The Medicaid Drug Rebate Program (MDRP) is a cornerstone of pharmaceutical pricing regulation, requiring drug manufacturers to provide rebates to Medicaid in exchange for coverage of their products. Established under the Omnibus Budget Reconciliation Act of 1990 (OBRA '90) and administered by the Centers for Medicare & Medicaid Services (CMS), the MDRP ensures Medicaid programs pay competitive prices for prescription drugs while presenting compliance challenges for manufacturers.

Given the strict reporting requirements, complex rebate calculations, and evolving regulatory landscape, manufacturers must take a proactive approach to ensure compliance. Failing to meet MDRP obligations can lead to significant financial penalties, enforcement actions under the False Claims Act (FCA), and exclusion from federal healthcare programs. With increasing scrutiny on drug pricing, it is more important than ever for manufacturers to understand MDRP compliance risks and implement effective compliance strategies.

Understanding MDRP Compliance Requirements

To participate in the MDRP, manufacturers must sign a National Drug Rebate Agreement (NDRA) with CMS, which obligates them to report pricing data and pay rebates to state Medicaid programs. The key pricing metrics manufacturers must report include Average Manufacturer Price (AMP) and Best Price (BP), which are used to calculate rebate amounts.
For brand-name drugs, manufacturers must provide Medicaid with a rebate equal to the greater of 23.1% of AMP or AMP minus BP. Additionally, manufacturers must pay inflation-based penalties if AMP increases exceed the rate of inflation (as measured by the Consumer Price Index for Urban Consumers (CPI-U)). For generic drugs, the rebate percentage is lower, but inflation-based penalties still apply.

One of the most challenging aspects of MDRP compliance is Best Price reporting, which requires manufacturers to ensure Medicaid receives the lowest price offered to any commercial payer. This includes discounts, rebates, and chargebacks, creating potential compliance risks if pricing is not carefully tracked.

MDRP compliance also intersects with the 340B Drug Pricing Program, requiring manufacturers to ensure that Medicaid does not claim rebates on drugs already sold at 340B-discounted prices. Duplicate discount violations can lead to repayment obligations, civil monetary penalties, and regulatory scrutiny.

Beyond federal rebate requirements, some states negotiate supplemental rebate agreements (SRAs) with manufacturers, adding another layer of complexity. Manufacturers must manage these state-specific agreements carefully to avoid inadvertent rebate overpayments or contractual disputes.

Data Integrity and Pricing Accuracy

Given the high volume of transactions and multiple layers of discounts, rebates, and chargebacks, maintaining accurate AMP and Best Price calculations is a significant challenge. Specialty pharmacy arrangements, limited distribution networks, and evolving contracting models add to the complexity. Errors in pricing calculations can lead to audit findings, CMS penalties, and even False Claims Act liability.

Inflation-Based Rebates and Price Increases

With inflation-based penalties increasing MDRP liabilities, manufacturers must carefully evaluate pricing strategies to prevent excessive rebate obligations. Companies that raise drug prices without considering Medicaid rebate implications may find themselves paying back more than they earn in sales.

Regulatory Uncertainty and Policy Changes

MDRP regulations are frequently updated, requiring manufacturers to stay ahead of policy changes. Recent updates include the CMS Final Rule on MDRP & Value-Based Contracting (2021), which allows manufacturers to incorporate value-based pricing arrangements into MDRP calculations, and the Inflation Reduction Act (IRA), which introduced new drug pricing reforms that impact Medicaid rebates.

Additionally, state Medicaid agencies are becoming more aggressive in auditing manufacturer rebate payments, leading to disputes over pricing data, contract terms, and rebate eligibility. Manufacturers must ensure compliance with both federal and state Medicaid rebate obligations.

False Claims Act (FCA) Risks and Government Enforcement

MDRP compliance violations can trigger False Claims Act (FCA) liability, leading to whistleblower lawsuits, government investigations, and multimillion-dollar settlements. The Department of Justice (DOJ) and state attorneys general have aggressively pursued FCA cases related to Medicaid drug pricing, with manufacturers facing allegations of:
 

• Misreporting AMP or Best Price, leading to underpaid rebates.
• Failing to pay inflation-based penalties.
• Structuring contracts to avoid Medicaid rebate obligations.
• Allowing duplicate discounts on 340B-purchased drugs.
 

Given the increased scrutiny of drug pricing, MDRP compliance must be treated as a top legal and financial priority. Even inadvertent pricing errors can lead to severe enforcement actions, making strong internal compliance programs essential.

Strengthening Internal Pricing Policies

Manufacturers should establish clear methodologies for AMP and Best Price calculations, ensuring all transactions, discounts, and rebates are correctly accounted for. Regular compliance training for pricing, finance, and legal teams is essential to avoid errors that could lead to non-compliance.

Investing in Technology and Data Analytics

Given the complexity of MDRP pricing data, manufacturers should invest in automated pricing systems that track transaction-level data across all payer segments. 340B tracking solutions should also be implemented to prevent duplicate discount violations.

Conducting Internal Compliance Audits

Regular internal audits can help manufacturers identify discrepancies early and submit corrected pricing data before CMS or state Medicaid agencies intervene. Engaging external compliance experts for independent pricing reviews can further strengthen MDRP compliance efforts.

Contract Structuring and Strategic Pricing

Manufacturers should carefully structure PBM, wholesaler, and payer contracts to minimize unintended Best Price implications. Additionally, companies should evaluate how their rebate agreements impact MDRP exposure, particularly in light of state-level supplemental rebate demands.

Monitoring Regulatory Developments

MDRP rules are constantly evolving, making it essential for manufacturers to track CMS guidance, legislative changes, and enforcement trends. Participating in industry trade groups and compliance working groups can help manufacturers anticipate regulatory shifts and adjust their compliance strategies accordingly.

How We Can Help

Navigating MDRP compliance requires a deep understanding of Medicaid pricing regulations, rebate calculations, and government enforcement trends. At Buchanan Ingersoll & Rooney, our Life Sciences and Healthcare attorneys have extensive experience advising pharmaceutical manufacturers on MDRP compliance, government pricing strategies, and Medicaid rebate audits.

Our team provides:

• MDRP Compliance Audits & Pricing Reviews – Ensuring accurate AMP, Best Price, and inflation penalty calculations to mitigate compliance risks.
• Regulatory Guidance & Policy Interpretation – Keeping manufacturers ahead of CMS rule changes and state Medicaid requirements.
• Medicaid Rebate Dispute Resolution – Assisting in challenging rebate calculations and resolving disputes with CMS and state Medicaid programs.
• False Claims Act Defense & Government Investigations – Defending manufacturers in FCA investigations related to MDRP pricing issues.
• 340B & Duplicate Discount Compliance – Implementing tracking systems and compliance protocols to prevent duplicate discount violations.
• Contract Structuring & Pricing Strategy – Advising on PBM, wholesaler, and payer contracts to align with MDRP requirements.

With increasing government scrutiny on drug pricing transparency and rebate compliance, manufacturers cannot afford to take a reactive approach. Our team at Buchanan Ingersoll & Rooney is committed to helping pharmaceutical companies navigate these complex challenges, mitigate compliance risks, and develop sustainable pricing strategies that align with regulatory requirements.

If you need guidance on MDRP compliance, government pricing, or rebate disputes, contact us today to discuss how we can support your organization.

This article was co-authored by Dae Y. Lee, Shareholder, Buchanan, and Natalie C. Oehlers, Associate, Buchanan.