28 January 2022

Fourth Circuit Applies Safeco to FCA Claims, Accuses CMS of “Maintaining Strategic Ambiguity” Around Medicaid Drug Rebate Program Requirements

In a recent 2-1 decision, the Fourth Circuit joined every other circuit to have considered the issue in applying Safeco’s “reckless disregard” standard to legally false FCA claims based on alleged violations of ambiguous laws and regulations.  Under Safeco, courts ask whether a defendant’s interpretation of the ambiguous law or regulation at issue was objectively reasonable and whether authoritative guidance might have warned the defendant away from that interpretation.  The Fourth Circuit found that the Safeco standard “duly ensures that defendants must be put on notice before facing liability for allegedly failing to comply with complex legal requirements.  Without such notice, defendants are not likely to receive due process.”

At issue before the Fourth Circuit was the Medicaid Drug Rebate Program’s (“MDRP’s”) requirement that manufacturers report their “best price” for Medicaid covered drugs for purposes of rebate calculations.  “Best price” is defined by statute as the “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity . . . inclusive of cash discounts, free goods that are contingent on any purchase requirement, volume discounts, and rebates.”  Given the complexity of Medicaid’s price reporting requirements, CMS has repeatedly emphasized that manufactures should “make reasonable assumptions” in calculating “best price.”

Based on these laws, regulations, and guidance, the relator claimed that the defendant, a pharmaceutical company, had submitted legally false claims to Medicaid because it had not appropriately accounted for discounts offered to separate customers along the distribution chain in its “best price” reporting.  More specifically, the relator alleged that the defendant should have aggregated the discounts offered to those customers and reported the aggregated discount price as its “best price” instead of the single lowest discount price.  The defendant countered that it reasonably interpreted “best price” to mean the lowest price at which a manufacturer sells a drug to any single entity and therefore it was justified in reporting the single lowest discount price.

The Fourth Circuit held the defendant’s interpretation of “best price” was reasonable because the statute (1) uses the term “price” instead of “prices”; (2) lists the entities to be considered in the singular rather than the plural; and (3) states that the price to be reported is the “available” price, which suggests an actual offered price, not a hypothetical aggregated discount price.  The court also held that the defendant was not warned away from its interpretation because “CMS knew . . . that manufacturers were not aggregating discounts given to different entities along supply chains . . . [yet] failed to clarify and thereby maintained strategic ambiguity.”

The majority’s broad attacks on the complexity of the MDRP combined with CMS’s persistent refusal to provide appropriate clarity on the MDRP’s requirements may offer broader defenses to FCA actions premised on alleged violations of the MDRP program, even outside the “best price” context.  Indeed, as the majority concluded: “relator’s position . . . makes sinister actors out of parties who have followed the law in every respect and sought administrative guidance where none was ever provided.  Given the veritable thicket of Medicaid regulations, it is not too much to expect something more in the way of clarity and direction than was ever offered here.  To reward the state with treble damages for this treatment of parties in the private sector is something no court should do.”

The dissent made many of the same arguments as the dissent in a recent Seventh Circuit decision applying Safeco and reviewing a defendant’s interpretation of Medicare Part D and Medicaid’s “usual and customary” price requirements (discussed here).

The Fourth Circuit’s decision can be found here.

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