June 5, 2009 – First Merck and now Wyeth.
Over the last seven years, two of the world’s largest drug manufacturers have been accused of circumventing the Medicaid Drug Rebate Program by offering nominal pricing as an inducement to access the lucrative hospital and managed-care markets. Merck paid $671 million (including interest) in its settlement, a portion of which went to providers participating in the federal 340B drug discount program.
On May 18, the U.S. Department of Justice, 15 states and the District of Columbia joined two whistleblower suits against Wyeth, alleging that the drug maker offered deep discounts on drugs to hospitals which were never extended, as required, to Medicaid.
The lawsuits allege that between 2000 and 2006, the Pennsylvania-based manufacturer failed to provide Medicaid the same “best price” it offered various hospitals for the acid reflux drugs Protonix Oral and Protonix IV. The 90-percent discount that Wyeth provided to hospitals on Protonix Oral, and the 80-percent discount it offered on Protonix IV, should have been reported to Medicaid as its “best prices,” and Medicaid should have been billed at those prices, the suits contend.
While such nominal prices are by law exempt from best-price calculations, the government’s position is that a price does not qualify as a nominal price if there are strings attached – such as requiring that hospitals guarantee the drug a certain market share in return for getting the discount. In the Protonix case, the manufacturer allegedly used the discounts as an incentive to the hospitals to provide Wyeth access to discharged patients in the retail outpatient market.
“By offering massive discounts to hospitals, but then hiding that information from the Medicaid program, we believe Wyeth caused Medicaid programs throughout the country to pay much more for these drugs than they should have,” said Tony West, assistant attorney general for the Civil Division of the Justice Department, the day the federal government joined the suits.
Doug Petkus, a Wyeth spokesman, said the company believes that its pricing calculations were correct and that it plans to defend itself “vigorously” against the litigation.
Manufacturers: Practices were legal at the time
For years, manufacturers offered nominal pricing to for-profit and non-profit providers to gain market share in an increasingly competitive environment. A “nominally priced” drug is defined under the Medicaid law as a drug that is sold for less than 10 percent of the manufacturer’s average manufacturer price (AMP). The price is excluded from the “best price” and AMP components drug makers use to calculate Medicate rebates and 340B discounts.
At the heart of the litigation is whether Congress, when crafting the Medicaid rebate statute, intended for nominal pricing to only benefit non-profit and safety-net hospitals – or whether drug makers could offer such prices to any hospital or healthcare entity.
The prosecution of Merck shocked the industry because the case, which settled in 2008, showed that the government was willing to go after manufacturers for prices they set before the passage of the Deficit Reduction Act of 2005 (DRA) – legislation that explicitly limited nominal pricing to several defined groups of safety-net providers. Companies responded to the DRA by cutting back such pricing, but there was little they could do about sales made before the law was enacted in early 2006.
The allegations should be viewed in the context of the statutory and regulatory requirements that applied at the time the alleged violations occurred, said Alice Valder Curran, a partner at Washington, D.C.-based Hogan & Hartson who advises pharmaceutical manufacturers on price reporting issues.
“The government’s allegations need to be tied back to the exact language of requirements that were in fact binding on manufacturers at the time,” Curran said. The government’s interpretation of those requirements is not always supported by the language in the statute or in the Medicaid agreement, she said.
Indeed, manufacturers maintain that they should not be held accountable for a pricing structure that was used throughout the industry for years, and with the government’s tacit approval. The fact that yet another manufacturer is being hauled into court over an alleged nominal-price violation, however, suggests that federal prosecutors will continue to scrutinize their pre-DRA interaction with the Medicaid Drug Rebate Program – potentially at a high cost for companies and their shareholders.
Fifteen states and District of Columbia also want a share
The states joining the DOJ and the District of Columbia in the whistleblower lawsuits are California, Delaware, Florida, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Nevada, New Hampshire, New York, Tennessee, Texas, Virginia, and Wisconsin.
The lawsuit against Merck over alleged best-price violations, yielded more than $9 million in recovery for 340B providers. If precedent holds, a future settlement against Wyeth could also benefit participants in the drug discount program.
But at that point, the litigation will no longer be Wyeth’s headache. The company is expected to be acquired by Pfizer later this year in a deal reported to be worth more than $60 billion.