Fourth Circuit Applies Safeco To FCA Claims, Accuses CMS Of “Maintaining Strategic Ambiguity” Around Medicaid Drug Rebate Program Requirements – Food, Drugs, Healthcare, Life Sciences

In a recent 2-1 decision, the Fourth Circuit joined every other
circuit to have considered the issue in applying
Safeco‘s “reckless disregard” standard to
legally false FCA claims based on alleged violations of ambiguous
laws and regulations. Under Safeco, courts ask whether a
defendant’s interpretation of the ambiguous law or regulation
at issue was objectively reasonable and whether authoritative
guidance might have warned the defendant away from that
interpretation. The Fourth Circuit found that the Safeco
standard “duly ensures that defendants must be put on notice
before facing liability for allegedly failing to comply with
complex legal requirements. Without such notice, defendants are not
likely to receive due process.”

At issue before the Fourth Circuit was the Medicaid Drug Rebate
Program’s (“MDRP’s”) requirement that
manufacturers report their “best price” for Medicaid
covered drugs for purposes of rebate calculations. “Best
price” is defined by statute as the “the lowest price
available from the manufacturer during the rebate period to any
wholesaler, retailer, provider, health maintenance organization,
nonprofit entity, or governmental entity . . . inclusive of cash
discounts, free goods that are contingent on any purchase
requirement, volume discounts, and rebates.” Given the
complexity of Medicaid’s price reporting requirements, CMS has
repeatedly emphasized that manufactures should “make
reasonable assumptions” in calculating “best
price.”

Based on these laws, regulations, and guidance, the relator
claimed that the defendant, a pharmaceutical company, had submitted
legally false claims to Medicaid because it had not appropriately
accounted for discounts offered to separate customers along the
distribution chain in its “best price” reporting. More
specifically, the relator alleged that the defendant should have
aggregated the discounts offered to those customers and reported
the aggregated discount price as its “best price” instead
of the single lowest discount price. The defendant countered that
it reasonably interpreted “best price” to mean the lowest
price at which a manufacturer sells a drug to any single
entity and therefore it was justified in reporting the single
lowest discount price.

The Fourth Circuit held the defendant’s interpretation of
“best price” was reasonable because the statute (1) uses
the term “price” instead of “prices”; (2) lists
the entities to be considered in the singular rather than the
plural; and (3) states that the price to be reported is the
“available” price, which suggests an actual offered
price, not a hypothetical aggregated discount price. The court also
held that the defendant was not warned away from its interpretation
because “CMS knew . . . that manufacturers were not
aggregating discounts given to different entities along supply
chains . . . [yet] failed to clarify and thereby maintained
strategic ambiguity.”

The majority’s broad attacks on the complexity of the MDRP
combined with CMS’s persistent refusal to provide appropriate
clarity on the MDRP’s requirements may offer broader defenses
to FCA actions premised on alleged violations of the MDRP program,
even outside the “best price” context. Indeed, as the
majority concluded: “relator’s position . . . makes
sinister actors out of parties who have followed the law in every
respect and sought administrative guidance where none was ever
provided. Given the veritable thicket of Medicaid regulations, it
is not too much to expect something more in the way of clarity and
direction than was ever offered here. To reward the state with
treble damages for this treatment of parties in the private sector
is something no court should do.”

The dissent made many of the same arguments as the dissent in a
recent Seventh Circuit decision applying Safeco and
reviewing a defendant’s interpretation of Medicare Part D and
Medicaid’s “usual and customary” price requirements
(discussed here).

The Fourth Circuit’s decision can be found here.