Policy References:

The Omnibus Budget Reconciliation Act of 1990 (OBRA '90) created the Medicaid Drug Rebate Program (Program). The Program requires a drug manufacturer to enter into and have, in effect, a national rebate agreement with the Secretary of the Department of Health and Human Services (HHS) for states to receive Federal funding for outpatient drugs dispensed to Medicaid patients.

Process and Document Preparation:

The Program provides savings to state Medicaid programs through rebates for outpatient prescription drugs. The Program is administered by the Centers for Medicare & Medicaid Services' Center for Medicaid and State Operations (CMSO). A drug manufacturer must sign an agreement in order to have its drugs covered by Medicaid.

The rebates are based on two prices per drug that manufacturers report to the Centers for Medicare and Medicaid Services (CMS): best price and Average Manufacturer Price (AMP). These manufacturer-reported prices are based on the prices that manufacturers receive for their drugs in the private market and are required to reflect certain financial concessions such as discounts. The statute governing the Program and the standard rebate agreement that CMS signs with each manufacturer define best price and AMP, and they specify how those prices are to be used to determine the rebates due to states.

Manufacturers pay rebates to states on a quarterly basis. They are required to report best price and AMP for each drug to CMS within 30 days of the end of each calendar quarter. Once CMS receives this information, the agency uses the rebate formula to calculate the unit rebate amount for the smallest unit of each drug, such as tablet, capsule, or ounce of liquid. CMS then provides the unit rebate amount to the states. Each state determines its Medicaid utilization for each covered drug and reports this information to the manufacturer within 60 days of the end of the quarter. The manufacturer then must compute and pay the rebate amount to each state within 30 days of receiving the utilization information. A specific percentage of rebate revenue is shared with the CMS.

The Program is administered by the Department of Health (DOH). The amounts invoiced, collected and disputed by the manufacturers for the Program are provided by DOH. A receivable and an allowance for uncollectible accounts for the amount owed to the State from the manufacturers and a reduction in Federal grants for the amount owed back to the Federal government are reported in the financial statements.

Guide to Financial Operations

REV. 01/11/2021