A whistleblower action under the federal False Claims Act (31 U.S.C. §§ 3729 et seq.) against a U.S. pharmaceutical company has settled for an amount that can be as high as $50 million. The incident highlights the value and the courage of whistleblowers in the healthcare industry, and shows what whistleblowers can recover through their whistleblower complaint if their evidence leads to a monetary settlement or award.
Background: Medicaid’s Drug Rebate Program
Before delving into the unlawful conduct by the pharmaceutical company and the whistleblower action, it is important to explain the complicated law at issue – Medicaid’s Drug Rebate Program, or MDRP.
Broadly speaking, under the MDRP, drug manufacturers must sign a National Drug Rebate Agreement (NDRA) in order to have their drug covered by a state’s Medicaid program. A part of the agreement requires that, four times a year, drug manufacturers pay a rebate to the state Medicaid program. The amount of this rebate is based on the difference between the drug’s current sale price and the price of the drug when it was first marketed.
The rebate program aims to offset the increase in prescription drug prices and, in so doing, protect state and federal Medicaid funding.
Nostrum Laboratories Claims Its “Old” Drug is Also “New” to Avoid Paying Rebate
Nostrum Laboratories is the manufacturer of Nitrofurantoin Oral Suspension, or Nitro OS, an antibiotic that treats and prevents certain types of bladder infections. Nostrum acquired the drug from another manufacturer in December, 2015, and continued to manufacture it, becoming one of only two pharmaceutical companies to produce it – the other being Casper Pharma.
In January, 2018, Nostrum stopped producing Nitro OS in order to tweak the formula to comply with revised guidance from the Food and Drug Administration (FDA) about lead amounts in prescription drugs. After modifying the quantities of two of the inactive ingredients in Nitro OS to reduce the drug’s lead levels below the new standards, Nostrum returned the drug to the market in September of that year.
Importantly, Nostrum claimed that the modification to Nitro OS was a “reformulation” so that the drug could continue to be sold under its old FDA approval.
However, after relaunching Nitro OS, Nostrum more than quadrupled the price, from $474.75 per dose to $2,392.23.
In an interview with Financial Times, Nostrum’s CEO, Nirmal Mulye, claimed that, “it is a moral requirement to make money when you can… to sell the product for the highest price.” He also defended the similar actions of another healthcare CEO, Martin Shkreli: “I agree with Martin Shkreli that when he raised the price of his drug he was within his rights because he had to reward his shareholders.”
When invoices came in from Medicaid’s Drug Rebate Program, though, Nostrum took a different approach. Rather than claiming that the modifications to the formula were just a “reformulation,” the drug maker claimed that they amounted to an entirely new prescription drug. The drug maker claimed this, even though it was marketing the drug under the drug’s original approval by the FDA. Based on this argument, Nostrum alleged, the price of Nitro OS needed to be recalculated and the original price point should be disregarded.
Based on this argument, the drug manufacturer refused to pay the increased rebate amounts.
False Claims Act Lawsuit Leads to Civil Settlement of Up to $50 Million
The federal government brought a lawsuit against Nostrum Laboratories and its CEO, Mr. Mulye, under the federal False Claims Act. This Act prohibits private individuals and companies from knowingly filing false claims of compensation from the government, including against Medicaid, and imposes treble damages for violations. Using this law, the U.S. Department of Justice (DOJ) demanded compensation for the missed rebate payments from October 1, 2018 through March 31, 2020.
On October 30, 2023, the DOJ issued a press release to announce that the case had settled out of court. Under the terms of the settlement agreement, Nostrum and Mr. Mulye have agreed to pay an amount of between $3.825 million and $50 million, based on financial contingencies. No admittance of fault or liability is made.
Some Evidence Seems Likely to Have Come from a Whistleblower
Two pieces of evidence serve as the crux of the prosecutors’ case, here:
- The extent of the modifications to the chemical compound, and
- Nostrum’s willfulness in its failure to pay the correct rebate amount.
The nature of these details suggests that they came from inside the company, and were likely provided to the DOJ by a whistleblower.
This is particularly true with regards to whether Nostrum’s nonpayment of the rebate was deliberate or not.
In fraud cases, proving a suspect’s or a defendant’s level of intent is often one of the most challenging parts for prosecutors. It can also drastically alter the amount of damages that get imposed by a judge or jury, and can even determine whether the case gets prosecuted as a crime or pursued as a civil violation.
In this particular case, it seems fairly likely that the prosecution team had access to internal discussions about whether to pay the full rebate amount after Nostrum inflated the prices it was charging for its prescription drug, Nitro OS. While there are certainly signs that indicate that the decision to refuse payment was a willful one, given Nostrum’s contradictory arguments over whether the modified chemical compound made it a new drug or not, those signs are still just circumstantial evidence of intent.
There are whistleblower protection laws that have anti-retaliation provisions and other whistleblower protections in place to provide worker protections from adverse action in the instance they have reasonable belief they have enough information to file whistleblower claims with the Government Accountability Office. The disclosures are only in protected under whistleblower laws if the whistleblower makes a protected disclosure, like classified information, disclosure to Congress, abuse of authority, securities fraud, or a substantial and specific danger to public safety and health.
As Dr. Nick Oberheiden, founding partner of the national whistleblower law firm Oberheiden P.C., states, “Having access to someone on the inside who is willing to share what they know can make or break many of the cases that the government files under the federal False Claims Act.”
This is one of the reasons why whistleblowers can recover a reward for their actions. The False Claims Act rewards whistleblowers with between 15 and 30 percent of the eventual recovery amount. In this case, depending on the final value of the settlement, whistleblower awards could be between $573,750 and $15 million.
