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Mylan's big settlement with the federal government last week over EpiPen rebates has a $120 million question attached to it.
The nearly six-month-long grace period drugmaker Mylan received before it has to pay full rebates for sales of its anti-allergy device could end up costing Medicaid tens of millions of dollars, an analyst said Tuesday.
Or it could end up costing Medicaid not much at all.
Because neither the federal government nor Mylan will explain what's going on with that grace period, it is not clear how much, or how little, Medicaid will end up being out of under the deal.
Evercore ISI senior managing director and analyst Umer Raffat told CNBC that Medicaid — after making a projected $120 million or more in EpiPen purchases through April 1 — might have been entitled to a nearly 99 percent rebate from Mylan without that grace period.
Such a high rebate rate would have meant that Medicaid's net spending on EpiPen would effectively "be zero," Raffat said.
The nearly $120 million in rebates Mylan would save under that scenario is more than 25 percent of the $465 million the company has agreed to pay Medicaid to settle claims that it shortchanged that health-coverage system for the poor by misclassifying EpiPen for the purposes of a drug rebate program.
Raffat's estimate is based on the assumption that federal health officials would have pegged Mylan's rebate to an inflation adjustment dating to 2010. That adjustment imposes a higher rebate rate on drugs whose sellers hike their prices beyond the inflation rate, as Mylan has done repeatedly with EpiPen.
He noted that the amount of money being foregone in rebates for six months could be much lower if the inflation adjustment is pegged to a more recent year.
"That's the single biggest question," Raffat said, referring to the date that the inflation adjustment is pegged to.
Theoretically, he said, the date should be when Mylan was first told it was misclassifying EpiPen for rebate purposes. Raffat suspects that was only done in the past year or so by the federal Centers for Medicare and Medicaid Services, but CMS will not reveal when it first informed Mylan of that.
Both Mylan and CMS refused to explain either the rationale for the grace period or its terms. They also refused to say what Mylan's new rebate level will be next year, making it impossible to know how much Medicaid could be missing out in rebates until April 1. Any money Medicaid receives in rebates is split between the federal and state governments that jointly run the program.
Late Tuesday afternoon, Sen. Charles Grassley, R-Iowa, said he had written U.S. Attorney General Loretta Lynch, whose Justice Department negotiated the settlement with Mylan, asking questions about the deal, and the grace period.
"Given that CMS has said Mylan misclassified its EpiPen, why is Mylan not required to reclassify the EpiPen immediately?" Grassley wrote.
"An immediate reclassification would help prevent Mylan from further over-charging the states under the Medicaid Drug Rebate Program."
Raffat's estimate and Grassley's letter came a day after CNBC revealed that Mylan's $465 million settlement with the federal government included the grace period for EpiPen rebates.
That grace period was not mentioned by either Mylan or CMS in statements to the media about the settlement.
Mylan disclosed the grace period in an 8-K filing with the Securities and Exchange Commission. That same filing also revealed that the SEC was investigating Mylan in connection with the Medicaid Drug Rebate Program.
That program requires drug sellers who have their products covered by Medicaid to pay a rebate on sales through the system. For generic drugs, the rebate rate is 13 percent. For brand-name drugs, the rate is at least 23.1 percent.
But brand-name drugs whose price rises faster than the rate of inflation are subject to even higher rebate rates, which can approach 100 percent if they are particularly costly. EpiPen prices have increased by more than 500 percent in recent years, and now cost more than $600 for a two-pack of the auto-injectors.
Weeks before the settlement, various members of Congress asked whether Mylan, which had classified EpiPen as a generic drug, was paying the correct rate. Those elected officials suggested that EpiPen should be considered a brand-name product for rebate purposes.
Mylan repeatedly denied that was the case, saying longstanding guidance from CMS indicated EpiPen could be classified as a generic.
However, CMS told CNBC in late September that the agency had repeatedly told Mylan that EpiPens should be considered a brand-name product.
CMS acting Administrator Andy Slavitt told Congress the same thing last week. However, Slavitt did not say when CMS first told Mylan of the misclassification, or how much it had shortchanged Medicaid on EpiPen rebates.
Within days of Slavitt's comments, Mylan, without admitting wrongdoing, cut a deal with the Justice Department to resolve any potential claims that it shortchanged Medicaid because of how it classified EpiPen. The company also said that effective April 1, it will classify EpiPen as a brand-name product for the rebate program.
Matt Salo, executive director of the National Association of Medicaid Directors, said his group, which represents the heads of state Medicaid agencies, is "not worried about the grace period."
"Because as I understand it, that's just because ... the law enforcing it was recently passed and the feds needed time to put the regulatory framework in place to do so," Salo wrote in an email to CNBC.
"My understanding is that while Mylan (and any other company that finds itself gaming the system the way it did) won't START paying the proper amount of rebates until April 1, that the provision will be retroactive back to 3rd quarter 2014, so on some level the grace period just slightly delays a lump sum payment that is coming," Salo wrote.
Salo was referring to the 2015 Bipartisan Budget Act passed by Congress, which extended the inflation protection adjustment to generic drugs. CMS is supposed to be implementing that provision later this year, when it will become retroactive to the latter half of 2014,
Salo added that, "part of the problem is that Mylan has been jacking up the costs of this drug well before that date, so this won't capture the full extent of their manipulation."
"We're still trying to figure out accurate estimates of the cost," he said. "The proprietary nature of drug pricing and the extreme opacity of that information makes doing so remarkably difficult."
However, again, CMS has declined to explain how the grace period for Mylan under the settlement will work, so it is not clear if Salo's interpretation of the situation will prove accurate.
Sen. Amy Klobuchar, D-Minn., a critic of Mylan, said she had "serious concerns" about the grace period "especially since Mylan has been paying incorrect rebates for close to 10 years."
"I will review the terms of the settlement when it is made public," Klobuchar said. "There are also still many unanswered questions. We still don't know how many other drugs are misclassified," she said. "We need answers and the process needs to be changed to stop this from happening again."