State didn’t collect $36 million in drug rebates, federal audit finds

A federal audit of Arizona’s Health Care Cost Containment System, commonly referred to as AHCCCS, found that the state missed out on $36 million in rebates on drugs over a three year period due in part to not having proper systems in place to look for said rebates.

The Office of the Inspector General for Health and Human Services conducted the audit early last year that found the discrepancy.

Auditors found that Arizona billed drug manufacturers for rebates for pharmacy and physician-administered drugs correctly, but Arizona did not bill and collect some rebates. Of the $36.7 million auditors found not to be rebated, $25.6 of it would have gone to the federal government and would have been used in part to rebate people on those programs for certain expenses.

The period of time examined was from 2010 to 2013, and during all but about six months, AHCCCS did not have the proper protocols in place to catch the issue, auditors said.

Arizona agreed with auditors on all but one of their findings.

The federal auditors stated that Arizona needs to work with the Centers for Medicare & Medicaid Services to determine whether there were other drugs that were eligible for rebates and then work to obtain those rebates, which they estimated to be approximately $7.3 million that is due to the federal government.

Arizona did not agree with this finding.

“It is Arizona’s position that there is no basis for an audit of Arizona’s compliance with the provision of the Medicaid Act that, but for the expenditure authority in Arizona’s approved demonstration, would have required the State to bill manufacturers for physician administered drugs,” a letter from AHCCCS Director of Pharmacy Suzanne Berman said in a response letter to the audit.

The funds not collected that auditors found are only a small portion of what AHCCCS collects in drug rebates. During the audit period, Arizona collected more than $651 million.

What they found and how

Arizona is not the only state that has had similar issues. Auditors found multiple other states such as Idaho, Oregon, California and Virginia all had rebates that were not collected.

The idea behind the rebates is that states bill manufacturers for rebates to reduce the cost of drugs to Medicaid programs.

During the audit period Arizona had contracted with Magellan Medicaid Administration to bill manufacturers.

“We requested that the State agency estimate the amount of rebates that the State agency could have collected if it had billed these physician-administered drugs for rebates,” the audit says. “However, because the State agency did not provide the requested information, we proceeded with our own estimates. Specifically, we estimated the minimum amount of rebates that the State agency could have collected if it had billed these drugs for rebates.”

Part of the reason behind the discrepancy comes from the state lacking a system during the audit period that would have ensured that certain medications were valid for rebates. However, when they finally put a system in place, it didn’t entirely fix the problem.

“Even after the State agency implemented the edit on October 1, 2012, this edit did not ensure that NDCs or valid NDCs were captured for all physician-administered drugs,” the audit states.

NDC, stands for National Drug Codes which are used to identify medications.

Auditors also found that it took AHCCCS nearly two years to notify the Medicaid managed-care organizations, known as MCOs, of a change in the law which was done in 2010 as part of the Affordable Care Act.

“The ACA amended section 1927 of the Act, effective March 23, 2010, to specifically require manufacturers to pay rebates on covered outpatient drugs dispensed to MCO enrollees if the MCOs are responsible for coverage of such drugs,” the audit says. “In an April 6, 2012, memo, the State agency informed its MCOs of the ACA’s rebate requirements.”

The recommendations

The Office of the Inspector General made four recommendations to Arizona to fix the issue.

  1. Bill and collect rebates from manufacturers and refund the estimated $18.3 million.
  2. Work with CMS to see if other drugs were eligible for refund and rebate an estimated $7.3 million.
  3. Strengthen internal measures to ensure that all eligible drugs are found.
  4. Ensure that all physician-administered drugs eligible for rebates are processed for rebates.

The state agreed with recommendations 1, 3 and 4 but did not agree with the second recommendation.

“The State agency commented that, pursuant to the expenditure authority granted to Arizona, the State agency was not required to collect and report utilization data and coding information for physician-administered drugs during our audit period,” the audit states.

Auditors stood behind their recommendations to the state.

“CMS officials told us that the State agency was not waived from collecting rebates both during and after our audit period for eligible drugs that were required to be billed for rebates under the Medicaid drug rebate program. In addition, the State agency has been billing manufacturers for rebates,” auditors said.

A full copy of the audit can be found here.

Jerod MacDonald-Evoy
Reporter Jerod MacDonald-Evoy joins the Arizona Mirror from the Arizona Republic, where he spent 4 years covering everything from dark money in politics to Catholic priest sexual abuse scandals. Jerod has also won awards for his documentary films which have covered issues such as religious tolerance and surveillance technology used by police. He brings strong watchdog sensibilities and creative storytelling skills to the Arizona Mirror.


  1. Why do we have to apply for rebates? wouldn’t it just be simpler to pay the after-rebate price in the first place? at least there should be a rule that says the rebate gets paid automatically when the drug is purchased. think of the waste of tax payer dollars associated with filing the paperwork for these rebates!


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