Nostrum Laboratories: The Same Approval, a Different Story for Medicaid

In the Nostrum Nitro OS Medicaid rebate settlement, Nostrum Laboratories and its chief executive agreed to pay at least $3,825,000 and up to $50 million if specified financial contingencies were met, over allegations of knowingly underpaying inflation-based rebates. The company changed the quantities of two inactive ingredients, kept the same Food and Drug Administration approval and raised the price. It then argued that Medicaid should treat the drug as new. If you work in government pricing, finance or product compliance, that split between the product’s history and its claimed rebate history is the heart of this case.

What the Nostrum Nitro OS Medicaid Rebate Settlement Covered

The settlement addressed rebates Nostrum allegedly owed state Medicaid programs for Nitrofurantoin Oral Suspension, known as Nitro OS. The Justice Department’s October 30, 2023 announcement covered alleged underpayments from October 1, 2018 through March 31, 2020.

Under the Medicaid Drug Rebate Program, participating manufacturers pay quarterly rebates to states in exchange for Medicaid coverage of their drugs. Inflation-based rebates protect the program when a drug’s price rises faster than inflation. That protection depends on retaining the earlier price against which the increase is measured.

Nostrum’s price increase generated larger state rebate invoices. The company admitted that it did not pay the full amounts even after learning why the bills had risen and receiving notice from the Centers for Medicare & Medicaid Services that it should pay them. The government’s allegation of knowing underpayment rests on that sequence: the higher price, the higher bill, the notice and the payment decision.

What Changed Inside the Bottle

Nostrum admitted changing the quantities of two inactive ingredients to reduce lead levels. It added no ingredients and removed none. The active ingredients, dosage form and strength stayed the same.

The company had acquired Nitro OS from another manufacturer in December 2015 and continued selling it under the existing Food and Drug Administration approval. In January 2018 it stopped manufacturing because the product’s lead content did not comply with updated agency guidance. Manufacturing and marketing resumed in August after the changes to the inactive ingredients.

Nostrum Nitro OS Inactive Ingredients Rebate Reset

Nostrum argued that changing the inactive-ingredient quantities created a new drug whose rebates should no longer depend on the earlier version’s price. The Centers for Medicare & Medicaid Services told Nostrum to pay the higher calculated amounts.

After the relaunch, the price rose from about $475 to about $2,392 per bottle. The Justice Department announcement described an increase of over 400%. The higher price triggered larger state rebate invoices. A manufacturer could gain from a higher selling price while owing more back to Medicaid through the inflation rebate. Nostrum sought to keep the earlier version’s price out of that comparison.

The company wrote to the Medicaid agency arguing that Nitro OS was new, despite its earlier communications to the Food and Drug Administration that there had been no major changes. For the approval, Nostrum relied on continuity. For the rebate, it argued for a fresh start. The same manufacturing change was being described to suit two different financial consequences.

Nostrum admitted paying less than the full invoices from the fourth quarter of 2018 through the first quarter of 2020, when it withdrew from the rebate program. The invoices and the agency’s response make this more than a story about the price printed on a bottle. They show the money Medicaid sought back and the company’s decision about paying it.

Why the Base-Date AMP Mattered

Base-date AMP is the historical average manufacturer price used in the inflation-rebate comparison. As the Justice Department explained it, the comparison starts with the price when the drug’s dosage form and strength was first marketed, or 1990, whichever is later. The inflation adjustment then measures how far the price has outpaced inflation. Moving the starting point forward to a higher price can remove earlier increases from the calculation.

That is why a product’s commercial relaunch and its rebate history matter separately. In Nitro OS, the question was whether the changed inactive-ingredient quantities justified leaving the prior version’s price behind. The drug’s continued approval, dosage form and strength were central to the government’s account. A fresh sales story did not persuade the Medicaid agency to accept a fresh rebate history.

Among pharmaceutical fraud cases, a closely related dispute appeared in Mallinckrodt’s Acthar rebate settlement. The government alleged that Mallinckrodt and its predecessor, Questcor, calculated rebates as though Acthar had first been marketed in 2013, relying on Food and Drug Administration approval of a new use in 2010. Earlier price increases then disappeared from the inflation comparison.

Mallinckrodt admitted that Acthar was not new in 2013, had been approved and marketed before 1990, and agreed to correct its base-date AMP. Nitro OS involved changes to inactive ingredients rather than a new use. In both cases, the manufacturer’s position would leave Medicaid without rebates reflecting the drug’s earlier pricing history. The product detail differs. The value of escaping the old baseline is the same.

The Chief Executive’s Later Exclusion

The Office of Inspector General of the Department of Health and Human Services listed Nostrum and its chief executive under heightened scrutiny after they refused a corporate integrity agreement on October 27, 2023.

On June 30, 2025, the office excluded the chief executive for defaulting on his payment obligations under the settlement with the Justice Department and the inspector general.

What Evidence Is Needed to Prove Fraud?

In a rebate case like this, the evidence connects the product’s history to the unpaid invoices and what the company knew. Our whistleblower experts work through those connections with you.

Someone in product compliance may understand why the manufacturer kept the same approval. Someone in government pricing may know the position the company sent to the Medicaid agency. Finance may see the state’s invoice, the amount paid and the explanation for the difference. Each view matters because the Nostrum admissions span all of those decisions.

The Medicaid agency’s notice is especially revealing. Nostrum admitted both learning why the rebate invoices had increased and being told to pay the higher amounts. That puts the company’s knowledge beside its payment conduct.

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

Why the Price and the Rebate Belong Together

A drug’s list price and its rebates can rise together. The USC Schaeffer Center’s February 2020 paper, The Association Between Drug Rebates and List Prices, examined list and estimated net prices for 1,335 U.S. brand prescription drugs from 2015 through 2018. It found that rebate increases were associated with roughly dollar-for-dollar increases in list prices.

For the insider reading Nostrum’s case, the useful connection is the need to understand the price decision together with the money owed back. Medicaid’s inflation rebate was supposed to protect the public health care program from the increase. Nostrum’s admitted sequence shows the company raising the price and then seeking to leave the earlier price out of the rebate calculation. The argument over the product’s history was an argument over who kept the money.

You Know Why the Rebate Went Unpaid

If you work in healthcare and know why a manufacturer claimed a new pricing history or left state rebate invoices unpaid, speak to one of our whistleblower experts about why the rebate went unpaid. We work with you to build your strongest Medicaid rebate whistleblower case and bring in pharmaceutical pricing whistleblower lawyers who understand Medicaid rebate obligations. From the first conversation through the pursuit of recovery, we stay on your side of the table.