Medicaid Price Reporting

In recent years, the cost of pharmaceuticals has risen dramatically, and so have pharmaceutical company profits. Although drug costs represent only about ten percent of overall national healthcare expenditures, the cost falls disproportionately on a small population subset; those with chronic diseases. In addition, Medicare alone does not cover many outpatient drugs. Therefore, the states use their Medicaid programs, which cover prescription drugs, to make pharmaceuticals more affordable to the poor and uninsured. With such a large pool of patients, one might think that states have considerable bargaining power to force down the prices charged by drug manufacturers; however the situation is much more complicated.

Pharmacies buy prescription drugs from manufacturers or wholesalers on the commercial market. When these drugs are sold to Medicaid patients, the state’s Medicaid program reimburses the pharmacy. Medicaid bases the drug’s reimbursement rate on its Average Manufacturer Price (AMP), or the average price at which the drug is sold to wholesalers.

Not surprisingly, states attempt to limit the amount that the uninsured, the elderly, or the poor have to pay for drugs by trying to get those individuals the same deal that drug manufacturers offer in the private sector to other purchasers. Indeed, the Medicaid Rebate Act requires the government to receive the lowest drug price offered to any private sector customer. To achieve this, the act requires drug manufacturers rebate each state’s Medicaid office quarterly. Rebates return Medicaid reimbursement money paid above the drug’s lowest price offered to any private customer in a given quarter.

The rebate amount is based upon a drug’s AMP and its “best price.” The best price is the lowest transaction price charged to any buyer in the private market. The best price amount must also take into account cash discounts, rebates, free goods contingent on other purchases, free samples, volume discounts, and other inducements given to private customers. Rebates paid to the Medicaid program are either the difference between the AMP and the best price, or 15.1% of the AMP. Actual manufacturer pricing information is considered proprietary; therefore drug companies submit the average (AMP) and best price information directly to the government. The Secretary of Health and Human Services is authorized to survey wholesalers and manufacturers to attempt to verify these reports. Still, some companies have submitted falsely high AMP’s and falsely high best prices in order to receive higher compensation and pay out smaller rebates. Various ways of misrepresenting these figures and violating the FCA may include the following:

  • Keeping two sets of computer records: one with inflated prices reported to the government and the other with actual prices used when dealing with private customers.
  • Using “nominal pricing” to discount their drug prices to their normal customers. Nominal pricing applies to drugs sold to charitable organizations at little or no cost, and the Medicaid Rebate Act exempts it from best price calculations. Misrepresenting this provision presents the government with a false claim.
  • Offering discounts to private customers for packaged products, without applying the discount across the bundled drugs reported to the government.


In 2004, pharmaceutical giant Schering-Plough Corp. was sued under the FCA for a failure to report the best price of its drug Claritin to Medicaid. After PacifiCare and CIGNA, two large HMO’s, threatened to stop buying the drug in favor of a cheaper alternative, Schering-Plough disguised Claritin discounts in the form of interest free loans and other side deals. Schering-Plough then tried to hide these discounts from the federal government, which resulted in Medicaid paying out an artificially higher price for the drug. The company ended up settling the False Claims Act claim for $290 million.

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