MedCity Influencers, BioPharma

3 Steps Drug Manufacturers Can Take To Mitigate Revenue Loss From Drug Rebate Noncompliance

Drug manufacturers can’t wave a magic wand and streamline government drug discount programs. Nonetheless, there are actions manufacturers can take to mitigate the impact of noncompliant rebates

The Medicaid Drug Rebate Program (MDRP) provides a 38-day window for Medicaid rebates within which the drug manufacturer must either pay the invoice or dispute it and pay less. Medicaid spent roughly $80.6 billion on outpatient prescription drugs in fiscal year 2021, while collecting $42.5 billion in rebates.

It’s extremely difficult, however, for manufacturers to make rebate determinations within the allotted time frame because of the sheer volume of prescriptions written in the U.S. Total retail prescriptions filled reached 4.76 billion in 2022, or 13.04 million per day.

Drug manufacturers try to organize this constant firehose of Medicaid invoices and rebate requests by using Excel spreadsheets and manually scrubbing the data before trying to find noncompliance through automated rules. This is an arduous process that consumes a lot of time and resources.

First, manufacturer employees lose untold hours to the time-draining task of obtaining claim level data (CLD). Once manufacturers have this rebate data, it needs to be organized and normalized because data input requirements vary by state. Some states, for example, fill in different data fields than other states; likewise, states will use different formats to present the data.

Consequently, pharmaceutical employees struggle to easily port this data into legacy software systems, which is why they resort to external Excel spreadsheets. Compounding these challenges are time lags, as rebates related to dispenses under managed Medicaid programs (MCO) may not show up on MDRP invoices for several quarters.

Generally what drug manufacturers do is what is referred to as “pay and chase.” They’ll pay the invoice even if they can’t manually reconcile it within 38 days. (Failure to pay within this time frame will result in an interest penalty for a manufacturer.) But if drug manufacturers eventually determine they paid on noncompliant discounts, they must try to recover the money that’s already been paid to the state. This can be very hard to do.

The drug discount system in practice

Drug manufacturers receive quarterly invoices from multiple sources, including every Medicaid program in each state for different labelers. (Until the pandemic, most of this process was paper based.) These invoices are summary-level; imagine going to dinner and getting a check that lists a line for “food” and a line for “beverages.” All these invoices must be entered into the manufacturer’s electronic system for processing.

If manufacturers desire itemized invoices, they must request CLD and enter information into their systems all over again – as the clock ticks away on the requisite window. Now, manufacturers must slog through itemized invoices coming from hundreds of sources to identify rebates. Should they identify questionable claims, they can file a formal dispute by submitting a Reconciliation of State Invoice (ROSI)/Prior Quarter Adjustment Statement (PQAS) form with data at the summary level, as well as a dispute report with data at the claims level. Tick, tick, tick.

Then payment is due, so manufacturers generate a payment packet with the ROSI/PQAs/Dispute Report and more attached. This documentation then transitions from a revenue management system (in the case of large manufacturers) to an ERP system, where a check is cut from the accounts payable module.

Revenue drains 

Noncompliant rebates are a costly problem, both for manufacturers and our healthcare system, which must absorb the costs of unwarranted discounts. In the U.S., drug discounts reached more than $250 billion in 2022. Estimates suggest that noncompliant discounts, such as 340B duplicate discounts, account for 5% of the drug discounts being paid, or $12.5 billion annually. Added to that cost is the time and effort expended by manufacturer employees to process and challenge rebate claims.

Here’s another problem: There’s no statute of limitations in MDRP. So, let’s say a state gets audited, and it’s determined the state failed to request $10 million in Medicaid drug rebates due in 2016. Without a statute of limitations, that state is allowed under law to request payment today for a rebate opportunity from seven years ago. The manufacturer under law must review this rebate request from the mists of time and, if valid, issue payment. (Here’s an example of a federal audit of a state’s Medicaid program that triggered a finding recommending the state collect $5.9 million in rebates from manufacturers, with the funds to be returned to the federal government.) It doesn’t matter if the manufacturer is publicly traded and long ago closed its books on 2016; because it lacks the tools to effectively challenge these newly discovered rebates, it has no choice but to pay up.

What drug manufacturers can do

Drug manufacturers can’t wave a magic wand and streamline government drug discount programs. Nonetheless, there are actions manufacturers can take to mitigate the impact of noncompliant rebates:

 – Check itemized receipts. Finance workers always check itemized receipts. Manufacturer operations teams responsible for processing Medicaid invoices should do likewise. It’s hard work but essential.

 – Stop doing pre-dispute and switch to formal dispute. Pre-dispute is an outmoded process for settling rebate questions. The manufacturer pays the full invoice and afterwards forwards paperwork to the state or covered entity to “work out” the difference – which may not ever happen. Then we’re back to pay and chase.

Cumbersome as it may be, the formal dispute process is more effective in helping manufacturers avoid paying out for noncompliant rebates. Most significantly, for a dispute to be considered official by the Centers for Medicaid and Medicare Services (CMS), it must be formally submitted via a ROSI/PQSA form.

Another benefit of formal disputes is they create a paper trail for manufacturers’ own record-keeping and offer government agencies visibility regarding the frequency of these disputes.

 – Assess the probability of payment. How do manufacturers think about drug discount rebates from an accounting standards perspective? What is the probability that they have to pay, or that their dispute is successful?

Drug manufacturer finance pros should gauge the likelihood of different rebate outcomes through a data analysis. Leveraging the formal dispute process allows manufacturers to assess the probability they would have to pay out versus having to collect under the pre-dispute “pay and chase” model. These assessments underscore the importance of manufacturers having accurate data to back up their positions regarding specific rebate invoices.


Under the current drug discount programs, it is difficult for manufacturers to determine within the 38-day MDRP window whether a rebate request is compliant. Further, the process of validating rebate requests is slow and inefficient, wasting valuable internal resources. By diligently checking itemized invoices, using the formal dispute process, and assessing the probability of payment for specific categories of invoices, manufacturers can better manage their drug rebate processes and minimize revenue leakage.

Photo: Devrimb, Getty Images

Micah Litow is president and chief operating officer of Kalderos, a data infrastructure and analytics company, and creator of the world’s first Drug Discount Management platform.

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