On September 23, 2022, the Fourth Circuit issued a per curiam opinion upholding the dismissal of a 2014 qui tam suit against Forest Laboratories, LLC while vacating both the district court and subsequent Fourth Circuit panel opinions. Although the Circuit Court’s en banc consideration was likely intended to mitigate the impact of the court’s decision with respect to the False Claims Act’s (FCA’s) scienter requirement, this case is germane to drug makers seeking to comply with the complex, and sometimes ambiguous, Medicaid Prescription Drug Rebate Program (“MDRP” or “Rebate Statute”).
By way of background, under the MDRP, states may provide coverage of outpatient drugs as part of the medical assistance furnished to eligible individuals as an optional benefit. For drug makers, Medicaid participation is contingent upon the provision of a rebate, and a critical component of the basic rebate formula is Best Price variable. To calculate Best Price, drug makers are required to consider “the lowest price available from the manufacturer during the rebate period” to a statutorily defined set of eligible entities. One of the main complexities in calculating Best Price, then, is whether aggregating two overlapping discounts provided to two separate entities is necessary—also referred to as rebate “stacking”.
In United States ex rel. Sheldon v. Forest Laboratories, LLC, the U.S. District Court for the District of Maryland considered the issue. Forest Labs, an innovator drug maker, maintained a practice of negotiating two separate sets of discounts. First, Forest negotiated formulary discounts with private insurers that paid in accordance with the number of drugs units for which the insurer paid. Separately, Forest negotiated rebate agreements with pharmacy providers that paid in accordance with the number of drug units purchased. Forest then reported Best Price based on the rebate or discount given to the private insurance company.
The District Court noted in dicta that although the statutory and regulatory language is open to multiple interpretations, Forest Labs’ avoidance of aggregating rebates provided to different, unrelated customers in calculating Best Price was reasonable based on the “plain and natural reading” of the Rebate Statute. Moreover, the District Court found that claims based on Forest’s reasonable interpretation could not qualify as false statements under the FCA nor could it support Relator’s allegations that Forest acted with the requisite scienter (i.e., the required state of mind that the government or relator must show in order to demonstrate an FCA violation) absent CMS guidance that would have otherwise “warn[ed] Forest away from its interpretation.”
In January 2022, in a 2-1 panel decision, the Fourth Circuit similarly concluded that the Rebate Statute’s plain language indicated that “Best Price is one offered to a single entity.” Here, the Court of Appeals did go on to distinguish several examples provided in multiple CMS guidances. This included aggregating prompt pay discounts to wholesalers and wholesaler chargeback agreements as being price concessions to a single entity.
Yet, the Fourth Circuit and District Court’s reasoning and judicial guidance on the matter was for naught. Following a petition for rehearing en banc, and presumably in consideration of the court’s application of an “objectively reasonable” standard to resolve issues stemming from the FCA’s scienter requirement, both opinions were vacated in their entirety, while nevertheless affirming the District Court’s dismissal. Note, however, that the Fourth Circuit did not provide any reasoning as to its decision.
Sheldon now appears headed for the Supreme Court where the justices will likely seek to resolve uncertainty over the FCA’s standard for scienter (and hopefully additional clarity on the calculation of Best Price). And while the Fourth Circuit and District Court’s reasoning no longer hold binding, precedential value at this time, the case is broadly illustrative of interpretive issues embedded within the Rebate Statute and relevant CMS guidances.
CMS 2016 Final Rule
Taking a step back, it is important to consider the lens with which the District Court initially viewed the relevant CMS guidances. Because the district court addressed conduct which occurred prior to the issuance of CMS’s 2016 Final Rule, it did not consider the 2016 rule’s substance or applicability (though the decision was rendered after the rule’s publication). Rather, the District Court was critical of the lack of guidance around rebate aggregation citing the Rebate Statute’s complexity and its price reporting requirements.
But the 2016 Final Rule’s preamble does discuss stacking requirements in certain circumstances. In fact, the rules provides that Best Price must include all discounts that subsequently adjust the price available from the manufacturer irrespective of which entity they are offered to, to the extent such rebates, discounts or price concessions are designed to adjust prices at the retail or provider level.
In today’s drug channel landscape, the rise of integrated delivery networks (“IDNs”), and other such complex delivery systems, has added a layer of intricacy to the rebate environment. As such, it is important for drug makers that participate in Medicaid—and those which seek to participate in Medicaid—to develop internal, procedural safeguards designed to comply with Best Price and Average Manufacturer Price computations. This includes, but is not limited to, accounting for the possibility of double rebate claims for the same drug and the possibility of legal liability arising from the same.
How Frier Levitt Can Help
Frier Levitt regularly counsels drug makers seeking to implement MDRP compliant rebate programs. Our attorneys are experienced in the representation of generic and innovator drug product manufacturers against government and whistleblower allegations of Medicaid Drug Rebate Program non-compliance and subsequent liability under the FCA. Contact us to discuss potential avenues for your business while ensuring compliance with the applicable laws and regulations.
