In 1991, Congress required all drug companies that sold their products through Medicaid to pay quarterly "rebates" to the states to ensure that their taxpayers obtained the best possible price for prescription drugs. The bill was passed to defray some of the costs of the $5 billion drug bill imposed on the federal and state governments under Medicaid, since there was a wide perception in Congress that drug companies were taking advantage of government inefficiency to charge high prices for their drugs.
Unfortunately, the formula used to calculate the rebate specified in the law was so complicated that nearly 80% of the rebate amounts calculated by the states during the first four years of the program were disputed by the manufacturers. Each state was required to separately bill each of more than 500 drug manufacturers the amount owed under the rebate program. The amounts varied widely across states and manufacturers, depending on the type and volume of drugs prescribed on a daily basis by thousands of independent physicians and pharmacists across the country.
The pharmaceutical industry was outraged by the new legislation, considering many of the charges illegitimate and burdensome to calculate. Drug companies, physicians and pharmacists, and state officials all doubted each others' motives, and questioned the accuracy of the data necessary to implement the program. Some manufacturers hoped to stall payment until a later Congress would cripple the rebate bill, or steamroll state Medicaid agencies by letting rebate charges build up and then offering a much lower take-it-or-leave-it bid.
By 1994, an estimated $1.2 billion in unpaid rebates had accumulated. As disputes between pharmaceutical companies and states multiplied, there were no formal mechanisms in place to resolve them. Each state handled the situation differently, leading to costly litigation and time-consuming hearings. Some manufacturers have pulled out of the Medicaid program after being unable to reach a settlement with states on their rebate liability.
After four years of various attempts to address the problem at state and federal levels, in 1994 the Health Care Financing Administration (HCFA) took the initiative to design a comprehensive system for resolving rebate disputes based on open communication and improved documentation. The resulting program, the Medicaid Prescription Drug Dispute Resolution Program (DRP), has brought stakeholders together for meetings at regional HCFA offices, allowing for multiple drug companies and state officials to cooperate on a resolution at one time.
Starting with a meeting of New England state officials and drug companies in Boston in 1994, both parties realized that by participating in the DRP they could untangle the convoluted legal and fiscal mess created by the rebate bill without capitulating to the other side or ignoring the law. By 1999, the program had resolved over $410 million of the dispute backlog (at least $180 million of which likely would have gone uncollected without DRP's intervention) and reduced the quantity of new disputes from about 80 cents of every invoiced dollar to only 10 cents. The majority of large pharmaceutical companies regularly take part in meetings facilitated through the DRP, and few have left the Medicaid program since.