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New Law Imposes Steeper Penalties, More Oversight and Enforcement on Drug Classifications under the MDRP

The Medicaid Services Investment and Accountability Act of 2019 (the Act) became law on April 18, 2019. Of most relevance to pharmaceutical manufacturers are the provisions amending the Medicaid statute concerning the Medicaid Drug Rebate Program (MDRP).

The MDRP requires drug manufacturers that have executed a MDRP agreement with the Centers for Medicare & Medicaid Services (CMS) to pay State Medicaid programs rebates on the Medicaid beneficiary utilization of covered outpatient drugs.  

The Act makes technical changes to the definitions of “multiple source drug,” “innovator multiple source drug,” and “single source drug” to codify in the MDRP statute the regulatory interpretation of such terms as reflected in 42 C.F.R. 447.502. Specifically, the Act removes the word “original” before New Drug Application (NDA) in the definition of single source and innovator multiple source drugs such that single source and innovator multiple source drugs are now defined to mean only those marketed under a NDA, unless a CMS-granted narrow exception to such classification applies. Of note, the Act clarifies that non-prescription Over-The-Counter (OTC) products will be considered single source or innovator multiple source drugs to the extent marketed under a NDA as opposed to an Abbreviated New Drug Application (ANDA) or OTC monograph. This is consistent with the definition of non-innovator multiple source drug under 42 C.F.R. 447.502, which recognizes that a drug’s classification can change if it was once marketed under a NDA and subsequently is marketed under an ANDA or OTC monograph.    

Importantly, the Act increases the civil monetary penalties that can be applied to manufacturers who “knowingly” misclassify a covered outpatient drug “by knowingly submitting incorrect drug product information” to two times the amount of the difference between the MDRP rebates that the manufacturer paid while the drug was misclassified and what they should have paid if the drug had been correctly classified. Manufacturers who knowingly misclassify a drug product can also be excluded from participation in Federal health care programs, an important enforcement tool included in the Act.

The Act also authorizes the Secretary of the Department of Health and Human Services (HHS) to determine on its own whether a manufacturer has misclassified a drug for purposes of the MDRP, regardless of any knowing intent, and require the manufacturer to properly reclassify the drug. If the manufacturer does not reclassify the drug within the timeframe set by the Secretary, HHS can either (1) correct the misclassification, (2) suspend the drug’s status as a covered outpatient drug and exclude coverage of the drug from state Medicaid programs, and/or (3) impose civil monetary penalties.    

Because failure to properly classify drug products could have potentially serious consequences, manufacturers that participate in the MDRP should make sure they have policies and procedures in place to ensure periodic review of how they classify their drug products. 

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