Opinions and Legal Insights

Discount “Stacking” in Medicaid Rebate Best Price Addressed by Federal District Court

By Alan M. Kirschenbaum

On November 5, the Maryland Federal District Court dismissed a Federal False Claims Act qui tam suit alleging that Forest Laboratories knowingly reported inflated best prices under the Medicaid Drug Rebate Program (MDRP), resulting in underpayment of rebates.  United States ex. rel. Sheldon et al. v. Forrest Laboratories, LLC et al. The case, in which the Department of Justice and numerous state attorneys general had declined to intervene, addressed the question whether discounts provided to different customers on a single unit of drug must be added together – or “stacked” – when determining best price.

The relator alleged that Forest provided rebates to both third party payors on one hand and purchasers (pharmacies and GPO members) on the other, so that a single unit of drug could be subject to both types of rebates.  The relator claimed that the statute, regulations, and CMS guidance unambiguously required Forest to add the rebates to different customers together in determining best price, because they all affected the price that Forest “actually realized” on a unit of drug.  The relator relied primarily on statements in the former version of the Medicaid Rebate Agreement and in CMS Manufacturer Releases from the 1990s that best price must be adjusted “if cumulative discounts, rebates, or other arrangements subsequently adjust the prices actually realized.”  Forest countered that best price aggregates only discounts to a single customer.

The Court first found that the language used by CMS to address cumulative discounts has not been clear or consistent, because the best price regulation initially published in 2007, unlike the former Medicaid Rebate Agreement or the Releases, required best price to be adjusted if cumulative discounts adjust prices “available from” – not “realized by” – the manufacturer.  (The 2007 regulatory text remains the same today.)  The Court went on to find that the statute, legislative history, regulations, manufacturer comments on rulemakings, and other sources demonstrate ambiguity, rather than unequivocal guidance on this point.  The court noted that the relator had not pointed to a single example where CMS had explicitly stated that manufacturers must aggregate discounts to different customers along the supply chain on a given unit.  Since Forest’s interpretation was found to be objectively reasonable, the Court decided that Forest’s best price reports could not qualify as objective falsehoods, and furthermore, that Forest could not have acted with the requisite knowing intent since it had not been warned away from its interpretation by CMS.

This lawsuit involved conduct that occurred before February 2016, when CMS amended its MDRP regulations.  The relevant text about cumulative discounts subsequently adjusting the price available from the manufacturer remains identical to the pre-2016 text, but the 2016 preamble did contain a discussion of “stacking” that was not considered by the Court in Forest.  Unfortunately, that discussion did not clear up the ambiguity regarding stacking.  CMS stated that “multiple price concessions to two entities for the same drug transaction” should be considered in best price, but then addressed only an example where a rebate paid to a PBM is designed to adjust prices at the pharmacy level and a discount is also provided to pharmacies.  81 Fed. Reg. 5170, 5253 (Feb. 1, 2016). In that scenario, it is not unreasonable to view the pharmacy as receiving two discounts on the same unit.  However, CMS did not address other situations, such as the one at issue in Forest, where discounts are given to two different customers and the discount to one does not affect the price to the other – e.g., a formulary discount to a third party payor and a discount to a GPO or pharmacy chain.  Therefore, ambiguity persists on the question of stacking.  The Forest case is the most recent in a long line of cases holding that a reasonable interpretation of an ambiguous statute or regulation is not actionable under the FCA.  After Forest, it will be especially difficult for the government or a relator to successfully prosecute an FCA claim alleging inflation of best price due to a failure to stack discounts.