The Office of the Inspector General of the Health and Human Services Departments said last week that it will begin investigating whether the Centers for Medicare & Medicaid Services properly monitors its Medicaid Drug Rebate Program. The investigation comes after CMS reported that Mylan (NSDQ:MYL) underpaid Medicaid by not paying appropriate rebates. The Canonsburg, Penn.-based company said it would pay $465 million to settle the claims with the Justice Department, but the federal government has not confirmed such a deal.

The federal watchdog’s office will also investigate whether other pharmaceutical companies have complied with the drug rebate policies or have similarly underpaid Medicaid.

Companies pay rebates to CMS in exchange for Medicaid coverage and the rebates are lower for generic products. Companies pay 13% for generics, compared to 23% for a brand-name product. Mylan classified its EpiPen emergency allergy device as a generic, but CMS reported that it “has, on multiple occasions, provided guidance to the industry and Mylan on the proper classification of drugs and has expressly told Mylan that the product is incorrectly classified.”

CMS also said that once companies are warned that their products are improperly classified, it is then the company’s responsibility to reclassify the device or drug. But some lawmakers are concerned that without proper oversight, companies could take advantage of the discrepancy, potentially costing taxpayers millions of dollars.

Last week, Inspector General Dan Levinson wrote to Sen. Chuck Grassley (R-Iowa), chair of the Senate Judiciary Committee, and said that his agency will look at the rebate data reported by companies, the process by which manufacturers determine rebates and how CMS prevents inappropriate payments for unapproved drugs.

“HHS OIG shares the concerns expressed … regarding CMS’s oversight of the Medicaid Drug Rebate Program to ensure the correct classification of drugs, including EpiPen, and address the potential consequences to State Medicaid programs and beneficiaries,” Levinson wrote.

“The more we learn about the misclassifications, the more we know this program is in dire need of proper oversight,” Grassley said in a statement. “It’s unclear whether CMS took any action between 2009 and now to get the EpiPen classification back on track after being told about the misclassification. If CMS did nothing, that’s a dereliction of duty to the taxpayers. The OIG is right to look at this program and help determine whether it works or doesn’t work as intended.”