What is Best Price Fraud?

“Best Price” is a term used in connection with Medicaid reimbursement for brand name prescription drugs. Essentially, a drug manufacturer is required to charge Medicaid no more than whatever its best (lowest) price is to a non-government (or commercial) payor. Because Medicaid does not buy drugs outright and furnish them to patients, the government enforces the “Best Price” rule through a system of price reporting to the Centers for Medicare and Medicaid Services (“CMS”), the agency that administers the Medicaid and Medicare programs, and mandatory rebates that the manufacturer must pay to the Medicaid programs.

Medicaid Reimbursement for Prescription Drugs

Medicaid patients obtain their prescription drugs from a pharmacy or other provider, at whatever price that provider is charging. The Medicaid program then reimburses the pharmacy for that prescription, at the price that was charged at the time the prescription was filled. The government cannot simply reimburse the pharmacy at the manufacturer’s Best Price, because the pharmacy may well have paid more for the drug than that amount.

Instead, there is a built-in rebate system that reduces the net amount that the government will end up paying for that drug. The rebate program requires a drug manufacturer, on a quarterly basis, to pay rebates to state Medicaid programs that have paid for that manufacturer’s drugs during that quarter. See 42 U.S.C. § 1396r–8. The rebate that the manufacturer must pay is calculated based on two different price metrics that the manufacturer must report to CMS. One of those price metrics is what is called Best Price, which is defined in detail in the government regulations.

Best Price Definition

Best Price is defined as “the lowest price available from the manufacturer during the rebate period” and must include “cash discounts, free goods that are contingent on any purchase requirement, volume discounts, and [non-exempted] rebates.” 42 U.S.C. § 1396r–8(c)(1)(C)(I)-(ii). There is a whole set of regulations governing the calculation of Best Price – for example, precisely what discounts need to be accounted for, what types of rebates are excludable, whether certain small or charitable drug transactions can be excluded and how quickly a manufacturer needs to update its Best Price reporting if its pricing to commercial customers changes.

In a highly simplified example, focusing solely on the Best Price component, assume that a Medicaid insured obtains drug XYZ from a pharmacy at the “list” price of $100. That $100 price will drive the initial reimbursement that Medicaid pays to the pharmacy. But imagine that the manufacturer that produces XYZ has a wide variety of prices to different customers, based on upfront price, offsets, discounts, rebates, volume of purchases, etc. If the manufacturer’s best (lowest) price to any commercial customer is only $75, the laws governing the Medicaid program mandate that the manufacturer allow the government to pay no more than that $75 Best Price. This is accomplished by a rebate that the manufacturer will pay to the Medicaid program, in the amount of $25 for drug XYZ, for however many prescriptions were dispensed to Medicaid insureds.

Any manufacturer that wants to have its drugs covered by the Medicaid program must enter into a rebate agreement with CMS. The Best Price is reported confidentially to the government, thus allowing manufacturers to engage in normal market pricing behaviors with their various customers. Through this somewhat convoluted system, the manufacturer has not revealed to anyone other than the government what its Best Price to any customer was, but the government ends up paying a net amount that matches the Best Price at which the manufacturer sells the drug. If a drug manufacturer falsely inflates its Best Price, it will reduce the amount of rebate it is required to pay – saving money for the manufacturer and overcharging the government. In the example above, if the manufacturer falsely reports that its Best Price was $85, instead of $75, then the amount of rebate that will be paid would decline, based on that inflated Best Price being used to calculate the rebate amount.

Best Price Fraud and the False Claims Act

Litigation arises under the False Claims Act for Best Price fraud because the misreporting causes the government to be overcharged for drugs in the Medicaid program. Since Medicaid is jointly funded by the federal and state governments, fraud claims will be asserted on behalf of both the federal and state governments. Additionally,  the Public Health Service Act includes a drug discount program known as the “Section 340B Program” that requires drug manufacturers to provide discounted prices to certain healthcare entities that receive federal funds, such as federally-qualified health centers, disproportionate share hospitals and urban Indian organizations. The formula used for calculating the price that can be charged for Section 340B sales depends on the Medicaid rebate amount, which is based on the reported Best Price. Accordingly, inflation of Best Price reporting typically leads to fraud on the Section 340B program also.

People who most typically observe and report fraud in a company’s reporting of Best Prices to the government include those who work in the manufacturer’s sales operations or who work in the departments that report prices to the government. Additionally, others in the chain of transactions between a manufacturer and customers may see Best Price fraud. Proper calculation and reporting of Best Price can be complicated, so it is important to reach out to a law firm that is familiar with the regulations and the ways to present a Best Price fraud case. For years, Berger Montague was lead counsel for a whistleblower who was responsible (with a second relator) for the largest Best Price fraud case under the False Claims Act. The case resulted in a settlement in which Wyeth Pharmaceuticals and Pfizer agreed to pay $784.6 million to the federal and state governments. The relators received a combined award of nearly $100 million in that case.

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