Medicaid – From a Simple Concept to an Operational Labyrinth

The federal government created Medicaid in 1965 as a public insurance program to expand existing federal support for healthcare services. It has since ballooned from its basic insurance program roots. Today, Medicaid is a vital source of financial protection for the 1 in 5 Americans who receive healthcare coverage through it. It is also arguably the most complex and demanding government program in terms of potential impact and resources for participating drug manufacturers.

• Obtain Access and Agreements – One-Time Setup

  In addition to signing and submitting a NDRA, drug manufacturers are required to enter into additional agreements with other federal programs to have their drugs covered under Medicaid; a pricing agreement for the Section 340B Drug Pricing Program¹, administered by the Health Resources and Services Administration (HRSA), and for branded drugs, a master agreement with the Secretary of Veterans Affairs for the Federal Supply Schedule (FSS)².

  Manufacturers also need to establish access to CMS reporting systems, state portals, and the Texas Formulary to ensure Medicaid claims are processed accurately.

• Calculate and Report AMPs to CMS – Ongoing Monthly and Quarterly

  Manufacturers are required to calculate and submit an Average Manufacturer Price (AMP) to CMS on a monthly and quarterly basis for each dosage form and strength of a drug sold within Medicaid. AMP is a derived value intended to reflect the average actual market price for a drug sold, net of all eligible discounts (which is typically much lower than the published Wholesale Acquisition Cost (WAC).

  Manufacturers can reference guidance from CMS on what sales should be included in their AMP calculations, however they must use a consistent application of reasonable assumptions and document them in Standard Operating Procedures (SOPs) in the absence of clear directives.The AMP value is then used to derive various government pricing values including Unit Rebate Amounts (URA) and PHS/340b pricing.

• Calculate and Report Best Price – Ongoing Quarterly

  Branded drug manufacturers (including authorized generic manufacturers) must report Best Price, the lowest price made available to customers, for consideration in the calculation of the Unit Rebate Amount. If the Best Price is lower than what CMS would receive for a price using the standard calculated methodology, than CMS will calculate a rebate owed based upon the difference between AMP and Best Price.

• Calculate URAs – Ongoing Quarterly

  The URA (Unit Rebate Amount) is a calculated value used to determine the amount of rebates a manufacturer will owe to government entities to offset some of the cost for Medicaid. To generate the URA, manufacturers follow formulas to compute the Base URA, Inflation Penalty and ultimately the Total URA, which is then reported to CMS on a quarterly basis.

  State programs compile utilization, which includes all drug claims, point-of-sale pharmacy prescriptions and medical outpatient drug claims dispensed to Medicaid patients during the prior calendar quarter. The total number of units is then multiplied by the URA (provided by CMS) for each product to calculate the total rebate amount owed by the drug manufacturer.

• Process, Validate and Pay Rebates to 300+ State Medicaid Entities – Ongoing Quarterly

  At the end of each calendar quarter, over 300 Medicaid programs across various states will submit invoices to participating manufacturers for rebates due. Invoices can be downloaded from various state portals and/or mailed to manufacturers. Overall invoice volume for a manufacturer far exceeds the number of U.S. states and can vary for the following reasons:

  • States issue multiple invoices to each labeler for unique programs that serve specific subsets of the population.
  • Participation in voluntary rebate programs such as SPAPs, supplemental and other ancillary programs may increase the volume of invoices a manufacturer gets, as they’re invoiced separately.
  • States issue separate invoices for both current quarters and past quarter utilization and/or utilization changes. Manufacturers are required to file Reconciliations of State Invoice (ROSI) forms in response to current quarter invoices, and Prior Quarter Adjustment Statement (PQAS) forms in response to adjustments in past quarter utilization or URAs. It’s important to note that there is no expiration on when states are required to stop issuing past quarter adjustments. Invoices can be added and/or adjusted going back to a drug’s first quarter of sale.
  • Drug manufacturers with multiple labeler codes will have separate invoices issued, as states issue invoices by labeler code.
  • Invoice volume for a manufacturer can range widely. It is not unusual to receive 500 – 1,000+ per quarter for high-utilization.

Prior to processing Medicaid rebate payments to various state entities, manufacturers should validate rebate amounts based on URA calculations and, if necessary, claim level detail to ensure they are paying the correct rebate amounts. While CMS has issued standard electronic formats for states to utilize, they are not universally adopted by all of Medicaid’s 300+ programs resulting in many different formats. Therefore, a manufacturer will be required to review invoices in various formats, which makes the validation processes complicated and time-consuming across the multitude of states and programs.

Following validation, Medicaid rebate invoices must be processed and paid by the manufacturer within 37 calendar days after the postmarked date on the original invoice to avoid paying interest. The 37 days includes time that an invoice was in mail transit, so this can reflect a tight window with which to adjudicate invoices. Payments can, in some cases, be grouped by jointly managed programs using checks and ACH transactions in a small number of instances. With so many operational challenges to processing Medicaid rebates, manufacturers need to have strict time management and standard operating procedures in place to ensure they remain in compliance and pay accurate rebate amounts to Medicaid agencies.

• Research and Resolve State Rebate Invoice Discrepancies – Ongoing

  Drug manufacturers also need to resolve any discrepancies that arise, including incorrect utilization on the invoices, payments not allocated correctly, and duplicate invoices received. The MDRP agreement allows pharmaceutical manufacturers to dispute claims they believe are invalid by indicating units to be disputed with the applicable CMS dispute code(s) on the ROSI or PQAS report upon payment. Manufacturers can also dispute claims retroactively. The disputes consume a tremendous amount of state and manufacturer resources to reach resolution.

  Manufacturers need to have a strong knowledge of the nuances of the 300+ Medicaid programs and establish partnerships with state processing contacts to effectively resolve discrepancies.

• Monitor Medicaid Program Changes and Adapt SOPs as Required – Ongoing

  Legislative and/or compliance changes at the federal and state level are common and require monitoring to ensure manufacturers stay in compliance and appropriately plan for operational and financial changes. Within the last year alone, broad scope changes for drug manufacturers participating in Medicaid have come from the Inflation Reduction Act and the American Rescue Plan Act.