Merck: Nominal Hospital Prices and Outpatient Sales

Merck agreed to pay more than $650 million in the Merck Medicaid rebate fraud settlements over allegations that it kept hospital discounts out of government price reports and paid physician kickbacks. The alleged bargain gave hospitals low prices tied to choosing Merck’s drugs. On the government’s account, hospitals got the discounts while Medicaid and the taxpayers funding it lost the rebates. For Pepcid, the government said the hospital discount was also a bid for prescriptions after the patient went home.

The Department of Justice announced the two civil settlements on February 7, 2008. These pharmaceutical fraud cases concerned different drugs and different whistleblowers, but shared a reporting decision. Merck allegedly treated prices offered to win hospital business as nominal and excluded them from the prices it reported to the government.

Why the Hospital Discount Mattered to Medicaid

A qualifying low hospital price can increase what a manufacturer owes the Medicaid Drug Rebate Program. The government alleged that Merck kept those prices out of its reports.

For brand-name drugs, the basic rebate per unit is the greater of a minimum percentage of Average Manufacturer Price or the difference between Average Manufacturer Price and Best Price. Best Price looks for the lowest qualifying price available from the manufacturer, including deals with hospitals. When that difference determines the rebate, leaving a low hospital price out can leave Medicaid with less money back.

The nominal-price exception allows certain very low prices to be excluded from Best Price. That exclusion was central to the Merck allegations. The government said Merck improperly used it for hospital prices intended to boost sales. The commercial benefit of the discount remained, while the discount disappeared from the government calculation.

This is the Best Price reporting problem a hospital contract can expose. The price matters, but so does what the buyer had to do to get it. In Merck’s case, the government described discounts tied to using its drugs in place of competitors’ products.

Zocor and Vioxx Hospital Discounts for Choosing Merck Over Competitors

A former Merck employee brought the case over Zocor and Vioxx hospital discounts. The government alleged that Merck offered deep discounts when hospitals used large quantities of those drugs instead of competitors’ brands. The lower price came with a commercial return for Merck: more of the hospital’s drug use.

A purchasing employee might see that arrangement as a price tied to product preference. A government-pricing employee might encounter the same sales under a nominal-price exclusion. The alleged Medicaid shortfall arose from how Merck reported that commercial arrangement. Reading the price without the condition attached to it misses why the company offered the deal.

The same case included physician kickback allegations. From 1997 to 2001, according to the government, Merck’s sales representatives used approximately fifteen programs to induce physicians to use its products. The government described excess physician payments disguised as fees for training, consultation or market research.

On the government’s account, the fee descriptions made prescribing inducements look like payments for work. The case therefore reached both the prices hospitals paid Merck and the money Merck paid physicians. Both were alleged ways to win drug business, with the price-reporting and kickback claims resolved together.

Pepcid and the Prescription After Discharge

The separate Pepcid case came from a physician. The government alleged that Merck offered substantially reduced hospital prices once hospitals agreed to use Pepcid primarily instead of a competing product. Merck allegedly excluded the discounts from its government-reported prices.

The government’s account of the Pepcid arrangement explains why the hospital business was valuable beyond the hospital’s own purchases. Merck allegedly wanted the continuing sales when patients bought Pepcid after discharge. A discounted hospital purchase could help establish the drug a patient continued taking at home.

The discount was valuable enough to win the hospital’s preference, yet Merck allegedly treated it as too nominal to count for Medicaid.

For someone who negotiates hospital contracts, this is the part of the case that a settlement headline misses. The buyer receiving the discount and the payer funding later prescriptions can be different. The government’s allegation connected the hospital’s purchasing commitment, the expected outpatient sales and the rebate treatment of the original discount.

Two Settlements and Two Whistleblower Outcomes

Merck agreed to pay $399 million to resolve the Zocor/Vioxx rebate and physician-payment allegations. The separate Pepcid settlement was $250 million. As part of resolving the two cases, Merck entered a five-year corporate integrity agreement with the Department of Health and Human Services’ inspector general to ensure that such conduct does not occur in the future.

Across the two settlements, the Justice Department announced more than $360 million for the federal government and more than $290 million for 49 states and the District of Columbia.

The former employee received about $44.7 million from the federal share and an additional $23.5 million from the states. The Justice Department said the physician who brought the Pepcid case would receive a share of the proceeds.

The different roles matter. Knowledge of a manufacturer’s dealings can come from inside the company or from the health care professionals who encounter its commercial practices. Merck’s cases reached the same reporting problem from both positions.

Public Citizen’s 2018 review of pharmaceutical settlements found that whistleblower revelations contributed, at least in part, to 54% of the federal settlements it examined from 1991 through 2017. The Merck cases put concrete roles behind that broader finding: an employee and a physician with different views of the business.

A whistleblower’s qui tam case under the False Claims Act can pay 15% to 30% of what the government recovers.

The Hospital Contract and the Rebate Report Tell One Story

The hospital-to-outpatient strategy appeared again in Wyeth’s Protonix rebate case. Wyeth and Pfizer agreed to a $784.6 million settlement in 2016 over allegations that Wyeth concealed bundled discounts on oral and intravenous Protonix from Medicaid. The government alleged that Wyeth wanted hospital use because discharged patients were likely to remain on oral Protonix, with payers including Medicaid paying nearly full price afterward.

The alleged reporting device differed. Merck allegedly treated hospital prices as nominal. Wyeth allegedly left bundled discounts out of Best Price. Both cases connected a hospital concession to later outpatient business and a rebate that Medicaid allegedly did not receive.

For a hospital-contracting or government-pricing insider, the useful connection runs from the terms of the deal to the treatment of its sales in the reported price. We examine what the hospital committed to, how the manufacturer classified the discount and how that classification affected the rebate. A contract can explain the business the manufacturer expected to win. The price calculation can show whether Medicaid shared in the concession used to win it.

You Know What the Hospital Was Promised

If you work in healthcare contracting, market access or government pricing and know why a discount disappeared from the rebate calculation, speak to our whistleblower experts about your Medicaid rebate case. We build the case with you around the commercial terms and the reported prices, and bring in pharmaceutical pricing whistleblower lawyers who know Medicaid rebate cases. We stay beside you through the process to turn your knowledge of the deal into your strongest Medicaid rebate whistleblower case.