Dey Pharmaceuticals Settles with State of Massachusetts in Pricing Fraud Case

California-based generic-drug manufacturer Dey LP has reached a $2.9 million settlement with the state of Massachusetts with regard to accusations of price inflation and defrauding of the Commonwealth’s Medicaid program. The company has already reached similar settlements with a slew of other states, including Missouri, Ohio, Connecticut, Nevada, West Virginia, Hawaii, and Idaho, but has never acknowledged any wrongdoing in any of the cases.

The origins of the pricing litigation date back to the middle of last decade, when Dey was accused of inflating their wholesale prices when reporting them to the industry meaning that state and federal Medicaid programs were reimbursing the company at much higher rates than they should have been. The alleged scam allows the company to increase its profits while keeping the costs of their pharmaceuticals low for consumers.

“We will not allow pharmaceutical companies to unfairly game the Medicaid price reporting system,” said Massachusetts Attorney General Martha Coakley in a statement. “In a time when health care costs are skyrocketing nationwide, we are committed to aggressively ensuring that taxpayer dollars are protected.” In addition to the cash settlement, the state will receive a 5 percent rebate on its drug purchases from Dey for five years.

The company is quick to point out that “the Commonwealth of Massachusetts acknowledges that the settlement does not constitute either an admission of, or evidence of, fault, liability, or unlawful conduct by Dey or its affiliates.” For its part, Dey is blaming flaws in the government’s average wholesale prices (AWP) reimbursement model.

The Taxpayers Against Fraud Education Fund (TAFEF), a nonprofit, public interest organization dedicated to combating fraud against the federal government, has conducted significant research into the pricing policies of the pharmaceutical industry. In a report released earlier this year, the group noted that “as of September 2004, seven pharmaceutical manufacturers, including three of the top five U.S. drug companies by sales volume, had settled cases with the Department of Justice (DOJ) involving allegations by whistleblowers of pricing or marketing fraud against Medicare and Medicaid. These settlements resulted in criminal fines of $652 million, over $2.4 billion in civil fines to the federal government, and payments of $413 million to state governments to compensate them for losses incurred by their Medicaid programs.” They also reported that “additional settlements would follow, noting that there were under seal in the fall of 2004 in the neighborhood of 100 whistleblower cases involving allegations against over 200 drug manufacturers with respect to 500 different products.”

TAFEF also explains, “The drug manufacturer settlements have also prompted a Congressional reexamination of Medicaid policies vis-à-vis drug rebates and drug price disclosure. Under the Deficit Reduction Act of 2005 (DRA), the Secretary of HHS is required to promulgate a regulation by July 1, 2007, clarifying how average manufacturer prices (AMP) are determined for purposes of calculating the Medicaid rebate.”

The watchdog group noted that a June 2005 study by the Office of Inspector General found that average sale prices (ASPs) were 68 percent below average wholesale prices (AWPs) for generic drugs. “Unlike average wholesale price (AWP) or wholesale acquisition cost (WAC), both of which are ‘catalogue’ or ‘sticker’ prices published by manufacturers, AMP, to a large extent, reflects actual transactions.”

To defend against fraudulent price reporting, the Secretary of Health and Human Services is now required to provide and make public AMP reports on a monthly basis. “Under prior law,” TAFEF says, “disclosure of AMP data was prohibited. State Medicaid programs are now able to use this data to more closely align the prices they pay to pharmacists for drugs with the pharmacists’ actual acquisition costs.” According to a recent Congressional Budget Office statement, AWPs “are not good predictors of actual transaction prices for generic drugs.” “Thus,” adds TAFEF, “the availability of AMP data should be especially helpful to states in determining what to pay pharmacists for generic drugs.”