The Medicaid Rebate Act and "Best Price" Provisions

Dean Steinke, the qui tam whistleblower who brought this False Claims Act case to whistleblower attorneys Steve Cohen and Mark Kleiman, alleged that Merck & Co., Inc., had submitted false price reports in order to reduce the rebates Merck was required to pay back to the States under the Medicaid Rebate Act, 42 U.S.C. §1396r-8. The Nevada federal court's decision that Merck's price reports were false and should have included marketing discounts Merck extended to hospitals but not to Medicaid was key to bringing about the settlement that is the subject of this Web site.

In 1990 Congress passed the Medicaid Rebate Act in response to increasing Medicaid expenditures for prescription drugs. (See a history of the Medicaid Rebate Program.) The legislation's goal was to stop drug companies from overcharging Medicaid by giving taxpayers (who fund Medicaid) the best discounts that other purchasers negotiated. (See How the Medicaid Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical Industry, Congressional Budget Office Paper (January 1996), Chapter II, the Medicaid Rebate Program, at 11.)

The mechanism Congress designed to achieve this goal requires drug companies that seek Medicaid payments for their prescription drugs to pay a rebate to each State each quarter that is based on the difference between the price that the State paid and any lower price paid by other purchasers, other than HMOs or government entities, known as the Best Price, or a rebate based upon a 15.1% discount off the Average Manufacturing Price (AMP), whichever provides the greatest rebates to the States. According to pharmaceutical pricing expert, Greg Hamilton, the overwhelming majority of manufacturer drug rebates are Best Price-based, not the flat 15.1% rebate.

The rebates are based upon quarterly price reports the drug companies submit to the federal Centers for Medicare and Medicaid Services ("CMS"). Using these price reports and the States' prescription drug-use data, CMS calculates the rebates owed by the drug companies to each State. Not surprisingly, the Office of Inspector General for the U.S. Department of Health and Human Services, which oversees CMS, has recognized that, "...manufacturers have a strong financial incentive to hide de facto pricing concessions to other purchasers to avoid passing on the same discounts to the states" in the form of higher rebates based on a Best Price that would otherwise have included these discounts. (See OIG Compliance Program Guidance for Pharmaceutical Manufacturers, 68 Fed. Reg. 23,731, 23,735 (2003)).

Even though the Medicaid Rebate Act requires Best Price reporting to include (a) cash discounts; (b) free goods contingent on other purchase requirements; (c) volume discounts; and (d) any other rebates, Best Price reporting does not include discounts that are "merely nominal" in amount. Merck thus devised a "nominal price" discount to market Vioxx® and Zocor® to hospitals, a discount the hospitals qualified for so long as they purchased set amounts. Merck excluded these large discounts of more than 90% of AMP from its Best Price reporting, claiming that so long as the discount resulted in a price of less than 10% of AMP, as CMS defined nominal price, the discount could be excluded from Best Price reporting.

However, the legislative history of the Medicaid Rebate Act indicates that nominal price exclusion to Best Price reporting was intended to protect special purchasers, such as penny-a-pack birth control pills sold to Planned Parenthood. (See 136 Cong. Rec. 25,145 at S12954-01, *S12962 (1990)). Congress was also clear that the overarching purpose of the Medicaid Rebate Act was to put Medicaid (the States, and the taxpayers) on par with all other commercial purchasers, such as hospitals. The Deficit Reduction Act of 2005 further delineated the nominal price exclusion, and as of Jan. 1, 2007, only certain sales for less than 10% of AMP qualify.