Mylan’s Grace Period for EpiPen Rebates Could Cost Medicaid Up to $120 Million

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 hadwritten 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 governmentincluded 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.