Allergan Win in Medicaid Drug Rebate Statute

The United States Court of Appeals for the Fourth Circuit decision in US ex rel. Sheldon v. Allergan Sales, LLC, a qui tam False Claims Act (FCA) suit, affirms the complexity of pricing and Medicaid rebates under the Medicaid Drug Rebate Statute, emphasizes the need for government guidance in complex regulations, and further confirms the importance of documenting intentions and reasonable assumptions with respect to the Rebate Statute. The Court was evenly split in upholding the dismissal of the suit brought by a former employee alleging Forest Laboratories LLC committed Medicaid fraud by violating the Medicaid Drug Rebate Statute and unjustly profiting from it.

In 2014, a relator brought a qui tam action against his employer alleging that the drug manufacturer knowingly “engaged in a fraudulent price reporting scheme under the Medicaid Drug Rebate Statute” and consequently received excess payment from the government. The relator claimed that Forest gave different discounts to different customers on the distribution chain and did not accurately aggregate those discounts, thereby failing to determine the correct “best price” and thus violating the statute. Per the Rebate Statute, “best price” is defined as “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider . . . or governmental entity” and is determined by combining all price discounts given to any entity in the chain of distribution relating to any single unit sold by the manufacturer.

The Rebate Statute requires manufacturers to report the “best price” to the Centers for Medicare & Medicaid Services (CMS) so it can then calculate rebates owed by manufacturers to the states for dispensed units reimbursed by Medicaid. Forest’s purported false price reporting led to an alleged overpayment of $680 million by the government and an underpayment of Medicaid rebates to states. Forest argued, among other things, that it correctly calculated “best price” in accordance with the statute and associated regulations, which expressly define “best price” as lowest net price to a single entity and do not require aggregation of price concessions to different entities in the distribution chain. Additionally, Forest maintained it did not “knowingly” submit false claims, per the FCA, because its actions and interpretations of the statute were objectively reasonable. The Court agreed and held that the objective standard precludes inquiry into a defendant’s subjective intent and confirms there must be notice before defendants are liable for violating complex legal and regulatory requirements. Further, the Court emphasized that a defendant cannot act “knowingly” if its actions are based on an “objectively reasonable” interpretation of the statute and it has not been warned away from that interpretation by authoritative guidance from the agency. In its decision, the Court stated, “If the government wants to hold people liable for violating labyrinthine reporting requirements, it at least needs to indicate a way through the maze.” 

Authored by: Lee H. Rosebush, Stephen Ruscus and Laura Macherelli