Merck Settlement Demonstrates Impact of Ongoing Scrutiny of Pharmaceutical Manufacturer Drug Pricing Practices

February 11, 2008

The United States Department of Justice (the “DOJ”) announced on February 7, 2008, that pharmaceutical manufacturer Merck & Company, Inc. (“Merck”) had agreed to pay a combined amount of more than $650 million to settle allegations that Merck improperly reported “best price” to the United States for the drugs Zocor, Mevacor, Vioxx, and Pepcid in violation of the Medicaid Drug Rebate Program statute, 42 U.S.C. § 1396r-8 (the “Medicaid Rebate Statute”). The combined recovery, which was the result of two separate qui tam actions under the Federal False Claims Act, one in the U.S. District Court for the Eastern District of Pennsylvania and the other in the U.S. District Court for the Eastern District of Louisiana, is being touted by the DOJ as one of the largest healthcare fraud settlements that it has ever achieved.

The whistleblower in the first case, a former sales manager for Merck, will receive over $68 million as a result of the settlement, with Merck also agreeing to pay attorneys’ fees of $3.75 million. The whistleblower in the second case, a New Orleans physician residing in Florida, will receive approximately $24 million, with Merck also agreeing to pay attorneys’ fees of $2.9 million.

The settlement agreements reveal that in both cases, Merck, in a series of pricing arrangements conducted at different times over a period of ten years between 1996 and 2006, failed to report in its “best price” calculation certain tiered discounts and nominal prices offered to hospitals, and in some instances, group purchasing organizations, in connection with its sales of Zocor and Mevacor (for the period April 1998 through March 2006), Vioxx (for the period October 2001 through September 2004), and Pepcid (for the third quarter 1996 through second quarter 2001). The DOJ contends that these arrangements were intended to influence healthcare providers’ choice of prescription drugs and were in violation of the Medicaid Rebate Statute. By excluding from the calculation of best price the nominal prices that it extended to certain hospitals and group purchasing organizations, Merck effectively decreased the rebate amount it paid to states. As a result, Federal and state governments effectively paid more to provide prescription drugs to Medicaid recipients than they would have paid had the nominal prices been included.

The Centers for Medicare and Medicaid Services (“CMS”) rules for determining best price in effect at the time Merck’s problematic pricing arrangements were in place did not specify whether the nominal price exception from best price applied to all purchasers or to a subset of purchasers. More recently, in implementing various provisions required by the Deficit Reduction Act of 2005 (“DRA”), CMS finalized changes to Medicaid rules for determining best price, including more clearly defining when nominal prices can be excluded from the best price calculation. The DRA and the Medicaid rules specify that nominal prices may only be excluded where they are extended to covered entities under Section 340B(a)(4) of the Public Health Service Act (e.g., federally qualified health center “look-alikes,” State-Operated AIDS Drug Purchasing Assistant Programs, or certain qualified disproportionate share hospitals); intermediate care facilities for the mentally retarded; state-owned or operated nursing facilities; and any other facilities or entities that CMS determines to be safety net providers to which sales of drugs at nominal prices would be appropriate. These changes to the best price calculations were included, in part, to prevent the nominal price exception from being used primarily as a competitive or marketing tool by pharmaceutical manufacturers. Congress has similarly expressed concerns over such practices by pharmaceutical manufacturers in the past and continues to monitor and investigate related activity (see Senate Finance Committee Urges CMS to Issue Further Guidance Regarding the Medicaid Drug Rebate Program by February 15, 2007).

As stated by United States Attorney General Michael B. Mukasey, the settlements “reflect [the DOJ’s] continuing effort to hold drug companies accountable for devising pricing schemes that deliberately seek to deny Federal health care programs the same lower prices for drugs that are available to other commercial customers.” The settlements also further demonstrate the powerful incentives created by qui tam actions and their effectiveness as an enforcement tool for Federal prosecutors.

The experience of Merck and a number of other pharmaceutical manufacturers that have been the subject of pricing probes in recent years suggests that pharmaceutical manufacturers should place particular emphasis on the accuracy of drug pricing calculations and reporting to Federal and state governments and compliance with available guidance from CMS and state Medicaid agencies regarding such matters.