In a recent decision out of the Seventh Circuit, the court upheld a jury verdict that resulted in a $183 million False Claims Act award against Eli Lilly (“Lilly”), the pharmaceutical company. The case, United States ex. rel Streck v. Eli Lilly, was brought by a whistleblower named Ronald Streck, who litigated the case after the government declined to intervene. The jury found $61 million in damages, which reached $183 million after statutory trebling. Lilly appealed.
The case involved a somewhat complicated Medicaid statute, called the Medicaid Drug Rebate Program, which, generally, requires drug companies to rebate, to Medicaid, price increases that outpaced the rate of inflation. A similar provision for the Medicare program came into law with the Inflation Reduction Act, in 2022. Judge Kolar’s opinion for the panel helpfully boiled down to the key point: “[F]ederal law required Lilly to tell the government the average price it received for drugs covered by Medicaid.” That price is called the “Average Manufacturer Price.” Under the Medicaid Drug Rebate Program, manufacturers who make drugs Medicaid pays for have to pay a rebate the government.
That rebate is calculated based on the AMP. In turn, the government reimburses pharmacies for drugs they sell to Medicaid beneficiaries. That reimbursement is based on the “usual and customary price” pharmacy customers pay for the drugs. As a result, “The price the government pays and the manufacturers' contribution from the AMP are supposed to correlate. As a drug price goes up, the government pays more. At the same time, that price increase should push up the AMP, and result in a higher corresponding rebate.”
The wrinkle in finding the AMP is that there is an intermediary step between the initial price Lilly sets on its drugs and the price at which retailers buy them. Manipulating the reported AMP can affect the amount of rebates owed to the government, and can be a violation of the False Claims Act. This allegation is at the heart of this case.
Lilly sells its drugs to wholesalers (e.g., Cardinal, Amerisource Bergen, etc.), who then sell it to retailers (e.g., CVS, Walgreens, etc.). Between 2005 and 2017, Lilly charged an initial price to wholesalers for its drugs. Then, if Lilly raised the price after the drugs were in the wholesalers’ hands and before they sold them to pharmacies, Lilly required the wholesalers to pay Lilly for that increase in price. As the court put it, “when Lilly sold a drug for $10 on Monday, and raised the price to $11 before the wholesaler sold it on Wednesday, the wholesaler needed to remit Lilly an additional dollar of value.” In this hypothetical, Lilly would claim its AMP was $10, and the whistleblower would argue it was $11. This claimed, lower price, would have allegedly improperly decreased the rebate amount owed to the government.
The key questions on appeal were: 1) Falsity - Were Lilly’s AMP calculations legally false? 2) Knowledge - Did Lilly know they were false (or recklessly disregard them being so)? 3) Materiality - Were Lilly’s under-reported AMPs material to the government’s decision to keep paying Lilly for drugs covered by Medicaid? In a fulsome exploration of the elements of the False Claims Act, the Seventh Circuit found that the answer to all three questions was yes. Before analyzing each one, the court addressed the underlying issue of whether Lilly’s method of calculating AMP was reasonable.
Reasonableness
This opinion has some very helpful language for whistleblowers looking to combat companies who try to defend their actions by claiming that, even if they were wrong, they acted based on a reasonable interpretation of the law.
While acknowledging the validity of Lilly’s arguments that Medicaid regulations can be intricate and difficult to parse, the Court noted that even if aspects of the statutory framework are complicated, the only part of the framework at issue in this case is how to calculate the AMP. In other words, just because some parts of the law about Medicaid – even some parts of the law specifically about AMP – may be complicated and hard to fathom, that doesn’t mean that the fundamental question of price – that $10 vs. $11 calculation – is impenetrable.
The 7th Circuit reasoned that “[a]s a matter of basic math and economics,” the $11 price is clearly the correct AMP. Not only that, but as a matter of law, the $11 AMP wins out as well: “The law draws no distinction between payments received in lump sum or over time.” Furthermore, the court took a step back to ask whether the $10 price makes any sense in the larger context of what the Medicaid Drug Rebate Program was designed to do. “Congress enacted the MDRP so drug manufacturers shouldered some of the cost to keep government spending manageable.” Under Lilly’s interpretation of AMP, the portion of the drug price that Lilly paid as a rebate to the Medicaid program could stay artificially low even while the retail price of the drugs went up. “Such a reading is not ‘consistent with the intent’ of [the Medicaid statute], which works by conditioning Lilly's participation in Medicaid on bearing some of its price tag. Lilly asks us to accept a loophole that undermines the law's central conceit.”
This is an important ruling for whistleblowers bringing cases under the MDRP, and a clear endorsement of the theory.
Falsity and Knowledge
The court reasoned that Lilly’s certifications of AMP were false as a matter of law, because Lilly’s decision to not include clawbacks in the AMP was not objectively reasonable.
On knowledge, the Court wrote that the question “is a closer call,” but that “Lilly’s objectively unreasonable interpretation of the relevant law is highly probative circumstantial evidence of a culpable state of mind.” The court included the caveat, “If we thought the regulations were ‘ambiguous’ or Lilly’s interpretation of the guidance was ‘reasonable’ we might look at the verdict differently.”
There were a few factual points the court pointed to as providing enough evidence for the jury to reasonably conclude that Lilly had the required level of knowledge of its wrongdoing. The mid-level employee who was responsible for overseeing Lilly’s contracts with wholesalers at the time that Lilly put the clawback provisions in place could not remember ever discussing the decision to not include clawbacks in the AMP with her supervisors. The supervisors were the ones who signed certifications to the government that the AMPs submitted were true and accurate, and they also said they did not know how or why Lilly decided not to include clawbacks in the AMP. Lilly also didn’t use an advice of counsel defense, meaning they did not introduce evidence that their lawyers told them not to include clawbacks in the AMP and they relied on that advice in good faith. The court asked the pointed question of how the certifiers could certify the AMP was true and accurate if they didn’t actually understand how the AMP numbers were reached: “on what information did the certifiers base their signatures?”
Lilly’s agreements with the government required the company to explain, in writing, how it calculated the AMP and what assumptions went into it. But between 2005 and 2011, Lilly never explained that the AMP excluded clawbacks or why it was reasonable to leave them out. All they said was that they exclude bona fide service fees – and, as discussed above, never said that it put clawbacks into that category even though they did not meet the requirements for it.
The court cautioned that if the government has information about a claim for payment and approves it in advance, the person making that claim can’t be deemed to have knowingly made a false claim. However, “ ‘merely showing some government knowledge’ of the falsity is not enough; there must be evidence of the government’s ‘cooperation and collaborate problem-solving’ or ‘explicit approval’ to undercut scienter” (citing United States ex rel .Spay v. CVS Caremark Corp.).
One piece of evidence Lilly tried to use as part of its defense ended up being damaging to its own argument. Lilly wrote a detailed, two-page letter to CMS in 2011 explaining how it excluded clawbacks from AMP. But Lilly knew, because the government had told them, that CMS did not read these letters and would not respond to them. In fact, the government told them to stop sending letters like this!. The court also noted that if Lilly really wanted to check in with CMS about this issue, high-level Lilly employees had sufficient contact with CMS employees to easily set up a meeting with them to do so.
In 2013, CMS asked Lilly to respond to an audit. In that context, where Lilly knew CMS would read its response, Lilly explained clawbacks only in a vague and incomplete explanation in a footnote that said they excluded clawbacks only if they met the elements of the bona fide service fee test.
The comparison between a full disclosure when they thought the government was not looking, vs. a potentially deceptive one when they knew the government was, is evidence of the company engaging in “ostrich-like conduct” and “burying its head in the sand and fail[ing] to make simple inquiries which would alert [it] that false claims are being submitted.”
It’s worth noting that the government did not escape some sharp word from the court: “We express our dismay at the government's lethargy, or perhaps regulatory capture.”
Materiality
The materiality analysis is closely tied up with the underlying unreasonableness of Lilly’s assumptions. The whole point of the way the MDRP program was constructed was to keep prices low, so Lilly’s false certifications went to the heart of its contracts with the government. Even after Lilly told the government how it calculated AMP in 2016, it did not reveal that this calculation led to $600 million in higher payments from the government to Lilly. “We are wary of imputing ‘actual knowledge’ on the government when it was not told that it had spent tens of millions of dollars it should not have due to Lilly’s calculations.” Even though the government kept contracting with Lilly after 2016, which could suggest the government did not find the false certifications material, that fact alone was not dispositive of immateriality. There could be other legitimate reasons why the government did not cancel its contracts with Lilly, including the need to figure out how to move forward without harming Medicaid beneficiaries who relied on Lilly’s drugs.
The court also found that the simple jury instruction provided on materiality, which was taken directly from the text of the False Claims Act, was accurate and not in error.
Conclusion
This opinion is a notable one for its very detailed analysis of a common friction points in False Claims Act cases against large, sophisticated companies who claim that they relied on a reasonable interpretation of confusing healthcare statutes. It’s worth staying tuned to see if Lilly will appeal, as some media reports suggest.
