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.
BACKGROUND
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
RECENT REFORMS
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.7
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 AMP15for 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
2020.16CMS 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.
CONCLUSION
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.
Footnotes
1.42 U.S.C. 1396r-8 § 1927(a).
2.Special 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).
3.See 42 C.F.R. Parts 433, 438, 447 and
456.
4.Best 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.
5.Under 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
6.42 C.F.R. § 447.502.
7.See 42 C.F.R. Parts 433, 438, 447 and
456.
8.Mylan $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.
9.CMS 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.
10.Id.
11.United States ex. rel. Ronald J. Streck v. Takeda
Pharms. Am., Inc., et al., Case No. 14-cv-9412 (Feb. 28,
2022).
12.A future update to this article will be published with
any material developments in this case.
13.United States ex rel. Streck v. Astellas Pharma US,
Inc. (Settlement Agreement).
14.The 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.
15.A 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.
16.In 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.
17.The 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.
18.United States ex rel. Deborah Sheldon v. Allergan
Sales, LLC, No. 20-2330 (4th Cir. Jan. 25, 2022).
19.Burr 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.
20.See 42 C.F.R. § 414.802; 42 C.F.R. §
447.502; see also, October 26, 2007 VA Dear Manufacturer
Letter.
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