People who are enrolled in Medicaid are entitled to pay the lowest amount possible for their prescription drugs. This is accomplished through a rebate system in which drug manufacturers reimburse the government for any differences between the “best price” offered and the price paid by the Medicaid plan participant.
Drug manufacturers who want their product to be used by Medicaid participants must allow state Medicaid programs to purchase the drug at the same best price the drug manufacturer offers to purchasers in the private sector, with some exceptions.
The best price for a medication is defined as the lowest one the manufacturer offers to any purchaser in the private sector during the rebate period in which the quarterly Average Manufacturer Price (AMP) is calculated.
Drug manufacturers are permitted to offer state Medicaid programs’ multiple best prices based on the value-based purchasing (VBP) arrangements they have with purchasers in the private sector.
States are then able to participate in the VBP arrangement of their choosing for the reported medication. If a state chooses not to participate in a VBP arrangement, the best price would be the lowest price offered to purchasers who do not have a VBP arrangement with the manufacturer.
The problem with the rebate system
One problem with the current rebate system is that some drug manufacturers will commit best-price fraud, which is a type of white-collar crime. It is a form of Medicare and Medicaid fraud that violates the False Claims Act.
One way that drug manufacturers commit best-price fraud is by wrongfully offering the government a best price that is greater than what is offered to the private sector. By doing this, the drug manufacturer reduces the rebate costs they must pay state Medicaid programs.
Another way drug manufacturers commit best-price fraud is by using an AMP that is higher than what it should be when calculating rebates. This way, the state Medicaid programs pay more for a medication than the private sector pays.
Drug manufacturers often get away with best-price fraud because they are not required to report AMPs to the government, and states do not have the resources to oversee VBP arrangements. This means that drug manufacturers simply give a “scout’s honor” that the best prices offered to the government are correct.
Still, there have been several notable cases in which large drug manufacturers were caught engaging in best-price fraud. These companies were ordered to pay millions in fees and settlements to the Department of Justice for their wrongdoings. Best-price fraud is a type of health care fraud that can land a company in serious legal hot water, costing them multi-millions in fines.