Health Law Daily Drug manufacturers’ interpretation of rebate was reasonable, not a knowing FCA violation
Tuesday, August 21, 2018

Drug manufacturers’ interpretation of rebate was reasonable, not a knowing FCA violation

By Jeffrey H. Brochin, J.D.

A qui tam relator’s complaint failed to establish that drug manufacturers knowingly violated the FCA when they excluded certain credits they received from their customers in calculating a drug’s "Average Manufacturer Price" (AMP.) The manufacturers’ decision to exclude the credits reflected a reasonable interpretation of the pertinent Medicaid Drug Rebate Program (MDRP) statutory provisions, a federal appellate court has ruled. The facts did not establish that the manufacturers possessed the mental state necessary for knowingly violating the FCA, the Third Circuit held in an unpublished opinion (U.S. ex rel. Streck v. Allergan, Inc., August 16, 2018, Vanaskie, T.).

Bases of fraud allegations. Nine drug manufacturers participated in the MDRP during the period 2004 through 2012. The MDRP helps to offset the cost of prescription drugs dispensed to Medicaid patients, and participating manufacturers must pay the states a rebate for their drugs that are covered by a state’s Medicaid plan. A central component for calculating the amount of the rebate is the drug’s AMP. Under the applicable versions of the MDRP, AMP is generally defined as the price wholesalers pay participating manufacturers for drugs. The lower the AMP, the lower the rebate manufacturers must pay the states.

The relator was CEO of a network of regional drug wholesalers who became aware of the manufacturers’ exclusion of price-appreciation credits from their AMP calculations, thereby reducing their AMPs and the rebates owed to the states. The parties dispute whether the manufacturers were permitted to do so. The relator contended that they were not and that this practice resulted in fraudulently lower AMPs, and ultimately, fraudulently lower rebates to state Medicaid programs resulting in false claims. He initially filed suit in October 2008 on behalf of the United States and several states against two groups of drug manufacturers. The district court dismissed his complaint for failure to establish the requisite scienter for FCA fraud, and for the reasons stated below, the appellate court agreed.

Innocent, good-faith mistake not enough. The FCA imposes liability on any person who "knowingly" makes a false claim to the government. A party acts knowingly if they act in reckless disregard of the truth or falsity of information. Consistent with the need for a knowing violation, the FCA does not reach an innocent, good-faith mistake about the meaning of an applicable rule or regulation, nor does it reach those claims made based on reasonable but erroneous interpretations of a defendant’s legal obligations.

Reasonableness of interpretation. The court noted that assuming the manufacturers’ decision to exclude price-appreciation credits was erroneous, the court further needed to examine whether doing so during the relevant time period was objectively unreasonable. Basing a defense on a reasonable, but erroneous, interpretation of a statute includes three distinct inquiries: (1) whether the relevant statute was ambiguous; (2) whether a defendant’s interpretation of that ambiguity was objectively unreasonable; and (3) whether a defendant was "warned away" from that interpretation by available administrative and judicial guidance. Accordingly, the court first needed to determine whether the MDRP’s definition of AMP was ambiguous with regard to price-appreciation credits.

This was a question of statutory interpretation, and the court concluded that despite the fact that some of the guidance (such as Manufacturer Releases issued by the CMS during the 1990s) could be read to support the relator’s interpretation, the court could not say that the guidance was so clear as to warn the manufacturers away from an interpretation that excluded price-appreciation credits from AMP. Rather, the court found that the available scattershot guidance failed to articulate a coherent position on AMP and, specifically, price-appreciation credits.

The court concluded that the manufacturers’ interpretation of the statute leading to their AMP calculations was reasonable, and that the complaint therefore failed to establish that they knowingly violated the FCA. The circuit court’s dismissal of the complaint was affirmed.

The case is No. 17-1014.

Attorneys: Nina M. Varindani (Faruqi & Faruqi LLP) for Ronald J. Streck. Brian T. Feeney (Greenberg Traurig, LLP) and Kelli R. Curry (Shook Hardy & Bacon) for Genzyme Corp. Jaime L.M. Jones (Sidley Austin LLP) for Allergan, Inc. and Abbott Laboratories, Inc. Joseph H. Young (Hogan Lovells US LLP) for Amgen, Inc.

Companies: Genzyme Corp.; Allergan, Inc.; Abbott Laboratories, Inc.; Amgen, Inc.

MainStory: TopStory CaseDecisions CMSNews DrugBiologicNews MedicaidNews MedicaidPaymentNews ProgramIntegrityNews DelawareNews NewJerseyNews PennsylvaniaNews

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