Streck v. Eli Lilly: $183M False Claims Act Verdict for Medicaid Drug Rebate Fraud

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Summary

• Court upholds jury verdict against drug manufacturer under False Claims Act.

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In ** Streck v. Eli Lilly & Co., the U.S. Court of Appeals for the Seventh Circuit affirmed a jury verdict finding the defendant knowingly provided false pricing information under a Medicaid reimbursement program. The jury’s award of over $61 million was automatically trebled under the False Claims Act resulting in a judgment of over $183 million.

An Incentive to Underreport Drug Prices

The Medicaid Drug Rebate Program (MDRP) requires drug manufacturers to make rebate payments to the government as a condition of the drug being covered by Medicare. Such rebates help fund Medicaid. The amount of the rebate is a function of the drug’s average manufacturer price (AMP). The higher the AMP, the higher the rebate owed the government. Every quarter the drug manufacturer must calculate the AMP for a covered drug and retain records demonstrating the methodology used in the calculation.

Eli Lilly, a drug manufacturer, sells to wholesalers who in turn sell to retail pharmacies. It calculated AMPs based on the initial price it received from the wholesalers. When Lilly later raised the price, the wholesalers correspondingly raised the price to pharmacies on the drug they held in stock. Lilly required the wholesalers to remit the price increase back to it, calling those remittances “clawbacks.” But when it made its quarterly rebates to the government, it used the original, lower price without the “clawbacks” it received from wholesalers, describing them as “service fees.”

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Liability Under the False Claims Act

In a qui tam action brought in the U.S. District Court for the Northern District of Illinois under the False Claims Act, Lilly was alleged to have falsely and fraudulently reported its AMPs to the government over a twelve-year period, thus reducing its rebates and cheating the Medicaid program. The False Claims Act makes it unlawful to knowingly submit a false claim for payment to the federal government. The district court granted summary judgment against Lilly on the issue of falsity but submitted to a jury the issues of scienter and materiality. The jury returned a verdict against Lilly resulting in treble damages of over $183 million.

Turning a Blind Eye

Lilly argued on appeal that the prices it reported to the government could not be false as a matter of law because they were the result of “good faith confusion” made in a “hopelessly confusing” regulatory environment. The circuit court rejected that argument ruling that falsity is a black and white issue under the False Claims Act, citing United States ex rel. Schutte v. SuperValu, Inc. and Universal Health Servs., Inc. v. Unites States ex rel. Escobar.

The court then turned to the scienter issue, which it found to be a “closer call.” What made it a closer call was that Lilly had reported its AMP methodology to the government. First, Lilly provided a “fulsome” description of its AMP calculations in a letter. It again disclosed the AMP methodology in a footnote in response to a later government audit which found Lilly’s methodology to be compliant. But the court found that the letter was “dead on arrival” because it was sent despite the government’s repeated warnings that such letters were not read. And the court found that the “vague” and “opaque” footnote in a 67-page report cut the other way. A reasonable jury could find that it evidenced knowing deception on the part of Lilly.

Trial testimony adduced by Lilly did not help its cause. The midlevel executive tasked with AMP calculations was unable to give a clear explanation of her methodology. Senior-level executives who had certified calculations to the government admitted they had not reviewed her work. The court found that a reasonable jury could find that such “ostrich-like” behavior showed that Lilly had willfully turned a blind eye to its legal obligations.

The court found that the jury reasonably concluded that the false AMPs were material where Lilly had realized over $600 million in clawback revenue – revenue it tracked – while depriving the Medicaid program of over $60 million.

A “Very Close Call”

“What is remarkable here is that Lilly was found to have knowingly misled the government even after it provided actual notice of its pricing practices,” notes Mark Cianci, Boston, MA, Co-Chair of the Fraud Subcommittee of the Business Torts & Unfair Competition Committee of the ABA Litigation Section. “The court nonetheless pointed to evidence that Lilly believed the government would not read its 2011 letter, and the later ‘opaque’ footnote was buried in a lengthy report,” he says. “Based heavily on that evidence, the court concluded that the jury could have reasonably inferred the requisite knowledge element under the False Claims Act, but that conclusion seems like a very close call,” notes Cianci.

“Eli Lilly tried to defend its pricing methodology as a reasonable effort to comply with a complicated regulatory regime,” says Donald W. Davis, Jr., Akron, OH, Co-Chair of the Litigation Section’s Healthcare Disputes & Litigation Committee. “But the court noted that Lilly failed to produce ‘one shred of paper’ discussing the decision to exclude ‘clawbacks’ from price calculations,” he says, “and none of the Lilly executives called to testify could explain it.” “With that the court held that the jury could reasonably find that Lilly turned a blind eye to its legal obligations,” says Davis.

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Resource

• Sarah Barney, Brian A. Hill, and Jason Nicholas Workmaster, “ New Materials? Jury Instructions on Materiality in Post- Escobar False Claims Act Cases,” Bus. Torts & Unfair Competition (Jan. 1, 2024).

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Endnotes

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Author

James Michael Miller

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Author

James Michael Miller

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