Drug Manufacturers’ Compliance with Rebate Statute Critical in the Wake of $61 Million Verdict Against Eli Lilly & Co.
On August 3, 2022, an Illinois federal jury returned a verdict ordering Eli Lilly & Co. (“Eli Lilly”) to pay $61 million for violations of the Federal False Claims Act (“FCA”) and adjacent state FCA laws. According to a qui tam lawsuit filed on behalf of the United States, Eli Lilly was alleged to have underreported its Average Manufacturing Price (the “AMP”), a central component for determining the manufacturer’s rebate amount due and owing to state Medicaid programs for drugs covered under the Medicaid programs. Importantly, because accurate reporting under the Medicaid Drug Rebate Program (“MDRP”) is directly dependent upon the accuracy of AMP and other relevant pricing metrics, Eli Lilly was found to be culpable in causing states to receive less in rebates than they were entitled to absent its deficient reporting processes. Eli Lilly has now moved for a new trial asserting that the relator failed to “introduce legally sufficient evidence upon which a reasonable jury could find that Lilly acted with the scienter required for liability under the FCA.”
For drug manufacturers, this case is of critical importance. The MDRP’s rebate computation scheme is intricate, and seeing that no proof of specific intent to defraud is required to establish a knowing violation of the FCA, drug manufacturers must ensure that AMP calculations are without error. This includes a thorough understanding of not only what manufactures may lawfully exclude from the AMP computation, but the effect of post-sale price adjustments and the continuing duty to report price revisions for up to the three years.
To understand the government’s allegations and Eli Lilly’s purported MDRP non-compliance, it is important to first consider a participating drug manufacturer’s Medicaid rebate liability. Under the MDRP, states may provide coverage of outpatient drugs as part of their medical assistance program furnished to eligible individuals as an optional benefit. For drug product manufacturers, Medicaid participation is contingent upon the provision of a rebate which, in turn, helps to offset the Federal and state costs of outpatient prescription drugs dispensed to Medicaid beneficiaries. What follows is a complex web of statutory formulations under which participating drug manufacturers are required to self-submit their rebate obligation to the requisite state Medicaid program.
In the present case, Eli Lilly allegedly disguised drug price increases—that it would have otherwise been required to account for in its AMP computation—by hiding the increases within its contractual definition of an AMP-exempt “service fee.” Under the terms of wholesaler service agreements, Eli Lilly was able to claw back any profit that a wholesaler could potentially realize following a price increase in the form of a “price concession credit” (representative of the difference between the wholesaler’s acquisition price and the increased market price). By applying the credit and realizing the increase through a reduced service fee obligation to the wholesaler, Eli Lilly maintained an artificially low AMP relative to its increased drug price.
The Government’s case against Eli Lilly was not unlike a concurrent 2013 qui tam—similarly brought under the FCA and by the very same relator—purporting that biopharmaceutical giant Bristol Myers Squibb (“BMS”) evaded its MDRP reporting obligations. There, the multinational drugmaker was alleged to have engaged in separate schemes to manipulate, and subsequently reduce its MDRP rebate obligation. First, through a “discount scheme,” BMS artificially reduced its AMP by disguising “bona fide service fees”, which are statutorily exempt from the AMP formula as discounts for services provided by distributors. The discount scheme resulted in a 1.33% reduction of its drug invoice price. Next, BMS was alleged to have disguised drug price increases through a “service fee scheme” not unlike Eli Lilly. Distributors reduced service fees charged to BMS—again, fees that would be statutorily exempt from being factored into BMS’s AMP formula—by the amount of additional revenue they realized by selling already purchased stock at the new higher price. BMS’s pricing indiscretions resulted in a $75 million settlement over allegations of Medicaid fraud.
As stated in the complaint against Eli Lilly, the drugmaker knowingly reported materially inaccurate AMPs to CMS, excluding post-initial sale transactions from its computation, and was subsequently found to have defrauded government healthcare programs. Although Eli Lilly has since moved for a new trial, asserting that it was questionable whether a reasonable jury could indeed find that it had acted “knowingly,” the extensive litigation that has spawned from Lilly’s alleged conduct makes clear that a drug manufacturer’s MDRP compliance obligations cannot be overlooked. While the statutory scheme is complex, it is essential to meticulously consider all per unit price adjustments and comport with the continuing duty to revise AMP calculations. Failure to do so, even without the specific intent to defraud, could result in FCA liability and substantial monetary penalties.
How Frier Levitt Can Help
Frier Levitt regularly counsels pharmaceutical manufacturers seeking to implement MDRP-compliant rebate programs. Additionally, Frier Levitt 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 False Claims Act. Contact us today to discuss potential avenues for your business while ensuring compliance with applicable laws and regulations.
 See, United States ex rel. Streck v. Takeda Pharm. Am., 1:14-cv-09412 (N.D. Ill. Aug. 2, 2022).
 Mot. Pursuant to Federal Rules of Civil Procedure 50(b) and 59, United States ex rel. Streck v. Takeda Pharm. Am., 1:14-cv-09412.
 See generally, United States ex rel. Streck v. Bristol-Myers Squibb Co., No. CV 13-7547 (E.D. Pa. Nov. 29, 2018), clarified on denial of reconsideration, 370 F. Supp. 3d 491 (E.D. Pa. 2019); see also Press Release, Department of Justice, Bristol-Myers Squibb to Pay $75 Million to Resolve False Claims Act Allegations of Underpayment of Drug Rebates Owed Through Medicaid (April 1, 2021), https://www.justice.gov/usao-edpa/pr/bristol-myers-squibb-pay-75-million-resolve-false-claims-act-allegations-underpayment.