Bristol-Myers Squibb Settlement Highlights a Common-Sense Law: The Medicaid Drug Rebate Program

Drug prices are out of control.  They now account for roughly 10% of our healthcare spending and America’s per capita outlay has nearly doubled over the past two decades.  For the least fortunate among us, many of these medications have become out of reach altogether. While new proposals are regularly made, one approach that often gets overlooked is simply enforcing the laws already on the books.

That is just what a whistleblower did, leading the government to a $75 million recovery from pharmaceutical giant Bristol-Myers Squibb for allegedly sidestepping the Medicaid Drug Rebate Program.  The recovery, in a case brought under the False Claims Act, offers an important reminder that existing laws regarding pharmaceutical pricing, together with the dedication of intrepid whistleblowers, provide important avenues for cost reduction and recovery.

What is the Medicaid Drug Rebate Program?

The MDRP generally requires drug companies to rebate state Medicaid programs for price increases that outpace inflation, benchmarked to 1990 or when the drug first came to market, whichever is later.

So, for example, if a company brings a new drug to market, charging $100 a dose, assuming a 2% inflation rate over the following two years, the maximum Medicaid would pay is $102 per dose.  If the company raises the price to $110 per dose, it would have to rebate the difference – $8 per dose – to the state Medicaid programs that covered the purchases.  It is a clear and common-sense approach to sheltering our most vulnerable from unfettered price increases, especially when regular market forces cannot get the job done.

MDRP rebate amounts are calculated using Average Manufacturer Prices. Manufacturers report their own AMPs to the government for each of their covered drugs, using a prescribed formula.  AMPs represent the average price paid by wholesalers for drugs distributed to retail, net of certain discounts.  Generally, the higher the reported AMP for a drug, the more expensive the drug is, and the greater the rebate the manufacturer pays to state Medicaid programs for the drug.

How Bristol-Myers Squibb and other Pharma Companies Misrepresent Average Manufacturer Prices

This week’s settlement resolves allegations that Bristol-Myers Squibb improperly calculated AMPs for many of its drugs in order to reduce the rebates it owed – and increase the share paid by Medicaid. Two different methods for its AMP reduction are set forth in the whistleblower’s complaint:

• First, Bristol-Myers paid certain fees to wholesalers, but improperly treated those fees as price reductions when calculating AMP;
• Second, wholesalers provided Bristol-Myers with credits based on provisions in their contracts that applied when the drugmaker increased prices on drugs already in their inventory, but Bristol-Myers did not include this additional value it received when calculating average prices.

Previous settlements and litigation have also involved drugmakers’ improper AMP calculations and underpayment of Medicaid rebates.

• In 2015, AstraZeneca and Cephalon paid a total of $54 million to resolve claims that they improperly reduced AMPs by wrongfully accounting for service fees they paid to wholesalers.
• Last year, the government joined a whistleblower suit against another pharmaceutical giant, Mallinckrodt, alleging violations of the laws. The lawsuit focus on Mallinckrodt’s Achtar gel, which is used to treat a variety of conditions, including MS and infantile spasms.  In 2001, when another drug company Questcor (which Mallinckrodt later acquired) secured the rights to manufacture the product, it cost only $50 a vial.  It has since skyrocketed to $40,000 per vial, an 80,000% increase or roughly 1,700 times the rate of inflation!  According to the government, Mallinckrodt and Questcor fraudulently pegged rebates not to 1990 pricing (when Achtar was already on the market), but to 2013 pricing, when the FDA approved the drug for treating additional diseases. The case is currently paused due to the company’s bankruptcy proceedings.

AMP gamesmanship may be particularly tempting for the many drug companies working to repurpose existing drugs to treat COVID-19 (or the next pandemic…).  As the New York Times recently reported, “driven by the pandemic’s spread, research teams have been screening thousands of drugs to see if they have this unexpected potential to fight the coronavirus.”  Many of these drugs, such as the antipsychotic chlorpromazine was, like Achtar, first approved decades ago.  In the likely event, some are ultimately approved to treat coronavirus, the manufacturer may feel justified in skirting Medicaid rebates as recompense for creating the life-saving breakthrough and the costs incurred in getting there.

Any company contemplating this path, however, should proceed with caution.  Whistleblowers, and the government, are watching, and stand ready to challenge drugmakers’ pricing approaches as violations of both the Medicaid Rebate Law and the False Claims Act.

How to Blow the Whistle on Improper AMP Calculations and other Medicaid Drug Rebate Fraud

The case against Bristol-Myers was brought under the False Claims Act, a law that allows private persons to sue those defrauding the government and share in the recovery.

The whistleblower, Ron Streck, was the CEO of an association of pharmaceutical wholesalers.  As such, he had access to drug pricing and reporting data. Streck’s action was first filed under seal in 2008; in 2017, after investigating Streck’s allegations for nine years, the government declined to intervene.  Streck then chose to pursue the action on his own on behalf of the government, as permitted by the False Claims Act. Whistleblowers pursuing False Claims Act cases without government intervention are eligible to receive between 25-30% of the federal government’s recovery.

Of the billions of dollars the government recovers under the False Claims Act every year, the vast majority of actions are prompted by whistleblowers.  It is a pattern surely to continue given the ever-increasing complexity of schemes to misappropriate Medicare and Medicaid funding.  The exigency for these front-line fraud fighters is even more pronounced these days as the government is seemingly at the brink of all it can muster with limited resources to police how it doles out the trillions of dollars in COVID relief funding.

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• The False Claims Act
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