Litigation involving drug price reporting under the Medicaid Drug Rebate Program (MDRP)1 has been very active in 2022. Most recently, on August 3, 2022, an Illinois federal jury levied a $61 million verdict against Eli Lilly and Co. for erroneous price reporting practices under the MDRP (discussed below). This follows a number of settlements in 2021 with the U.S. Department of Justice (DOJ) related to the MDRP.
The MDRP is implemented by the U.S. Department of Health and Human Services (HHS) and involves oversight from the Centers for Medicare and Medicaid Services (CMS) and state Medicaid agencies, as well as active participation from drug manufacturers. The MDRP requires drug manufacturers to pay a rebate for all drugs dispensed to Medicaid beneficiaries. The required rebate is set by statute and is intended to ensure the net price of a drug for Medicaid beneficiaries is either equal to (a) the “Best Price” for the drug available in the private market or (b) a percentage of the drug’s “average manufacturer price” (AMP) — whichever gives Medicaid the lowest price. Brand name drugs require the greatest rebate and generics the lowest. The rebate is designed to insulate the Medicaid program from drug price increases that might outpace inflation.
CMS uses data reported by drug manufacturer to calculate what is called a “unit rebate amount” (URA). Manufacturers pay states rebates for each unit of the drug on the basis of the URA. Misreported prices run the risk of federal healthcare programs (such as Medicare, Medicaid, the 340B Program, Veteran Health Administration, etc.) overpaying for drugs, or manufacturers underpaying rebates. Failing to report altogether or improperly reporting drug pricing, sales, and product information to CMS could result in substantial liability for manufacturers under the False Claims Act (FCA) and can result in Civil Monetary Penalties.2
In 2020, the MDRP was subject to substantial reforms.3 Notable changes, among others (effective January 2022) include:
- Allowing manufacturers to report varying Best Prices4 for single doses and allowing manufacturers to restate AMP and BP, even outside the three-year restatement window, when a change is the result of pricing from a so-called “value-based purchasing arrangement” or “VBP arrangement;”
- Clarifying that VBPs may qualify as a “bundled sale” for purposes of calculating AMP and BP. Manufacturers can “choose not to report [using the] multiple Best Prices approach for their VBP program, and follow existing rules, or, as appropriate, choose another approach to determining Best Price (and AMP) such as the bundled sales approach.” CMS acknowledged that many manufacturers already treat VBP arrangements as bundled sales “under the reasonable assumption that a VBP arrangement represents a type of performance requirement.” In the final rule, CMS revised the definition of bundled sale to explicitly state that VBP arrangements may qualify as a bundled sale;5
- Expanding the “new formulations” subject to the line extension alternative rebate. “New formulation” is defined to mean “a change to the drug, including, but not limited to: an extended release formulation or other change in release mechanism, [or] a change in dosage form, strength, route of administration, or ingredients;”6 and
- Banning the blending of AMP reporting for brand name drugs and authorized generics sold under the same New Drug Application. CMS now requires a separate AMP calculation for each drug product — that is, one AMP for the brand drug, and one AMP for the authorized generic product, and the AMP for the brand drug should always exclude sales of the authorized generic product, including transfer sales of the brand name drug to the manufacturer of the authorized generic.
Manufacturers must pay close attention to not only their existing price reporting obligations, but also to ongoing developments in the MDRP to ensure they do not inadvertently run afoul of these complex regulations.
False Claims Act Enforcement
FCA cases predicated on price reporting issues are not new.8 At the heart of these cases is the idea that a drug manufacturer has intentionally underreported, mis-reported, or neglected to report accurate and appropriate drug pricing data, as mandated by statute; and as a result, the government overpaid for drugs for Medicare, Medicaid, and other government program beneficiaries. Recent settlements and existing ongoing litigation suggest that manufacturers need to remain vigilant about staying up-to-date on price reporting compliance requirements.
Below is a summary of two recent price reporting FCA settlements against pharmaceutical manufacturers and current pending price reporting FCA litigation all brought by the same relator, Ronald J. Streck. We have also included a summary of a recent DOJ settlement with Mallinckrodt Pharmaceuticals over violations of the MDRP and end with a summary of a recent decision by the U.S. Court of Appeals for the Fourth Circuit involving Best Price calculations.
1. Streck MDRP False Claims Act Litigation and Settlements
Since 2008, Ronald J. Streck, a lawyer and pharmacist with a background in negotiating drug distribution agreements, has filed and settled multiple qui tam suits against drug manufacturers for violations of the MDRP. Many of the allegations at the center of the FCA litigation involve the delineation between (a) a bona fide service fee paid by the manufacturer to a distributor or wholesaler in exchange for administrative services performed on the manufacturer’s behalf (“service fees”) and (b) a discount the manufacturer provides a distributor or wholesaler off the price of the product. The MDRP regulations essentially require that manufacturers should not take service fees into account when calculating AMP, but should take discounts into account.9
The Streck cases discussed below and those from years past highlight the courts’ expectation for manufactures to know what constitutes a “service fee.”10 In many of the Streck cases, manufacturers allegedly reduced AMP and Medicaid rebate payments by improperly including in their AMP calculations service fees paid to distributors as discounts.
Eli Lilly and Company Litigation
On February 28, 2022, the U.S. District Court for the Northern District of Illinois ruled on several motions involving allegations against Eli Lilly and Co. (Lilly) in connection with MDRP price reporting.11 Mr. Streck alleges Lilly violated the FCA and state false claims provisions by failing to accurately consider service fees in the reporting of AMP, resulting in reducing the company’s Medicaid rebate obligations. Among other things, the court granted Mr. Streck partial relief on his motion for summary judgment, holding that “Lilly’s AMP calculations and related certifications were factually and legally false,” but rejected Mr. Streck’s arguments as to the elements of knowledge, materiality, and causation, allowing these issues to go to the jury. On August 3, 2022 the jury penalized Lilly with a $61 million verdict after finding the company knowingly underpaid rebates to the Medicaid program which resulted in an intentional, material false claim, that caused government losses under the MDRP. It is not yet known if Lilly will appeal the verdict, but an appeal is likely.12
Astellas Pharma U.S., Inc. (September 2021 Settlement)
According to a qui tam lawsuit, filed by Mr. Streck on behalf of the U.S. government, Astellas Pharma U.S., Inc. (Astellas) allegedly failed to properly report the AMP for its covered outpatient drugs under the MDRP between October 2007 and March 2016. The core of the Mr. Streck’s allegations stem from Astellas’ alleged practice of treating compensation provided to wholesalers under wholesaler agreements as discounts or price reductions, rather than bona fide service fees, when calculating and reporting AMPs to CMS. This misconduct allegedly allowed Astellas to underpay their quarterly rebates, causing the federal government to overpay for Astella’s state payments to the Medicaid program. The DOJ declined to intervene in the lawsuit.
To resolve these allegations, Astellas agreed to pay $18 million ($10 million to the federal government and $8 million to various state governments) as well as $950,000 in attorney’s fees, costs and expenses.13
Bristol Myers Squibb Co. (March 2021 Settlement)
In a qui tam suit resolved in April 2021, Mr. Streck brought similar allegations against Bristol Myers Squibb Co. (BMS) for price reporting misconduct. According to Mr. Streck’s complaint, between 2007 and 2013, BMS allegedly inappropriately treated service fees paid to wholesalers as price reductions when reporting AMP to CMS. Further, the suit alleges that the wholesalers would pay BMS by, in-turn, offering credit or reducing service fees when the manufacturer increased drug prices. BMS, however, allegedly would not report this additional value. The DOJ declined to intervene in the lawsuit.
To resolve these allegations, BMS paid a total of $75 million. Out of this settlement, $45 million went to the federal government, while the remaining $34 million was split between the fifty states and the District of Columbia.
2. Mallinkrodt MDRP Settlement
According to a March 2022 DOJ settlement with pharma company, Mallinckrodt ARD LLC (Mallinckrodt) and its predecessor Questcor Pharmaceuticals Inc. (Questcor), the defendants allegedly underpaid Medicaid rebates and also collected illegal Medicare Part D patient copay subsidies for its use of Acthar Gel (Acthar), and as a result, allegedly violating the False Claims Act.14
DOJ alleged that from 2013 until 2020, Mallinckrodt misreported the base date AMP15 for Acthar to the MDRP, which had the result of reducing the amount of rebates Mallinckrodt paid to the program by $650 million. Allegedly Mallinckrodt began paying rebates for Acthar in 2013 as if Acthar was a “new drug” first marketed in 2013, rather than a drug that had been approved since 1952, which ignored all pre-2013 price increases when calculating and paying Medicaid rebates for Acthar from 2013 until 2020.16 CMS notified Mallinckrodt in 2016 and 2017 that the company had been reporting an inaccurate base date AMP and directed the company to correct its price reporting, but the company failed to do so. In the settlement, Mallinckrodt ultimately acknowledged the 1952 FDA approval of Acthar and corrected the base date AMP.
To settle the matter, Mallinckrodt paid $234.7 million to resolve the MDRP rebate allegations. The settlement also required Mallinckrodt to enter into a five-year corporate integrity agreement (CIA) with the HHS Office of Inspector General. The CIA contains drug price transparency and monitoring provisions focused on Medicaid rebate and patient assistance program activities.17
3. Allergan Best Price Stacking MDRP Litigation
The Fourth Circuit recently issued a 2-1 decision affirming the dismissal of an FCA qui tam action brought against Allergan in relation to Allergan’s MDRP price reporting obligations.18 The complaint alleged that Allergan violated the MDRP statute by not “stacking” discounts given to separate customers when calculating its Best Price (explained below). The court held that the complaint failed to allege that the defendants acted “knowingly” as defined under the FCA, and therefore could not be held liable under the FCA, because Allergan’s reading of the MDRP statute as to the BP calculation “was at the very least objectively reasonable” and Allergan “was not warned away from that reading by authoritative guidance.”
In the absence of guidance to the contrary, CMS allows drug companies to make “reasonable assumptions” when calculating average sales prices and Best Prices for drugs under the MDRP. When calculating Best Price, often this means that companies will aggregate price concessions and discounts they offer separate customers for the same drugs. For example, if a drug company gives (a) a prompt-pay discount to a wholesaler and (b) a separate rebate to a pharmacy for the same drug, the relator asserted in Allergan that a company should “stack” these rebates – i.e. calculate the Best Price for the drug based on a combined price reduction that accounts for the aggregate of both discounts. Allergan, however, did not aggregate the stacked discounts; instead, Allergan calculated Best Price based on the Best Price it gave to each single entity in the distribution chain.
The court analyzed the MDRP statute and found that its plain language aligned with Allergan’s interpretation and “was not only objectively reasonable but also the most natural.” The court went on to say: “We cannot accept the idea that a defendant acts ‘knowingly’ when its reading of a statute is both objectively reasonable and in fact the best interpretation; when [CMS’s] regulation mirrors, rather than repudiates, that interpretation; when [CMS] resists attempts to get it to clarify its view; and when [CMS] explicitly invites regulated parties to make reasonable assumptions.” In reaching this holding, the court applied the Supreme Court’s scienter (knowledge) standard set forth in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), as five other federal circuit courts have done.19 The one dissenting judge argued that Safeco should not apply to FCA claims, but that even under that standard, the relator had plausibly alleged an FCA claim.
Managing Price Reporting Risk
There are a number of steps drug manufacturers can take in light of recent enforcement to ensure their price reporting practices are compliant and up-to-date:
- Manufacturers should develop and regularly reassess written policies and procedures that address current service fees and ensure that any new service fees meet the CMS and Veterans Affairs definition of which fees can be excluded;20
- Include regular government affairs updates on both federal and state drug pricing developments during Pricing Committee and Compliance Committee meetings;
- Conduct regular price reporting audits to ensure accurate reporting;
- Vet all market access contracts, rebate agreements, inflation agreements, and other similar types of agreements with counsel to ensure compliance with drug price reporting and calculation requirements; and
- Routinely update internal Reasonable Assumptions documents and check in with any third-party price reporting vendors who assist with maintaining Reasonable Assumptions documentation.
Price reporting compliance for federal healthcare programs such as the MDRP will continue to be a source of government enforcement. Goodwin’s attorneys will continue to monitor drug pricing developments and report on them.
142 U.S.C. 1396r-8 § 1927(a).
2Special Advisory Bulletin, Average Manufacturer Price and Average Sales Price Reporting Requirements, OIG (2010): See also, Types of Civil Monetary Penalties and Affirmative Exclusions, U.S. Dep’t Health & Human Servs, OIG (July 2022).
3See 42 C.F.R. Parts 433, 438, 447 and 456.
4Best Price can generally be defined as the lowest price a manufacturer makes available to any wholesaler, retailer, provider, health maintenance organization, non-profit entity or governmental entity in the U.S. in any pricing structure in the same quarter in which AMP is computed. 42 C.F.R. § 447.505.
5Under the bundled sales approach, any discount paid because of failure to meet value parameters can be distributed proportionally to the total dollar value of all units sold as part of the bundled arrangement
642 C.F.R. § 447.502.
7See 42 C.F.R. Parts 433, 438, 447 and 456.
8Mylan $465 million settlement for misclassification of drugs under MDRP; see also, Wyeth and Pfizer $784.6 million 2016 settlement for failure to appropriately account for bundled sales; see also, AstraZeneca, Teva, and Cephalon $50 million settlement.
9CMS issued a regulation in 2007 to prevent unrelated service fees from being bundled with the price of the unit to
manipulate AMP calculations to a lower price. 42 U.S.C. § 447.502.
11United States ex. rel. Ronald J. Streck v. Takeda Pharms. Am., Inc., et al., Case No. 14-cv-9412 (Feb. 28, 2022).
12A future update to this article will be published with any material developments in this case.
13United States ex rel. Streck v. Astellas Pharma US, Inc. (Settlement Agreement).
14The settlement also resolves a separate lawsuit where DOJ alleged that Mallinckrodt violated the Federal Anti-Kickback Statute (AKS) by subsidizing Medicare patients’ co-payment responsibilities for Acthar by using a charitable organization as a conduit for the subsidies. Mallinckrodt allegedly did this to alleviate patient and doctor concerns about Acthar’s price and would market the drug as “free.” Mallinckrodt paid $26.3 million to resolve the AKS claims.
15A drug’s “Base Date Average Manufacturer Price (AMP)”, is the drug’s price on the date that the “dosage form and strength” of the drug was first marketed or 1990, whichever is later, to its current price. 42 U.S.C. § 447.504.See 42 C.F.R. § 414.802; 42 C.F.R. § 447.502; see also, October 26, 2007 VA Dear Manufacturer Letter.
16In particular, the government alleged that Acthar’s price had already risen to over $28,000 per vial by 2013, and therefore ignoring all pre-2013 price increases for Medicaid rebate purposes lowered Medicaid rebate payments for Acthar.
17The CIA also requires Mallinckrodt to establish a risk assessment program, assign a chief compliance officer, obtain compliance-related certifications from company executives, and create a new compliance committee that must meet quarterly.
18United States ex rel. Deborah Sheldon v. Allergan Sales, LLC, No. 20-2330 (4th Cir. Jan. 25, 2022).
19Burr sued Safeco for charging Burr a higher insurance premium based on his credit score in violation of 15 U.S.C. § 1681m(a), which imposes civil liability for entities who “willfully fail” to notify consumers when said entities take adverse action (such as charging a higher insurance premium) based on information from a consumer credit report. The Court ultimately held that reckless disregard of the statute would be included in “willfully [failing]” to notify customers; however, Safeco had reasonably misread the statute and the case was remanded for further proceedings consistent with the Court’s opinion.
20See 42 C.F.R. § 414.802; 42 C.F.R. § 447.502; see also, October 26, 2007 VA Dear Manufacturer Letter.
Heath R. IngramAssociate
Roger A. CohenPartner
Matt WetzelPartnerLife Sciences & Healthcare