The recently enacted Inflation Reduction Act contains provisions¹ that require drug manufacturers pay rebates to the government if the cost of their drugs rises faster than the rate of inflation, pegged to prices in the beginning of 2023 relative to prices in 2021 for certain Medicare-covered drugs. From 2019 to 2020, half of all drugs covered by Medicare had price increases above the rate of inflation over that period. Before this change in the law Medicaid – but not Medicare – included a rebate program.

The Medicaid Drug Rebate Program is intended to offset the cost of prescription drugs for State Medicaid programs. Drug manufacturers are required to pay the government a rebate of a portion of the proceeds of certain of their drug sales that are covered by a state’s Medicaid plan based on the Average Manufacturer’s Price (AMP). The AMP is the average price wholesalers pay the manufacturers. If the AMP rises by more than the rate of inflation, the AMP has to be adjusted if “cumulative discounts or other arrangements” change the prices that they are actually charging the wholesalers. Manufacturers who fail to pay the rebates to the government may run afoul of the False Claims Act, as recently confirmed in a jury verdict against a major pharmaceutical company.

On August 3, 2022, an Illinois jury found that defendant Eli Lilly caused $61 million in damages to various states’ Medicaid programs in a suit brought by a whistleblower alleging that Lilly violated the False Claims Act. Because the FCA requires those found liable to pay treble damages, the total judgment is $183 million plus penalties (between $12,537 and $25,076 per claim).   In the case against Lilly, the relator, Ronald Streck, alleged, and the jury found, that Lilly was intentional misrepresenting and underreporting its AMP, to make it seem like prices were rising slower than they were, to pay less in rebates to the government in violation of the FCA.

If the IRA’s new Medicare provisions had been in place when the case against Eli Lilly was filed in 2014, many more taxpayer funds may have been recovered. Hopefully the new rules discourage drug manufacturers from failing to meet their rebate obligations to the government, but if not, whistleblowers will be integral in recovering Medicare funds.

Jacklyn DeMar is the Director of Legal Education at Taxpayers Against Fraud.

1. Subtitle B, Part II, of Title I, Section 11101-02