Policy Clarification for the Calculation of Interest Under Section V(b) of the Medicaid Drug Rebate Agreement:

The following is an overview of the interest provisions of the Medicaid Drug Rebate program. For purposes of Section v(b) of the rebate agreement, the interest rate as specified in Section 1903(d)(5) of the Act is used. The interest rate is based on the yield of the weekly 90-day Treasury bill auction rates. The investment yield is considered the bond equivalent rate or the true discount rate.

Auctions of 90-day Treasury bills are generally held each Monday. If Monday is a holiday, the Treasury Department decides whether to hold the auction on the preceding Friday or the following Tuesday. Information on the rates will be provided by CMS to the manufacturers and State Medicaid Agencies periodically in the State Medicaid Director/Manufacturer releases to assure both parties are using the same interest rates in their calculations.

Interest is applied to disputed or unpaid amounts and late rebate payments but not to prior period adjustments of unit rebate amounts or State utilization adjustments. Interest will begin accruing on disputed or unpaid amounts 38 calendar days from the date the State mails the State utilization data, as evidenced by the postmark by the United States Postal Service or other common mail carrier on the envelope (not a postage meter stamp). Note that this is a revision to the policy described in our Release Number 15 to States. In that release, we specified that interest on unpaid amounts accrues beginning on the 31st day after the manufacturer receives utilization data from a State. We are now including 7 additional days to allow time for receipt by the manufacturer of the mailing.

This revised policy allows sufficient time for the mailing and receipt of the state utilization data while reducing costs previously associated with return receipt requests.

For documentation purposes, states must maintain a record of the date of mailing and manufacturers must maintain the envelope bearing the postmark from the state.

Interest accrues on the disputed portion of the rebate amount or on the total amount of the late rebate payment for all quarters beginning January 1, 1991 and only stops accruing on the date the check is disbursed. We consider the date of disbursement to be the date the check is mailed by the manufacturer. Interest must be collected and may not be disregarded as part of the dispute resolution process by the State or manufacturer.

The interest calculation is based on a 365-day year with simple interest applied to the average of the yield of the weekly 90-day Treasury bill auction rates during the period for which interest will be charged. (For purposes of this calculation, include the rate for the entire week if the beginning and/or ending date fall within that week.) To calculate the interest rate to be applied to disputed rebate amounts, use the following formula:

1. Total the yield of each weekly auction of 90-day Treasury bills during the period for which interest will be charged.

2. Divide the total from Step 1 by the number of rates to determine the average interest rate.

3. Multiply the average interest rate from Step 2 by the unpaid rebate amount that is outstanding to obtain the amount of interest due.

4. Divide the amount of interest due from Step 3 by 365 days to obtain the daily amount of interest due.

5. Multiply the daily amount of interest due from Step 4 by the number of days that the unpaid rebate amount is outstanding to obtain the total interest due. Interest is applied to disputed or unpaid amounts and late rebate payments but not to prior period adjustments of unit rebate amounts or State utilization adjustments. The first day of interest starts on the 38th day after the state mails the state utilization data to the labeler(s), as evidenced by the postmark.

Example:

The state sends a manufacturer utilization data postmarked 01/25/93, resulting in rebates due totaling $5,400 for the 4th quarter of 1992. Within 30 days after receipt of the data, the manufacturer pays $4,400 of that amount and disputes the remaining $1,000. Interest starts accruing on 3/4/93, which is the 38th day after the State mailed the data. Subsequently, the manufacturer decides that the State data are correct and pays the remaining $1,000 by check postmarked on 4/1/93.

In this example, interest is accrued for the period 3/4/93 through 4/1/93. The check from the manufacturer must include the principal of $1,000 plus interest calculated as follows:

Obtain yield rates (bond equivalent rates) for period involved:

    AUCTION DATES          AND           YIELD RATES

     3/01/93                    3.035%

     3/08/93                    3.043%

     3/15/93                    3.064%

     3/22/93                    3.003%

     3/29/93                    3.022%

Step 1. Total the yield rates of each weekly auction of 90-day Treasury Bill. Total: 15.167%

Step 2. Divide the total from Step 1 by the number of rates to determine the average interest rate. 15.167% divided by 5 = 3.0334% Average Interest Rate.

Step 3. Multiply average interest rate by amount of unpaid rebate. $1,000 x 3.0334% = $30.33 Amount of Interest Due.

Step 4. Divide the amount of interest due by 365 days to obtain the amount of interest due per day. $30.33 divided by 365 days = .08310 = Amount of Interest Due Per Day.

Step 5. Multiply daily amount of interest due per day by the number of days the unpaid rebate amount is outstanding. $.08309 x 29 days (3/4/93-4/1/93) = $2.41 Total Interest Due

THEREFORE, THE AMOUNT OF THE CHECK SHOULD BE $1,002.41.

To reiterate, when a manufacturer pays the state for disputed rebate amounts or late rebate payments, the manufacturer must also pay all interest due. If a manufacturer fails to reimburse the state for the interest due, the interest calculations described above will apply to the unpaid balance. The unpaid interest will be treated as principal due, and interest will begin accruing as of the date the manufacturer paid the original disputed invoice amount. Interest will continue accruing on the unpaid balance of the principal for all quarters and stop accruing the date the check is mailed by the manufacturer.

TOLERANCE THRESHOLD FOR INTEREST

In those instances where the administrative cost of recovering interest payment(s) exceeds the interest payable to the State, the State may apply the $50 tolerance level per labeler to interest payments. Application of this tolerance is optional for States; that is, any State may choose to invoice a labeler for interest amounts at or below the tolerance level. In all cases where a State chooses to apply tolerance levels, adequate documentation should be maintained by both the States and the labeler.

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Page Last Modified: 12/14/2005 12:00:00 AM
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