The Centers for Medicare and Medicaid Services says it repeatedly told Mylan that it had misclassified EpiPen for Medicaid rebate purposes, suggesting that the government-funded health program overpaid for the increasingly pricey product for years.

And, according to a CMS spokesman, Mylan is not only paying lower base rebates by classifying EpiPen as a generic drug--13% versus 23.1% for branded meds--it's also not shelling out additional rebates imposed when prices go up.

Mylan "is not paying an inflation rebate that is required by statute when manufacturers increase the prices of brand name drugs at a rate greater than the rate of inflation," spokesman Aaron Albright told FiercePharma via email.

Mylan's EpiPen price increases, which took the list price past $600 from just $100 in 2007, certainly exceed inflation. Had the company properly classified EpiPen, those rebates would have been enormous, experts tell us.

The CMS announcement comes as U.S. senators are urging the Justice Department to investigate Mylan’s EpiPen rebate payments and its classification as a “non-innovator multiple source” drug. The state of West Virginia is also probing Mylan’s relations with Medicaid, citing potential fraud.

Mylan has said that it followed all laws and regulations governing Medicaid rebates. The drug inside EpiPen’s patented autoinjector is epinephrine, a long-off-patent med that’s sold in other packaging far more cheaply than EpiPen’s current list price of $600-plus.

Experts call drug-device combinations such as EpiPen a “gray area” for Medicaid classification, because many of them marry old meds with new devices that make them exclusive products on the market.

But the CMS says, in this case, it's black and white. EpiPen was approved as a new drug by the FDA, has patent protection and doesn't have any FDA-approved generic equivalents. It doesn't meet the definition of a generic drug. It's a single-source product, the agency says.

Current regulations allow the CMS to grant a "very narrow" exception, but the agency has "made clear that this exception is not applicable to drugs that are given patent protection such as EpiPen," Albright told FiercePharma.

At least one other epinephrine product--Sanofi’s now-withdrawn Auvi-Q, EpiPen’s only direct competitor in recent years--was classified as an “innovator” product for Medicaid, according to a rebate database posted by the agency online.

Given that classification as a generic comes with lower rebates to Medicaid--13% compared with 23% for branded drugs--Mylan would net higher sales on each EpiPen under that category than it would if the product were categorized under the “innovator” tag. Generic drugs also are not subject to the price-increase rebates on branded meds, at least until 2017.

One state, Minnesota, estimates it has overpaid for EpiPen by $4.3 million so far this year, CNBC reported, as cited by Wells Fargo analyst David Maris.

“If this is true and indicative of the relative costs at other states, we believe the misclassification could be sizable for Mylan, as Minnesota represents less than 2% of the U.S. population,” Maris said in a Thursday investor note.

Sen. Amy Klobuchar first raised the issue of EpiPen’s Medicaid classification and rebates last month, and on Wednesday, she and fellow senators Chuck Grassley and Richard Blumenthal, all members of the Senate Judiciary Committee, asked U.S. Attorney General Loretta Lynch to investigate whether Mylan misclassified the product deliberately. The Justice Department is expected to respond by Oct. 12.

“Companies can reap huge profits, at the expense of the states and taxpayers, by misclassifying innovator drugs,” the senators’ letter stated.

The CMS says that drugmakers that don't accurately report product and pricing data to the rebate program and pay "insufficient rebates" could face penalties under the rebate agreement they're required to make with the Department of Health and Human Services. They could also face liability under the False Claims Act, the agency said, and other government action.

Meanwhile, Mylan is required to hand over EpiPen documents to the House Committee on Oversight and Government Reform in the coming days, after a hearing last week in which CEO Heather Bresch defended the company’s EpiPen pricing, but not to the panel’s satisfaction.

"We didn't believe Mylan's numbers last week during their CEO's testimony, and we don't believe them this week either, which is why we gave them 10 days from the date of our hearing to produce their internal files," the committee’s ranking member, Rep. Elijah Cummings, said Monday.

Grassley had demanded answers to a slate of EpiPen questions as well, and last week said the company had responded only partially. Some of Grassley’s queries were rather specific, but the answers, by contrast, weren’t specific enough, the Republican senator said.

“[I]t’s an incomplete response and wouldn’t satisfy my constituents who are upset about the EpiPen price increases,” Grassley said in a Friday statement. “It doesn’t provide the full picture that I requested, and it doesn’t answer all of my questions.”

Related Articles:

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Lawmakers smack Mylan CEO for pay, plane and pricing at EpiPen hearing

Mylan's EpiPen pricing leads to Medicaid fraud probe by West Virginia AG

After Grassley decries 'incomplete response,' Mylan agrees to pony up EpiPen docs

Editor's note: This story was updated with comments from the CMS.