U.S. shelled out $1.3B on EpiPen, and Mylan could face $400M-plus in back rebates

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Mylan did overcharge Medicaid for EpiPen for years, two congressional investigators say--more and more so as the company hiked prices past $600 over four years. The question is, how much might Mylan have to pay to settle up?

Quite a bit, analysts say after running the numbers. Mylan could face a $400 million-plus liability for unpaid rebates, Bernstein analyst Ronny Gal wrote in an investor note. With penalties of $100,000 per infraction under Medicaid rules, perhaps even more.

The liability estimates follow a new letter from the Centers for Medicare and Medicaid Services that put some numbers to questions about EpiPen spending and rebates. Medicaid has spent nearly $800 million on EpiPen since 2011, or $960 million less rebates, and those rebates were lower than they should have been, the agency wrote. Mylan had classified the product as a generic drug, which are subject to 13% rebates; instead, EpiPen should have been on the hook for 23.1% rebates as a branded drug, plus additional paybacks for inflation-beating price hikes.

Overall, CMS laid out almost $1.3 billion on EpiPens for Medicare and Medicaid patients from 2011 to 2015, the agency said. Spending on the product grew to $487 million in 2015 from $86 million in 2011, before rebates.

Questions about Mylan’s rebates to Medicaid surfaced in August when Sen. Amy Klobuchar wrote CMS for numbers, but the issue drew widespread attention last week when a handful of lawmakers asked the Justice Department to investigate. Since then, the Centers for Medicare and Medicaid Services weighed in with its own determination, countering Mylan’s contention that it had properly handled its Mediaid payments.

To justify its lower rebates, Mylan had been relying on a 1997 letter that deemed EpiPen a “non-innovator” drug for rebate purposes--despite the fact that CMS had told the company otherwise. Since Mylan bought the product from Merck & Co. in 2007, when the list price was just $100, the agency “expressly told Mylan that the product is incorrectly classified,” CMS Acting Administrator Andrew Slavitt said in the letter.

“This incorrect classification has financial consequences for the amount that federal and state governments spend because it reduces the amount of quarterly rebates Mylan owes for EpiPen," Slavitt said.

CMS’ letter about EpiPen’s misclassification set off a round of new criticism for Mylan and its EpiPen price increases. “Today’s letter is more evidence that while Mylan irresponsibly raised the price of EpiPen, they were also bilking taxpayers out of millions of dollars,” according to a statement from ranking committee member Ron Wyden (D-OR) and House Energy and Commerce ranking member Frank Pallone, Jr. (D-NJ).

“Essential medicines like EpiPen are increasingly out of reach for families across the nation due to unjustified price hikes,” the statement said, “and it’s high time for drug companies to take responsibility for their actions. We will ensure taxpayers get their due.”

Slavitt wouldn’t say how much Mylan might owe because of the misclassification. That fell to Gal and other analysts to calculate. Evercore ISI analyst Umer Raffat, for one, said the liability the company faces is up to three times “the several hundred million” investors had previously estimated.

Addressing CMS’ response to her demands for answers on Medicaid rebates, Klobuchar said Wednesday, “we have yet to get information on how much money the misclassification of Mylan has cost taxpayers. In Minnesota, the Department of Human Services has estimated that this misclassification will cost our state more than $4 million in overpayment in just one year.”

Gal pointed out that it’s premature to judge Mylan guilty, calling it “a bit convenient” that CMS has decided Mylan was wrong for years, and yet the agency did nothing about it over that time. But Mylan has had plenty of time since 2007 to review its regulatory status and it was “a business mistake to leave this issue lingering,” he said, particularly if it had been notified by CMS.

Similarly, it seems management made an error of judgment in not realizing the risk of public rebuke to its pricing strategy (as high deductible plans became more common), Gal said. “Mylan’s argument to shareholders (as we understood it) for the last year has been – you may not like our governance, but we are great operators. This argument looks weaker now.”

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