Report 95109 Summary - March 1996

Department of Health Services: Has Not Collected $40 Million in Supplemental Rebates From Drug Manfacturers


We found that:

Results in Brief

The Department of Health Services (department) has not collected approximately $40 million in supplemental rebates owed to the State and the federal government by drug manufacturers because it has not adequately administered the California Medical Assistance Program (Medi-Cal) drug rebate program (program). The department does not calculate and bill specific supplemental rebate amounts owed by manufacturers, and it has failed to monitor and track supplemental rebate payments and sanction manufacturers who do not remit the required amounts owed to the State and the federal government. As a result, the State has not received $20 million in supplemental rebates, and the federal government has not received its $20 million share in supplemental rebates.

The department prepares various types of documents related to its reviews of drugs to be added to the Medi-Cal List of Contract Drugs (LCD). Although the department has indicated that it follows the criteria stated in the Welfare and Institutions Code when conducting its reviews, it does not uniformly prepare and retain its documents in a manner that clearly demonstrates that the criteria were the bases for its decisions.

The 1994 legislation authorizing the supplemental rebate program has not significantly reduced the availability of drugs to Medi-Cal recipients. Because some drug manufacturers were unwilling to participate in the supplemental rebate program, only 16 drugs were suspended from the LCD. In addition, the administrative costs of the supplemental rebate program are far exceeded by the potential revenue from the program. The annual required costs to administer the program are approximately $5 million, but the potential revenue for fiscal year 1994-95 was approximately $70 million.


To properly administer the program, the department should:

Calculating a specific dollar amount on the invoice that the department sends to a manufacturer;

Monitoring the accuracy of payments;

Tracking manufacturers who have not paid; and

Sanctioning manufacturers for nonpayment or for late or erroneous payments.

Use ingredient cost or another pricing base it already possesses as the statutorily approved pricing base if using the average manufacturer price for billing is impractical;

Suspend drugs from the LCD that are produced by manufacturers who do not pay the rebate; and

Charge interest on late payments.

Agency Comments

The department agrees that it has not received rebates from a large number of drug manufacturers and indicated that it intends to seek legislative authority to sanction drug manufacturers who do not pay or consistently make late payments. Although it is not convinced of the accuracy of the supplemental rebates owed, the department states that it is not in a position to specify a more accurate amount because of deficiencies in its payment tracking system.