medicaid Rebates 
Supplemental Rebates. The Medicaid drug rebate program consists of 
rebates collected under the national rebate agreement and the 
ACA-required offset rebates.  States may also negotiate supplemental 
rebate agreements (SRAs) with drug manufacturers to generate additional 
____________________________________________________________ 
19 According to  CMS, if the difference between  AMP and best price is less than or equal 
to 15.1  percent of AMP, the UROA equals 8 percent of AMP (i.e., the difference between 
23.1  and 15.1 percent of AMP).  If  the difference  between AMP and  best price is greater  
than  15.1  percent of AMP, but less than  23.1 percent of  AMP, the UROA equals the 
difference between  23.1 percent  of AMP and AMP minus best price.  If  the difference 
between AMP and best price is greater than or equal to  23.1  percent  of AMP, the UROA  
equals  $0.   The  UROA for generic drugs equals 2 percent of  AMP.  See CMS, 
SMDL#10-019  [State Medicaid Director Letter #10-019]Medicaid Prescription Drugs,  
September 28,  2010.  Accessed at  http://downloads.cms.gov/cmsgov/archived-
downloads/SMDL/downloads/SMD10019.pdf on June 28, 2012.  
20  CMS instructed States to report each URA  as $0  on the rebate invoice.     
21  CMS, Medicaid Drug Rebate  Program Release No. 155,  August 11, 2010.  
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)  5 
   
   
rebates and further reduce expenditures.  As they do with rebates collected  
through the Medicaid drug rebate program, States share supplemental 
rebates with the Federal Government on the basis of their FMAP amounts.     
Most States have received CMS approval on their State Plan Amendments  
to enter into supplemental drug rebate agreements that generate additional 
rebates. States may enter into SRAs alone or in conjunction with other 
States. The terms of the SRA describe the rebate amounts and drugs 
covered by the agreement.   
Preferred Drug List and Prior Authorization. In conjunction with their 
SRAs, States may establish preferred drug lists (PDLs) or require prior 
authorization for certain covered outpatient drugs.  Manufacturers pay 
States supplemental rebates for including their drugs on the PDLs.  The 
drugs included on a States PDL may result in lower beneficiary costs; the 
drugs not included on a States PDL may require prior authorization.     
METHODOLOGY 
Data Collection 
CMS Data. We obtained CMSs policies and procedures for collecting, 
calculating, and reporting of Medicaid rebate data.  We also obtained data 
from CMS (through MBES) on Medicaid drug expenditures and Federal 
rebates from 2008 through 2012. 
Electronic Survey of State Medicaid Agencies. In February 2013, we 
emailed surveys to the 51 State Medicaid agencies.  We received 
responses from all 51 States.     
State Rebate Data. We first asked States to report the total amount of 
offset rebates for 2011 and 2012.  We then asked States whether they had 
SRAs in effect as of January 1, 2013, to collect supplemental Medicaid 
rebates. If they answered yes, we asked them to provide the total amount 
of supplemental rebates collected for drugs dispensed from 2010 through 
2012. If they answered no, we asked them to explain why they did not 
collect supplemental Medicaid rebates and whether they had plans to start 
collecting these rebates by the end of 2013. 
We also asked the States that collected supplemental Medicaid rebates 
whether they contracted with Medicaid MCOs to provide medical care 
specifically, drug coverageto Medicaid beneficiaries.  We asked the 
States to describe how they provided drug coverage to beneficiaries 
enrolled in Medicaid MCOs and whether they extended their supplemental 
rebate programs to include drugs covered through Medicaid MCOs.  If 
States did extend their supplemental rebate programs to include drugs 
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   6 
   
   
covered through MCOs, we asked them to provide the amount of 
supplemental rebates requested and collected for these drugs. 
State Medicaid Agency Policies and Procedures.   We asked each State that 
had an SRA in effect as of January 1, 2013, to describe the methodology it 
used to calculate supplemental rebates and the type of SRA  in effect as of 
January 1, 2013 (i.e., single-State SRA  or multi-State SRA).  Finally, we 
asked States to report on how the recent changes under the ACA affected 
their collection of supplemental rebates.  We asked States whether they 
changed or renegotiated their SRAs and whether the amount of 
supplemental rebates collected decreased as a result of the collection of 
offset rebates.   
Data Analysis    
Using States responses to the survey, we first determined the number of 
States that reported offset rebates in 2011 and 2012 and the number of 
States collecting supplemental Medicaid rebates as of January 1, 2013.  
We then calculated the total offset rebates reported in 2011 and 2012 as 
well as the total supplemental rebates collected from 2010 through 2012.  
For States that did not collect supplemental rebates, we determined, on the 
basis of States responses, the reasons for not collecting and whether the 
States intended to begin collecting these rebates.  Using Federal rebate 
data from CMS, we estimated the portion of supplemental rebates retained 
by the States. 
We reviewed survey responses to determine the method each State used to 
calculate supplemental rebates and to determine the number of States that 
extended their supplemental rebate programs to include the utilization of 
drugs covered through MCOs. Finally, we determined which States 
reported changes to their supplemental rebate programs as a result of the 
changes related to the ACA.     
Limitations 
The responses provided by the States are self-reported.  We did not verify 
the accuracy or completeness of States  responses or rebate data; we also 
did not verify the accuracy of CMSs data.  In addition, several States 
indicated that the reported offset and supplemental rebate amounts for 
2012 were not complete at the time we collected the information, and one 
State provided offset rebate totals for 2012 only.    
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.   
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   7 
   
   
FINDINGS 
Forty-eight States reported a total of $2 billion in ACA 
offset rebates for 2011 and 2012 
Offset rebates for 48 States totaled approximately $1.2 billion in 2011 and 
$819 million in 2012.22, 23  Offset rebates for individual States ranged from  
less than $1 million to over $100 million in both 2011 and 2012.  Of the 
remaining three States, one reported a combined total for 2010 through 
2012, but did not report rebate amounts separated by year; one did not 
provide a separate amount for offset rebates; and one State responded that 
computer and technology problems prevented it from reporting the offset 
rebate information.   
Forty-four States reported collecting a total of          
$1.7 billion in supplemental Medicaid rebates in 
2011 and 2012   
As of January 2013, 44 States reported having SRAs in effect, allowing 
them to collect supplemental Medicaid rebates.   These States reported 
collecting approximately $1.7 billion in rebates in 2011 and 
2012 combined.24   We estimate that the State share of supplemental rebates 
totaled $656 million in 2011 and 2012.25  See  Appendix A for a list of States 
that collected supplemental Medicaid rebates as of January 2013. 
Of the 44 States that collect supplemental Medicaid rebates, 17 States 
have single-State SRAs, 25 States have multi-State SRAs, and 2 States 
have both single-State and multi-State SRAs.26  See Table 1 for a 
description of State SRAs. 
       
 
 
       
____________________________________________________________ 
22 At least five States reported  2012 offset rebates that were not for the full year.  

Therefore, the  2012 total might not  represent the complete amount  for the year.  
   
23 One State was able to report offset rebates for 2012 only.   

24 At least nine States indicated that the supplemental rebates collected for 2012 were not 

for the full year.  Therefore, the 2012 total  might not represent the complete amount  for 
 
the year. 

25 This estimate is based  on FMAPs calculated using MBES expenditure data.   

26 Four States noted in their responses that they have their own individual  SRAs, but are 

part of a group.  We classified these States as having multi-State SRAs.   

States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   8 
   
   
      Table 1: State SRAs  
Type of SRA   Number of States 
No SRA   7 
Single-State SRA only  17 
Multi-State SRA only    25 
Single- and Multi-State SRAs   2 
     Total  51 
                                                        
      Source:  OIG analysis of State Medicaid agency responses, May 2013.  
           
Seven States did not have SRAs as of January 2013; one of 
these States intended to establish an SRA 
The seven States that did not have SRAs as of January 2013 provided 
several reasons for not collecting these rebates.  Two of these States 
previously collected supplemental rebates, and one of the two intended to 
begin collecting supplemental rebates again.  Two other States noted that a 
substantial portion of their Medicaid populations were enrolled in MCOs 
that carved in the drug benefit. Among the remaining three States, one 
State did not provide a specific reason; another State noted that it has a 
relatively low volume of the market share; and the remaining State said 
that its legislature had passed a law prohibiting supplemental rebates. 
The method that most States used to calculate 
supplemental rebates may reduce rebate amounts  
Under most States rebate agreements, supplemental rebates are inverse to 
Federal rebate amounts (which include offset rebates):  if the Federal 
rebate increases, the supplemental rebate decreases by an equal amount.  
Specifically, 41 of the 44 States that collect supplemental Medicaid 
rebates negotiate a guaranteed, fixed price that is the basis for the 
supplemental rebate amount.27  The remaining three States usually 
calculate supplemental rebates as a percentage of WAC, although two of 
these States noted that in limited circumstances, they base their 
methodology on a guaranteed price.  
____________________________________________________________ 
27 Ten of these forty-one States also calculate supplemental rebates on the basis of a 
percentage of WAC.   One additional State also calculates supplemental rebates on the 
basis of  a percentage of AMP;  another  State also calculates supplemental rebates on the 
basis of a set amount.   
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   9 
   
   
The guaranteed price is a fixed final net price for a drug that the 
manufacturer assures to provide the State.  In other words, the State 
negotiates the rebate amount in relation to the final amount it will pay for 
the drugs. The supplemental rebate for these States is calculated by 
subtracting the CMS (i.e., Federal) rebate and the bid price or guaranteed 
price from a benchmark price such as AWP,  AMP, or WAC.  Under this 
model, States could negotiate the same discounts pre- and post-ACA, but 
would retain fewer rebates because they do not share in the offset rebates.   
See Figure B-1 in Appendix B for an illustration of the effect of offset 
rebates. 
Although States reported that supplemental rebates increased 
in the aggregate, most States reported that supplemental 
rebate amounts decreased  
Although States reported that supplemental rebates slightly increased in 
the aggregate from 2010 to 2011, individual States reported that 
supplemental rebates for individual drugs were lower than they would 
have been under the pre-ACA rebate amounts.28, 29  Thirty-nine States 
reported a decrease in supplemental Medicaid rebate amounts because of  
changes to Medicaid rebates in the ACA; the remaining five States 
reported no decrease. Twenty of these States estimated a total of 
approximately $22 million in lost supplemental rebates.30  
Six States reported making changes to their SRAs as a 
result of changes related to the ACA   
Several provisions of the ACA changed the Medicaid drug rebate program, 
including increases to the URAs for certain drugs and the requirement to 
____________________________________________________________ 
28 States attributed the increase in  rebates to several reasons, including the increase in the 
number and cost of drugs covered by the supplemental rebate program and/or the lack of  
URA data from  CMS.  Because of  changes to  (1)  the definition of AMP, (2) rebate  
percentages, and (3) Federal share rules, CMS was not able to calculate URAs during  
2010.  In  May 2011, CMS calculated URAs for  each quarter of 2010  and provided  those 
data to  States.  Several States noted that 2011  data would include prior-quarter 
adjustments resulting from the lack  of URA data for 2010 and that this inclusion may 
lead to inflated totals for 2011.   
29 Additionally, some States reported that there was an increase in the number of  drugs 
for which the supplemental unit rebate amount decreased and/or was  $0 because of 
Federal rebate increases (i.e., the supplemental rebate amount was reduced to  $0 because  
of  the offset rebate).  
30 Twenty States provided estimates of lost supplemental rebates.  The estimates for 17 of 
these States were for the third quarter of 2012; the remaining 3 States did not specify the 
time period for the lost rebates.  One additional State provided a percentage estimate of  
its decrease in supplemental rebates only; another State provided a percentage estimate of 
supplemental  rebates only.         
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   10 
   
   
collect rebates for drugs covered through Medicaid MCOs.  Thirty-eight 
States did not report making any changes to their SRAs as a result of 
changes under the ACA.  Of the six States that made changes, three 
reported changes related to line extension drugs31 and the other three 
reported that they began collecting supplemental rebates on drugs utilized 
by beneficiaries who receive drug coverage through MCOs.32    
A small number of States collected supplemental rebates on 
drugs covered through Medicaid MCOs 
Thirty-two of the forty-four States that collect supplemental rebates also 
had contracts with MCOs.  Six of these States reported that they are or  
intend to begin collecting supplemental rebates on drugs covered through 
a Medicaid MCO.33  Two of these six States were able to provide the 
amount of supplemental rebates for drugs covered through MCOs; of the 
remaining four States, one did not have the data available,34 another had 
just started requesting these rebates and did not have the amounts 
available, and the remaining two had not started collecting rebates at the 
time of our survey. 
Of the remaining 26 States, 20 carved in at least some portion of their 
prescription drug benefits.35  Sixteen of these States cited the fact that 
MCOs have their own PDLs, that there is no common PDL, that MCOs 
want to negotiate their own rebates, or that SRAs apply to only FFS 
beneficiaries as the reasons they were unable to collect supplemental 
rebates on drugs covered through MCOs. For the remaining four States, 
one State prohibited supplemental rebates for MCO utilization, one State 
maintained a majority carve-out approach and said it was not practical at 
that time to expand its supplemental rebate program, one State responded 
that manufacturers would not pay supplemental rebates for MCO 
____________________________________________________________ 
31 In a proposed  rule, CMS defines a line extension drug as a single-source or innovator 
multiple-source drug that is an  oral solid  dosage  form that has been approved  by the Food 
and Drug Administration  as a change to the initial brand-name listed drug  in that it 
represents a new  version of the previously approved listed drug.  See 77  Fed. Reg. 5318, 
5323 (Feb. 2,  2012).    
32 Three additional States also reported changing or renegotiating their SRAs as a result 
of changes to  Medicaid rebates under the ACA. 
 
33 One additional State noted that it was exploring changes to its SRA that would  provide 

opportunities to acquire supplemental rebates for its MCO population  under certain 
 
conditions.   

34 One State reported that it collects supplemental  rebates on drugs covered through  a 
Medicaid MCO, but did not  report changes to its SRA as a result  of the ACA.        
35 The other six States carve out their drug benefit and provide drug coverage through 
FFS, not through the MCO.   
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   11 
   
   
utilization, and the remaining State did not provide a reason.  See 
Appendix C for information on supplemental rebates and MCOs.    
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   12 
   
   
CONCLUSION AND RECOMMENDATIONS 
Our results show that nearly all States reported offset rebates and that 
supplemental rebates were one method that States used to reduce Medicaid 
expenditures on prescription drugs.  For 2011 and 2012, States reported a 
total of approximately $2 billion in offset rebates and approximately 
$1.7 billion in supplemental Medicaid rebates.   
The ACA changes to the Federal Medicaid rebate program increased total 
rebates to the Federal Government, but may affect States collection of 
supplemental rebates because the method that most States used to 
calculate supplemental rebates may result in lower rebate amounts.  
Nearly all States that collect supplemental rebates base them on a 
guaranteed price. The guaranteed price limits the total rebates available 
for the drugs; because the Federal Government retains all offset rebates, 
the guaranteed-price methodology may result in reduced supplemental 
rebate amounts for States.  Given our findings that (1) not all States 
reported offset rebates, (2) not all States collected supplemental rebates, 
and (3) States methods for calculating supplemental rebates may result in 
lower supplemental rebate amounts, we recommend that CMS: 
Ensure that all States appropriately report offset rebate 
amounts 
Section 1927(b)(1)(C) of the Act requires CMS to reduce payments to the 
States by an amount attributable to the rebate increase (i.e., by the amount 
of the ACA offset rebates).  To ensure that CMS receives the benefit of all 
eligible rebates, States must be able to report the ACA offset rebates.  
CMS could work with States to ensure they are able to perform this 
function. 
Consider further whether to encourage all States to establish 
supplemental rebate programs  
Given that 44 States have reduced Medicaid drug expenditures by 
implementing SRAs, CMS should consider further whether States that do 
not currently collect supplemental rebates should be encouraged to 
implement supplemental rebate programs.      
Encourage States to explore alternate methods for calculating 
supplemental rebates  
For all but 3 of the 44 States that collect supplemental Medicaid rebates, 
the method for calculating these rebates (i.e., basing the rebate amount on 
a guaranteed price) is directly affected by the Federal rebate increase.  
Some States currently base supplemental rebates on benchmark prices 
(e.g., AWP,  WAC) minus a set percentage, a method that may not be 
directly affected by changes to the Federal rebate amount.        
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   13 
   
   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
CMS concurred with our recommendation to ensure that all States 
appropriately report offset rebate amounts and noted that it has been 
monitoring and enforcing the ACA requirements.  CMS stated that it is 
monitoring whether States are reporting offset rebate amounts 
appropriately and, to the extent it finds a State has not reported offset 
rebate amounts or is having problems reporting them, it has been 
providing technical assistance to States to ensure they are able to report 
offset rebates and will continue to do so.   
CMS concurred with our recommendation to consider encouraging States 
to establish supplemental rebate programs as a cost-containment measure, 
but noted that States have flexibility as to whether to do so.  CMS issued 
guidance to States in 2002 and 2004 that provided clarification regarding 
establishing and implementing SRAs and stated that it will continue to 
provide technical support to States. CMS further noted that multiple 
States are submitting State plan amendments to include in their 
supplemental rebate collections the drug utilization of beneficiaries 
enrolled in Medicaid MCOs. 
Finally, CMS concurred with the recommendation to encourage States to 
explore alternate methods for calculating supplemental rebates.  CMS 
noted that fluctuation in drug pricing caused most States to use the 
guaranteed price methodology because this price is not affected by price 
changes. In addition, CMS noted that the three States that base 
supplemental rebates on a benchmark price minus a set percentage may 
not be significantly affected by a change to the offset rebate amount, but 
may be impacted by various drug pricing changes.   
We did not make any changes to the report on the basis of CMSs 
comments. However, after we received CMSs comments, one State 
revised its submission for offset rebates reported in 2011 and 2012; we 
incorporated the States revised rebate totals into the report.  For the full 
text of CMSs comments, see Appendix D.   
 
 
   
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   14 
   
   
APPENDIX A 
           Table A-1. States Collecting Supplemental Medicaid Rebates as of 
January 1, 2013  
State   State Has an SRA 
Alabama  Yes  
Alaska   Yes  
Arizona  No 
Arkansas  Yes  
California  Yes  
Colorado   Yes  
Connecticut  Yes  
Delaware   Yes  
District of Columbia  Yes  
Florida   Yes  
Georgia  Yes  
Hawaii  No 
Idaho   Yes  
Illinois   Yes  
Indiana  Yes  
Iowa   Yes  
Kansas  Yes  
Kentucky  Yes  
Louisiana  Yes  
Maine  Yes  
Maryland   Yes  
Massachusetts   No 
Michigan  Yes  
Minnesota  Yes  
Mississippi   Yes  
Missouri  Yes  
Montana   Yes  
Nebraska   Yes  
Nevada   Yes  
New Hampshire   Yes  
New Jersey   No 
New Mexico  No 
New York   Yes  
North Carolina   Yes  
North Dakota   No 
Ohio   Yes  
Oklahoma   Yes  
Oregon   Yes  
Pennsylvania  Yes  
Rhode Island   Yes  
South Carolina   Yes  
South Dakota   No 
Tennessee   Yes  
Texas   Yes  
Utah   Yes  
Vermont   Yes  
continued on next page 
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   15 
   
   
States Collecting Supplemental Medicaid Rebates as of January 1, 2013 
(continued)  
State   State Has an SRA 
Virginia  Yes  
Washington  Yes  
West Virginia   Yes  
Wisconsin  Yes  
Wyoming  Yes  
 
Source:  OIG analysis of State Medicaid agency survey responses, May 2013. 
   
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   16 
   
   
APPENDIX B 
The Potential Effect of Offset Rebates on Supplemental 
Medicaid Rebates  
As Figure B-1 illustrates, the hypothetical rebate increase under the ACA  
is shifted from the supplemental rebate (which the State shares with the 
Federal Government) to the offset rebate (which the Federal Government  
does not share with States). In both the pre-ACA and post-ACA  
calculations, the State negotiates a $25 discount from the manufacturer.  
However, because States do not share in the offset rebate, they receive less  
of the discount. 
 
Figure B-1. An Example of the Potential Effect of Increased Federal Rebates on State 
Supplemental Rebates36   
 
Pre-ACA Calculation  
 
Minus Guaranteed  Minus 15.1 Percent  Supplemental 
WAC $100 
Net Price $75  of AMP $7.55  Rebate  
Amount $17.45  
 
 
 
 
  The post-ACA rebate increases because 
  of the UROA and the supplemental rebate 
  decreases by the same amount.  
 
Post-ACA Calculation 
 
WAC $100  Minus Guaranteed  Minus 23.1 Percent  Supplemental 
Net Price $75  of AMP $11.55  Rebate  
Amount $13.45  
 
  
Source:  OIG analysis of the effect of the ACA on States and State survey responses, May 2013.   
 
   
____________________________________________________________ 
36 This example assumes a WAC of $100, a guaranteed price of  $75, an AMP of  $50, and  
the Federal  rebate percentage  for brand-name drugs (15.1 percent  of AMP pre-ACA and 
23.1 percent of AMP post-ACA).  This example would not  produce the same result for  
States that use alternative methodssuch  as a percentage of WACfor calculating 
supplemental rebates.     
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   17 
   
   
APPENDIX C 
Table C-1. Supplemental Rebates on Drugs Covered through MCOs  
Number of  
State Description   States  
Among States that utilize  MCOs and have SRAs 
Collect or intend to collect supplemental rebates on drugs covered through 
6 
MCOs  
Carve in at least some portion of the drug benefit but do not collect 
20 
supplemental rebates on drugs covered through MCOs37  
Carve out drug benefit; drugs covered through FFS  6 
Among States that do not utilize  MCOs or do not have SRAs 
Have SRAs, but do not utilize MCOs   12 
Do not have SRAs  7 
     Total Number of States   51 
Source:  OIG analysis of State Medicaid agency survey responses, May 2013.   
  
   
____________________________________________________________ 
37 Eight of these States reported using a mixture of carve-in and carve-out approaches  
(although one of these States noted that it maintains a majority carve-out approach).  For 
example, three of these States carve out specific classes of drugs, such as HIV drugs and 
antipsychotics.   
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   18 
  APPENDIX D 
Agency Comments 
DEPARTMEI\'T OF HEAI:n-t & HUMAN SERVICES  Centers IO< Medlcere & Medlceid S..Mces 
--
----~~----
Admi11istrator 
Washington. DC 20201 
DATE:  APR  1~ 2014 
TO:  Daniel R. Levinson 
Inspector General 
FROM:  Marilyn Tavenner 
Administrator 
SUBJECT:  Office oflnspectorGeneral (OIG) Drafl Report:  "States Collection of Offset and 
Supplemental Medicaid Rebates" (OEl-03-12-00520) 
Thank you tor the opportunity to review and comment on the above subject OIG draft report. 
The Centers for Medicare & Medicaid Services (CMS) appreciates the information presented in 
the report and ol1ers the following comments. The purpose of this report wa.~ to survey Sl!ltes' 
methods and amounts for Medicaid supplemental rebate calculations, collections, and reporting 
as well as to dctem1ine the impact ofthe changes under ACA that increased the federal Medicaid 
rebate portion idcntilied as the offset rebate amount. OlG found that 48 states reported 
approximately $1.2 billion in 20 II and $900 million in 2012 for ACA offset rebates with the 
offset rebates for individual states ranging from less than $1 million to over $100 million in both 
20 II and 2012. OIG also found that 44 states reported collecting approximately $1 .7 billion in 
supplemental rebates in 201 I and 2012 combined. OIG also learned that the guaranteed net unit 
price (GNlJP) method which most states usc to calculate supplemental rebates may result in 
lower rebate amounts. OIG reported that 41 of the 44 states collecting supplemental Medicaid 
rebates negotiate a GNU P which is a fixed final net price for a drug that the manufacturer assures 
to provide to the state.  Post-ACA. only those states that ba~e the supplemental rebates on the 
GNUP would retain lesser rebate amounts. Although the states reported that the supplemental 
rebates increased in the aggregate due to the increase in the number and cost of the drugs 
covered by the ~upplemental rebate program, 20 states estimated approximately $22 million lost 
in supplemental rebates due to the increast-'d federal ofrset. OIG found that 38 states did not 
report making any changes to their Medicaid supplemental rebate agreements (SRAs) with drug 
manufacturers to increase the federal Medicaid rebate percentage to include the offset. 
In accordance with l927(a) of the Social Security Act, Medicaid drog rebates including 
supplemental rebates are collected from drog manufacturers that participate in the Medicaid drug 
rebate program to reduce Medicaid expenditures for prescription drugs. The Affordable Care 
Act (AC'A) made significant changes to the Medicaid Drug Rebate Program by increasing the 
federal Medicaid rebate collection from manufacturers which is referred to as the otTset and by 
expanding the drug manufacturers' obligation to pay rebates for drugs dispensed to beneficiaries 
enrolled under a Medicaid managed care orgamzation (MCO). 
States' Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)  19   
   
Agency Comments (continued) 
 
 
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)  20 
   
   
Agency Comments (continued) 
 
 
   
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)  21 
   
   
ACKNOWLEDGMENTS 
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office.  
Edward K. Burley served as the team  leader for this study.  Central office 
staff who provided support include Kevin Farber, Kevin Manley, and 
Christine Moritz.  
States Collection of Offset and Supplemental Medicaid Rebates (OEI-03-12-00520)   22 
   
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.