Biotech and Pharma

Underpayments on EpiPen rebates to Medicaid could top $700 million

Mylan EpiPen protest
Erik McGregor | Pacific Press | LightRocket | Getty Images

Mylan might have to write a very big check for allegedly shortchanging Medicaid on EpiPen rebates.

A state Medicaid agency has estimated that all U.S. states are receiving just 15 percent of the rebates that they are legally entitled to from big drugmaker Mylan on sales of its lifesaving EpiPen through Medicaid programs.

In other words, Mylan is currently not paying 85 percent of the amount of rebates it might be obligated to pay the Medicaid on the anti-allergy devices, according to the "preliminary" estimate cited in a letter from the National Association of Medicaid Directors to congressional staffers that was posted online this week.

That estimate suggests that Mylan may have shortchanged the national Medicaid system to the tune of up to $707 million on EpiPen from 2011 to 2015, according an analysis released Friday by Evercore ISI, which highlighted the NAMD letter.

The Evercore analysis came two days after the head of the federal Centers for Medicare and Medicaid Services told a U.S. senator that Mylan had been repeatedly warned it was underpaying Medicaid in rebates for the auto-injectors by at least 10 percentage points because the drug has been misclassified by the company as a generic product as opposed to a brand-name one.

But it's not known when those warnings were first issued, muddying the question about Mylan's potential liability for allegedly underpaying the rebates.

Mylan's exposure could grow higher if it is found to have violated the False Claims Act, Evercore noted. In addition to the maximum fine of triple damages, or more than $2.1 billion, Mylan could be assessed a fine of $100,000 per instance, or every time it sold an EpiPen through Medicaid.

"If you do $100,000 times the numbers of prescriptions written, then the number goes stupid," said Umer Raffat, senior analyst at Evercore, who conducted a webinar presentation on Mylan's EpiPen situation Friday morning. "You're talking about hundreds of billions of dollars."

Raffat hastened to say that he would not expect Mylan, if it even is found in violation of the False Claims Act, to pay a penalty nearly that large.

"In reality, we've never seen a settlement that big," he said.

Raffat also said evidence suggests that "Mylan only got notified in the last year or so" by CMS that it was misclassifying EpiPen. If that is the case, it would sharply reduce Mylan's potential liability for alleged underpayments of rebates.

Mylan has said it is properly classifying EpiPen under guidance issued by CMS two decades ago.

The company, which has not been formally accused of violating the False Claims Act, declined to comment on Evercore's analysis or the NAMD letter.

CMS acting administrator Andy Slavitt, in a letter to Sen. Ron Wyden, D-Ore., this week, said Mylan has misclassified EpiPen as a generic product, and thus is paying a rebate rate of just 13 percent.

Instead, the company should be paying a rate of at least 23.1 percent due from brand-name products under the Medicaid Drug Rebate Program, Slavitt said.

But the actual rate Mylan should be paying now, Slavitt wrote, could be higher still since the program requires drugmakers who hike their prices above the rate of inflation to pay rebates beyond the 23.1 percent minimum.

Mylan has raised EpiPen prices well beyond the inflation rate. Since 2007, when Mylan acquired EpiPen, the company has raised the price of the device more than 500 percent.

Slavitt's letter said Medicaid paid nearly $800 million for EpiPens from 2011 to 2015 after rebates were factored in. In 2015 alone, Medicaid spent $365 million on EpiPen before rebates, which was more than five times the amount that Medicaid spent on EpiPen before rebates in 2011.

CMS could not comment on how much the agency believes Mylan has shortchanged Medicaid on rebates, he said. Nor did his letter say when Mylan was first notified of the incorrect classification.

Raffat of Evercore noted that the inflation penalty under the rebate program can make the rebates equivalent of up to 100 percent of the average manufacturer's price for drugs that have aggressive price increases.

"In other words," a slide from the Evercore analysis said, "if EpiPen was NOT supposed to be a non-innovator [drug, as Slavitt says] its rebates would have been so high that [net] sales to Medicaid should have been minuscule."

The rebates paid are split between the federal government and the individual state's Medicaid agencies, which jointly run that health coverage program.

In its letter to congressional staff last month, the National Association of Medicaid Directors wrote, "If EpiPen is considered a generic for Medicaid rebate purposes but is not an actual generic product, it appears Mylan is taking advantage of the" Medicaid Drug Rebate Program.

"At this time, there is not a readily available estimate of the total cost implications of this inconsistency in classification for EpiPen," the NAMD wrote. "However, a preliminary estimate from one state Medicaid agency indicates states are receiving only 15 percent of the quarterly rebate on EpiPen expenditures that they would otherwise be entitled to under the law if EpiPen were classified as a brand product."

The NAMD, which has not yet returned a call from CNBC seeking comment, did not identify the state agency in that letter. The letter was dated Sept. 8, but only posted online Monday, according to the group's website.

Mylan shares fell 2.4 percent to $35.94 on Friday.