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Bayer Agrees to $14 Million Settlement Over Medicaid Pricing

Nancy Tarleton Landis

A $14 million agreement by the Bayer Corporation to settle allegations of falsely inflating drug prices used to set Medicaid reimbursement rates may be the prototype for settlement of similar charges against more than 20 other companies. The companies' pricing policies have been under investigation for three years, and the agreement by Bayer could lead to changes in the way the federal government and states are paid for Medicaid drug purchases.

The U.S. Department of Justice announced in January that Bayer would pay a total of $14 million to the United States and 45 states. The false-claims charges were brought in a "whistleblower" lawsuit by Ven-A-Care of the Florida Keys Inc., on behalf of the United States. Bayer reached the agreement with the Justice Department, the U.S. Attorney's Office for the Southern District of Florida in Miami, the Office of Inspector General for the Department of Health and Human Services (HHS), and a team of state negotiators from Maine, Nevada, New York, and Washington representing the National Association of Medicaid Fraud Control Units.

The government's investigation of the allegations revealed that Bayer, by giving state governments falsely inflated figures for average wholesale price (AWP), direct price, and wholesale acquisition cost, caused physicians and other health care providers to submit fraudulently inflated claims to Medicaid. According to a Justice Department press release, "By setting an extremely high AWP and, subsequently, selling the product to doctors at a dramatic discount, Bayer induced physicians to purchase its products rather than those of competitors by enabling doctors to profit from reimbursement paid to them by the government."

The investigation involved AWPs for Bayer biological products, including Kogenate, Koate-HP, and Gamimune, used in treating hemophilia and immune deficiency diseases.

The investigation further revealed that Bayer's practice, engaged in since the early 1990s and commonly referred to by manufacturers as "marketing the spread," also has the effect of discouraging competition from manufacturers that do not inflate AWPs as a way of inducing health care providers to purchase the companies’ products.

The Justice Department said that, in addition to the monetary settlement, Bayer has reached an agreement with the HHS inspector general's office that the government will monitor the integrity of the company's conduct for five years. Under this agreement, Bayer will provide the federal and state governments with the average selling prices of its drugs to help the governments set fair reimbursement rates for the company's products and, potentially, the products of any competitors attempting to take advantage of Bayer's cooperation.

The parties also are settling allegations that Bayer knowingly underpaid the Medicaid program for rebates owed by the company to the states. The Medicaid rebate program requires drug companies to pay quarterly rebates to states to account for discounts the companies give to other customers. Bayer was required to report to the Health Care Financing Administration the best price the company offered to any commercial, for-profit customer and to pay a quarterly rebate based in part on that best price. The announcement by the Justice Department said Bayer understated the extent of the discounts given to certain customers and thus underpaid the rebates it owed.

In response to the announcement of the settlement, Bayer said that it had been truthful in reporting AWPs and that its practices were consistent with industry standards. Bayer also said the settlement removes the company from related investigations and state lawsuits filed against other manufacturers of pharmaceutical and biological products.

The whistleblower, Ven-A-Care of the Florida Keys, will receive 20% of the federal government's share of the recovery.

The state of Texas, which will recover $1.03 million of the $14 million settlement by Bayer, has independently challenged drug company pricing practices. After an investigation in conjunction with the state health and human services commission and department of health, the state attorney general sued three companies—Dey Inc., Roxane Laboratories Inc., and Warrick Pharmaceuticals Corp.—for civil Medicaid fraud. The state claims that since 1995 the three companies have defrauded Texas Medicaid of more than $20 million "as part of a complicated scheme to corner the market in respiratory disease medications," according to a press release by the attorney general's office. The state seeks to recover the $20 million in "overpayments," plus more than $58 million in penalties, for a total of $79 million.

According to the attorney general's office, Texas is the only state that requires a drug manufacturer to certify in writing the prices for which the company sells a product in order to qualify the product for Medicaid reimbursement. The state charges that the companies reported falsely inflated prices. Warrick, which had the greatest share of the Medicaid market for albuterol in the state, also had the highest "spread," selling a box of the product for $13.50 to pharmacies but reporting to the state that the price was $40.30.

A spokesman for the Texas attorney general's office said the court case is pending. Other states, he said, are acting on their own against companies for providing false information to Medicaid.

The lawsuits over Medicaid pricing highlight the urgency of obtaining a mechanism for paying pharmacists for professional services. As noted in a May 25, 2000, letter to state Medicaid directors from ASHP and five other national organizations, changes in reimbursement practices could be detrimental to patient care, in that pharmacists are currently expected to support their professional services with the payments received for dispensing pharmaceuticals. A comprehensive review of such changes in reimbursement should "take into account the disparity between dispensing fee levels and the cost of serving Medicaid beneficiaries, especially those with conditions requiring complex drug therapies," the letter stated.