Whistleblower Qui Tam Law Blog

Recently, McKesson Corporation agreed to pay the United States $190 million to resolve claims that it violated the False Claims Act by falsely reporting inflated Average Wholesale Prices ("AWPs") for a large number of prescription drugs, causing government to set higher reimbursement rates for those drugs. The settlement was the result of a lawsuit filed by a whistleblower under the qui tam provisions of the False Claims Act.

Fraudulent AWP schemes are not uncommon. Reimbursement rates for prescription drugs purchased by Medicaid beneficiaries generally are set using certain bench marks, such as the AWP. The AWP is the average price at which drugs are purchased at the wholesale level. In general, network pharmacies purchase prescription drugs from manufacturers or wholesalers, such as McKesson. When a Medicaid beneficiary purchases a covered drug from a network pharmacy, the pharmacy submits a claim for reimbursement to the state Medicaid agency. Although each state establishes its reimbursement formula, reimbursement generally is based on the AWP minus a certain percentage. The seller - usually the manufacturer or wholesaler - pays a rebate to Medicaid each quarter. Reporting inflated AWP data is a common fraud, as it increases payments to manufacturers and wholesalers that sell pharmaceuticals.

Here, the government alleged that McKesson, a large drug wholesaler, reported the inflated pricing data for a wide variety of brand name prescription drugs to First DataBank, a company that publishes drug prices used by most state Medicaid programs to set payment rates for pharmaceuticals, and other publishers of drug prices.

The Medicaid program is funded jointly by the Federal and state governments. The settlement resolved federal Medicaid overpayments based on McKesson's inflated pricing information. State Medicaid agencies can separately negotiate with McKesson to resolve claims based on the states' shares of the Medicaid overpayments.

According to Acting Assistant Attorney General Stuart F. Delery, "[t]his case demonstrates the Department of Justice's commitment to ensuring that Medicaid funds are expended appropriately. . . . Companies that report pricing data that affect government payment rates, whether those companies are manufacturers, wholesalers, or otherwise, are required to report that data accurately."

"This is the latest example of a corporation's intentionally manipulating the complicated system by which drug purchases are reimbursed," said U.S. Attorney Paul J. Fishman. "We have no tolerance for those who take advantage of that system to bring in more business by falsely increasing reimbursements to retailers."

"This settlement with McKesson highlights the Office of Inspector General's commitment to protecting against artificially inflated drug prices," said Inspector General Daniel R. Levinson. "Our analyses of drug price reporting practices - including the use of 'Average Wholesale Price' - have consistently identified excessive Medicare and Medicaid payments resulting from these practices."

Under the qui tam provisions of the False Claims Act, whistleblowers who report fraud and abuse in government healthcare programs, such as Medicaid, are entitled to receive a percentage of the government's recovery. Andrew M. Beato specializes in representing whistleblowers in False Claims Act litigation involving fraudulent pricing schemes by pharmaceutical manufacturers, wholesalers, and retail pharmacies, such as false AWP reporting schemes.

Congress and Abraham Lincoln enacted the False Claims Act in 1863 in response to widespread corruption and fraud by defense contractors in selling supplies and provisions to the Union Army during and after the Civil War. After being weakened by Congress during World War II, the FCA was revived in 1986 after congressional hearings and GAO reports exposed rampant fraud in the defense industry. Senator Charles Grassley and Congressman Howard Berman pushed the amendments through Congress, and Ronald Reagan signed them into law, thus enhancing the Government's ability to combat fraud and recover losses.

For the past 25 years, the False Claims Act has been the single most effective tool for combating fraud against the government. The law owes much of its success to the courage of whistleblowers, who not only alert the government to fraud, but also provide invaluable assistance by uncovering evidence and explaining highly complex fraudulent schemes. The False Claims Act's qui tam provisions allow whistleblowers with evidence of fraud against the government to sue on behalf of the government, and receive 15 to 30 percent of the amount recovered.

In Fiscal Year 2010, the government recovered over $3 billion under the False Claims Act, 80 percent of which was recovered as a direct result of whistleblower lawsuits. Since the 1986 amendments to the False Claims Act, the government has recovered over $30 billion in judgments and settlements.

Taxpayers Against Fraud, a nonprofit, public interest organization dedicated to combating fraud against government, chronicles the False Claims Act's remarkable success over the last 25 years and highlights the pivotal role of whistleblowers in The 1986 False Claims Act Amendments, A Look At Twenty-Five Years of Effective Fraud Fighting in America.

Average wholesale price ("AWP") is the primary benchmark for the reimbursement of drugs by the government. Although the Centers for Medicare and Medicaid Services does not regulate or set AWPs, it relies on drug manufacturers to report accurately the AWP of their drugs to the Red Book and other publications. Physicians and pharmacies are reimbursed for drugs covered under their state's plan based on the AWP minus a percentage.

Under the Medicaid Rebate Program, 42 U.S.C. § 1396r-8, drug manufacturers also must report their "best prices" for single-source innovator and multiple-source drugs to the federal government. The "best price" is used to calculate the rebates that drug manufactures must pay to the states in exchange for coverage under the state plan and reimbursements. Best price is defined as the "lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States . . . ." 42 U.S.C. § 1396r-8(c)(1)(C)(i). Best price calculations include discounts and are "without regard to special packaging, labeling, or identifiers on the dosage form or product or package." 42 U.S.C. § 1396r-8(c)(1)(C)(ii)(I)-(II).

"Lick and Stick" is the name given to a fraudulent scheme that enables manufacturers to avoid reporting discounted prices in the AWP and best price calculations. The focus of the scheme is re-labeling the product. Under this scheme, a drug manufacturer sells large quantities of discounted prescription drugs to a third party payer, such as a health maintenance organization (HMO), and re-labels the drug using the name and national drug code of the third party payer. The drug manufacturer then claims that the discounted drug is "different" from the identical drug sold to Medicaid for the purposes of reporting AWP and best price.

Recently, GlaxoSmithKline, Bayer, Novartis, Merck, Pfizer and other drug manufactures agreed to settle a lawsuit based on a "lick and stick" fraud. The lawsuit, which was brought by counties in New York, alleged that drug manufacturers falsely reported the AWP for certain drugs to the Red Book. As a result, their Medicaid programs overpaid for the drugs.

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