Pharmaceutical Best Price Obligations and the False Claims Act

By: Joel M. Androphyi

Federal law proscribes that drug manufacturers pay rebates to the states to insure that the Medicaid program is receiving the best price on covered drugs. When manufacturers determine the best price, they must include cash discounts, free goods, volume discounts, and rebates given on the covered drug.1 However, best price calculations exclude prices charged to the Indian Health Service, the Veterans Administration, state homes for the disabled veterans, the Department of Defense, state pharmaceutical assistance programs, the Federal Supply Schedule of the General Services Administration, and any depot prices and single award contract prices, as determined by the Government.2 In addition, best price does not take into account prices that are merely nominal in amount.3

Given the complex calculation issues and the fact that manufacturers are given the most crucial role in the process, fraudulent best price schemes are so common that it was the first healthcare area addressed by Inspector Janet Rehnquist.4 This is one of the most common types of healthcare fraud,5 and has become a top priority for the Office of Inspector General (“OIG”), DHHS, and other healthcare fraud enforcement agencies.

On April 28, 2003, the OIG released the final version of its Compliance Program Guidance for the Pharmaceutical Industry (“Guidance”).6 The Guidance reflects the Government’s continuing concern about sales and marketing practices by pharmaceutical manufacturers. Two of the major risk areas addressed in the Guidance are the integrity of data used to establish or determine Government reimbursement and kickbacks.7

First, the Guidance asserts that a manufacturer may be liable under the False Claims Act if: (1) Government reimbursement for a product depends partly on pricing information reported directly or indirectly and (2) the manufacturer knowingly or recklessly fails to report such information completely and accurately.8 Where appropriate, manufacturers’ reported prices should take into account discounts, rebates, free goods that are contingent on a purchase agreement, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits offered to purchasers.9 The Guidance stressed that accurate net prices must be calculated in bundled sales, stating “any discount…offered on purchases of multiple products should be fairly apportioned among the products.”10 Although the Guidance does not provide instructions on calculating Medicaid rebates, it urges manufacturers to pay particular attention to calculating AMP and best price accurately.11

Kickbacks in this form of discount, rebates, and other incentives are another popular risk area with regard to best price obligations.12 The new Guidance reminds manufacturers that discounts deserve careful scrutiny, particularly because of their potential to implicate the best price requirements of the Medicaid Rebate Program.13 In addition, the Guidance highlights the OIG’s fear that manufacturers have “a strong financial incentive to hide de facto pricing concessions” that could affect best price calculations and trigger increased Medicaid rebates.14


  1. 42 U.S.C. §§ 1396r-8(c)(1)(c)(i) to 1396r-8(c)(1)(C)(iii).
  2. Id. The term “depot” means:
    “[a] centralized commodity management system operated by the Department [of HHS] through which drugs and biological for the use of entities of the Department are –
    “(A) received, stored, and delivered through 0
    “(i) a warehouse system under jurisdiction and operation of the Department; or
    “(ii) a commercial entity operating under contract with the Department; or
    “(B) delivered directly from the manufacturer to the entity using the drugs or biologicals.”
    S. Rep. No. 102-421, 102d Cong., 2d Sess. (Sept. 15, 1992), 1992 U.S. Code Cong. & Admin. News 4113, also available at 1992 WL 232830, at *1, *13.
  3. 42 U.S.C. § 1396r-8(c)(1)(C)(ii)(III). A Nevada district court defined a “merely nominal price” as a price that was less than 10% of the Average Manufacturers Price (“AMP”) and is not tied to other conditions of performance or consideration in addition to the nominal prices. Nevada ex rel. Steinke v. Merck & Co., 432 F.Supp.2d 1082, 1087 (D. Nev. 2006).
  4. Office of Inspector General, “Compliance Program Guidance for Pharmaceutical Manufacturers,” available at (last visited March 3, 2005). Link has been archived or moved.
  5. Id.
  6. OIG, “Compliance Program Guidance for Pharmaceutical Manufacturers,” N. 26 supra.
  7. Id.
  8. Id.
  9. Id.
  10. Id.
  11. Id.
  12. Id.
  13. Id.
  14. Id.

iAuthor of treatise, Federal False Claims Act and Qui Tam Litigation, Law Journal Press (2010), research source of the issues discussed in this article.



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