Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

Daniel R. Levinson 

Inspector General 

December 2014 

OEI-03-12-00520 

STATES’ COLLECTION OF 

OFFSET AND SUPPLEMENTAL 

MEDICAID REBATES 
 

 

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 rebates—by an amount referred to as the 

“offset rebate”—in 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 State’s 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 State’s 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 agency’s 

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 provider’s 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 

State’s Medicaid cost. 

2

 This estimate was calculated from two sources: CMS’s 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 State’s 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 manufacturer’s 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 

State—Quarter Ending September 2013. Accessed at http://www.medicaid.gov/ 

Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/StatePrescription-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/deliverysystems/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 drug’s 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 

rebates—amounts known as the “offset rebate”—to 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 

. 

1. AMP/Best Price Data 

4. Rebates* 

3. Rebate Invoice with 

sp Utilization Data 

2. Rebate Amounts 

Manufacturer CMS/Federal 

Government 

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 State’s 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/archiveddownloads/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 State’s PDL may result in lower beneficiary costs; the 

drugs not included on a State’s PDL may require prior authorization. 

METHODOLOGY 

Data Collection 

CMS Data. We obtained CMS’s 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 coverage—to 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 CMS’s 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. 

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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. 

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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. 

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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. 

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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 CMS’s 

comments. However, after we received CMS’s comments, one State 

revised its submission for offset rebates reported in 2011 and 2012; we 

incorporated the State’s revised rebate totals into the report. For the full 

text of CMS’s 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 
 

 

 

Pre-ACA Calculation 

WAC $100 Minus Guaranteed 

Net Price $75 

Minus 15.1 Percent 

of AMP $7.55 

Supplemental 

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 

Source: OIG analysis of the effect of the ACA on States and State survey responses, May 2013. 

WAC $100 Minus Guaranteed 

Net Price $75 

Minus 23.1 Percent 

of AMP $11.55 Supplemental 

Rebate 

Amount $13.45 

 

 

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 

____________________________________________________________ 

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 methods—such as a percentage of WAC—for 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 

State Description 

Number of 

States 

Among States that utilize MCOs and have SRAs 

Collect or intend to collect supplemental rebates on drugs covered through 

MCOs 6 

Carve in at least some portion of the drug benefit but do not collect 

supplemental rebates on drugs covered through MCOs37 20 

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 OIG’s 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.