Last week, the Senate passed the Medicaid Services Investment and Accountability Act (H.R. 1839) to address, among other things, pharmaceutical manufacturers’ misclassification of drugs. When a manufacturer misclassifies a brand drug as a generic drug, this results in manufacturers paying less in Medicaid rebates because the standard rebate for generic drugs is smaller than the standard rebate for brand drugs. The legislation, which passed the House of Representatives on March 25 and is now headed to the President’s desk, provides the Centers for Medicare & Medicaid Services (CMS) with an array of enforcement tools to tackle misclassification. The legislation will impact not only the Medicaid Drug Rebate Program, but likely the 340B Drug Pricing Program as well. 

The legislation authorizes CMS to reclassify drugs that were improperly classified, recover Medicaid rebates on misclassified drugs, and impose civil monetary penalties (CMPs) for “knowingly” misclassified drugs. While the legislation does not directly address the 340B Drug Pricing Program, enhanced oversight and enforcement of drug classification could result in increased refunds to 340B covered entities for overcharges by manufacturers. Since the 340B ceiling price calculation formula is closely intertwined with the methodology for determining Medicaid rebates, misclassification of a brand drug as a generic drug could cause not only underpayment of Medicaid rebates, but also overcharges on 340B drugs.

Increased policing of drug classification could also result in imposition of CMPs for 340B overcharges. The legislation states that the CMPs for “knowingly” misclassified drugs “are in addition to other penalties as may be prescribed by law.” This statutory language opens the possibility that the Department of Health and Human Services Office of Inspector General could impose 340B CMPs on a manufacturer for overcharges due to misclassification. However, while the legislation’s CMPs apply to misclassification that is done “knowingly,” 340B CMPs can only be levied for overcharges that are both knowing and intentional.

We will monitor these and other proposals that could affect the 340B Drug Pricing Program. In the meantime, please reach out to any one of us with questions.

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