Ripping off Medicaid Through Nominal Pricing

On Friday, the WSJ reported that Merck agreed to pay out more than $650 million in its settlement of two qui tam (ie, “whistleblower”) lawsuits. In the suits, Merck allegedly used a historically exploited exception to the 1990 Medicaid Drug Rebate Program, which otherwise requires drug makers to report the lowest prices they charge to any entity not excepted by the law. The law’s exception—originally intended to foster deep drug discounts to charities and certain state-run facilities—specified that drug discounts of 90% or more (ie, "nominal prices") do not have to be disclosed to the government or included in the seller's best-price calculation for Medicaid reimbursement.

The qui tam lawsuits were specifically directed at the widespread practice of loosely applied nominal pricing, in which drug companies offered extreme medication discounts to health care facilities in exchange for formulary preference, and thus a sizeable market share for the drug. According to a 2003 report by the WSJ, the suit brought by qui tam relator and New Orleans geriatrician William LaCorte, MD, alleged that, from 1996 to 2001, Merck sold each tablet of then-prescription famotidine (Pepcid) to some New Orleans hospitals for $0.10, while charging Medicaid approximately $1.65 per tablet.

In its February 7 press release, Merck acknowledged the settlement, while asserting that it did not constitute an admission of guilt. The company also clarified that it believed "its pricing and sales and marketing policies and practices were consistent with all applicable regulations and contracts during the relevant time." The company also claims that it "voluntarily began to put in place substantial compliance initiatives in 2001," which raises the question If Merck’s pricing practices were consistent before 2001, why did it have to initiate compliance initiatives in 2001?

A December 2006 clarification of nominal pricing is provided in a DHHS document to state Medicaid directors, which defines nominal prices as those offered to 1) a covered entity described in section 340B(a)(4) of the Public Health Service Act; 2) intermediate-care facilities for the mentally retarded, and (3) state-owned or -operated nursing facilities. The document further clarifies that "[n]ominal sales to other entities must be included in the drugmaker’s best price."