Whistleblower Cases Involving Medicaid Price Reporting

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A Medicaid beneficiary obtains a prescription drug from a participating pharmacy, which has purchased the drug in the marketplace from a manufacturer or wholesaler. The pharmacist submits a claim and then receives payment from the state Medicaid agency based on the state’s formula for typically AWP less a percentage. The seller then pays a rebate, months later, for all of its drugs reimbursed by Medicaid each quarter.

The rebate for drugs are based in part on two prices submitted by the manufacturer to CMS each calendar quarter. The first is the AMP (Average Manufacturer Price), which is the average price that a drugmaker receives in a given quarter for sales to wholesalers of a drug distributed in the retail class of trade. The second, is the lowest transaction price, or “Best Price,” charged to any buyer in the private market (and reflecting all rebates or discounts) during that quarter.

The AMP and the Best Price must be reported for each respective dosage form and strength of all prescription drugs purchased on behalf of Medicaid beneficiaries. Those prices, which remain confidential, serve as reference points in determining drugmakers’ rebate obligations.

CMS calculates the unit rebate amount (URA) for each covered drug using price data submitted by the drug manufacturers. Each quarter, each State Agency sends an invoice to each drug manufacturer/labeler, using the URA from CMS and the units dispensed for each drugs (from its own records), to determine the actual rebate amounts due from the manufacturer. The manufacturer has 38 days from the day a State Agency sends an invoice to pay the rebate and avoid interest charges.

Three Drug Categories

In order to determine rebate amounts, the reporting requirements include designation of a drug’s status into one of 3 categories:

  1. Innovator Multiple Source Drug” is defined by statute as having “the meaning set forth in Section 1927(k)(7)(A)(ii) of the Act and shall include all Covered Outpatient Drugs approved under a New Drug Application (NDA), Product License Approval (PLA), Establishment License Approval (ELA) or Antibiotic Drug Approval (ADA). A Covered Outpatient Drug marketed by a cross-licensed producer or distributor under the approved NDA shall be included as an innovator multiple source drug when the drug product meets this definition.” 42 U.S.C. § 1396r-8(c)(1)(C)(k). In 42 CFR 447.502, CMS clarified that an Innovator Multiple Source drug includes an authorized generic drug including any labelers operating under the NDA.
  2. Single Source Drug” is defined by statute as ” a covered outpatient drug which is produced or distributed under an original new drug application approved by the Food and Drug Administration, including a drug product marketed by any cross-licensed producers or distributors operating under the New Drug Application (NDA).” It also includes a Covered Outpatient Drug approved under a PLA, ELA or ADA.
  3. Non-Innovator Multiple Source Drug” is defined by statute as “a multiple source drug that is not an innovator multiple source drug.”

A Single Source, and an Innovator Multiple Source Drug, are both commonly known and referred to herein as a “Brand Name Drug,” while a Non-Innovator Multiple Source Drug is commonly known as, and referred to herein as a “Generic Drug.”

Rebate Formula

For Brand Name drugs, the rebate consists of two components: 1) the manufacturer must pay a “basic rebate” equal to the greater of (I) 15.1 percent of the “Average Manufacturer Price” (AMP) of the drug or (ii) the difference between the drug’s AMP and its “Best Price” (BP) whichever is greater; plus (2) the manufacturer must pay an “additional” rebate to the extent that the AMP of the drug has increased faster than the rate of inflation since the launch of the product.

The manufacturers of Brand Name Drugs almost always owe the additional rebate. In 2003, for instance, the drugs for which an additional rebate was owed represented about 84 percent of Medicaid’s reimbursements for brand-name prescription drugs. In its Report, “The Rebate Medicaid receives as Brand-Name Prescription Drugs” dated June 21, 2005, the Congressional Budget Office, Congress of the United States, estimated that in 2003, the average rebate received by Medicaid for brand-name prescription drugs was 31.4% of the AMP.

The rebate for Generic Drugs is much less than for Brand Name Drugs. It is a base rate of 11% of AMP, with no additional rebate. In contrast, the total rebates due for Brand Name Drugs have typically been within a couple of points of 31% of AMP, a difference of roughly twenty (20) percent.

The Fraud

In order to decrease the amounts owed to the states, some companies misrepresented material facts regarding the regulatory origin/status of their Brand Name Drugs, the AMP, and/or the Best Price. Despite the Government’s good faith reliance to charge manufacturers a unit rebate amount based upon the manufacturer’s own representation of drug status, and price, some manufacturers have deceptively and fraudulently, breached their duty to deal honestly with the Government.