Drug giant’s “common-sense” price scheme ruled illegal by federal court, upholding over $183 million in damages.
The United States Court of Appeals for the Seventh Circuit has affirmed a landmark jury verdict against pharmaceutical titan Eli Lilly on Thursday, forcing the company to pay over $183 million for defrauding the government’s Medicaid program. The ruling, released today, culminates a decade-long legal battle initiated by a whistleblower who exposed the company’s complex pricing scheme.
At the heart of the case was Eli Lilly’s practice of charging wholesalers an initial price for drugs and then, if the price increased before the wholesaler resold the drug to a pharmacy, requiring the wholesaler to pay the difference.
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A simple example: if Lilly sold a drug to a wholesaler for $10 and then raised the price to $11, the wholesaler would credit Lilly the extra dollar. Lilly, however, only reported the initial $10 price to the government, a number known as the Average Manufacturer Price (AMP). This seemingly technical detail was highly consequential. The higher the AMP, the more money a drug company must pay back to the government for the privilege of participating in Medicaid.
By reporting a falsely low AMP, Eli Lilly underpaid the federal government by more than $61 million between 2005 and 2017. The court’s decision, authored by Circuit Judge Kolar, was based on a simple, “common-sense plain reading” of the relevant laws and contracts.
“Did Lilly realize a price of $10 or $11 for its drug? The plain language of the relevant texts, Medicaid’s clear purpose, and common sense point to a clear answer: it sold the drug for $11,” the opinion stated. The court found that Lilly’s AMP calculations were “false as a matter of law” and that the company had acted with a culpable state of mind, or “scienter.”
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The court was particularly critical of Eli Lilly’s actions, noting that the company had no written records justifying its pricing methodology despite a contractual requirement to do so. In one instance, Lilly sent a candid letter to government regulators about its pricing but chose a communication channel it knew the government had instructed it not to use and would not review.
Then, in a subsequent government audit that Lilly knew would be read, it buried the same information in a single, equivocal footnote, leading the court to conclude that Lilly was actively trying to “hide the ball.”
The victory is a major win for the whistleblower, Ronald J. Streck, who first publicly accused pharmaceutical companies of this type of fraud in 2011. Under the False Claims Act, whistleblowers like Streck can sue on the government’s behalf and receive a portion of any recovered funds. The original jury award of $61,229,217 was trebled to $183,687,651 under the Act’s provisions.
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While the court acknowledged that Medicaid regulations can be “among the most completely impenetrable texts within human experience,” it firmly rejected Eli Lilly’s argument that the ambiguity of the law excused its conduct.
The opinion emphasized that the company’s interpretation would create a “gaping loophole” that would undermine the entire purpose of the Medicaid Drug Rebate Program, which was created to ensure that drug companies bear some of the cost of their medications.
The ruling has significant implications for the pharmaceutical industry, as it sends a clear message that overly complex pricing models designed to reduce government rebates will not be protected by claims of regulatory confusion. The decision firmly holds that what matters is the price a manufacturer “actually realized” from its sales, regardless of how those payments were structured.
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