Massachusetts v. Mylan Laboratories, Civil Action No. 03-11865-PBS.

608 F.Supp.2d 127

The Commonwealth of MASSACHUSETTS, Plaintiff, v. MYLAN LABORATORIES, et al., Defendants.

Civil Action No. 03-11865-PBS.

United States District Court, D. Massachusetts.

December 23, 2008.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

MEMORANDUM AND ORDER

SARIS, District Judge.

I. INTRODUCTION

The Commonwealth of Massachusetts brings this case against nine pharmaceutical manufacturers¹ for allegedly causing Massachusetts to overpay for generic prescription drugs under the Massachusetts Medicaid Program ("MassHealth"). Massachusetts contends that the defendants caused such overpayment by fraudulently inflating the "Wholesale Acquisition Cost" ("WAC") and the "Average Wholesale Price" ("AWP") of twenty-seven covered drugs.

Massachusetts moves for partial summary judgment as to liability with respect to Count IV of the First Amended Complaint, its claim that the defendants violated the Massachusetts False Claims Act, Mass. Gen. Laws. ch. 12, § 5A et seq. The defendants jointly move for summary judgment as to Count IV, as well as to Massachusetts' claims based on common law fraud (Count I), the Massachusetts Medicaid False Claims Act, Mass. Gen. Laws ch. 118E, §§ 40-41 (Count III), and breach of the covenant of good faith and fair dealing implicit in the defendants' rebate agreements (Count VI).

After several hearings, a tutorial, and a review of the briefs and the extensive record, Massachusetts' cross-cutting motion for partial summary judgment as to Count IV [Docket No. 434] is DENIED on the ground that there is a disputed issue of fact concerning defendants' scienter. The defendants' joint motion for summary judgment [Docket No. 450] is DENIED except with respect to AWP-based claims. For the most part, the defendants' individual motions for summary judgment will be addressed separately.

II. BACKGROUND

The following facts are drawn from the extensive record. The Court also assumes knowledge and incorporates by reference its prior order on the defendants' motion to dismiss, Massachusetts v. Mylan Labs., 357 F.Supp.2d 314 (D.Mass.2005), and its numerous opinions in the related multidistrict litigation, In re Pharm. Indus. Average Wholesale Price Litig, 263 F.Supp.2d 172 (D.Mass.2003), In re Pharm. Indus. Average Wholesale Price Litig, 307 F.Supp.2d 196 (D.Mass.2004), In re Pharm. Indus. Average Wholesale Price Litig, 230 F.R.D. 61 (D.Mass.2005), In re Pharm. Indus. Average Wholesale Price Litig, 233 F.R.D. 229 (D.Mass.2006), In re Pharm. Indus. Average Wholesale Price Litig, 460 F.Supp.2d 277 (D.Mass.2006), In re Pharm. Indus. Average Wholesale Price Litig, 478 F.Supp.2d 164 (D.Mass. 2007). Unless noted, the facts are undisputed.

A. Medicaid Reimbursement

The Medicaid program is a federal-state program that provides medical assistance to low income individuals. MassHealth is the Commonwealth's component of the Medicaid program. MassHealth, like all state Medicaid agencies, must act in accordance with a State Plan, which the federal Centers for Medicare and Medicaid Services ("CMS") must review and approve annually. (Defs.' Joint Statement of Undisputed Material Facts [Docket No. 452] ("Defs.' SOF") ¶ 2.) Among other things, MassHealth reimburses "providers," such as doctors or pharmacies, for prescription drugs dispensed to insureds. The reimbursements are based on formulae set out in the Commonwealth's regulations, which were developed in accordance with federal requirements.

1. Federal Regulations

Under federal Medicaid regulations, a state Medicaid program's payments for a drug may not exceed the "estimated acquisition cost" of the drug plus, a reasonable dispensing fee, where the "estimated acquisition cost" ("EAC") is defined as "the agency's best estimate of the price generally and currently paid by providers for a drug marketed or sold by a particular manufacturer or labeler in the package size of drug most frequently purchased by providers." 42 C.F.R. § 447.301 (2006). Federal regulations require that the reimbursements be sufficient to enlist enough providers to provide MassHealth insureds with access equal to that of the rest of the population. See 42 C.F.R. § 447.204 (2006).

Federal regulations also required that payment for drugs not exceed the Federal Upper Limit ("FUL"). 42 C.F.R. § 447.331 (2007).

The Medicaid Act further requires that a Medicaid Plan's payment rates and any changes to those rates be set by a "public process," in which the proposed rates and justification for the proposed rates are published, providers and other interested parties are given reasonable opportunity for review and comment, and the final rates, methodologies underlying the establishment of rates, and justification for the final rates are also published. The Commonwealth established its Medicaid payment rates through a public regulatory process and its rates are published in the Code of Massachusetts Regulations.

To set a FUL, CMS groups together a drug's therapeutically equivalent versions and sets an upper limit on payment for that group. (Donohue Tutorial [Docket No. 514-2] ¶ 26.) Each version of the drug has several associated published prices, such as an AWP, a WAC, and a Direct Price ("DP"). (Id.) To set a FUL for a class of drugs, CMS finds the lowest of these prices for any member of the class and multiplies it by 150%. (Id.)

2. The State Standard

The drugs at issue here are generic noninnovator "multiple-source drugs." These are drugs with at least three manufacturers or suppliers. (Donohue Tutorial ¶ 26.) MassHealth based reimbursement for these drugs on the lowest of the following:

(a) the Federal Upper Limit ("FUL") for the drug, if one is available, plus a dispensing fee;

(b) the Massachusetts Upper Limit ("MUL") for the drug, if any, plus a dispensing fee;

(c) the Estimated Acquisition Cost ("EAC") of the drug, plus a dispensing fee; or

(d) the pharmacy's usual and customary charge ("U & C") for the drug.

114.3 Mass.Code Regs. 31.04 (2007).

Prior to 2003, the MUL was calculated identically to FUL.² (Donohue Tutorial at ¶ 29.) In 2003, Massachusetts regulations were changed to reduce the multiplier from 150% to 130%. See 114.3 Mass.Code Regs. 31.02 (2007). This change was driven not only "to generate additional savings," but also to keep compensation "sufficient to assure participation by pharmacies in the program." (Klemeyer Decl. [Docket No. 453] Ex. 10 (Jeffrey Dep. 95:8-20, June 14, 2007).)

Massachusetts regulations define EAC as "an estimate of the price generally and currently paid by eligible pharmacy providers for the most frequently purchased package size of a drug." 114.3 Mass.Code Regs. 31.02 (2007). Prior to 1989, Massachusetts based EAC on the AWP reported by manufacturers for each drug. Subsequently, the regulations defined EAC to be the drug's WAC plus a percentage; prior to August 3, 2002, EAC was defined as WAC plus 10%; since then, EAC has been defined as WAC plus 6%. (Commonwealth's Mem. Supp. Summ. J. 5.) While some other states also calculate EAC by adding a percentage to WAC, most states calculate EAC by subtracting a percentage from AWP. (Donohue Tutorial ¶ 30.)

Finally, prior to 1995, U & C had been defined as the usual and customary charge paid by retail or cash payors, and did not include the (often lower) amounts paid by large institutions. (Id. ¶ 38.) Since 1995, Massachusetts regulations have defined U & C as "[t]he lowest price that [a pharmacy] charged or accepted from any health insurer or pharmacy benefit manager for the same quantity of a drug dispensed to a Massachusetts resident on the same date of service." 114.3 Mass.Code Regs. 31.02 (2007). According to testimony made at the public hearing regarding this change, the definition of U & C was made to "insure that [MassHealth] would receive the absolute best deal any retail pharmacy would offer." (Klemeyer Decl. Ex. 22 (Public Hearing Statement 114.3 CMR 31.00: Prescribed Drugs at 3).) By changing the definition, the Commonwealth was attempting to get for itself the best deal that a private insurer had obtained from a pharmacy. (Id.) In the same testimony, however, it was made clear that the state believed that "there are situations where EAC may be lower," and it was necessary to include EAC in the reimbursement formula "to, insure that public payors get the lowest available price." (Id. at 5.)

3. Payment of Medicaid Claims

During the relevant period, the Commonwealth utilized a Medicaid Management Information System ("MMIS") which is used to process and maintain records concerning Medicaid claims (Commonwealth's Statement of Undisputed Material Facts Applicable to All Defs. ("Cmwlth.'s SOF-All") [Docket No. 436] ¶ 31) in conjunction with the Commonwealth's Pharmacy Online Processing System ("POPS"), which allows pharmacies to submit their claims electronically (Id. ¶ 33). The pharmacist submits a claim to the state through POPS for every prescription filled. On the claims form, there is a field called "billed amount"; pharmacists are instructed to fill this field with their U & C. (Klemeyer Decl. Ex. 9 (Jeffrey Dep. 84:18-85:16).) As early as 1992, when Massachusetts providers submitted paper claim forms, providers were required to submit a U & C, and the form required the provider to "certify that the information entered on the form is correct" by signing the form. (Def. Mylan's Statement of Undisputed Material Facts [Docket No. 459] ¶¶ 69-70.) The provider still must submit a U & C and certify "the accuracy and truthfulness of all data, information, reports, books, and records submitted." (Id. ¶ 73.) The claim is then submitted electronically and processed.

Upon submission of a claim, the computer system automatically applies the claims processing algorithm, based on the applicable regulation, determining and paying out the lowest of: a) the FUL plus a dispensing fee; b) the MAC plus a dispensing fee; c) the EAC plus a dispensing fee; or d) the U & C. (Cmwlth.'s...