Review of California's Invoicing of Rebates for Medicaid Compound Drug Expenditures-Electronic Claims

We estimated that the State failed to invoice manufacturers for and collect $26.7 million ($13.6 million Federal share) in rebates for eligible compound drug ingredients for the period October 1, 2003, through June 30, 2009. Pharmacists create compound drugs by combining two or more prescription or nonprescription drug products and then repackaging them into a new form. For each compound drug claim, Centers for Medicare & Medicaid Services (CMS) guidance states that the drug code and corresponding quantity for each ingredient must be included on the claim for Medicaid reimbursement.

The State did not invoice drug manufacturers for any rebates associated with the electronic claims or report to CMS the total number of units for compound drug ingredients. Furthermore, the State had inadequate internal controls to ensure that compound drug expenditures billed on electronic claims complied with Federal requirements.

We recommended that the State (1) invoice manufacturers for the estimated $26.7 million in rebates for eligible compound drugs and refund the Federal share of the rebates collected by reporting it on Form CMS 64 as a reduction to the Federal reimbursement for Medicaid expenditures and (2) strengthen internal controls, including modifying the Rebate Accounting Information System, to invoice manufacturers for eligible compound drug ingredients and report drug utilization data to CMS. In written comments on our draft report, the State provided information on actions that it planned to take to address the recommendations.