California misses Medicaid rebate on compound drug claim

July 15, 2011

California has failed to bill drug manufacturers for nearly $30 million in rebates due on compound drugs dispensed through the state Medicaid program, known as MediCal.

Key Points

California has failed to bill drug manufacturers for nearly $30 million in rebates due on compound drugs dispensed through the state Medicaid program, known as Medi-Cal. The shortfall was described in a pair of reports issued by the Office of the Inspector General of the federal Department of Health and Human Services in June 2010 and May 2011.

The latest report looked at rebates that should have been taken on electronic claims filed between 2003 and 2009. OIG found $26.7 million in missed rebates, accounting for approximately 18.8% of compound drug expenditures.

"States can still get reimbursed for ingredients in compound drugs, but can't get rebates," said John Norton, spokesman for the National Community Pharmacists Association (NCPA). "What occurred [in California] is an accurate clarification of that dynamic."

OIG said the problem lies with the state's Rebate Accounting Information System (RAIS), which has been a work in progress for much of the last decade. The system is supposed to track all Medi-Cal prescription claims and then bill manufacturers for rebates due under the Medicaid program. Most claims cover 1 or more individual drug products.

The Social Security Act, which includes the Medicaid program, also allows for compound drugs, which OIG describes as 2 or more prescription or nonprescription products that are combined by the pharmacist and repackaged in a new form. Medicaid regulations require that claims for compound drugs include the drug code and quantity for each ingredient so that the appropriate rebates can be billed back to manufacturers and reported to the Centers for Medicare and Medicaid Services (CMS).

"The [California] state agency did not invoice drug manufacturers for any rebates associated with the electronic claims or report to CMS the total number of units for compound drug ingredients," said OIG Inspector General Daniel Levinson. "We estimated that the state agency failed to invoice manufacturers for and to collect $26.7 million in rebates for eligible compound drug ingredients."

Round 2

This isn't the first time California has missed rebates for compound drugs. In 2010, OIG checked Medi-Cal claims for 2004 and 2005 that had been submitted manually and found that the state had neglected to invoice manufacturers for $2.1 million in rebates on $15.5 million in compound drug claims, 13.5% of the total spend.

While California could use the unclaimed rebate dollars to shore up its shaky financial position, compound drug rebates are pocket change compared to the state's $2 billion Medi-Cal drug expenditure. Medi-Cal spends between 1% and 2% of its drug budget on compound drugs, said state Department of Health Care Services (DHCS) spokesman Norman Williams. Higher cost areas get more attention.

$100 million beats $4.5 million

When California created its RAIS, programmers ran into problems tracking the individual ingredients that went into compound drugs, said Williams. Rather than delay the entire RAIS program, which processes about $100 million in rebates annually, state officials opted to leave compound drugs out of the initial build. The plan, he said, was to add compound drugs to RAIS later and bill manufacturers retroactively.

"Upgrading our computer systems to meet federal standards such as National Provider Identification Numbers had a significant impact," Williams said. "We looked at our options and recognized it was the difference between collecting $100 million on all drugs or $4.5 million on compound drugs. We made a reasonable decision."

Time to pay up

Reasonable or not, OIG recommended that the state invoice manufacturers for the $26.7 million in missed rebates and refund the federal share of $13.6 million. The report also recommended that the state modify its RAIS to properly invoice drug makers for rebates on eligible compound drug ingredients and report the appropriate drug utilization data to CMS.

The state agency agreed with both recommendations, but don't look for a quick fix. DHCS told its fiscal intermediary to make the changes back in August 2010. In the meantime, the state decided to change fiscal intermediaries. Williams said DHCS expects it will take between 12 and 16 months to implement the 2 recommendations.